Blockchain Cryptocurrency Regulation 2022

Blockchain Cryptocurrency Regulation 2022

MABARSPORT - Blockchain Cryptocurrency Regulation 2022 - attitude and definition Australia has a reputation for being a favorable and stable nation for blockchain and cryptocurrency firms. 

The Australian Government (Government) has encouraged wide expansion and innovation in the financial technology (fintech) industry. Many new financial services and businesses utilizing or transacting cryptocurrencies have emerged from the Australian blockchain and cryptocurrency ecosystem.

Businesses in the payments, crypto asset, lending, investing, and custodial services sectors have helped drive the sector's growth in Australia. To yet, the Government has chosen a non-interfering stance to cryptocurrency legislation, enabling the environment to expand quickly without substantial legislative constraints. According to the Government's Select Committee on Australia as a Technology and Financial Centre's third issues report published in March 2021, the sector's prospects and hazards have been expanded to encompass digital assets and cryptocurrencies.

Currently, Australian law does not consider cryptocurrency as “money” or equate it with conventional cash. The Reserve Bank of Australia (RBA) has no imminent intentions to create a digital dollar (often known as a “eAUD”). There is presently no public policy basis for issuing a retail central bank digital currency (CBDC), despite the RBA's involvement in various programs to study its possible usage and ramifications.   

A broad explanation of the applicability of Australian regulatory frameworks to the industry has been made by the Government.

For example, since 2018, Australia's AML/CTF framework has included digital currencies.

This amendment addressed the prospect of digital currencies being used for money laundering and terrorist financing (ML/TF).

Crypto assets (including cryptocurrencies) are expected to be accepted as an investment asset class, as well as in payments.

The Australian Securities and Investments Commission (ASIC) will begin a consultation process in June 2021 on its plans to clarify expectations for crypto assets that are part of the underlying assets of exchange-traded products (ETPs) and other investment products.

Regulating Bitcoin

Many regulatory changes to facilitate cryptocurrency usage have focused on transactional interactions (e.g., issuing and exchanging procedure) and activities using cryptocurrencies, rather than cryptocurrencies themselves (see chart below).

ASIC reiterated that legislative and regulatory duties are technology-neutral and apply regardless of the technology used to supply a regulated service.

While no specific legislation has been enacted to deal with cryptocurrencies, they may be captured within current Australian legal systems - see “Sales regulation” below.

ASIC's regulatory guidelines advises companies on coin legality (or tokens).

The structure and rights associated to them set the restrictions an organization must follow.

For example:

If cryptocurrency is, or is part of, a financial product under the Corporations Act 2001 (Cth), it will be subject to Australia's current financial services regulatory structure.

More on this under “Sales regulation” below. Cryptocurrency financing has also grown in popularity. These lending operations may need an Australian credit licence or be excluded from the obligation to be licensed under the National Credit Consumer Protection Act 2009 (Cth). ASIC has opened a consultation process to clarify expectations for crypto assets used in ETPs and other investment products. For market operators, retail fund operators (i.e., responsible entities), listed investment entities (including listed investment trusts and listed investment companies) and AFSL holders trading in crypto assets, ASIC seeks to establish expectations.

This focuses on factors that ASIC expects market operators to use when deciding whether a crypto asset is suitable for market-traded products. This needs institutional backing for the crypto asset, service providers ready to facilitate its usage, maturity of the crypto asset spot market, regulation of crypto asset derivatives, and strong and transparent crypto asset pricing mechanisms.

The consultation also contains ASIC's suggested good practices for fund asset holders to custody crypto assets, as well as risk management systems. ASIC seeks to incorporate crypto assets as a separate asset class on AFSL authorisations for managed investment schemes, but only for the short term. The consultation process is still ongoing and ASIC expects industry comments to help shape future suggestions.

Currently, Australia has no particular blockchain or distributed ledger technology (DLT) rules.

