What is a crypto-asset, ASIC?
The Australian Securities and Investments Commission (ASIC) released a 2022–2026 corporate plan which included crypto-assets as a key focus. They acknowledged the need to support the development of an effective regulatory framework for crypto-assets, with attention given to consumer protection and market integrity.
Despite various papers and consultations by ASIC relating to how crypto related products are to be formally classified, their guidance is still very vague and this is causing confusion in the market. As a result, this is affecting Australia’s credibility as a serious crypto destination.
Regulatory confusion
Crypto-assets do not fall within the existing regulatory perimeter of financial products and services and are generally unregulated by ASIC. However, crypto-assets have been classified as a commodity by major global regulators and industry for years. ASIC has not accepted this categorisation, but instead created a new standalone crypto-asset class, as defined in INFO 230. It has also embedded this into licencing applications and company obligations under the Corporations Act 2001, as set out in INFO 225.
ASIC’s approach of treating crypto-assets as a new regulatory asset class has not stopped some crypto-assets still being regarded by the Australian market as commodities (much like gold). ASIC has also stated that some crypto-assets fall into the definition of a financial product. How a crypto-asset is structured or how the rights are provided to a person who acquires and holds the product, adds another level of complexity, as this defines a security.
On the 29th of October 2021 ASIC released guidance on crypto-asset related investment products (21-285MR). This included notes on how businesses can meet their regulatory obligations in relation to crypto-asset exchange traded products (ETPs) and other investment products. This guidance superseded ASIC’s Good Practices and Licencing Public Consultation Paper 343 (Crypto-assets as underlying assets for ETPs and other investment products (CP 343) in June 2021). Consultation Paper 343 defined a crypto-asset as:
“can be understood to be 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. A crypto-asset may or may not have identifiable economic features that reflect fundamental or intrinsic value.”
This definition does not describe crypto-assets as a financial product and furthermore ASIC went on to state that:
“working understanding of crypto-assets and may evolve over time. We may craft a different description of crypto-assets as needed in performing our legislative functions in line with government policy at that time. We use the term ‘crypto-assets’ but recognise that they may also be commonly referred to as digital assets, virtual assets, tokens, or coins. We are not aware of a universally accepted name for, or definition of, ‘crypto-assets’.”
Australia a global outlier
ASIC clearly admits that this is a moving space and may change its mind, which further supports the notion that their approach is causing instability in the market. This is especially evident where their changing direction and ambiguous approach raises the question as to whether offering crypto derived products requires an Australian Financial Service Licence (“AFSL”) to operate, when previously it did not. Furthermore, ASIC stated that it is not aware of a “universally accepted name for, or definition of, ‘crypto-assets.’” when they were consistently described as commodities by the vast majority of thirty-two firms consulted by them as part of the Consultation Paper 343. Broadly speaking, as ASIC regulates securities and other investments that are financial products but does not regulate direct commodity investments. This may explain their reluctance to accept commodities as the description of crypto-assets.
“The regulatory framework is tasked with protecting investors and preserving financial stability. It should also allow innovation and not get in the way of progress …”
If one accepts ASIC’s premise that a universal definition of a crypto-asset does not exist, and the suggestion that businesses with an association with crypto-assets require an Australian Finance Services Licence (AFSL), how can a business confirm an association exists when the asset itself cannot be universally defined?
The thirty-two firms consulted by ASIC, also raised concerns as to the confusion and regulatory burdens ASIC may create and suggested crypto-assets were out of ASIC’s asset class domain. Concerns over placing additional regulatory burdens to no benefit and being at odds with other countries could also delay consumer protections and add costs of additional regulator burden that would be paid by regular retail consumers and by crypto businesses. This may discourage crypto businesses from engaging the Australian market, pushing their operations and jobs offshore.
The confusion does not end there, especially when considering how various crypto businesses might require regulatory authorisation to operate. For example, if contributions are pooled or used in a common enterprise to produce financial benefits or interests in an asset, these falls into the definition of a retail managed investment scheme and an AFSL is required. The investible asset class is now irrelevant, as it is the action of arrangement and dealing which is key. However, this approach is contradicted, if companies are considered which offer online trading in crypto-assets, via a non-dealing desk operation (not providing liquidity for transactions made by clients on their trading platform, as appose to a market making operation). These businesses are not required to hold an ASFL to operate, but should they then offer shares, spread betting, contracts for difference, commodities, forex, or indices, then they would, and therefore the investible asset class is now relevant.
The regulatory framework is tasked with protecting investors and preserving financial stability. It should also allow innovation and not get in the way of progress, but this is becoming difficult with crypto businesses confused as to how to they can remain regulatory compliant, in such an ambiguous and rapidly shifting regulatory landscape, supervised by regulators with mercurial temperaments.
Author
Will Banks is an Adjunct Industry Fellow in Griffith Business School. Will has had a successful career in senior financial and board level executive positions, which have spanned across Australia, Europe, and the United Kingdom. With an expertise in leading businesses through financial regulatory authorisations, mobilisations, or crisis management, he has dedicated over two decades to building, advising, and managing global financial service institutions and start-ups.
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