Written by:Michele Levine & Jaime Lumsden

Compiled by: TaxDAO

Following the release of the "Recommendations for Regulating Digital Asset Platforms" (hereinafter referred to as the "Recommendations") in October 2023, the Australian Government is negotiating a new regulatory framework for digital asset service providers and proposes that digital assets should be regulated within the existing Australian Financial Services License (AFSL) framework.

The Recommendation is the next step in Australia’s efforts to develop a robust regulatory framework for digital assets. The proposed regulatory framework will be the first of its kind in Australia; however, there are several issues that need to be addressed. This article highlights the questions that should be asked during the consultation process. It is vital that industry uses this opportunity to identify issues and provide support to Treasury Australiacryptocurrencyguidance to industry on alternative solutions as further consultation prior to draft legislation could not be guaranteed.

What activities will be regulated?

Asset holding will be a key regulatory activity. Anyone holding digital assets (where real-world assets areTokenAny entity that supports digital assets in the context of digitalization will become a "digital asset platform", which will be a new type of financial product under the Corporations Act 2001. Anyone operating a digital asset platform will need to hold an AFSL with certain authorizations and comply with a series of customized regulatory requirements.

In addition to holding assets, certain "financial functions" related to digital assets (non-financial products) will also be regulated. These financial functions include digital asset transactions,TokenStaking, asset tokenization, and crowdfunding. These financialized functions will also be subject to customized regulatory requirements.

There are currently no proposals to regulate non-financial digital assets, and any digital assets that are financial products will continue to be subject to the existing financial services regime.

What is asset holding?

The Proposal proposes the concept of “de facto control” as a threshold for determining whether a person holds assets and therefore becomes a DAF. We have no objection to the use of “de facto control” per se, and we think that it is a good standard for asset holding in general.

However, the concept of “asset holding” needs further clarification and definition, especially considering the different business models in the market. For example, in a brokerage model, the broker may not providewallet, nor do they hold assets for clients, but when brokering transactions, they mayexchangeTemporary custody of tokens between clients and customers. At present, this would trigger DAF regulation. We believe this is not appropriate and there are other models that can address the risks. One option might be to implement client asset rules (similar to client money rules) to provide protection around temporary custody. For example, all assets must be held in a designated trustwallet中，资产只能持有有限的时间（如 5 天），客户在交易指令时必须提供wallet地址，以便及时转移代币。

If a decentralized autonomous organization (DAO）没有充分去中心化并且可以通过交易验证或治理建议进行事实控制，那么它们也有可能受到监管制度的约束。这一点需要进一步探讨，因为它可能会抑制澳大利亚的创新努力并引发潜在的执法问题。例如，澳大利亚创新者也许不太可能在岸上推出 DAO，因为 DAO 可能需要一些时间才能充分去中心化（即在不同区域拥有大量独特的节点 / 验证点）。如果澳大利亚人的活动存在被发现的风险，并可能导致某种形式的个人责任，这也可能会抑制澳大利亚人参与 DAO 的积极性。我们建议行业（特别是 DeFi 和 web3 Businesses) to consider the proposals and highlight any concerns and potential solutions.

Is a low value exemption appropriate?

The Recommendation suggests that DAFs with assets below a certain limit may be exempted from the AFSL requirement in the following circumstances:

• the total value of DAF Rights held by any one customer of the Platform Provider at any time does not exceed AUD1,500;

• The total assets held by the DAF Provider will not exceed A$5 million at any time.

The exemption is based on the exemption for non-cash payment facilities; however, while we support the concept of the exemption, we question whether the proposed limit is appropriate for DAFs. This is because the exemption for non-cash payment facilities is based on ongoing transactions - that is, there is a limit for each transaction and an aggregate limit for all transactions currently being processed. While a transaction is being processed, it counts towards the limit. Once the transaction has been processed, that portion of the limit can be used again. This approach is not necessarily appropriate for asset holding arrangements because the function is not transactional but static.

We therefore believe that there should not be any individual account limits, and we also ask what the appropriate aggregate limit for DAFs is. A good starting point might be the limits on current and proposed stored value facilities, which appear more akin to token asset holding arrangements as an arrangement to hold fiat currency indefinitely until instructions are received.

