I INTRODUCTION TO THE LEGAL AND REGULATORY FRAMEWORK

i Overview

Distributed ledger technologies (DLTs) are regulated in Australia under a range of laws. Like many other jurisdictions, Australian regulators are taking a keen interest in DLTs, and have been reasonably active in seeking to understand how emerging developments in this space will impact existing business models and regulatory frameworks. To date, Australian regulators have largely attempted to address DLT developments through existing frameworks, which they have sought to incrementally adapt and augment through a combination of regulatory guidance notes and targeted changes.

Although the level of token generation events (TGEs) has come off the highs experienced in 2017 to 2018, we expect that the legal and regulatory landscape in Australia will evolve incrementally as DLT-use cases continue to proliferate, and policymakers and regulators seek to establish more sophisticated approaches to addressing the impact of DLTs.

In this chapter, we focus on the legal and regulatory framework that impacts virtual currencies and TGEs.

ii Regulation

The Australian Securities and Investments Commission (ASIC) is Australia's corporate regulator, with broad powers under the Corporations Act relating to providing financial products and a range of fundraising activities that may impact TGEs.2

The Australian Transaction Reports and Analysis Centre (AUSTRAC) is Australia's principal anti-money laundering and counter-terrorism financing (AML/CTF) regulator. The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (the AML/CTF Act) subjects digital currency exchanges (DCEs) to mandatory registration and reporting obligations.

Self-regulation

Australia's regulatory environment is also supported by industry self-regulation including by the Australian Digital Commerce Association (ADCA), the industry body representing businesses using blockchain technology that maintains the voluntary Digital Currency Industry Code of Conduct (DCI Code).

iii Taxation

The Australian Taxation Office (ATO) is the principal Australian revenue collection agency responsible for administering Australia's federal taxation system. The ATO has issued guidance regarding how virtual currency and ICO token events, including acquisitions and disposals, are treated from a taxation perspective.

iv Consumer protection

Australian law prohibits various forms of misleading and deceptive conduct. ASIC has powers to investigate and prosecute TGE issuers, sponsors or advisers engaging in misleading and deceptive conduct in breach of the Australian Consumer Law (ACL).3

II SECURITIES AND INVESTMENT LAWS

The Corporations Act, Australia's main securities legislation, operates on a technology-neutral basis and has not been changed to specifically accommodate (or prohibit) virtual currencies and TGEs.4 Instead of establishing a clear regulatory perimeter for virtual currencies or TGEs, ASIC has provided guidance on how existing securities legislation could apply to cryptoassets and TGEs based on their accompanying features and rights.5 It also warns entities that they could be required to justify to ASIC a conclusion that their virtual currency or TGE does not constitute a financial product, or that an exemption applies to requiring an Australian Financial Services (AFS) licence.6

As each virtual currency or TGE is different, its regulatory treatment depends on its structure and the rights attached to it. The fact that a token is described as a virtual currency or utility token does not mean it falls outside regulation under the Corporations Act (e.g., as a financial product) or is not subject to its provisions (e.g., in relation to misleading and deceptive conduct).

Chapters 6D and 7 of the Corporations Act, which regulate fundraising and financial services markets respectively, are the main aspects of the Corporations Act that could potentially apply to virtual currencies and TGEs. The obligations apply also to foreign financial services providers carrying on business in Australia.

i Regulation as a financial product

Whether a virtual currency or TGE is caught by Chapter 7 turns principally on whether it is a financial product.7 Although ASIC does not consider Bitcoin is a financial product,8 whether any other virtual currency or TGE constitutes a financial product requires analysing its structure and rights, which can be a challenging process given that emerging use cases often do not fit neatly into traditional categories.

Based on recent ASIC guidance, the following are examples of a virtual currency or TGE that may be a financial product:

  1. it has the characteristics of a security, such as linking to an underlying asset granting rights to voting, dividends or distribution of capital in a body corporate;
  2. it may be used as a payment method that makes it a non-cash payment facility;
  3. where DCE transactions do not settle immediately, or the price or a requirement to provide consideration is derived from another asset or index, in a way that makes it a derivative;
  4. it allows money to be exchanged for tokens and pools contributions to provide financial benefits to token holders, making it a managed investment scheme; or
  5. entities that are currently licensed to provide financial services or a financial market in respect of a financial product expand their offering to incorporate a virtual currency or TGE.

