New regulations for Aussie crypto exchanges: What it means for investors
Local crypto exchanges are set to be regulated by existing financial services laws, and a handful of bespoke regulations.
It seeks to combine existing financial services regulations in combination with new rules specific to cryptocurrency.
If passed, exchanges that hold over $5 million in customer assets would be forced to obtain an Australian Financial Services License (AFSL).
An AFSL is required by most businesses that offer financial services, like share trading platforms, superannuation funds and insurers.
New rules will also be introduced that relate to the storage of digital currencies, how they are transferred, and how they are used for trading, staking and fundraising.
Currently, Australian cryptocurrency exchanges must register as a Digital Currency Exchange (DCE) with AUSTRAC, but do not need to hold an AFSL.
Registering as a DCE requires exchanges to enforce certain policies Know Your Customer (KYC) checks and maintain Anti-Money Laundering policies.
However, there is very little regulation specific to cryptocurrencies, exchanges or the technologies surrounding them, despite both Liberal and Labor governments discussing the topic for some time now.
The current government proposal looks to make the regulations around DCEs more robust and "decrease the risk of crypto exchange collapses".
The timing of the proposal coincides with the ongoing trial in the US against Sam-Bankman Fried, who stands accused of defrauding customers of the FTX crypto exchange.
How it affects you
There are two main pieces to the proposal.
The first is that exchanges with over $5 million in customer assets would be forced to obtain an AFSL.
Therefore this is likely to affect major exchanges like Binance Australia, Swyftx, CoinSpot, Kraken Australia and more.
This means you will be granted additional consumer protections if you use an exchange that obtains an AFSL.
According to the Australian Securities and Investment Commission (ASIC), businesses holding an AFSL have the following requirements:
- Financial obligations. Exchanges would be obligated to submit financial records and meet certain cash reserve requirements.
- Dispute resolution. Complaints by customers would be handled by the Financial Ombudsman Service if they cannot be resolved internally by the exchange.
- Compensation and insurance. Exchanges would need to provide adequate insurance and compensation arrangements.
- Train staff. Staff – in particular, management – would need to have suitable levels of training, qualifications and experience.
- Risk management. Exchanges will need to have adequate risk management systems in place. They must manage any conflicts of interest, which are currently abundant in the crypto industry.
The second part of the proposal is regulations specific to cryptocurrency exchanges (DCEs).
These include the following:
- Minimum standards for holding tokens and the software used to custody them.
- Standards for transacting tokens.
- Specific rules for trading, staking tokenisation and fundraising.
Overall, the regulations appear to be beneficial for retail investors. Bringing crypto exchanges in-line with existing financial institutions is justified given recent failures by the sector to regulate itself.
Forcing exchanges to be more transparent with their practices may also renew consumer confidence in the industry locally, and give traders a reason to stick with local exchanges rather than risky off-shore entities.
However, there are concerns that applying existing financial services regulations lacks nuance, which is necessary in such a disruptive industry.
Jonathon Miller, managing director of crypto exchange, Kraken Australia says
"Our concern is that this approach creates ample opportunities for the regulation to ignore the nuances of the technology (for example, unique services like NFTs). I'm hopeful that we can work collaboratively with the Government to make sure we don't snuff out the benefits of future innovations in crypto that might fall outside the conventional 'financial services' box."
Fortunately, the government has announced a consultation process in which interested parties – individuals, businesses and otherwise – can submit a response to the proposed regulations by 01 December, 2023.
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