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Supplementary submission on Select Committee on Australia as a technology and financial centre – Third Issues Paper (cryptocurrency focus)

A follow up to our initial submission on our views about making Australia a centre for digital asset innovation

August 2021: In response to the Select Committee on Australia as a technology and financial centre, Finder prepared the following as a supplementary submission to further our original response. Visit our government submissions hub for more Finder submissions to government consultations and inquiries.

Finder has had a chance to review the other submissions to this consultation which has given us an opportunity to further discuss and refine our thinking on this topic. We would like to use this supplementary submission to clarify and amend our recommendations in relation to the regulation of digital assets in Australia.


As a top-level summary, our recommendations are now as follows:

A. Introduce a new regulatory working group to focus on the crypto-asset space.

B. Create an interim framework with basic standards until this work is complete.

C. Avoid broadly defining crypto-assets as financial products and instead launch a crypto-asset classification process as a top priority for a regulatory working group.

D. Commit to aligning with international standards wherever possible.

E. Create a new regulatory framework for crypto assets that sits outside of the current regulation.


Recommendation A: Introduce a new regulatory working group to focus on the crypto-asset space

This is very similar to Recommendation 2 from our original submission and from reading the other submissions we now see this as a key recommendation. This is a complex space that is changing quickly. To get on the front foot, Australia needs a well-resourced regulatory unit or working group with an explicit role in this space. This group should include representatives from the relevant regulators and public entities with the possibility of new roles being created to ensure the relevant expertise is present. It could also be supported by an external advisory committee made up of academic and/or industry participants.

We think this group should be given a 12-month period to assess the following:

  1. The current guidance surrounding crypto-assets and how this can be improved
  2. The domestic market for crypto-assets and the value this presents to consumers
  3. The international landscape for crypto regulation and what Australia can learn from this
  4. The best way to implement a regulatory framework for crypto-assets that is fit-for-purpose (with an explicit remit for asset classification as outlined in Recommendation C)

Recommendation B: Create an interim "innovation zone" framework with basic standards until this work is completed

Whilst this work is ongoing, Finder recommends an interim framework with basic requirements for organisations operating in this space. This interim framework could include both a "safe harbour" or "innovation zone" as suggested by other submissions alongside some basic requirements for organisations operating in this space during this transitional period. Getting such a framework in place quickly will signal Australia's interest in becoming a financial and technology centre and for finding the optimal settings in this sector for both individuals and businesses.

The "safe harbour" component of this framework should give businesses in this space certainty that there will be no regulatory action where the law is still unclear and also clarity that no retrospective actions will be taken once a new framework has been introduced. We strongly believe this will help to minimise any flight of talent or capital in the inevitable transitionary period and lead to inward investment as Australia starts to be seen as a collaborative jurisdiction from which to launch crypto-asset projects.

In return, the expectation should also be that organisations operating under this interim framework should also support the work of the new regulatory working group from Recommendation A. This could include elements such as:

  • Requiring these organisations to do reporting that helps with disclosure and market sizing (e.g. whitepapers, intended purpose of any tokens, details on customer numbers, etc.)
  • Requiring these organisations to comply with the existing AUSTRAC AML/KYC rules where relevant
  • Creating an external disputes resolution process (possibly through registration with AFCA)
  • Requiring organisations to clearly display a risk statement in this interim phase outlining how this space is unregulated and risky.
  • Close assessment of any providers included in the framework from the ACCC on any possible misleading and deceptive conduct.

We would recommend that this transitional framework be implemented as quickly as possible and cover the 12-month period of regulatory review. It should then stay in place for a transitional period of at least 12 months after the new policy framework is introduced to give businesses time to adapt. In order to allow for the full possible consumer benefits of such an "innovation zone", we think a broad range of innovative crypto-asset based services such as DeFi should be included.


Recommendation C: Avoid broadly defining crypto-assets as financial products and instead launch a crypto-asset classification process as a top priority for regulatory working group

Finder notes a number of organisations through their submissions recommending broadly defining digital assets as financial products in the Corporations Act 2001. The extension of this change would mean, amongst other things, that organisations operating in this space would be included in ASIC's Australian financial services licensing (AFSL) regime. On the flip side, we see other organisations suggesting the opposite with all digital assets sitting outside of financial product regulation. This is a complex discussion but one central to the direction of regulation on digital assets and cryptocurrencies in Australia.

Our view is that, while a broad inclusion of digital assets as financial products may seem like a neat solution, taking this approach would disregard the variance in how blockchain technology and the innovation it offers in many industry verticals is coming forward, creating a long list of unexpected (and predominantly negative) consequences.