ii Financial markets

Where a virtual currency or TGE is a financial product, any platform enabling consumers to buy or sell the virtual currency or TGE may constitute a financial market, as described in further detail in Section V. As at 19 June 2019, there were no licensed or exempt platform operators of virtual currency or TGE financial products in Australia.9

iii Regulation of managed investment schemes

A managed investment scheme (MIS), also known as pooled or collective investments, is a type of Australian investment scheme where pooled contributions produce financial benefits for scheme members.10 An MIS must be registered, and cannot be operated unless it is registered, if it meets certain criteria (e.g., it has more than 20 members).11

Rights granted to token holders described in white papers and offer documents can potentially constitute an MIS. This is particularly the case where issuers seek to tokenise certain assets or create exposure to a certain asset class or trading activity, such as a venture capital (VC) fund or hedge fund, through issuing a bundle of rights using a blockchain.

In recent regulatory guidance, ASIC states that the rights granted to token holders should be interpreted broadly, such that if the rights and value of the cryptoasset is affected by the pooling of funds from contributors, or the use of those funds under the arrangement, then the arrangement is likely to be an MIS, particularly if the arrangement is offered as an investment.12

This follows ASIC's investigation in May 2018 of Neds, an Australian wagering and betting start-up company, proposed to issue NedsCoins, which could be used to place bets on the Neds platform and entitled token holders to receive dividends of 0.25 per cent of the company's quarterly turnover. ASIC investigated the offer and determined that, in addition to potentially misleading statements in the white paper, the offer was an unregulated MIS. Neds, along with other issuers, subsequently halted their ICO and indicated they would make structural changes.13

iv Virtual currency and non-cash payment facilities

A non-cash payment (NCP) is a payment made without physically delivering Australian or foreign currency, made through an NCP facility.14 In May 2018, ASIC stated that a virtual currency or ICO token itself is unlikely to be an NCP facility.15 However, a virtual currency or TGE may be an NCP facility in certain circumstances,16 unless an existing exemption applies or ASIC grants relief from the operation of these provisions.17

v Fundraising provisions

If a virtual currency or TGE gives token holders rights that are equivalent to a security (e.g., a share) then the disclosure requirements in Chapter 6D will apply to such token offers. For example, tokens giving token holders the right to vote in decisions of the issuer and receive dividends proportionate to their token holdings. Exemption from disclosure is available in certain circumstances, such as for small-scale offerings, or offers to sophisticated investors or through financial services licensees.18

III BANKING AND MONEY TRANSMISSION

Virtual currencies and cryptoassets are not currently regulated in Australia as legal tender or money.

The Reserve Bank of Australia (RBA), Australia's principal payments system regulator, has stated that it does not consider virtual currencies to be part of the Australian payments system because:19

  1. they are not widely accepted or used as a payment method;
  2. they are not an effective store of value due to large fluctuations and strong speculative influences; and
  3. they are not commonly used as a unit of account: goods and services in Australia continue to be priced overwhelmingly in Australian dollars.

At the time of writing, linkages in Australia between virtual currencies and the broader financial system remain limited,20 underlined by financial institutions continuing to take steps to avoid dealing with virtual currencies and intermediaries.21 The RBA consequently has limited concerns regarding virtual currencies with respect to competition, efficiency or risk to the financial system warranting urgent regulatory intervention, despite token valuation losses occurring.22

The RBA has indicated that it does not plan to issue an 'eAUD', and that regulatory intervention can be expected to mitigate any payments system stability risks once virtual currencies mature beyond 'speculative mania' to become an efficient or widely used payment method.23

IV ANTI-MONEY LAUNDERING

The concern that virtual currencies may be used by criminals seeking a low-detection risk method to transfer funds has played a prominent role in shaping the initial response of Australia's lawmakers to the growth of virtual currencies.24

This has culminated in strengthened AML/CTF measures to safeguard the ability of regulators such as AUSTRAC and law enforcement agencies to detect criminals who would otherwise desire to manipulate the financial sector to obfuscate illegal transactions and funding sources. In accordance with the approach adopted in other advanced economies, the Australian government has sought to focus regulation on DCEs as the primary entry and exit points between the payment systems supporting virtual currencies and fiat currencies.

i Application to digital currency exchanges

The AML/CTF Act regulates DCE services and other digital currency-related services as a designated service; and establishes mandatory registration and reporting obligations on registrable DCE operators.

