On Oct. 20, the Australian Senate Committee delivered a groundbreaking report calling for a complete overhaul of crypto legislation and licensing in the country. But, will it achieve its aim of transforming Australia into an international blockchain hub and providing a model for other countries to follow?
Top-down governmental responses to innovation have always been questioned by entrepreneurs. Right now in crypto land as institutional investment flows steadily in and decentralized finance (DeFi) use cases and products have continued to flourish over the past 18 months, many crypto companies are begging for further regulatory clarity.
The original Australian Senate Select Committee on FinTech and RegTech, chaired by Senator Andrew Bragg, was established in 2019 to strengthen the regulatory environment for fintechs and regtechs in Australia. It would quickly become known as the Bragg Inquiry and is now largely focused on crypto. Generally not regarded for its regulatory progress, Australia’s quick pivot to researching and proposing helpful rules for the crypto industry has surprised many.
Judging by the report’s heavy quoting of stakeholders, the Australian government’s October 2021 Senate inquiry final report into digital assets has attempted to truly listen to the vast concerns and aspirations of the bustling Australian crypto industry, with almost 18% of Australia’s population owning crypto. The inquiry released its final report after six months of hearings and submissions on the topic. This timely report has received widespread industry applause.
Generating a response
Notable recommendations include proposals for tax reform and a possible new corporate entity to be able to register decentralized autonomous organizations (DAOs) in Australia. The recommendations present an opportunity to attract jobs, investment and innovation to Australia and to retain talent.
The outcome is perhaps not surprising, given that Bragg is making his mark as a “Crypto Bro.” He participated in a July “Ask Me Anything” session on Reddit and met with crypto stakeholders. He conducted another in September, where he proclaimed:
“I am very keen on the democratic mandate of crypto — I think it has created an asset class that anyone can access.”
He seems to understand the space well, as the final report suggests Australia create DAOs as a new legal corporate vehicle. An acknowledgment that is trying not to subsume these new technologies into existing legal frameworks is contrary to Australia’s common law legal system built on precedent and legislation. On Reddit, Bragg had tipped his hat to progressive legislation in the United States state of Wyoming: “The point here is regulatory arbitrage. We want the innovation to be legitimised through a non-stifling regulatory approach. Do you think the Wyoming DAOs are a good idea?”
So, has crypto gotten too big for the government to ignore? The report suggests the committee, composed of six members from the major political parties and an independent senator, and not just Bragg, is willing to explore new ideas and genuinely support Australia’s place as a home for crypto innovation.
The summation of the report is that Australia might legislate an encouraging regulatory regime for ambitious concepts such as DAOs and that crypto custodial services can now be conducted in Australia. Does this provide an example for less crypto-friendly countries to follow? After all, Australia has been long known for dangerous wildlife and, rarely if ever, for innovative regulation.
It could be argued that with this move, Australia is looking to position itself as a location with favorable laws, hoping to attract more business. “Jurisdictions that provide competitive policy for decentralized technology will attract talent and investment in this space,” noted Kelsie Nabben, a Blockchain Australia board member and Cointelegraph contributor. Wyoming made DAOs a corporate entity a year ago and is now celebrated in crypto circles globally.
The industry welcomed the report but there are concerns that few in the government understand the industry well enough to adequately debate and pass the legislation. Chloe White, CEO of Genesis Block, is well known in crypto circles, having been the Australian government’s former “ambassador for blockchain.” She told Cointelegraph that the government will need to ramp up its efforts in order to follow through on execution:
“The reforms proposed by the Senate mark a turning point. However, the government will struggle to meet the Senate’s ambitious deadline — of 12 months to legislation — if it does not liaise closely with industry experts to earn a more thorough understanding of digital assets.”
The final report — if implemented — would offer much regulatory clarity for the crypto industry. Here are some of the key recommendations that were included:
DAOs a company law vehicle
Investor Telegram groups have paid considerable attention to the Australian inquiry. Notably, investors are greatly excited by the recommendation for the government to establish a new DAO company structure into corporate law. Legal personality for DAOs and limited liability for members would open the floodgates of innovation.
This Senate’s final report itself noted: “Legal liability for members (i.e. token holders) for these organisations is currently unclear, and this regulatory uncertainty is preventing the establishment of projects of significant scale in Australia.” In other words, institutional investment could now flow to major DAO-based projects.
“This is a big one. If legislated, these will be the most significant reform to corporate law in two decades,” RMIT Blockchain Innovation Hub researcher Aaron Lane noted in a press release, adding: “Providing DAO members with the option of a limited liability company structure will encourage talent and investment in Australia.”
Stop de-banking of crypto exchanges
The committee first recommended establishing a new market licensing regime for crypto exchanges since the major Australian banks have long been accused by Australian regulators and the Senate Inquiry of the anti-competitive removal of remittance payments for crypto exchanges or “de-banking,” despite being registered with the financial services watchdog Australian Transaction Reports and Analysis Centre, or AUSTRAC. Large centralized crypto exchanges such as Independent Reserve supported the idea in their Senate submissions to the inquiry.
Further, the proposal recommended establishing “bespoke” custody or depository regime for crypto assets. Crypto asset custody under the remit of Australian regulators would act as a risk minimizer for local investors and encourage custodial businesses to be set up in Australia.
A “token mapping” exercise aimed at appropriately characterizing different crypto assets and determining if they are considered financial products that require some crypto exchanges to register for an Australian Financial Services License (AFSL) is also proposed. This would be welcomed by many, particularly those seeking institutional investment. Australia is also particularly well-known for long established custody rules from a highly professional superannuation industry as a reference point.
