2024 Overview: Securities Regulation of Crypto Asset Activities in Canada
1. Understanding Cryptoassets and Their Regulatory Landscape in Australia
In Australia, cryptoassets, which encompass various forms like cryptocurrencies, stablecoins, and non-fungible tokens (NFTs), lack an explicit definition in the legal framework. Consequently, there exists no consensus on the precise meanings of terms such as “cryptoassets,” “digital currency,” and “cryptocurrency,” often used interchangeably. Not classified as fiat currency, cryptoassets are not recognized as money by Australian regulators.
Regulatory treatment of cryptoassets in Australia is contingent upon their intended use, features, and associated rights. For instance, cryptoassets categorized as “financial products” fall under the ambit of Australia’s financial services licensing regime, as explored in subsequent questions (2, 3, and 4).
A series of recent and ongoing Australian Government reviews aim to address the regulation of cryptoassets and related services. In February 2023, the Government initiated a token mapping consultation to delineate the activities and functions of cryptoassets and align them with existing regulatory frameworks. By December 2023, the consultation on proposals to bring “digital asset facilities” (platforms where client assets are held) under financial services regulation concluded. This process, using the term “digital asset” to denote a token and its associated entitlements, anticipates the release of exposure draft legislation in 2024, followed by a 12-month transition period.
3. Regulation of Different Types of Cryptoassets
In Australia, no cryptoassets have been expressly outlawed, and regulatory authorities maintain a technology-neutral stance, applying legislative obligations irrespective of the technology used to provide services. While specific legislation for cryptoassets is under consultation, existing laws may encompass cryptoassets.
Legislative amendments so far have primarily focused on the transactional aspects of cryptoasset activities rather than the assets themselves. The government has conducted multiple consultations to clarify the nature of cryptoassets and translate associated risks into a regulatory framework for service providers (see above, Question 2).
Financial Services Regulation:
Entities engaging in financial services related to cryptoassets, classified as financial products, trigger requirements for an Australian Financial Services License (AFSL). The definitions of “financial product” and “financial service” under the Corporations Act 2001 (Cth) are broad, and ASIC’s information sheet “INFO 225 Crypto-assets” offers guidance on regulatory obligations.
Cross-border Issues:
Operating a financial services business in Australia necessitates a Foreign Financial Services Provider (FFSP) to hold an AFSL, unless exempt. The Corporations Act may apply to cryptoasset sales regardless of origin, with ongoing changes in Australia’s treatment of regulated offshore entities.
Design and Distribution Obligations (DDO) and Product Intervention Powers:
Since October 2021, issuers and distributors of financial products must comply with DDO, impacting cryptoasset structure and sales. ASIC also wields product intervention powers to address market-wide problems or specific business models.
Consumer Credit Regulation:
Entities engaged in cryptocurrency lending may need an Australian credit license under the National Credit Consumer Protection Act 2009 (Cth), adhering to responsible lending and disclosure obligations.
Prudential Regulation:
Entities conducting banking business must be authorized by APRA as an Authorized Deposit-taking Institution (ADI). Stored value holders associated with Purchased Payment Facilities (PPF) are also subject to APRA authorization.
Consumer Law:
Cryptoasset sales, even if not regulated under the Corporations Act, may fall under Australian Consumer Law, prohibiting misleading conduct and ensuring products are fit for purpose. ASIC has delegated powers to address misleading conduct in cryptoasset marketing or sales.
ASIC’s vigilance over cryptoasset sales extends to social media manipulation, inadequate disclosure, and misleading claims, with consequences including monetary penalties and injunctions for non-compliance.
Taxation of Cryptoassets
In Australia, the taxation of cryptoassets has sparked considerable debate, notwithstanding recent efforts by the Australian Taxation Office (ATO) to provide clarity. The Treasury Laws Amendment (2022 Measures No. 4) Bill 2022, enacted on 23 June 2023, clarified that, for income tax purposes, cryptocurrency is treated as an asset held or traded, rather than money or a foreign currency (except for government-issued digital currencies).
Tax implications for cryptoasset holders vary depending on the purpose for which the cryptocurrency is acquired or held. Here’s a summary of tax considerations for Australian residents:
Staking Cryptoassets: Holding units of cryptocurrency for the purpose of validating and verifying transactions on a blockchain may result in additional tokens as rewards. These rewards should be treated as ordinary income when received.
Issuers of Cryptocurrencies: In the context of initial coin offerings, coins issued by entities that are Australian tax residents or operating through an Australian permanent establishment may be assessable in Australia, subject to corporate tax rates.
Australian Goods and Services Tax (GST): Transactions involving digital currency made from 1 July 2017 are generally not subject to GST. However, normal GST rules apply to digital currency used as a method of payment for goods and services.
Cryptocurrency Mining: Whether GST is payable by a miner on the supply of new cryptocurrency depends on various factors, including the miner’s specific features and GST registration status.
Regarding insolvency or bankruptcy, Australia currently lacks a specific regime for digital asset intermediaries, so general insolvency laws apply. Treatment of cryptoassets in insolvency proceedings remains untested in Australian courts. Additionally, taking security over cryptocurrency is unsettled, as courts have yet to determine if cryptoassets constitute “property” under relevant legislation.
Smart contracts are enforceable as legal contracts under Australian law, permitted by the Electronic Transactions Act 1999 (Cth). However, challenges arise with self-executing contracts requiring discretion.
In cases of crypto fraud, victims may pursue civil actions for breach of contract, breach of trust, misrepresentation, and damages. Fraud is also a criminal offense, with penalties for dealing with fraudulently obtained cryptoassets.
Ongoing legal consultations and frameworks include proposed updates to payment systems regulation, enhancements to payment service provider regulations, and inquiries into simplifying financial services regulations. These initiatives aim to adapt regulatory frameworks to emerging technologies like cryptoassets.