The AML/CTF Act will only apply to entities that provide services related to digital currencies, which is defined as a digital representation of value that:

  1. is not issued by or under the authority of a government;
  2. functions as a medium of exchange, a store of economic value or a unit of account;
  3. is interchangeable with fiat money, and may be used as consideration for the supply of goods or services; and
  4. is generally available to members of the public without any restriction on its use as a form of consideration.25

ii Compliance obligations

The AML/CTF Act applies to reporting entities that provide designated services within Australia or that otherwise have a predefined link to Australia.26 Reporting entities must meet know-your-customer obligations to properly identify customers before providing DCE services, meet reporting and record-keeping obligations and have an AML/CTF compliance programme.27

Reporting obligations require DCEs to submit to regular reporting to AUSTRAC regarding suspicious transactions or transactions above a threshold amount.28 These measures acknowledge the increasing role played by DCEs to assist the intelligence-gathering efforts of regulatory and law enforcement agencies.

V REGULATION OF EXCHANGES

DCEs are the main touch point between virtual currencies and traditional fiat-based payment systems. There are a growing number of DCEs either in Australia or located outside Australia offering markets in Australian dollars.

The regulatory regimes impacting DCEs operating in Australia include mandatory registration, reporting and compliance obligations under the AML/CTF Act; and potential requirements to obtain and maintain a licence to offer a financial service or financial market under the Corporations Act, depending on whether the DCE operator is offering a financial product: see Section II.

i AML/CTF requirements

A DCE operator that is a reporting entity providing a designated service must comply with the reporting entity obligations under the AML/CTF Act: see Section IV.

All registrable DCE operators must enrol and register with AUSTRAC on the Digital Currency Exchange Register (DCE Register) before providing DCE services, and must renew their registration every three years.29 While AUSTRAC does not currently publish the DCE Register, several Australian DCE operators have announced their successful registration with AUSTRAC to demonstrate their regulatory compliance to the market. AUSTRAC may also publish the names of persons whose DCE registration has been cancelled.30

ii Licensing requirements

An entity must obtain a licence to authorise any financial services or financial markets offered or provided in relation to financial products. ASIC has indicated the following DCE-related activities are not financial products, financial services or financial markets requiring a licence:

  1. the immediate exchange and settlement of virtual currency transactions and operating a DCE;
  2. software that facilitates virtual currency transfers between wallets;
  3. virtual currency automated teller machines; and
  4. escrow facilities supporting DCEs.

At the time of writing, no major Australian DCE operator has obtained an AFS licence for their DCE activities. However, DCE operators will need an AFS if their exchange lists a cryptoasset that is a financial product or for other activities involving a financial product. For example, CoinJar, in addition to providing DCE services, provides CoinJar Swipe, which is an electronic funds transfer at point of sale (EFTPOS) card allowing consumers to convert virtual currency to Australian dollars to make purchases at EFTPOS terminals in Australia. The CoinJar Swipe product is a financial product issued under an AFS licence,31 which is distinct from the DCE services offered by CoinJar.

VI REGULATION OF MINERS

See Section IX for information on how mining activities are treated under taxation legislation.

No obligations otherwise apply specifically to miners, other than the general obligations described throughout this chapter.

VII REGULATION OF ISSUERS AND SPONSORS

See Section II regarding the application of the Corporations Act to virtual currency and ICO token issuers and sponsors.

See Section VIII regarding virtual currency and ICO token issuer and sponsor consumer protection obligations for issues such as making market representations.

VIII CRIMINAL AND CIVIL FRAUD AND ENFORCEMENT

Several laws regulate enforcement activities relating to the marketing and selling of virtual currencies and ICO and STO tokens in Australia. Regulators' investigative and enforcement powers include seeking substantial civil, and in some cases criminal, penalties for breaches.

