A surge in retail consumer exposure to crypto assets has led the Government to consider additional regulation in Australia to support consumer confidence and trust in the crypto asset ecosystem and provide regulatory certainty to support crypto businesses’ investment decisions.

The Government has also asked the Board of Taxation to review the appropriate policy framework for the taxation of digital assets and transactions in Australia.

Licensing and custody regime for crypto asset secondary service providers

Treasury has issued a consultation paper outlining the Government’s proposed approach to licensing crypto asset secondary service providers (CASSPrs) and crypto custody requirements.

A crypto asset is a digital representation of value that can be transferred, stored, or traded electronically. Crypto assets use cryptography and distributed ledger technology.

The consultation paper says crypto assets have three primary uses: as an investment; as a means of exchange; and to access goods and services. Crypto assets include cryptocurrencies like BTC, Ripple and Litecoin, utility tokens like filecoin and basic attention token, and security tokens. They may run on their own Blockchain or use an existing platform like Ethereum. Crypto assets may also include non-fungible tokens (NFTs).

Crypto assets are a subset of digital assets, that uses cryptographic proof to determine ownership.

The Government considers that the most appropriate subject of regulation are the crypto asset secondary service providers.

Crypto asset secondary service providers provide a range of services to allow consumers and businesses to access and use crypto assets such as:
• custody and storage (where software and hardware are used to store and handle private keys);
• exchange, brokerage and dealing services (where the service provider facilitates access to crypto assets); and
• operating a market (facilitating peer-to-peer exchange of crypto assets).

The Consultation Paper says that the primary risk associated with CASSPrs is the potential loss of a consumer’s assets or balance (in fiat or crypto) through the use of a providers’ facilities. This includes risks from:
• operational risks including business continuity, illiquidity and inadequate capital;
• insolvency and disorderly wind down;
• fraud and key personnel risks;
• Misleading or deceptive conduct; and
• cybersecurity

The proposed licensing regime would provide a framework for minimum standards of conduct, including for custody of private keys and the suitability of key persons to be operating secondary service provider businesses (through fit and proper person tests).

Review of the Tax Treatment of Digital Assets and Transactions in Australia

The Government has released the Terms of Reference for a review to be undertaken by the Board of Taxation (the Board) into the appropriate policy framework for the taxation of digital assets and transactions in Australia.

The Board is asked to:

• Consider the current Australian taxation treatment of digital assets and transactions and emerging tax policy issues;
• Consider the awareness of the taxation treatment by both retail and wholesale investors and those transacting in digital assets as part of their business;
• Consider the characteristics and features of digital assets and transactions in the market, including the rapid evolution of technology supporting the broader digital asset ecosystem;
• Analyse the taxation of digital assets and transactions in comparative jurisdictions and consider how international experience may inform the taxation of digital assets and transactions in Australia; and
• Consider whether or not any changes to Australia’s taxation laws and/or their administration are warranted in the context of digital assets and transactions, both for retail and wholesale investors.

The Board has been asked to report back to the Government by 31 December 2022.

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Author: David Jacobson
Principal, Bright Corporate Law
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About David Jacobson
The information contained in this article is not legal advice. It is not to be relied upon as a full statement of the law. You should seek professional advice for your specific needs and circumstances before acting or relying on any of the content.