However, ASIC has a public information sheet (INFO 219 Evaluating distributed ledger technology) detailing its regulatory stance to blockchain technology and DLT solutions in general. Businesses contemplating adopting DLT to operate market infrastructure or provide financial or consumer credit services will still be subject to existing licensing restrictions. Entities depending on technology to provide regulated services must have the requisite organizational competency, technical resources, and risk management procedures in place. While the present legislative framework accommodates current DLT deployments, future regulatory issues will develop as the technology advances.

Several bitcoin networks have adopted “smart” contracts.

Licensing

If a cryptocurrency is a financial product, it must be licensed and disclosed by the financial services regulator.

Any Australian financial services provider must have an AFSL or be excluded.

As a result of the wide definitions of “financial product” and “financial service” under the Corporations Act, ASIC has said that bitcoin with comparable qualities to current financial products or securities would trigger regulatory duties. ASIC said in INFO 225 that the legal status of cryptocurrency is determined by the ICO structure and the coin or token rights.

ASIC said that rights should be viewed liberally.

Depending on the conditions, coins or tokens may be classified as managed investment schemes (collective investment vehicles), securities, derivatives, or other financial items subject to Australian financial services regulation. To help participants understand their legal and regulatory duties, ASIC offered high-level regulatory signposts in INFO 225. In addition to crypto asset issuers, these signposts are applicable to crypto asset intermediaries, miners, and transaction processors, as well as crypto asset exchanges and trading platforms.

Entities selling coins or tokens as financial products must comply with the Corporations Act's disclosure, registration, licensing, and conduct requirements. The operator of a cryptocurrency exchange may be needed to possess an Australian market licence if the coins or tokens exchanged on the exchange are financial products.

Generally, ASIC's regulatory advice aligns with other agencies' positions.

To launch an ICO or other token sale, ASIC recommends that organizations contact its Innovation Hub (described in detail below, “Promotion and testing”) for informal help.

This indicates its desire to increase investor trust in cryptocurrencies.

ASIC has taken action to prohibit planned token sales targeting retail investors because to concerns with disclosure and advertising materials (which are addressed below) as well as offers of financial products without an AFSL.

The Treasury consulted on ICOs and the appropriate regulatory frameworks in Australia in 2019, but no findings have been announced.

Marketing

Acknowledging that a token sale may include an offer of financial items has obvious consequences for marketing. Examples of regulated disclosure documents include product disclosure statements (PDS), prospectuses (prospectuses) and financial services guides (FSG). This disclosure document must provide the provider's cost structure to let a customer determine whether to buy bitcoin from the service.

In certain cases, the marketing effort alone may lead the token sale to be restricted.

An offer of financial goods may not be regulated under the Corporations Act if the investor is a “sophisticated investor” or a wholesale customer.

Border problems

Unless exempted, a foreign financial services provider (FFSP) must have an AFSL to do business in Australia.  The Corporations Act may apply to an ICO or token sale whether it is established and issued in Australia or elsewhere. FFSPs licensed in some countries may offer financial services to wholesale customers (akin to the idea of an accredited investor under US law) in Australia without possessing an AFSL.

The FAFSL replaces Australia's prior passporting system (though FFSPs already relying on passport relief may do so until 31 March 2023).

The Treasury is now consulting on restoring passport relief for FFSPs and/or providing additional relief, as well as a fast-track licensing framework for FFSPs seeking an AFSL.

Neither of these discussions has produced any results as of this writing.

In order to do business in Australia, foreign firms may be needed to either register with ASIC and open a branch or become a subsidiary. Generally, the more system, repetition, or continuity an organisation has in Australia, the more likely it is that registration is necessary. Generally, an AFSL holder is doing business in Australia, therefore triggering the necessity.

Promoters should also be aware that if their cryptocurrency is deemed a financial product under the Corporations Act, they cannot advertise it to Australian citizens until the licensing and disclosure requirements are completed.

Generally, a non-Australian service provider may respond to requests for information and issue products to an Australian resident if the resident initiates contact and the issuer has not engaged in conduct designed to entice the investor to contact them.