The main regulatory focus is currently on TGEs, pursuant to which issuers, advisers and promoters alike can be held liable for engaging in illegal conduct. Separately, AUSTRAC is focusing on registration and reporting compliance obligations for DCEs, as described in Section V.

i Misleading and deceptive conduct

Under Australian law, misleading or deceptive conduct is prohibited in the course of business32 and under the securities law in connection with financial services and in relation to financial products.33 In May 2018, ASIC announced it would issue inquiries to ICO issuers and advisers where it identifies conduct or statements that may be misleading or deceptive, noting that 'regardless of the structure of the ICO, there is one law that will always apply: you cannot make misleading or deceptive statements about the product. This will be a key focus for us as this sector develops'.34

ASIC has also issued guidance noting specific examples of potentially misleading and deceptive conduct for ICOs, which would likely extend to TGEs generally:35

  1. falsely stating or conveying the impression that the TGE or underlying token is a financial product;
  2. falsely stating or conveying the impression that a cryptoasset trading platform does not quote or trade financial products;
  3. using social media to artificially inflate public interest in a TGE;
  4. undertaking or arranging for a group to engage in trading strategies to generate the appearance of greater buying and selling activity levels for a virtual currency or ICO or STO token;
  5. failing to disclose adequate information about a TGE; or
  6. suggesting that a TGE is a regulated product or that the regulator has approved a TGE, if that is not the case.

According to ASIC, the most prevalent legal issues experienced by ICOs are the use of misleading or deceptive statements in marketing, the operation of illegal managed investment schemes, and failing to hold an AFS licence.36 For example, in one case, ASIC cited fundamental concerns regarding the ICO's structure and overly optimistic business growth forecasts in its white paper disclosure.37

Remedies available to consumers, regulators and courts in respect of misleading and deceptive conduct (including for making false or misleading representations) include maximum pecuniary penalties ranging between A$945,000 (for individuals), and the greater of A$10 million, three times the value of the benefit received by the corporation as a result of the conduct, or where the benefit cannot be calculated, 10 per cent of the annual turnover in the preceding 12 months (for corporations) or 10 years' imprisonment,38 and injunctions (such as an injunction blocking a TGE),39 compensation for damages and other orders.

ii Product intervention power

From April 2019, ASIC received further powers to make a product intervention order in relation to conduct where a product has, will or is likely to result in significant consumer detriment,40 which would apply to virtual currencies or TGEs to the extent they are a financial product or a credit product. In its current draft regulatory guide regarding enforcement of its product intervention powers, ASIC indicates that the factors that make significant consumer detriment more likely include:41

  1. the extent and operation of any conflicts of interest;
  2. the complexity or opacity of the product and circumstances of its sale; and
  3. how choices and processes are presented to consumers that influence their take-up and use of the product (the choice architecture).

iii Unlicensed financial products and markets

Penalties for breaching the licensing and registration requirements under the Corporations Act include fines of up to A$105,000 or five years' imprisonment for individuals and up to A$525,000 for corporations, depending on the breach.

At the time of writing, there has not been a successful ICO involving a financial product in Australia. ASIC has otherwise successfully acted to prevent a number of ICOs raising capital without the appropriate investor protections, with some of these put on hold or restructured to comply with applicable securities and investments laws.42 For example, on 13 September 2018, ASIC issued a final stop order on a PDS issued by Investors Exchange Limited for 'units' in the New Dawn Fund. ASIC considered that the New Dawn Fund was an unregulated 'crypto-asset managed investment scheme' as it proposed to invest in a range of cryptocurrency assets on behalf of New Dawn Fund 'unit' owners.43

Given the current and growing regulatory and governmental scrutiny of Australia's financial services sector (including ASIC's role), penalties for unlicensed financial products and markets will likely increase.44

iv AML/CTF breaches

Failure by a registrable DCE operator to comply with AUSTRAC's registration requirements, including providing unregistered DCE services and breaching registration conditions, can result in up to two years' imprisonment or a A$105,000 fine, or both. The penalty can increase to up to seven years' imprisonment or A$420,000, or both, for repeat offenders and for failing to comply with undertakings.

AUSTRAC has historically sought significant penalties to deter breaches of the laws it administers, and DCE operators should expect the same treatment under the AML/CTF Act. For example, in 2018, the Commonwealth Bank of Australia agreed with AUSTRAC a settlement involving a A$700 million penalty for over 53,000 breaches of the AML/CTF Act, which included failing to comply with its AML/CTF programme in respect of 778,370 bank accounts.

