Australia as a Technology and Financial Centre: Report

The Senate Select Committee on Australia as a Technology and Financial Centre chaired by Senator Andrew Bragg has delivered its final report. 

The report overviews digital assets markets in Australia and the regulatory framework in Australia and overseas, and examines options for reforming the Australian regulatory framework. It also looks at the issue of de-banking for Australian fintechs and some other policy issues.

What are digital assets?

“Digital assets” are also known as crypto-assets. The report notes ASIC’s definition of this type of property:

A crypto-asset is a digital representation of value or contractual rights that can be transferred, stored or traded electronically. Crypto-assets use cryptography, distributed ledger technology or other technology to provide features such as security and pseudo-anonymity. A crypto-asset may or may not have identifiable economic features that reflect fundamental or intrinsic value.

Cryptocurrencies like Bitcoin are a form of digital asset.

Market licensing

Many digital assets are traded on digital currency exchanges (“DCEs”), which are currently only lightly regulated in Australia by a requirement to be registered with AUSTRAC. This contrasts with the heavily regulated markets licence regime for financial products.

The report recommends that the Australian Government establish a market licensing regime for DCEs, including capital adequacy, auditing, and responsible person tests, under the Treasury portfolio.

Custody of digital assets

In traditional finance, custodians are often used hold an investor’s assets, which could be in electronic form such as a share register or in physical form such as gold held in a vault.

Digital assets are secured through the use of cryptographic keys. For a transaction to be executed in relation to a digital asset, the correct private key must be matched with the public key, so whoever controls the private key controls the asset. It is therefore critical that the private key is held securely, especially since public blockchain transactions generally cannot be reversed.

The report recommends that the Australian Government establish a custody or depository regime for digital assets with minimum standards under the Treasury portfolio.

Decentralised autonomous organisations

A decentralised autonomous organisation (“DAO”) is a governance structure based on a blockchain in the form of rules encoded as a computer program, controlled by the organisation members.

DAOs are an important part of the digital asset ecosystem because they are often used to organise systems and applications which use blockchain technology.

The legal status of this type of organisation is unclear in Australia and in most other jurisdictions. On 1 July 2021, Wyoming became the first US state to recognise DAOs as a legal entity.

The report recommends that the Australian Government establish a new DAO company structure.

AML/CTF regulation

AML/CTF regulations should be clarified in the committee’s view, to ensure that they are fit for purpose and do not undermine innovation.

The report concluded that consideration should be given to the driver of the Financial Action Task Force guidelines on the “travel rule”, which requires financial institutions to include verified information about the originator (payer) and information about the beneficiary (payee) for wire transfers and other value transfers throughout the payment chain. The report found that technological solutions to enable digital asset service providers to comply with the travel rule are still under development and that AUSTRAC needed to strike a balance between appropriately managing risks while not implementing the travel rule in a way that undermines the operation of legitimate digital asset businesses.

Tax

The report recommends that the capital gains tax (“CGT”) regime be amended so that digital asset transactions only create a CGT event when they genuinely result in a clearly definable capital gain or loss.

Digital asset mining tax breaks

Concerns were raised in some submissions to the committee about the energy consumption associated with some digital asset protocols, in particular the energy intensity of Bitcoin mining.

The report concluded that cryptocurrency mining and related activities in Australia should not undermine Australia's net zero emissions obligations, and companies engaging in these activities should be incentivised to source their own renewable energy. The committee recommended that the Australian Government give a 10% company tax discount to businesses undertaking digital asset mining and related activities in Australia if they source their own renewable energy for these activities.

Central bank digital currency

A policy review by Treasury was recommended by the report into the viability of a retail central bank digital currency in Australia.

Other recommendations

Other recommendations in the report include:

• the Australian Government should conduct a token mapping exercise to determine the best way to characterise the various types of digital asset tokens in Australia;

• enacting the recommendation from the 2019 ACCC inquiry into the supply of foreign currency conversion services in Australia that a scheme to address the due diligence requirements of banks be put in place;

• the Australian Government develop a clear process for businesses that have been de-banked, anchored around the Australian Financial Complaints Authority;

• common access requirements for the New Payments Platform should be developed by the Reserve Bank of Australia; and

• the Australian Government establish a Global Markets Incentive to replace the Offshore Banking Unit regime.

Patrick Dwyer and Kathleen Harris
Legal Directors