One key change is to institute a new recourse for under-banked customers, which would allow customers to appeal to the banks’ decisions. Common access could also be granted to the New Payments Platform, an industry-wide payments platform for Australia, national infrastructure for fast, flexible and data rich payments in Australia controlled by a group of major banks.
This move would reduce the reliance on payments systems on the major banks since the crypto exchange industry in Australia is believed to be built on a house of cards without direct banking. Many crypto exchanges rely on two to three fintechs to bank with the Australian banking system. If those fintechs were de-banked, then the crypto exchange industry is plausibly at risk of collapse in Australia.
Rejecting the Financial Action Task Force’s (FATF) Travel Rule.
Furthermore, the inquiry rejected the Financial Action Task Force’s (FATF) “Travel Rule.” FATF is the international body that sets standards for Anti-Money Laundering. The Travel Rule means that in transactions involving virtual assets, ordering institutions must obtain and hold Know Your Customer (KYC) information for both the sender and the receiver. FATF currently has an extremely broad working definition regarding virtual assets and Virtual Asset Service Providers (VASPs).
The key point is that FATF considers VASPs very broadly when it comes to the purposes of the Travel Rule. Decentralized exchanges (DEXs), certain decentralized application (DApp) owners and operators, crypto escrow services and certain nonfungible tokens (NFTs) are all considered VASPs. This, is of course, unworkable for DeFi projects which are open access to anyone with a crypto wallet and do not require verification.
If crypto exchanges were overregulated under the wide FATF Travel Rule approach, this would likely stop Australia from becoming a hub of DeFi innovation. The Travel Rule is far too expansive in its description of VASPs, making enforcement very difficult for products such as high-frequency automated trading.
While this would hinder experimentation in the crypto industry, it would also send some decentralized exchanges and protocols permanently underground, as they would seek to avoid any compliance. To date, no government seems to want to enforce the Travel Rule. Perhaps everyone is waiting for the U.S. to lead on the issue.
Clearing up the DeFi tax nightmare
The evolution of DeFi has made the tax treatment of cryptocurrencies increasingly problematic for the industry. While Bitcoin (BTC) and Ethereum (ETH) are currently considered capital gains tax assets and eligible for capital gains tax upon the sale, DeFi’s liquid speed presents a new problem for tax considerations. Examples include minting and staking, along with the tax status of crypto to crypto exchanges, liquidity provider tokens and wrapped coins, which remain unclear for tax purposes.
The Bragg Inquiry recommended that capital gains tax should only be applied “when there is a clearly definable capital gain or loss” when a trade occurs. However, the threshold for triggering taxation has yet to be declared.
Also, a 10% tax discount was proposed for businesses that sourced their own renewable energy to mine cryptocurrencies and could serve as a nice touch to attract talent to Australia.
Mostly positive response?
Many were surprised by the support from Australia’s crypto industry. CEO at BTC Markets, Caroline Bowler, praised the recommendations saying Senator Bragg's report not only meets our expectations of a proportionate, responsive policy change but also surpasses it in many ways: “For an industry that is moving at such a rapid pace, these pragmatic recommendations are going to give a massive leg up in putting Australia on the global fintech map.”
Tim Lea, a crypto policy activist in Sydney and the CEO of fractional funding platform, Fractonium, told Cointelegraph:
“The report is supremely intensive. If the key recommendations are taken up, it has the potential to position Australia so strongly in the global markets as a jurisdiction with a workable regulatory framework that provides Australian innovators with the clarity, certainty and flexibility to aggressively seize global market share.”
The order of the recommendations is notable and suggests that the government understood which policy levers to pull first.
Fred Pucci, a long time crypto advocate and investor, told Cointelegraph that the report reads “a bit like playing music. It makes artistic choices at every step.” DeFi, which is hard to regulate if at all, was not explicitly mentioned in recommendation one, which concerns the establishment of a market licensing regime for digital currency exchanges.
In recommendation two, custody is advised as important for investor protections but, again, no mention of DeFi or “upstairs markets,” an old term in equity for off-market trades being permitted but less transparent.
Meanwhile, “DAOs are the future and a key part of DeFi and this says that Australia wants to create a legal environment for experimentation in Recommendation 4” states Pucci. It is interesting that DAOs are considered to be ahead of the Anti-Money Laundering reform recommendations. In short, crypto exchanges are supported front-and-center first in the recommendations, but the regulation is not over-reaching. This reflects the policy messaging throughout the 143 page report.
Devil in the details
The report is mostly aspirational for now, but some regulatory patience may play in Australia’s favor. This area could be finalized as these proposed laws settle in the future, giving Australia time to follow other jurisdictions. The token mapping delay is sensible because tokens and assets are hard to define, as every country now knows.
Senator Bragg said he believed the recommendations struck the right balance between encouraging innovation and protecting consumers, and that he wanted the proposals legislated within 12 months.
He also suggested that his aim was to challenge other crypto-friendly jurisdictions, Singapore, the United Kingdom and the United States. “What we’ve tried to do is not use old hooks for new coats. This is a detailed report with an agenda for Australian leadership in digital assets,” he said:
“We want to be an economy which is dynamic, we don’t want to be captured by the old vested interests of yesteryear.”
Some are still reticent, recalling Australia’s regulatory track record for innovation. “This is an 8.5/10” said Pucci, “but it’s probably not going to get much better than this at the implementation stage. It still has to go through the Treasury and the rest of the political system.”