On 8 March 2019, AUSTRAC reiterated that it will continue to monitor compliance with AML/CTF requirements that came into full effect on 2 October 2018.45 At the time of writing, AUSTRAC's DCE enforcement activities have included 11 investigations, suspending two DCE registrations owing to involvement with organised crime, and refusing two DCE registration applications.46

v Taxation

The ATO announced on 30 April 2019 that it will be collecting records from Australian virtual currency service providers and matching them against ATO data to identify taxpayers who are failing to adequately disclose their income details.47

According to the National Tax Liaison Group, the ATO's agenda for virtual currencies in 2019 will:

  1. continue to focus on releasing guidance, with further updates expected in October 2019;
  2. focus on compliance and engagement activities (including the use of data matching) to promote compliance among virtual currency providers and brokers; and
  3. strengthen international engagement, in particular with the Joint Chiefs of Global Tax Enforcement (J5).48

IX TAX

The range of potential structures for virtual currencies and TGEs lends a degree of uncertainty regarding their tax treatment for issuers and holders. The ATO has provided some guidelines and commentary regarding virtual currency treatment under Australia's taxation regime, specifically Bitcoin.49 The ATO views virtual currencies such as Bitcoin as assets with tax consequences, rather than money or currency. The main tax considerations are:

  1. income tax;
  2. capital gains tax;
  3. goods and services tax (GST); and
  4. fringe benefits tax.

i Income tax

Australia's income tax regime is principally set out under the Income Tax Assessment Act 1936 (Cth) and the Income Tax Assessment Act 1997 (Cth). If a person carries on a business (e.g., for commercial reasons, in a business-like manner) that involves transacting with virtual currency,50 any virtual currency held by the business (whether as part of an incorporated entity or not) will likely be treated as trading stock. This means that proceeds from the sale of a virtual currency will be treated as ordinary income and assessed accordingly, while the costs and outgoings of carrying on the business (such as virtual currency mining costs) are deductible.51

ii Capital gains tax

The ATO has issued guidance clarifying that capital gains tax may apply where virtual currency is sold or gifted, traded or exchanged, converted to fiat currency, or used to obtain goods or services.52 In circumstances where one virtual currency is disposed of to acquire another, the capital gain (or loss) arising from the disposal is worked out using the market value of the original virtual currency when it is disposed of.

Whether capital gains tax applies to a virtual currency disposal depends on whether it is held as an investment, or as a personal use asset kept primarily to purchase items for personal use or consumption:

  1. if held as an investment, any capital gains from a virtual currency disposal will be added to an individual's assessable income provided that, if the individual held the virtual currency for at least 12 months prior to its disposal, any capital gain is eligible for a 50 per cent discount; and
  2. if held as a personal use asset and acquired for less than A$10,000, a virtual currency will generally be exempt from capital gains tax; however, any capital losses from its disposal cannot be used to offset any capital gains.

ATO has provided the following guidance on how capital gains tax will be applied to virtual currency chain splits, where a holder of virtual currency receives new virtual currency in addition to their existing holdings:53

  1. if held as an investment, the initial receipt of the new virtual currency is not earned as income nor is a capital gain made; in determining the capital gain on a disposal of that new virtual currency, the cost base will be zero; and
  2. if held as part of a business, it will be treated as trading stock (see Section IX.i).

iii GST

Since 1 July 2017, the sale and purchase of digital currencies54 or its use as a payment is not subject to GST (i.e., Australia's value added tax regime), unless a person is carrying on a business in relation to the virtual currency, as described above.

iv Fringe benefits tax

If an employee has a valid salary sacrifice arrangement with its employer (i.e., to receive a virtual currency as remuneration for work performed instead of Australian dollars), the payment of the virtual currency may be a fringe benefit, making the employer subject to fringe benefits tax. Employers must pay tax at on the taxable value of fringe benefits provided to employees, such as cars and mobile phones, and, in this case, virtual currencies. If there is no valid salary sacrifice arrangement, the virtual currency will be deemed to have been earned as ordinary salary or wages, and the employer must meet its pay as you go tax obligations on the Australian dollar value of the virtual currency it pays to the employee.

X OTHER ISSUES

The DCI Code was published by the ADCA in February 2016 following the recommendation of the 2015 Senate Economics References Committee Report on Digital Currencies regarding the development of a self-regulatory model in consultation with government agencies.55

The DCI Code may be voluntarily adopted by virtual currency businesses that are located or provide services in Australia.56 Businesses certified by the ADCA as DCI Code-compliant must be independently audited and adhere to certain best practice standards.57

The DCI Code also requires certified members to:

  1. apply data security systems and processes to protect customer data, including virtual currency identifiers, wallet addresses and user credit card information; and
  2. adopt, maintain and comply with an AML/CTF and sanctions compliance programme addressing a risk assessment framework, employee due diligence processes, governance controls and AML/CTF compliance.58 See Section IV regarding AML/CTF obligations and Section V regarding virtual currency exchange regulation.