Another important question is how to value the total assets of a DAF, given that the assets held by the DAF may be illiquid or volatile. Providers of non-cash payment facilities and stored value facilities can easily operate within the limits because the value of the assets (fiat currencies) generally does not change, while DAFs may exceed the limits due to good markets.

A more appropriate approach might be to provide a buffer by providing a grace period to correct threshold violations over a rolling period (eg, a 30, 60, or 90-day rolling average) and/or before a breach occurs.

What licenses are required?

At this stage the Proposal does not propose a specific authority as this will be the responsibility of the Australian Securities and Investments Commission (ASIC), but we know that DAF providers will need an AFSL, as will anyone who provides DAF-related financial services. This is conceptually sound, but we believe that certain changes to the Corporations Act will be needed to better meet the requirements of DAFs.

For digital asset facility providers, it is proposed that authorization to “operate” a facility would be required (similar to the authorization for a registered managed investment scheme). In addition, we propose the inclusion of a specific definition of transaction to cover the proposed regulated financialization functions. That said, the current concept of financial product transactions is unlikely to cover transactions executed through DAFs, so changes would need to be made to include them in the definition.

In addition, the Recommendation covers intermediaries that facilitate transactions or provide advice on DAFs. Our understanding is that the recommendation regulation will apply at the DAF level (not the digital asset level), so intermediaries will have obligations when they recommend the use of a particular DAF for asset holding or one of the financialization functions, but not when they recommend the tokens that are the subject of any transaction. Since token transactions are one of the financialization functions that are regulated (provided the definition of transactions is amended as discussed earlier in this article), any intermediary digital asset transactions on DAFs will also be considered financial services.

We believe it is appropriate to follow the approach taken by insurance intermediaries, whereby intermediaries can act as agents for either product issuers or clients.

Is the Net Tangible Assets (NTA) calculation valid?

It is proposed that a DAF must hold $5 million in net tangible assets, unless the institution outsources its custody. If it outsources its custody, it will still need to hold $0.51 of the net tangible assets. This amount is considered appropriate to cover the administrative costs of an orderly liquidation and is therefore unlikely to change unless it can be demonstrated thatcryptocurrencyThe costs of an orderly wind-up of the business may be higher or lower, thus justifying an increase or decrease in the tangible net worth requirement.

It is not clear how the “value” of a DAF would be calculated. Presumably, the value of all tokens in the asset holding arrangement would need to be accounted for, even if custody has been outsourced. Therefore, the same issues apply to valuing DAF assets for the purposes of calculating NAV as we highlighted above with the low value exemption. That is, if assets are illiquid or volatile, then how should their value be determined.

Is the proposed approach effective?

Under the current proposal, DAF providers would still need to hold AUD5 million in net tangible assets if they outsource custody to an institution that is not licensed in Australia. We believe this will create issues for global businesses and local businesses that need access to global custody solutions, particularly given that there is currently no local digital asset custody market in Australia. We recommend that an approach similar to APRA’s outsourcing should be considered so that businesses can choose offshore custody, but with the assurance that certain minimum protections are in place.

Furthermore, it is suggested that clients need to contract directly with the custodian. This is highly unusual and does not reflect the current outsourcing model in the financial services industry. This requirement is a major disincentive to outsourcing custody and removes any control the DAF has over its custody provider. We suspect the intention behind this is to protect client assets in the event of insolvency. We believe there are better ways to address this, which could include robust client asset rules to protect assets in liquidation (similar to client money rules), asset segregation and ring-fencing rules and providing for client step-in rights in certain circumstances.

A platform that provides a variety of digital asset facilities

Under the proposal, each DAF could only provide one service, such as custody, and each financialization function would need to be provided through a separate DAF.

We believe this approach is clumsy and fails to recognize the fact that DAFs provide financialization functions by holding digital assets. This is because many financialization functions come from holding assets.

