The Australian Government today published a consultation paper outlining a proposed licensing regime for “crypto asset secondary service provider” (CASSPr).

“Crypto asset secondary service provider” is defined as follows:

Any natural or legal person who, as a business, conducts one or more of the following activities or operations for or on behalf of another natural or legal person:

• exchange between crypto assets and fiat currencies;
• exchange between one or more forms of crypto assets;
• transfer of crypto assets;
• safekeeping and/or administration of virtual assets or instruments enabling control over crypto assets; and
• participation in and provision of financial services related to an issuer’s offer and/or sale of a crypto asset.

A “crypto asset” is defined by ASIC as: “…a digital representation of value or contractual rights that can be transferred, stored or traded electronically, and whose ownership is either determined or otherwise substantially affected by a cryptographic proof.”

The proposal would implement a CASSPr licensing regime which would be separate from the AFS licensing regime.

Most of the entities providing access to crypto assets also provide custodial services. These entities would need to comply with the custodial obligations, or, if they outsource custody to a third party, ensure that these entities comply with the custody obligations.

There would only be one licence type for CASSPrs who facilitate the buying and selling of crypto assets (exchanges, dealers, brokers) and custodians but the obligations would be graduated depending on the number and type of services offered by the CASSPrs.

The obligations would be administered in a flexible manner with the aim of ensuring that industry participants behave with honesty, fairness, integrity, and competence while keeping a simple, consistent and efficient regulatory approach.

This regime would impose the following obligations on CASSPrs:

• (1) do all things necessary to ensure that: the services covered by the licence are provided efficiently, honestly and fairly; and any market for crypto assets is operated in a fair, transparent and orderly manner;
• (2) maintain adequate technological, and financial resources to provide services and manage risks, including by complying with the custody standards proposed in this consultation paper;
• (3) have adequate dispute resolution arrangements in place, including internal and external dispute resolution arrangements;
• (4) ensure directors and key persons responsible for operations are fit and proper persons and are clearly identified;
• (5) maintain minimum financial requirements including capital requirements;
• (6) comply with client money obligations;
• (7) comply with all relevant Australian laws;
• (8) take reasonable steps to ensure that the crypto assets it provides access to are “true to label” e.g. that a product is not falsely described as a crypto asset, or that crypto assets are not misrepresented or described in a way that is intended to mislead
• (9) respond in a timely manner to ensure scams are not sold through their platform;
• (10) not hawk specific crypto assets;
• (11) be regularly audited by independent auditors;
• (12) comply with AML/CTF provisions (including a breach of these provisions being grounds for a licence cancellation); and
• (13) maintain adequate custody arrangements as proposed in the next section.

The first seven obligations are similar to obligations that are applied under the financial services regime and go towards ensuring minimum standards of conduct and operational resilience.

ASIC would be empowered to grant relief from some or all the obligations if warranted, on a case-by-case basis to ensure the regime remains agile and flexible.

More work will be needed to define the scope and application of these obligations if they are implemented in legislation along with the necessary powers needed for the regulator e.g. to grant, vary and cancel licences.

Under the proposed hawking prohibition, a CASSPr must not, in the course of an unsolicited contact with a retail consumer:

• offer specific crypto assets for sale; or
• request or invite a consumer to ask for crypto assets offered through the service.

The objective of this proposed prohibition is for consumers to have control over their decisions to purchase crypto assets and not be subject to aggressive selling tactics by CASSPrs in relation to the crypto assets they offer through their service. The hawking prohibition would not generally apply to advertising or the mere provision of information.

There are alternative options proposed too.

Alternative option 1: Regulating CASSPrs under the financial services regime

Under this option, all crypto assets could be brought into the existing financial services regime by defining crypto assets as financial products under section 764A of the Corporations Act and the financial services regime tailored to achieve the appropriate outcomes for crypto assets.

The Government (or the regulator) could be provided with powers to exempt or “carve out” particular crypto assets which do not warrant regulation under the financial services regime in a risk-based manner.

Under this option CASSPrs that provide a trading venue would be subject to the Australian market licensing regime. Entities operating as brokers – by forwarding clients’ orders to a third-party exchange for execution – would be licensed under the AFS licensing regime and comply with the associated obligations. Other entities would need to comply with the relevant obligations under financial services regimes.

There is flexibility in how this option could be implemented. For example, the Government could tailor the financial services regime to apply differently to different products or services. For example, basic banking products are subject to less onerous requirements than derivatives.

This approach could lead to a delay before new crypto assets could be excluded from the regime, which may impede innovation. Some CASSPrs would be subject to much higher financial requirements (for instance under the market licence), as well as navigating compliance with numerous parts of the regime.

Alternative option 2: Self-regulation by the crypto industry

Under this option, industry would develop a code of conduct for crypto asset services. This could be approved by a regulator and meet minimum regulatory policy goals similar to those proposed above – such as in respect of consumer protection and AML/CTF.

The ‘Global Digital Finance Principles for Token Trading Platforms’ and Blockchain Australia’s ‘Australian Digital Currency Code of Conduct’ provide useful starting points for a voluntary code of conduct.

The existing regulatory regime for AML/CTF obligations would continue to apply.

This approach is closer to the US and UK, who do not specifically regulate crypto assets (excluding for AML/CTF) unless they are securities or financial products. Both jurisdictions are considering additional obligations for crypto assets.

The closing day for submissions is 27 May 2022.