XI LOOKING AHEAD

As with many jurisdictions, Australia's legal and regulatory landscape for DLTs is in its early stages, and will continue to evolve as DLT-use cases continue to develop.

Virtual currencies and TGEs have represented the main initial use cases for DLTs, and consequently have been the main area of focus for regulators to date. As DLT-use cases expand over the next few years and the business models become more diverse, we expect the legal and regulatory landscape will continue to evolve as policymakers and regulators seek to grapple with these developments and realign the legal and regulatory landscape in response.

i Higher levels of enforcement action likely in the short term

Despite the significant decrease in the ICO market in 2019 compared with 2017–2018, ASIC's enforcement approach to ICO enforcement activities is likely to continue to focus its enforcement priorities on fraud and misleading conduct, consumer protection and more egregious breaches of local securities law. We expect AUSTRAC to closely monitor the sector for DCE compliance failures given the end of the AML/CTF Act policy principles period on 2 October 2018. We also expect the ATO to continue to expand its compliance programme to prevent further leakages from the Australian tax base owing to cryptoassets.

ii Experimentation with DLT by traditional institutions will continue

We are continuing to see banks and other traditional financial institutions continuing to experiment with DLTs. For example, in July 2019, three major Australian banks formed a consortium with IBM and a shopping centres operator to launch a live pilot for Lygon, a digital platform underpinned by DLT designed to streamline and reduce the risk of fraud in connection with obtaining and managing bank guarantees.59 This pilot points to the growing interest by Australian banks in using DLT where it offers advantages to manage its risk, or otherwise to help improve organisational understanding of DLT and the future possibilities for its integration into business.

In April 2019, the operator of the Australian Securities Exchange (ASX) launched a sandbox for a proposed DLT-based replacement of its exchange settlement and clearing system. ASX announced that the April software drop into the sandpit was one of seven drops planned at regular intervals over the following 12 months, aimed at allowing customers to interrogate business functionality and assess options. The ASX plans to roll out the DLT-based platform in March 2021, after it announced in September 2018 a delay to the initial roll-out target of Q4 2020, highlighting the complexity of replacing entrenched legacy systems with the new DLT-based platform.

iii Facebook

In June 2019, Facebook announced in a white paper its plans to introduce Libra, a new decentralised blockchain, virtual currency and smart contract platform aimed at creating new opportunities for 'responsible financial services innovation'.60 Given Facebook's position and reach, Libra could be the catalyst to bring virtual currencies mainstream. However, regulatory scrutiny is likely to remain high and will probably require regulators to look long and hard at whether existing banking and financial regulations are fit for purpose. We also expect that ventures such as Libra may raise questions regarding the ongoing relevance of some other virtual currencies, and precipitate a greater need for interoperability between DLTs to maximise adoption.

iv STOs will become more prominent as tokenisation moves into more traditional asset classes

Entities that wish to undertake TGEs are becoming more sophisticated in their approaches, which have started to better account for the requirements of securities and other legislation and the stated concerns of regulators.

We see the rise of STOs as the next big step in the use of DLTs as a fundraising tool. This will extend the benefits of tokenisation beyond the creation of virtual currencies and utility tokens into new areas.

There are a range of factors that are driving the shift to STOs over time:

  1. greater levels of regulator-led scrutiny and enforcement against unregulated offerings;
  2. the application of tokenisation and fractional ownership techniques to new asset classes (e.g., illiquid assets) and business models (e.g., crypto VC funds and hedge funds) that need to be structured to comply with local securities law;
  3. the entry of more traditional funding sources into crypto markets, such as VC funds, family offices and large financial institutions; and
  4. the greater use of technology to remove the costs associated with the launch of regulation-compliant securities across several markets.

The shift to STOs is also likely to be accompanied by a shift to a compliant by default approach to TGEs, where the underlying rights associated with the relevant token are treated as a security or financial product.

Unlike traditional funding mechanisms, such as initial public offerings, which have significant costs and risks that cannot otherwise be avoided, the availability of standardised regulation-compliant security token platforms will play a significant role in facilitating the more cost-efficient delivery of STO-based fundraising. Several platforms have already started to emerge globally in this space and we expect these platforms to be used to drive fundraising activity across several jurisdictions in parallel as a means of increasing the investor pool in a manner that complies with the securities, taxation and AML/CTF legislation in each jurisdiction. Australia will not be immune to these developments.


