Australia Sets Course for Crypto Regulation with Draft Legislation on Licensing and Custody Rules

Like many nations, Australia recently released a proposal outlining a new licensing regime for cryptocurrency exchanges and service providers, aiming to regulate the rapidly evolving crypto industry under existing financial services laws. 

The primary focus of this draft legislation is to set forth comprehensive licensing and custody rules for the crypto sector, a significant stride towards establishing clear regulatory frameworks in Australia.

The cryptocurrency space is continually evolving, and as it gains prominence in the financial landscape, governments worldwide are seeking ways to regulate and govern this burgeoning sector. Australia, too, is taking substantial steps to introduce a structured regulatory framework to manage the digital asset space. 

The Australian Treasury recently unveiled plans to regulate the crypto industry through a consultation paper, demonstrating a keen interest in taming the potential risks and fostering innovation.

The proposed regulation in Australia focuses on regulating the crypto sector at the exchange level, including cryptocurrency exchanges and other service providers. The objective is to enhance consumer protection and instil trust in this innovative financial realm.

“Australia has been waiting for certainty over digital asset regulation so it can seek to catch up with the rest of the world,”

said Michael Bacina, digital asset lawyer at Piper Alderman and Chair of Blockchain Australia. 

The proposed rules dictate that any crypto exchange holding assets exceeding $3.2 million or individual holdings surpassing $946 must obtain an Australian Financial Services License (AFSL) from the Australian Securities and Investment Commission (ASIC), the national corporate regulator of Australia.

The proposed regulations come with stringent standards for crypto exchanges to follow. These standards encompass transparent and fair service delivery, effective management of conflicts of interest, comprehensive financial reporting, adherence to solvency requirements, and maintaining sufficient cash reserves. Additionally, the regulations introduce asset custody rules to heighten consumer protection within the crypto sector.

Addressing Concerns and Encouraging Innovation

Australia’s proposed regulatory framework balances addressing potential consumer harm and fostering innovation within the crypto sector. 

The regulations intend to ensure that cryptocurrency exchanges adhere to strict standards, providing a level playing field for both national and overseas crypto platforms. By doing so, the government aims to strengthen consumer protection, which is critical considering the increasing number of Australians engaging with cryptocurrencies.

Public consultation on the government’s regulatory plans will continue until December 1, fostering an inclusive approach to framing these regulations. Following this, an exposure draft of the proposed legislation is expected to be released next year. 

Treasury and Reserve Bank of Australia will be expected to publish a “joint report around the middle of 2024 that will provide a stocktake on central bank digital currency (CBDC) research in Australia and set out a roadmap for future work,” Dr Brad Jones, Assistant Governor at the Reserve Bank of Australia said in a speech.

Once the regulations come into effect, crypto exchanges will have a transition period of 12 months to adapt to the new regulatory framework. This grace period aims to ensure a smooth transition while upholding the regulatory standards set by the government.