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Australia’s Treasury is seeking feedback on new proposals that would require almost all crypto trading platforms to obtain a financial services licence.
In a new consultation published last week, the Treasury has proposed that digital asset trading platforms must obtain an Australian Financial Services Licence (AFSL), except those that fall within a low-value exemption.
If adopted, the proposals would mark the end of the line for the idea of a “bespoke framework” for digital assets — something that opposition senators have pushed for previously.
Under the Treasury’s proposals, the only exemptions to the AFSL licensing requirement would be for:
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Platforms where no single client holds more than A$1,500 ($946) in digital assets.
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Platforms where all clients collectively hold less than A$5m ($3.1m) in digital assets.
The Treasury said the risks posed by digital asset trading platforms are proportionate to the size and scale of the platform.
Under existing regulations, a similar “low-value exemption” is applied to facilitators of non-cash payments.
For these firms, if the maximum that can be held by one customer is less than $1,000, and the maximum that can be held collectively is less than $10m, an AFSL is “generally” not required.
With regard to the digital asset industry, the Treasury said the low-value exemption will encourage “innovation and experimentation” in the early stages of developing a “novel service offering”.
The Treasury has asked for feedback on the licensing and other proposals by December 1, 2023.
Reaction to AFSL compliance proposals
In a statement, the Australian Banking Association (ABA) welcomed the proposals, calling them a “step in the right direction” in the fight against scams.
Anna Bligh, CEO of the ABA, said that almost half of scammed funds in Australia are channelled into crypto, and once they reach a crypto exchange they are “virtually impossible” to recover.
“The changes will help banks and customers ensure money is only transferred to reputable crypto operators that are subject to strict rules and regulator enforcement action,” she said.
“This means no matter what financial services door a customer walks through, customers will be protected by the same regulatory standards.”
To maintain an AFSL, firms must meet general obligations such as solvency and cash reserve requirements, and must keep and submit financial records.
They must also have in place systems for managing conflicts of interest, dispute resolution and for monitoring and disrupting misconduct from within the firm.
With these requirements applied to crypto firms, the Treasury aims to prevent future FTX-style bankruptcies that leave thousands of investors out of pocket.
As noted by the Treasury, FTX had more than 50,000 customers in Australia, whose bankruptcy claims are now among the $9bn of claims from customers around the world.
However, there are concerns that the low-value exemption could be impractical during a rapidly rising market, as seen in 2021 and 2022.
As Luke Raven, senior partner in financial crime compliance at Bank of Queensland, told Vixio, in this scenario many smaller exchanges could breach the low-value exemption limits at the same time.
This would cause compliance issues not only for the platforms themselves, but also for Australia’s regulators, he said.
Putting an end to ‘rug pulls’
In general, however, Raven agreed that the introduction of AFSL requirements will help to “shake out” bad actors from Australia’s crypto markets.
For example, the Treasury’s plans to impose due diligence standards on token listings will prevent future "rug pulls", he said.
In crypto parlance, a rug pull is when the founders of a new token pump up its value, only to dump it on smaller investors in large quantities at a later date, crashing its price.
A rug pull is similar to a "pump and dump" scheme in traditional markets, except pump and dump schemes can involve legitimate assets.
In crypto, a rug pull token is fraudulent from the outset, and is launched only to dump on unsuspecting investors so that founders and insiders can cash out.
The Treasury’s plans are likely to prevent this type of crypto scam, said Raven, but are unlikely to prevent other crypto scams that are currently on the rise.
“In pig butchering scams, for example, it’s not the token but the scammer that is the problem, because that’s who the victim willingly sends their funds to,” he said.
Last month, as covered by Vixio, US regulators warned of a rise in pig butchering scams, where the scammer forms a relationship with the victim and “financially fattens” them before stealing their funds.
Even with the AFSL requirement, Raven said there is little that Australian exchanges could do to recoup losses from pig butchering scams.
“In this type of scam, the reason the funds are so hard to get back is because crypto is immutable,” he said.
“So even if the funds are traced and identified, they’re basically impossible to seize, despite what many in the crypto lobby will tell you.
“Whereas for regular money, it’s very seizable, so the criminals just move it super quick and get it out as cash.”
AML proposals on the move
It is worth noting that the regulatory framework proposed by the Treasury does not intend to address anti-money laundering and counter-terrorism financing (AML/CTF) requirements.
In April, as covered by Vixio, the Attorney-General’s Department opened a separate consultation on expanding the range of digital asset-related services that are subject to AML/CTF regulation.
As noted by Mark Dreyfus, attorney general, the proposals are in line with global Financial Action Task Force (FATF) standards.