Footnotes

1 Ara Margossian is a partner, Marcus Bagnall is a senior associate, and Ritam Mitra and Irene Halforty are lawyers at Webb Henderson.

2 Corporations Act 2001 (Cth) (Corporations Act), Chapter 6 and Chapter 7.

3 On 19 April 2018, ASIC received delegated powers from the ACCC to take action under the ACL relating to cryptoassets and ICOs, regardless of whether it involves a financial product.

4 ASIC Information Sheet 219: Evaluating distributed ledger technology.

5 ASIC Information Sheet 225: Initial coin offerings and crypto-assets (INFO 225).

6 ibid.

7 See Corporations Act Chapter 7, Part 7.1 Division 3.

8 Australian Securities Investments Commission, 'Senate inquiry into digital currency, Submission by the Australian Securities and Investments Commission', December 2014.

9 ASIC Information Sheet 225: Initial coin offerings and crypto-assets (INFO 225).

10 Corporations Act, Section 9.

11 ibid., Section 601ED. Note that an MIS does not need to be registered if all interests issued would not have required a product disclosure statement (PDS) had the scheme been registered.

12 For more information on requirements, see: ASIC Regulatory Guide 133, Funds management and custodial services: Holding assets, July 2018, available at: https://download.asic.gov.au/media/4832070/rg133-published-31-july-2018.pdf 

13 ASIC media release 18-122MR: ASIC takes action on misleading or deceptive conduct in ICOs,
https:// asic.gov.au/about-asic/media-centre/find-a-media-release/2018-releases/18-122mr-asic-takes-action-on- misleading-or-deceptive-conduct-in-icos; Jacobs, S 'ASIC is taking aim at dodgy ICOs as it issues a warning to the sector', Business Insider Australia, 1 May 2018.

14 Corporations Act, Section 763D(1). Examples include the direct debit of a deposit account, gift vouchers or cards, prepaid mobile phone accounts and loyalty schemes.

15 ASIC Information Sheet 225: Initial coin offerings and crypto-assets (INFO 225).

16 Cryptoassets may involve an NCP facility if it includes an arrangement that allows payments of value to be made using a cryptoasset to a number of payees, or allows payments to be made using the cryptoasset and which is then converted to fiat currency to enable the completion of the payment. For more information see: ASIC Information Sheet 225: Initial coin offerings and crypto-assets (INFO 225).

17 For the type of relief that ASIC may order with respect to an individual or class of products or arrangements, see ASIC Regulatory Guide 185: Non-cash payment facilities, RG 185.9. At the time of writing, ASIC has not granted class order relief or declared any virtual currencies or ICO tokens as exempt from Chapter 7 of the Corporations Act.

18 Corporations Act, Section 708.

19 The payments system in Australia refers to arrangements that allow funds transfers between accounts, typically held in financial institutions, through instruments such as cash, credit cards and cheques, and through electronic funds transfer.

20 RBA media release: Payment Systems Board Update: 23 February 2018, https://www.rba.gov.au/media- releases/2018/mr-18-04.html 

21 RBA speech: Cryptocurrencies and distributed ledger technology, Tony Richards, Head of Payments Policy Department, Sydney 26 June 2018, http://www.rba.gov.au/speeches/2018/pdf/sp-so-2018-06-26.pdf, p11.

22 RBA, Submission 19, p. 9; Dr Anthony Richards, Reserve Bank of Australia, Committee Hansard, 7 April 2015, p. 45.

23 RBA Address to 2017 Australian Payment Summit, Governor Philip Lowe, Sydney 13 December 2017 https://www.rba.gov.au/speeches/2017/sp-gov-2017-12-13.html

24 AUSTRAC typologies and case studies report 2012, http://www.austrac.gov.au/sites/default/files/ documents/typ_rprt12_full.pdf 

25 The AML/CTF Act does, however, provide for methods for certain activities to be declared through the rules made under ibid., Section 229. See, for example, the definition of stored value card: ibid., Section 5.

26 ibid., Section 6.

27 ibid., Parts 2, 3, 4, 7 and 10.

28 ibid., Part 3. At the time of writing, the reportable transaction threshold is A$10,000.