We recommend that DAFs should be able to hold digital assets and provide token trading and token staking capabilities. However, we do agree that each asset tokenization and crowdfunding project should be a separate DAF and subject to the proposed requirements separately.

The consultation paper also mentions that multi-facility platforms may have DAFs provided by different facility providers. We are not aware of any platforms that currently operate this way, other than where different entities within a corporate group provide specific functions. If this is the case, we would like to know whether this is simply an outsourcing arrangement or involves separate facilities being provided by different entities. This is something the industry may wish to clarify or comment on.

trading

对于非金融产品的数字资产提出了不同的市场规则。业界不妨提出他们对这些市场规则的任何担忧，以及考虑到加密市场的运作方式，这些规则是否合适。也就是说，与加密货币交易和市场相关的具体风险是什么？拟议的要求是否适当地解决了该风险？

In addition, there is also the question of what market rules apply when digital assets of non-financial products are exchanged for digital assets of financial products subject to usual market rules. This is a question that requires further consideration, especially after the merger of TradFI (traditional finance) and DeFI.

Asset Tokenization

Businesses looking to tokenize assets will need to comply with the AFSL as a DAF as they will be custodians of the assets backing the tokens and perform the financialization functions of the asset tokenization. We believe it is appropriate for token issuers to be able to operate their own DAF for their asset tokenization projects.

Once an asset-backed token is finalised, any platform that facilitates the trading or staking of that asset-backed token will also become a DAF and will need to hold an AFSL and comply with the proposed regulatory requirements.

We believe that all DAFs involved in the digital asset value chain should be subject to the proposed regulatory regime.

Crowdfunding

Any project that wishes to raise funds by issuing tokens will be intermediating through a DAF and will be subject to a number of requirements. This approach is similar to the capital raising regime in Chapter 7 of the Companies Act. However, the financialization function of capital raising does not facilitate direct financing similar to that permitted under Chapter 6 of the Companies Act, which involves the issuance or sale of securities, which will still be regulated as financial products.

"This proposal could impact the way the industry currently funds crypto projects and could cause crypto projects to move offshore. We recommend that the industry consider this and raise any issues they foresee with this approach and propose alternative solutions that seek to correct for customer risk."

Another approach could be to enable projects to raise funds directly through an Initial Coin Offering (ICO) without a DAF license, provided that the project does not hold any tokens issued as part of the ICO (i.e. provide a custodial wallet), on a similar basis to the self-dealing exemption for capital raising. If a project will hold tokens issued as part of an ICO, then it would make sense to regulate the project as a DAF and comply with the proposed licensing and regulatory requirements.

If the self-dealing exemption for ICOs is allowed as proposed, the question arises whether there should be any limit on the total number or value of tokens issued or sold through an ICO. This is because the current self-dealing exemption for securities is predicated on the basis that the financing is not a "public offering". As ICOs are typically public, replicating the public offering requirement may be challenging. Therefore, a limit or cap may be more appropriate. The industry may wish to comment on the feasibility of this option and what caps or limits the industry considers appropriate.

In circumstances where an ICO may be launched outside of a DAF, it is important to consider whether and what disclosure should be mandatory. For securities financings, a prospectus is required unless an exemption applies. For ICOs, requiring a short form and basic disclosure document subject to an exemption is appropriate, but must comply with the exemption. For example, if the project is raising funds below a certain monetary threshold or from certain specific investors (i.e. wholesale, sophisticated or professional clients), a disclosure document may not be required. Similar exemptions currently exist for securities and this may be a helpful point.

We also recognizeXiaobai NavigationTherefore, it is worth considering whether any disclosures required for ICOs (whether directly or through a platform intermediary) should be subject to the same disclosure requirements. This would ensure consistency in project financing and reduce any potential regulatory arbitrage.

What happens next?

The Proposal is a critical step on the road to regulation of the cryptocurrency industry. The industry must take this opportunity to consider, pause and reflect on these proposals and raise any questions or concerns. There may not be another opportunity for comments before the draft legislation is released, and it may be too late to raise major structural issues at this point.

The article comes from the Internet:Analyzing the Australian Digital Asset Supervision Proposal: What trends does it reflect?

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