Firstly, any resulting requirement for organisations in the digital asset sector to apply for and hold an AFSL in order to participate would create an overbearing cost barrier for all but the incumbent players. It is our view that the innovation will still occur, but that it will originate from overseas jurisdictions with lower barriers to entry. Overbearing regulation if placed too early could result in both our talent and any future capital they attract, exiting the country. Our research shows that younger generations are more likely to be holding digital assets and, as such, younger Australians are likely to have the most significant understanding, talent and passion for this new industry. We don't want this geographically mobile demographic to migrate to more favourable markets to launch projects and work for organisations in this space.

Instead, we want to see an Australian economy with a clear digital assets regulatory working group (Recommendation A) and an interim "innovation zone" (Recommendation B) that will allow entrepreneurs to focus on innovation while gaining increasing experience, audience and exposure to regulation over time. It is our view that this solution offers a better balance where innovation is captured here in Australia, and nurtured in collaboration with policymakers and regulators to ensure suitable development that supports the industry while protecting consumers.

Premature regulatory classification or requirements could prevent the industry from attaining meaningful development here in Australia. We encourage both Australia's policymakers and our regulators sufficiently to undertake and form a deep understanding of this nascent technology and thoroughly evaluate the opportunities it can deliver to improve our society. We urge a proactive approach by the Government to empower Australia, and those looking to build a brighter future here.

Secondly, and in addition, where businesses face premature or overbearing regulation and do manage to undertake the required actions, they are likely to make Australian digital asset businesses less competitive on the international stage due to the additional compliance and associated resource costs of running the businesses in Australia. The market for digital assets is more borderless than almost anything that has gone before it. Australian consumers have already chosen to engage with the leading projects in the cryptocurrency and decentralised finance (DeFi) sector, and access to these offerings will continue to be made available, regardless of the domicile of the providing business, as easily as visiting Netflix.

Thirdly, too much regulation in this space may restrict the scale of the leading digital asset projects to only the Australians who carry the necessary technical sophistication to access them. This would significantly reduce the potential benefits of these projects, which can provide meaningful value for participants, to a limited audience rather than the average Australian who may otherwise stand to benefit. We think these are all scenarios that should be avoided, and risks that arise without regulation can be better addressed through appropriate access to education, disclosures and risk warnings.

Our recommendation is that crypto-assets should instead be classified on a case-by-case basis under the existing regulations, with consideration given to the underlying methodology used by other jurisdictions to mitigate the risk of conflict of laws issues. This work could be completed by the new regulatory working group outlined in Recommendation A and be supported by public consultations on each asset and the underlying technology it leverages, with allowance for the industry to provide input and feedback. All classifications can then be clearly communicated to the market with a suitable transitional period for businesses to respond.


Recommendation D: Commit to aligning with international standards wherever reasonable

As we have noted previously, crypto-assets are generally international in nature and more borderless than many technologies that have come before them. As such, we would advocate for as much considered alignment with international standards as is reasonable. This is particularly important for token classification to help Australian businesses avoid accidentally breaching international law by following Australian standards.

In line with this, Finder further advocates for a process that acknowledges licences from other jurisdictions when a crypto-asset framework is eventually introduced. This aligns to other crypto-currency frameworks such as the Markets in Crypto-assets (MiCA) framework in the European Union which will allow for this kind of "passporting" to occur between European markets.


Recommendation E: Create new regulatory framework for crypto assets that sit outside of current regulation

Once the token classification outlined in Recommendation C has been completed for current major assets, there will likely be a number of assets that fall outside of the existing regulatory settings. Our recommendation is that a separate, bespoke regulatory framework is created for these assets and that this is carefully aligned against international standards as recommended previously. It is especially important that there is some consistency on how assets or tokens are classified in Australia compared to other jurisdictions. One of the goals should be to avoid scenarios where one jurisdiction is more attractive than another to launch a project due to how assets are classified.

We think it is too early to have a firm view on the specifics for how such a framework could be structured and we will be watching international developments with interest. We further welcome all opportunities to contribute feedback, and our participation, towards future public consultations on this specific topic.

What is clear is that any framework created will need to outline the requirements for organisations that look to offer custody, exchange, brokerage, market and advice services in relation to these assets. Particular attention will need to be paid here to how licensing arrangements equivalent to the Australian Financial Services Licence (AFSL) and those that allow organisations to run licensed financial markets should be structured. These licensing arrangements should seek to maximise innovation and consumer benefit whilst protecting consumers and introducing other economic safeguards.

As outlined in our original submission to this consultation, we see significant potential benefits for Australian consumers arising from innovative DeFi products and services. We would strongly support any new regulatory framework like the one recommended considering DeFi specifically in order to ensure the framework does not stifle innovation in this space.

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