Australia introduces long awaited Crypto recommendations

The Australian Federal Government has recommended stricter controls surrounding crypto Exchanges to bolster consumer protection while also fostering responsible growth in the sector.

In a move to safeguard and protect Australian investors, the Federal Government is looking to introduce a regulatory framework targeted at crypto exchanges so that they fall under the current Australian Financial Services Licence (AFSL) structure. 

Treasury released its recommendations to introduce stronger regulation and policy change via its “Regulating Digital Assets Platforms” proposal paper, whilst also promoting innovation through technology neutrality and regulatory clarity. 

These recommendations come after several cryptocurrency collapses lead to significant consumer losses and triggered a near wipeout of the entire sector. According to the report, “The approximate total (global) value of bankruptcy claims at the time of collapse were: FTX (USD 9 billion), Genesis (USD 3.4 billion), BlockFi (USD 1.3 billion), Voyager Digital (USD 1.3 billion), Celsius (USD 1.2 billion), Babel Finance (USD 280 million), Hodlnaut (USD 193 million).”

“The collapse of FTX alone affected approximately 50,000 Australian consumers,” the report highlighted. The primary reasons, cited by the report, were: “(i) significant loss of assets held on behalf of customers; (ii) ineffective management practices; (iii) inadequate governance structures; (iv) poor operational resilience; (v) instances of fraudulent activities; and (vi) widespread conflicts of interest.”

The main message the Government wants to send, is that regulation is all about unifying the traditional financial framework with the innovative realm of digital currencies. It’s a green light to the sector while ensuring everyone is playing with the same rules.

For digital platforms and exchanges that are unsure of what it all means, “don’t fret”. In this article, we will summarise the main points and break it down into simple terms.

Why the New Regulations?

1. Protection: With the rise in crypto's popularity, scams and corrupt transactions have become more frequent. The shocking collapse of the FTX exchange in 2022, where billions were lost, highlighted the risks of an unregulated market. Many Aussies were affected, leading to increased demands for protective measures.

2. Get ahead: Crypto is fast becoming mainstream and Australia has wanted to lead the world in cryptocurrency adoption. 

How: Treasury is focusing its attention on exchanges and digital platforms instead of focusing on individual crypto tokens. It will do this using current AFSL licensing. 

What Are the Rules?

1. Licensing: An AFSL license will be for any exchange holding more than $5 million in total or more than $1,500 for an individual. They need this license to operate in Australia.

2. Standard Financial Practices: Once they have the AFSL, exchanges will have to play by some familiar rules. These include:

• Being honest in their services,

• Properly managing any conflicts of interest,

• Revealing necessary information to users, and

• Submitting financial reports just like any other financial service.

3. Special Crypto Rules: Added rules will focus on:

• The contracts exchanges use,

• How they handle (or 'custody') digital tokens, and

• The technology behind transactions.

4. Non-fungible tokens (NFTs) – Trendy digital collectible art or gaming collectibles will not require any direct regulating. But exchanges that buy or sell NFTs, will require an AFSL.

Why is this Good?

1. Consumer Protection: The AFSL Licensing framework sets rules for the exchanges to provide services honestly and fairly with regular disclosures. It helps create a safer space for Australians to invest their money.

2. Clarity for Exchanges: Exchanges now have a clear set of rules to follow which will rebuild confidence and trust in the sector. 

3. Supporting Innovation: These regulations are created to stifle innovation but instead, support the potential of blockchain and crypto technologies and encourage responsible growth.

This summary reinforces the government's focus in blending the crypto world with traditional finance's regulatory framework.