Australian Treasurer Jim Chalmers is set to conduct a world-first crypto asset stocktake, the first step towards establishing a framework for cryptocurrency regulation. The upcoming exercise, which the government aims to complete before the end of the year, will help identify how digital assets should be regulated.

The government wants to establish a framework for licensing and regulating crypto service providers in 2023, as part of a wider strategy to modernize Australia’s financial system. The move comes in the wake of FTX’s collapse, which has heightened interest in introducing regulations to safeguard consumer funds.

Token Mapping

Australia has launched an exercise called token mapping to regulate its cryptocurrency sector. The process is said to be the first of its kind in the world, and is aimed at plugging gaps in regulations, setting licensing and custody rules and protecting investors.

Australian Treasurer Jim Chalmers announced Monday that the new Labor government will prioritise token mapping this year as a way of better understanding crypto assets and their underlying use cases. It will also look at gaps in Australia’s regulatory and licensing frameworks, review organizational structures, and look at custody obligations for third-party custodians of crypto assets.

According to a joint statement from the Treasury Department and Chalmers, the project will be the first of its kind in Australia and will set a number of standards for digital asset service providers. It will also improve consumer protection and safeguards.

Token mapping will be the basis of a licensing and custody framework for crypto asset service providers that is expected to be released in mid-2023. A public consultation paper is expected to be released soon and public submissions will close on 3 March 2023.

Licensing and Regulation

The Australian government is focusing on developing a framework to regulate digital assets. This involves undertaking a world first ‘token mapping’ exercise and regulating exchanges.

The Australian Securities and Investments Commission (ASIC) has powers to intervene in products where it identifies consumer detriment. These powers are likely to impact marketing and distribution practices in the crypto asset sector where they fall within ASIC’s remit.

ASIC’s powers also allow it to apply “first mover” restrictions where an entity is acting for the first time in the Australian market. It can also require an entity to provide information to ASIC about its business activities.

Similarly, DCE providers are required to register and enrol as a reporting entity under Australia’s Anti-Money Laundering and Counter-Terrorism Financing Act 2006. Failure to do so is punishable by up to two years’ imprisonment or a fine of up to A$111,000.

AUSTRAC has established an Innovation Hub to improve the relationship between new businesses and regulators in the cryptocurrency and blockchain sectors more broadly. This includes setting up a regulatory sandbox to encourage new market entrants to test innovative solutions.

Regulation of Service Providers

Australia has an established regulatory regime for financial services providers, with a focus on risk management and consumer protection. However, the nature of crypto assets and their use may cause issues for some service providers.

ASIC’s guidance (INFO 225) on the regulatory status of certain crypto assets confirms that legislative obligations and regulatory requirements apply irrespective of technology used to provide a regulated service. ASIC also expects that entities relying on digital asset technology will have the organisational competence, technological resources and risk management systems in place to comply with their legal obligations under the relevant licensing regime.

ASIC has also launched an Innovation Hub designed to help fintech start-ups navigate the Australian regulatory system. This includes providing tailored information and access to informal assistance intended to streamline the application process for innovative businesses, including those operating in the blockchain and cryptocurrency sectors.

Taxation

Cryptocurrency is treated as property by the Australian Tax Office (ATO), and as an asset for Capital Gains Tax purposes. It may also be viewed as additional income and taxed as Income Tax, depending on the transaction.

Traders and investors are required to report any gains realised from the trading or sale of cryptocurrencies on their annual financial statements, regardless of the currency used. They should be prepared to calculate the cost basis of their assets, as well as the fair market value at the time of disposal.

Australian investors who hold their assets for longer than a year enjoy a 50% long-term capital gain discount on any gains arising from the disposal of their crypto holdings. However, this discount only applies if the cryptocurrency is acquired for A$10,000 or less.