The Australian Government, via the Treasury, has announced that it is working to introduce a regulatory framework for entities providing access to digital assets and holding them for Australians and Australian businesses – which will include required licensing of all digital asset intermediaries.

The reforms target identified consumer harms, while supporting innovation in the uses of digital assets and emerging technologies. The implementation of the proposed framework is subject to future legislative design and development.

The proposed regulatory framework would apply to digital asset service providers that present similar risks to entities that operate in the traditional financial system. It seeks to leverage the Australian Financial Services Licence (AFSL) framework to regulate digital asset service providers to ensure consistent oversight and safeguards for consumers.

The Treasury has issued a Consultation Paper entitled Regulating digital asset platforms, open for comment and submissions until December 1.

This paper has seven parts:

1. Introduction – explains the objectives of the reforms and the policy problem being solved.
2. Regulating digital asset intermediaries – outlines a proposed regulatory framework for digital asset facilities, including its scope, structure, and focus.
3. Licensing digital asset intermediaries – describes a mix of standard and tailored licensing obligations that would apply to service providers in relation to digital asset facilities.
4. Minimum standards for facility contract – describes the proposed requirements for structuring a digital asset facility, including custodial and reporting rules.
5. Minimum standards for ‘financialised functions’ – describes the specific activities that would require compliance with additional rules.
6. Other activities – explores some activities that may be included in the future.
7. Next steps – outlines future milestones in relation to this proposal.

The regulatory framework proposed in this paper does not intend to address anti‑money laundering and counter‑terrorism financing (AML/CTF) requirements. Businesses providing digital currency exchange services, as set out in the AML/CTF Act will continue to be required to register with AUSTRAC. A separate consultation being led by the Attorney‑General’s Department is currently considering expanding the range of digital asset related services that are subject to AML/CTF regulation in line with global Financial Action Task Force Standards, including the requirement for businesses providing such services to register with AUSTRAC.

The Treasury notes that consumer harms associated with digital assets have centered around the vulnerabilities of intermediaries. The business model shared by the intermediaries responsible for these harms is a ‘multi‑function platform that holds assets for customers’ (digital asset platform). Intermediaries in the digital asset ecosystem are almost universally structured as digital asset platforms. This includes all the dominant players in the digital assets market, both in the volume of transactions they process and the size of the customer base they serve. It also appears to include most ‘brokers’ and even intermediaries holding non‑digital assets as part of an ‘asset‑backed token’ arrangement.

Recent failures of digital asset platforms have led to considerable consumer losses. For instance, the collapse of FTX alone affected approximately 50,000 Australian consumers. The common factors among these failures 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.

Overall, the objectives of the proposed framework include:

• protecting consumers;
• promoting innovation through technology neutrality and regulatory clarity;
• aligning Australia’s digital asset regulatory framework with international jurisdictions, where appropriate; and
• utilising regulatory tools that provide agility, flexibility, and adaptability.