Design, distribution, and product intervention duties

From October 5, 2021, financial product issuers and distributors must meet with design and distribution requirements (DDO), which may effect future cryptocurrency structures and token sales.

Effective product governance includes (among other things) a target market determination subject to review triggers.

Product influencers

With temporary product intervention powers, ASIC may address market-wide concerns or particular business models, as well as deal with some “first mover” challenges.

ASIC Act 2001 (Cth) and the Corporations Act (Cth) (ASIC Act) encompass financial products and credit products under the NCCP Act.

Because cryptocurrencies are covered by the authorities, these marketing and distribution operations are likely to be impacted.

CPLA

Even if a token sale is not governed by the Corporations Act, it may be governed by other legislation, such as the Australian Consumer Law (ACL) under Schedule 2 of the Competition and Consumer Act 2010 (Cth). The ACL forbids misleading or deceptive behavior in several contexts, including marketing and advertising. As a result, advertising material for token sales must be carefully crafted to avoid misleading or deceiving purchasers.

Moreover, promoters and dealers must confirm that the coins or tokens produced are appropriate for their intended purpose. The ASIC Act provides virtually comparable protection to investors in financial goods or services.

The Australian Competition and Consumer Commission has delegated authority to ASIC to take action against misleading or deceptive behavior in promoting or issuing token sales (regardless of whether it involves a financial product).

According to ASIC, misleading or deceptive behaviour in token sales includes:

• misrepresenting the token sale as a regulated product or endorsed by a regulator;
• misrepresenting the token sale as a regulated product or endorsed by a regulator.

ASIC said it will utilize this ability to investigate token issuers and their advisors for any unauthorized and deceptive behaviour. Infractions of the ACL or ASIC Act may result in monetary fines, injunctions, compensatory damages, and costs orders.

Cryptocurrency taxes

Despite recent efforts by the Australian Taxation Office (ATO) to clarify the tax legislation, the taxation of cryptocurrencies in Australia remains controversial. The ATO considers cryptocurrencies a taxable asset owned or exchanged (rather than as money or a foreign currency).

Normal commercial sales or exchanges of cryptocurrencies

If a cryptocurrency holder sells or exchanges cryptocurrency in the usual course of business, the cryptocurrency is held as trading stock.

Token sales gains will be taxable, but losses will be deductible (subject to integrity restrictions and “non-commercial loss” regulations).

Relevant companies include bitcoin trading and mining.

The determination of whether or not a taxpayer is carrying on a business is based on the facts and circumstances of each case. Generally (though not primarily), actions that are conducted for a profit, repetitive, continuing, and contain business paperwork are considered business activities.

Isolated deals

In certain cases, profits or gains from a “isolated transaction” involving the sale or disposal of cryptocurrency may be taxed even if the transaction was not entered into with the intention of profiting and was part of a business operation or commercial transaction.

Crypto investments

Not in the course of a company, or as part of an isolated transaction with a profit motive, a bitcoin profit on sale or disposal should be recognized as a capital gain. In this sense, the ATO has stated that bitcoin is a CGT asset. Capital gains may be discounted under the CGT discount rules if the taxpayer meets the prerequisites (that is, the cryptocurrency is held for at least 12 months before it is disposed of).

Although bitcoin is a CGT asset, a capital gain on its sale may be ignored if it was bought for less than $10,000.

Capital losses on personal use cryptocurrencies are also excluded.

Cryptocurrency is a personal use asset if it is obtained and utilized quickly for personal use or consumption (that is, to buy goods or services). Due to the fast advancement of both bitcoin technology and its usage, the ATO's opinions on the tax consequences of cryptocurrency transactions are in flux.

Staking bitcoin

An entity may retain cryptocurrency (tokens) to confirm and verify blockchain transactions.

The “validator” may be awarded with extra tokens.

Participating in proxy staking or voting with their tokens in “proof of stake” or other consensus procedures may earn more tokens.

The value of such tokens should be considered as regular income at the moment of receipt.

