Australian Treasury consults on AFSL obligations for crypto-asset platforms

On 16 October 2023, the Australian Government released a Consultation Paper which proposes a new regulatory regime for "digital asset platforms". The new regime seeks to bring digital asset platforms in line with existing Australian financial services regulations and international approaches to crypto regulation. Significantly, the proposed changes would require certain persons "carrying on a financial services business in Australia" in relation to a digital asset facility to, amongst other things, hold an appropriate Australian financial services licence (AFSL) or otherwise seek to rely upon an available exemption.

According to the Consultation Paper, this new regime aims to promote the growth in crypto-assets and other digital tokenised products whilst protecting consumers who may be vulnerable to collapses of digital asset platforms.

Introduction of digital asset facilities

In Australia, the financial services laws already apply to digital assets that are financial products (where for example, those digital assets constitute a security, derivative or interest in a managed investment scheme). ASIC Information Sheet 225 provides further guidance on when a crypto-asset may constitute a financial product.

In saying that however, there are a number of digital assets that are not financial products.

In recognition of the significant role that is played by the that asset holding arrangements that underpin digital assets (and the risks associated with such arrangements), the Consultation Paper proposes that the business of holding significant values of digital assets or assets backing digital assts, should be a regulated activity. As such, the Consultation Paper proposes to introduce a new type of financial product called a "digital asset facility", which would be inserted into the Corporations Act 2001 (Cth).

A digital asset facility is a facility for holding assets and assets backing digital assets. In particular, it is not intended to be a transferable instrument (like a share or bond) but rather a non-transferable facility (like a non-cash payment facility or a margin lending facility). The digital asset facility definition will capture asset holding arrangements, including ‘custody only’ arrangements as well as digital asset platforms that allow customers to transact in platform entitlements.

Captured entities

Entities providing financial services in relation to a digital asset facility will be required to hold an AFSL. Such entities include issuers of digital asset facilities (ie. platform providers responsible for the obligations owed to customers), as well as brokers, agents, arrangers, market makers and advisers.

Overview of the proposed framework

Under the proposed framework, digital asset platform providers and other intermediaries must comply with existing AFSL licensing obligations and newly imposed minimum standards. There are additional recommendations in respect to "financialised functions" and "custody-only arrangements" which are beyond the scope of this paper.

The Consultation Paper extends the following existing regulations to digital asset platform providers and other intermediaries:

• Standard AFSL obligations: Platform providers and other intermediaries performing certain financial services in relation to digital asset facilities will be required to obtain an AFSL.

  However, digital asset facilities who hold less than $1,500 per customer and less than $5 million in total will be exempt under a "low-value facility" exemption, similar to that of the "low value facility" exemption for non-cash payment facilities.

• General obligations: A platform providers must also comply with general financial services obligations, such as providing financial services efficiently, honestly and fairly and managing conflicts of interest, together with other relevant obligations such as complying with the design and distribution requirements for retail clients.
• Disclosure obligations: A platform provider will also be subject to disclosure obligations and must provide a facility guide and facility contract to consumers prior to providing any services (which is not dissimilar to the requirements which apply to IDPS operators).

  Relevantly, all arrangements involving digital asset facilities would be required to be structured as non-discretionary arrangements. In this regard, the facility contract must meet specific obligations, including a requirement to vest account holders with the sole discretion to decide on and provide instructions in relation to platform entitlements.

• Financial requirements: Similar to financial requirements for responsible entities of managed investment schemes, platform providers must meet a net tangible assets (NTA) requirement for holding cash or cash equivalents and holding liquid assets of at least:
  • 0.5 % of the value of the facility (if using a sub-custodian digital asset facility that has $5m NTA), or
  • $5 million (if performing the custody function).

Additional obligations on financialised functions

Any non-financial digital asset platforms undertaking the following "financialised functions" will be further subject to minimum standards:

• asset tokenisation – the creation and exchange of platform entitlements backed by tangible and intangible non-financial product assets;
• funding tokenisation – the sale of platform entitlements to fund the development of non-financial products and services;
• token staking – an account holder's participation in validating transactions on a public network;
• token trading – the exchange of platform entitlements between account holders.