red 
October 16, Australian Treasury published consultation document on the proposed regulation of digital asset platforms.
The proposed regulatory framework seeks to regulate digital asset platforms under existing financial services laws. It will also supplement existing regulatory frameworks for non-financial activities such as gambling where there are risks that are best addressed through the application of financial services laws.
Objectives of the proposed regulatory framework
The long-awaited regulatory framework adopts a “similar activity, similar risk, same regulatory approach” by applying the Australian Financial Services License (AFSL) framework to regulate digital asset service providers that present similar risks to entities in the traditional financial (TradFi) system. This ensures consistent oversight and safeguards for consumers.
The objectives of the proposed framework include:
- consumer protection;
- promoting innovation through technological neutrality and regulatory clarity;
- aligning Australia’s digital property regulatory framework with international jurisdictions; and
- using regulatory tools that are agile, flexible and adaptable.
What is most interesting about the proposed framework is how ambitious it is. In other jurisdictions such as Hong Kong and Singapore, they have chosen to focus on higher-risk activities in the trading and exchange of digital assets when they introduce digital asset laws first before moving on to regulate others such as custody and stablecoin issuance. However, Australia has decided to take the opposite route, with a breathtaking framework in terms of its regulatory perimeter to precisely target risks in digital assets.
Australia’s Principles for Regulating Digital Assets
First, the framework is anchored by asset holding activity or more specifically, asset holding arrangements used by digital asset platforms to be regulated as a “digital asset entity”.
With this, Australia has identified an activity that is most analogous to TradFi services governed by existing laws and with the same risks and benefits, yet is pervasive in the digital assets ecosystem regardless of the actual business model or use case.
Then, by introducing the concept of “platform rights” or rights issued by a multilateral instrument for digital assets that regulate the use, transfer and receipt of user funds, such digital asset platforms must be regulated regardless of whether the rights are recorded in a warrant-based system or token. They will be subject to minimum standards for holding assets, rights to intermediary platforms and transaction functions.
Furthermore, by using broad concepts around “control” to identify digital asset platforms to include in its regulatory framework, the framework provides a way to enforce anti-fraud and fraud measures, many of which identify as decentralized finance (DeFi) but are able to steals customers’ tokens.
This comprehensive approach is designed to be technology agnostic and the obligations would be designed so that it would be possible and necessary for a business that controls user tokens using custodial software, such as smart contracts, to meet the same requirements as any other business – with a clear implication for most if not all DeFi platforms and companies.
This view of DeFi in particular goes back to the September statement issued by the International Organization of Securities Commissions (IOSCO) – when published its policy recommendations to address DeFi risks – on the common misconception that DeFi is truly decentralized and driven by autonomous code or smart contracts, when “[in] reality […] ‘responsible persons’ can be identified […]whether legal or physical, which should be responsible for preserving investor protection and market integrity”.
Finally, the framework also addresses the growing tokenization of real assets by stating that platform rights to underlying non-financial assets (i.e. asset-backed digital assets) do not become financial products, which could otherwise complicate their distribution.
However, given the ease with which any cryptoasset can be “financed”, platforms that facilitate digital asset transactions other than financial products should meet minimum standards for financial functions such as token trading, token investing, asset tokenization, and funding tokenization.
Therefore, the proposed framework aims to maintain the current regulatory boundaries between financial products and other products. Where relevant, digital asset platforms should meet the high standards of their TradFi peers even if their services do not include rights other than financial products.
Growing industry concern
Predictably, the proposed regulatory framework – initially praised for providing regulatory clarity – did caused by growing consternation among existing players in Australia, who are already struggling to limit scams and fraud in the industry.
While shying away from the high cost to qualify for AFSL where a platform must have a total of more than $5 million or more than $1500 for an individual customer, experts say most Australian exchanges registered with the Australian Transaction Reporting and Analysis Center (AUSTRAC) would be unlikely to meet the new standards, leading to mass exits or industry consolidation.
In part, this is because AUSTRAC’s Anti-Money Laundering and the Financing of Terrorism (AML/CFT) regime is relatively light, requiring exchanges to have an SPN/FT program that focuses mainly on Know Your Customer (KYC) and Customer Due Diligence policies.
In addition, the same regime has been blamed for the lack of proper regulation of digital assets which has hampered investor confidence and stifled industry growth in Australia. This is clearly a situation where it is not possible to have one’s cake and eat it too – effective regulation with a focus on consumer protection inevitably comes with costs and frictions that may require a reassessment of commercial viability.
Management of different risks and priorities
To the Treasury’s credit, it recognizes the danger of regulatory overreach – especially when digital assets are not homogenous and are used for a growing number of financial and non-financial purposes that may be regulated by different existing frameworks managed by agencies equipped with the relevant tools and expertise.
As stated in the consultation document, the proposed regulatory framework for digital assets will complement these specialized frameworks, which will prevent “overlapping regulation, potential conflicts in regulatory responsibilities and lead to poor outcomes for consumers”.
While there is a risk that the proposed framework is too broad, Australia clearly recognizes the danger and is attempting to create fit-for-purpose digital asset regulation that strikes a balance between risk mitigation, consumer protection and innovation.
With the filing deadline set for December 1, the industry will have more than enough time to provide feedback and shape the trajectory of digital asset regulation in the country.
Crypto Regulation Financial Services APAC
