The crypto question for Australia's financial regulators

The recent crypto market downturn has sharpened policymakers’ awareness of the need for better regulation within the crypto ecosystem.

Aside from the widespread losses incurred by investors and the collapse of certain projects, the turmoil has exposed vulnerabilities within blockchain protocols and systemic concerns within the crypto landscape.

The result has been lower crypto prices and slower activity, which offers a slight – yet temporary – reprieve from the urgency of the regulatory task.

The regulatory agenda of multiple international policymakers reveals that key priorities will include consumer protection, financial stability, market conduct, and anti-money-laundering rules, among others, while also striking a balance that enables and fosters continued innovation in financial markets.

Australia's policy perspective

While the policy stance is fragmented across jurisdictions, S&P Global views Australia as “crypto supportive” and “advanced” in policy formation.

Along with Switzerland, Singapore and the United Arabic Emirates (UAE), Australia is seen as more crypto-friendly than most in terms of regulations surrounding crypto assets. Nevertheless, several regulatory challenges lie ahead.

The Australian Treasury recently concluded its consultation on the licensing and custody requirements of crypto asset secondary service providers (CASSPrs).

Treasury’s proposals included, among others, the development of one definition of crypto asset that applies to all relevant Australian regulatory frameworks.

According to ASIC, a crypto asset is “a digital representation of value or contractual rights that can be transferred, stored or traded electronically, and whose ownership is either determined or otherwise substantially affected by a cryptographic proof”.

Foreseeing a definitional conflict arising between the proposed definition and the definition of “asset” for financial reporting purposes under the Australian Accounting Standards (AAS), which form part of the Australian regulatory framework, CPA Australia recommends that the crypto asset definition be aligned with the definition of an “asset” under AAS.

In the context of international accounting regulation, CPA Australia notes that the European Financial Reporting Advisory Group (EFRAG), in its January 2022 issues paper recommends that the International Accounting Standards Board (IASB) develops clarifying application guidance to address a range of crypto asset (and liability) holders, issuers and valuation topics, alongside scoping crypto assets out of IAS 2 (inventories) and IAS 38 (intangible assets) and into IFRS 9 (financial instruments) or IAS 40 (investment property).

These proposals recommend revisiting the agenda decision published in 2019 by the IFRS Interpretations Committee (IFRIC), concluding that holdings of cryptocurrencies should be accounted for under IAS 38 unless they are held for sale in the ordinary course of business, in which case IAS 2 applies.

Back then, the committee decided that cryptocurrencies don’t meet the definition of financial assets in IFRS 9.

The IASB hasn’t responded to EFRAG’s recommendations yet, but decided against CPA Australia’s recommendation to include a research project in the IASB’s work priorities for 2022-2026 to explore the role and prevalence of cryptocurrency-based transactions in global capital markets. Instead, the IASB has included the topic as part of a research project on intangible assets.

Regulatory milestones

In addition to developing a dedicated licensing regime, Treasury provided regulatory milestones that it aims to achieve by the end of 2022:

• Examine the appropriate regulatory structure for innovative new corporate structures like decentralised autonomous organisations (DAOs)
• Assess the viability of a retail central bank digital currency (CBDC) by the Reserve Bank of Australia and the Treasury
• Conduct token-mapping exercise to provide further clarity as to how crypto assets are classified on a risk-based and technology-agnostic basis.

CPA Australia believes the token-mapping exercise should precede further regulatory discussions. A clear understanding and classification of crypto assets is essential to assess suitable regulatory frameworks.

In April 2022, the Australian Prudential Regulation Authority (APRA) laid out a policy roadmap for developing a long-term prudential framework for crypto assets and related activities, including the following policy initiatives:

• Crypto activities: Undertake domestic consultations after the Basel Committee on Banking Supervision consultation on the prudential treatment for bank exposures to crypto assets.
• Operational risk standards: Release draft prudential standards for consultation in mid-2022 to cover control effectiveness, business continuity and service provider management. The operational risk prudential standard will take effect in 2024.
• Stablecoins: Consider approaches to the prudential regulation of payment stablecoins (that is, crypto assets that are backed by stabilisation mechanisms).

APRA will continue to collaborate with international regulatory bodies to ensure that Australia’s approach is consistent with emerging international standards.

Current approach in Australia

In Australia, cryptocurrency exchanges must register with the Australian Transaction Reports and Analysis Centre (AUSTRAC) to comply with AML/CTF 2006 Part 6A – Digital Currency Exchange Register.

The regulations require exchanges to identify and verify their users, maintain records, and comply with government AML/CTF reporting obligations.

AUSTRAC has flagged that risks remain. In January 2022, it warned that almost 400 currency exchanges operating in Australia weren’t endorsed as safe for retail investors.

AUSTRAC noted that the current registration system doesn’t necessarily cover consumer protection and may even give some customers a false sense of security.

The Board of Taxation is currently reviewing the tax treatment of digital assets and transactions in Australia, with the report due by the end of 2022. In the meantime, the Australian Taxation Office supports crypto investors by providing information on:

• what crypto assets are, how they work and how tax applies to them
• how to work out and report capital gains tax (CGT) on transactions involving crypto assets
• how tax applies to crypto rewards and new tokens from staking crypto assets
• how to treat a new crypto asset received as a result of a chain split
• working out if a crypto asset is a personal use asset and when a personal use crypto asset is CGT exempt
• what records need to be kept of crypto asset transactions and how long to keep them.

Lastly, the International Organization of Securities Commissions announced that it will address crypto-related policy matters. Reports including policy recommendations are expected by the end of 2023.