29 ibid., Section 76A. It is an offence for a registrable DCE operator to provide DCE services without being registered on the DCE Register: ibid., Section 76A(3). AUSTRAC can also refuse, suspend or cancel a registration on certain grounds, such as where the DCE poses an unacceptable money laundering, terrorism financing or other serious crime risk: ibid., Part 6A Division 3.

30 ibid., Section 76J(4).

31 Emerchants eftpos prepaid debit card PDS: https://s3-ap-southeast-2.amazonaws.com/coinjar-assets/swipe/eftpos-pos-20160101.pdf.

32 ACL, Section 18.

33 Corporations Act Section 1041H; Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act), Section 12DA.

35 ASIC Information Guide 225: Initial coin offerings and crypto-assets (INFO 225).

36 ASIC media release 18-274MR: ASIC acts against misleading Initial Coin Offerings and crypto-asset funds targeted at retail investors, https://asic.gov.au/about-asic/news-centre/find-a-media-release/
2018-releases/18-274mr-asic-acts-against-misleading-initial-coin-offerings-and-crypto-asset-funds-targeted-at-retail-investors/ 

38 See ACL, Section 224(3); ASIC Act Section 12DB; Corporations Act Schedule 3 Item 310.

39 ACL, Section 232.

40 Corporations Act, Part 7.9A.

41 ASIC draft regulatory guide: Product Intervention Power (attachment to CP 313), June 2019,
https://download.asic.gov.au/media/5165180/attachment-to-cp313-published-26-june-2019.pdf 

42 ASIC acts against misleading Coin Offerings and crypto-assets funds targeted at retail investors, 18-247MR, Thursday, 20 September 2018, available at: https://asic.gov.au/about-asic/news-centre/find-a-media-release/2018-releases/18-274mr-asic-acts-against-misleading-initial-coin-offerings-and-crypto-asset-funds-targeted-at-retail-investors/ 

43 ASIC acts against misleading Coin Offerings and crypto-assets funds targeted at retail investors, 18-247MR, Thursday, 20 September 2018, available at: https://asic.gov.au/about-asic/news-centre/find-a-media-release/2018-releases/18-274mr-asic-acts-against-misleading-initial-coin-offerings-and-crypto-asset-funds-targeted-at-retail-investors/ 

44 See Treasury Department, ASIC Enforcement Review Taskforce Report: https://treasury.gov.au/review/ asic-enforcement-review/r2018-282438; Treasury Department, Australian Government response to the ASIC Enforcement Review Taskforce Report, https://treasury.gov.au/publication/p2018-282438 

45 AUSTRAC Media Release, Cybercrime Squad and AUSTRAC remind digital currency exchanges of reporting obligations, http://www.austrac.gov.au/media/media-releases/cybercrime-squad-and-austrac-
remind-digital-currency-exchanges-reporting 

47 ATO media release, ATO receives cryptocurrency data to assist tax compliance, https://www.ato.gov.au/Media-centre/Media-releases/ATO-receives-cryptocurrency-data-to-assist-tax-compliance/; see also ATO, Cryptocurrency: 2014–15 to 2019–20 financial years data matching program protocol, https://www.ato.gov.au/General/Gen/Cryptocurrency-2014-15-to-2019-20-financial-years/ 

49 Australian Taxation Office: Tax treatment of crypto-currencies in Australia – specifically bitcoin, QC42159, https://www.ato.gov.au/misc/downloads/pdf/qc42159.pdf 

50 Examples include virtual currency traders, miners, exchange operators and virtual currency automated teller machine operators.

51 Australian Taxation Office: Tax treatment of crypto-currencies in Australia – specifically bitcoin, QC42159, https://www.ato.gov.au/misc/downloads/pdf/qc42159.pdf, p. 7.

52 ibid., p. 7.

53 ibid., p. 6.

54 As defined in Section 195.1 of A New Tax System (Good and Services Tax) Act 1999 (Cth).

55 Recommendation 3, Digital Currency – game changer or bit player, Senate Economics Reference Committee, 4 August 2015 at [5.64].

56 DCI Code Clause 3.2, ADCA, http://adca.asn.au/home-2/code-of-conduct 

58 ibid., Clause 4.3.2, ADCA, http://adca.asn.au/home-2/code-of-conduct 

60 Facebook, Libra White Paper, https://libra.org/en-US/white-paper/