Yesterday the Australian Federal Government released its proposal paper on regulating the crypto industry (Paper). The government proposes to regulate exchanges, custodians and other digital asset service providers within the scope the Australian Financial Services (AFS) licensing regime.

The AFS licensing regime is proposed, rather than a bespoke crypto licence (or other existing licensing frameworks, such as the Australian Markets Licence regime). 

The Paper suggests that licensing would be tied to a range of “financialised functions” (i.e token trading, staking, tokenisation and token based capital raising). Non-custodial exchanges appear to be in scope of the new proposals.

Digital asset platforms with assets above a certain threshold would be required to hold an AFS license and meet the general obligations of financial services laws. Additional tailored obligations would apply to particular activities, such as requiring disclosure documents to be given to retail clients and requiring standard form contracts that meet minimum standards for certain tasks.

The minimum standards for digital asset custody would largely mirror those currently applying to traditional custody providers. This includes minimum expectations surrounding organisation structure, staffing capabilities and capacity and resources to perform core administrative activities. Crucially, digital assets would be expressly required to be held on trust for clients, providing a key measure of protection for consumers. Technical standards will also be imposed in relation to safeguarding of crypto in custody.

Those providing services in transactional functions must also meet minimum standards surrounding (among other things) decision-making independence of the asset owner and adherence with market misconduct laws.

The Paper requests industry responses to the consultation questions by 1 December 2023.

Stay tuned as we follow this major development.