Cryptocurrency issuers

If you are an Australian tax resident or operating via a “permanent establishment” in Australia, you may be liable for tax. The current corporation tax rate in Australia is between 26% and 30%. However, if the issued coins are taxed as stock or are issued to repay a loan, the ICO revenues may not be taxable to the issuer.

Digital currency purchases and sales done after July 1, 2017 are exempt from GST since they are input-taxed financial supplies. As a result, sellers of digital currency will not be obligated to charge GST on these supply, and buyers will not be eligible to GST refunds (i.e., input tax credits).

Because digital currency is a payment mechanism instead of cash, the standard GST regulations apply when paying or receiving digital currency for goods and services.

The GST statute defines “digital currency” as a digital unit of value that meets the following criteria:

No country's currency is involved; the value is not generated from or based on anything else; and it does not provide an entitlement or privilege to obtain anything else.

Whether or not a miner must pay GST on the supply of new cryptocurrency relies on many aspects, including the cryptocurrency's characteristics, the miner's registration for GST, and whether the supply is done in the course or advancement of the miner's company.

Activities undertaken for personal enjoyment, as a pastime or as an employee are excluded from the definition of a miner's enterprise.

Some miners may unwittingly be carrying on a “enterprise” for GST purposes.

Cryptocurrency is a sort of security or derivative, a “digital currency” as defined by the GST law, or a right or claim to goods or services. If the cryptocurrency is a security, derivative, or “digital currency”, it is an input-taxed financial supply (assuming the other requirements are satisfied).

A cryptocurrency miner must register for GST if its annual GST revenue exceeds $75,000, excluding digital currency supplies and any input-taxed supply.

A miner that does not meet this GST registration level may nonetheless register for GST to collect full input tax credits (i.e., GST refunds) for its business acquisitions (but acquisitions that relate to the sales or acquisitions of securities, derivatives or digital currencies are prima facie non-creditable or non-refundable).

A supply made in connection with a miner's business, including its start or end, is typically considered "in the course or advancement" of the business and is subject to GST if other conditions are met.

Anti-money laundering and money transfer legislation

Since 2018, digital currency exchanges must register with AUSTRAC as a reporting company under Australia's AML/CTF regulatory framework. Non-registration carries a penalty of up to two years in jail or A$111,000 fine, or both.    Registered exchanges will be expected to adopt know-your-customer systems to sufficiently authenticate their clients' identities, as well as to monitor and report suspicious and big transactions. Exchange operators must also preserve records of client identity and transactions for seven years. DCE providers must re-register every three years.

AUSTRAC has been closely watching the ML/TF risks linked with digital currency.

As of June 2021, AUSTRAC has advocated the Financial Action Task Force's (of which Australia is a member) red flags guideline for signs of ML/TF, which is intended to assist the development of AML/CTF legislation pertaining to digital currency.

Adverts and tests

To better understand and interact with companies, Australian regulators often communicate with industry on potential regulatory changes.

In order to help new market entrants (including those in the blockchain and cryptocurrency industries) understand their duties under Australian law, ASIC and AUSTRAC have created Innovation Hubs.

ASIC has also signed relationships with international agencies to better understand their regulatory approaches and product offers (as discussed below).

Wills and estate planning

The handling of cryptocurrencies under Australian succession law is currently unregulated.

Generally, if executors cannot access a deceased's cryptocurrency (e.g., by obtaining the private key), it may not transfer to the beneficiaries.

A will should be written to allow the executor to handle digital assets.

It may be beneficial to choose an executor who is conversant with cryptocurrency.

Because cryptocurrencies are often stored anonymously, a will should specify that they are to be allocated to recipients. A trustworthy representative must also be able to access passwords to digital wallets and external disks containing cryptocurrencies. Unlike a bank account, a digital wallet may be accessed by anybody, thus external disks and passwords should not be immediately available on the face of the will. This may involve giving the executor a list of passwords and accounts to keep in a safe custody facility until a will is needed.