General legal and regulatory framework

Legal framework

What legal framework governs cryptoassets? Is there specific legislation governing cryptoassets and businesses transacting with cryptoassets?

Australia has no specific legal framework which governs cryptoassets. However, the Anti-money Laundering and Counter-Terrorism Financing (AML/CTF) Act 2006 defines a ‘digital currency’ as:

  • a digital representation of value which:
    • functions as a medium of exchange, a store of economic value or a unit of account;
    • is not issued by or under the authority of a government body;
    • is interchangeable with money and may be used as consideration; and
  • is generally available to members of the public; or
  • a means of exchange or digital process or crediting declared to be digital currency under the AML/CTF Rules.

The AML/CTF Rules may be updated by the Australian Transaction Reports and Analysis Centre (AUSTRAC) chief executive officer without the need for Parliament to change underlying legislation. Where a business wishes to offer a service of converting fiat currency to cryptocurrency, it will be providing a designated service under the AML/CTF Act and will be required to be registered as a digital currency exchange with AUSTRAC unless an exemption applies. This is expected to be expanded to capture conversion services from crypto to crypto in due course.

Since the registration system was introduced, more than 250 digital currency exchanges globally have registered their businesses in Australia.

The A New Tax System (Goods and Services Tax) Act 1999 (Goods and Services Tax Act) also contains a separate definition of ‘digital currency’, which, despite being different to the definition in the AML/CTF Act, operates in practice such that there is no material difference in its application. The Goods and Services Tax Act defines ‘digital currency’ as a digital unit of value that:

  • is designed to be fungible;
  • can be provided as consideration for a supply;
  • is generally available to members of the public without any substantial restrictions on their use as consideration;
  • is not denominated in any country’s currency;
  • does not have a value that depends on or is derived from the value of anything else; and
  • does not give an entitlement to receive, or to direct the supply of, a particular thing or things, unless the entitlement is incidental to:
    • holding the digital units of value; or
    • using the digital units of value as consideration;

but does not include:

  • money; or
  • a thing that, if supplied, would be a financial supply for a reason other than being a supply of one or more digital units of value to which the above bullets apply.

Cryptographic tokens which are used to represent an asset, provide an interest payment or a revenue share or which facilitate a payment may be a financial product under the Corporations Act 2001. Bitcoin and ether are not recognised as financial products. A business dealing in, advising in relation to or issuing a financial product will generally be required to hold an Australian financial services licence.

Government policy

How would you describe the government’s general approach to the regulation of cryptoassets in your jurisdiction?

The government generally has a broad, technology-neutral approach to regulating cryptoassets. In the absence of specific legislation affecting cryptoassets, the key regulatory bodies are:

  • the Australian Securities and Investments Commission (ASIC);
  • the Australian Tax Office (ATO); and
  • AUSTRAC.

These bodies regulate the activities of the cryptoasset industry primarily by providing general guidance such as information sheets, but also through legislation, including:

  • ASIC’s INFO 225 ‘Initial coin offerings and crypto-assets’;
  • the ATO’s tax treatment of cryptocurrencies webpage; and
  • AUSTRAC’s AML/CTF Act and Rules.
Regulatory authorities

Which government authorities regulate cryptoassets and businesses transacting with cryptoassets?

ASIC regulates activities involving cryptoassets to the extent that those activities meet the definition of a ‘financial product’ under the Corporations Act. ASIC has delegated powers from the Australian Competition and Consumer Commission which enables it to take action under the Australian Consumer Law (Schedule 2 of the Competition and Consumer Act 2010) for misleading and deceptive conduct in the marketing or selling of cryptoassets.

Regulatory penalties

What penalties can regulators impose for violations relating to cryptoassets?

No penalties apply specifically to cryptoassets. Specific violations of activities are dealt with under their respective legislation, for example:

  • violations relating to tax offences are dealt with in the Tax Administration Act 1953 administered by the ATO with varying custodial and financial penalties;
  • crimes involving the use of a cryptoasset (other than money laundering or drug-related crimes which involve federal law) are dealt with under state-based criminal legislation with varying custodial and financial penalties; and
  • the use of a cryptoasset as a financial product without a licence may be a breach of the Corporations Act 2001 (Cth), which carries a fine calculated as the greater of:
    • A$1 million or three times the benefit received for individuals; or
    • A$10.5 million or three times the benefit received from the contravention or 10% of turnover capped at a fine of A$525 million for companies.
Court jurisdiction

Which courts have jurisdiction over disputes involving cryptoassets?

No particular court has exclusive jurisdiction over disputes involving cryptoassets; different state and federal courts have jurisdiction depending on the nature and amount in dispute.

Legal status of cryptocurrency

Is it legal to own or possess cryptocurrency, use cryptocurrency in commercial transactions and exchange cryptocurrency for local fiat currency in your jurisdiction?

Yes, it is legal. However, businesses providing fiat-to-crypto exchange services as a business must be registered with AUSTRAC as a digital currency exchange under the AML/CTF Act. There is no explicit restriction on consumers to use exchanges registered or not registered with AUSTRAC.

Fiat currencies

What fiat currencies are commonly used in your jurisdiction?

Australian dollars are the most commonly used fiat currency in Australia, as Australian banknotes are legal tender throughout Australia via the Reserve Bank Act 1959 (Cth) and the Currency Act 1965 (Cth). While other fiat currencies such as US dollars, British pounds, NZ dollars and Japanese yen are all commonly used, they are not legal tender in Australia.

Industry associations

What are the leading industry associations addressing legal and policy issues relating to cryptoassets?

The leading industry association in Australia is Blockchain Australia and Fintech Australia.

Cryptoassets for investment and financing

Regulatory threshold

What attributes do the regulators consider in determining whether a cryptoasset is subject to regulation under the laws in your jurisdiction?

The starting point for businesses is to determine whether a cryptoasset is a financial product under the Corporations Act 2001 (Cth) and whether issuing cryptoassets will require the business to hold an Australian financial services licence (AFSL). ‘Financial products’ are defined under the Corporations Act as a facility through which or through the acquisition of which a person:

  • makes a financial investment;
  • manages financial risk; or
  • makes non-cash payments.

The Corporations Act also deems specific things to be financial products, including:

  • securities;
  • derivatives; and
  • interests in a managed investment scheme.

Businesses offering to deal in cryptoassets, such as by operating a market or providing custodial services, must obtain an AFSL if they deal with, give advice or provide intermediary services for cryptoassets that constitute financial products.

If businesses offer payment services, such as accepting cryptoassets and making payments, assuming that the cryptoasset is not a financial product, the business will still likely be providing a non-cash payment facility under Section 763D of the Corporations Act and must hold an AFSL with a non-cash payment facility authorisation unless an exemption applies. Digital wallets in Australia will most likely constitute non-cash payment facilities. The non-cash payment facility concept in Australia is broadly analogous to the e-money licence system in Europe.

Investor classification

How are investors in cryptoassets classified and treated differently?

There are no prescribed classes of investor specific to cryptoassets.

Where a cryptoasset is a financial product, Corporations Act disclosure exemptions will apply to investors who meet the definitions of ‘professional investors’, ‘sophisticated investors’ and ‘wholesale investors’. Sophisticated investors either control A$2.5 million in assets or have had an income of more than A$250,000 for two years. Retail investors are anyone below this threshold.

Initial coin offerings

What rules and restrictions govern the conduct of, and investment in, initial coin offerings (ICOs)?

In May 2019 the Australian Securities and Investments Commission (ASIC) updated its INFO 225 guidance relating to ICOs. ASIC considers that there is a high risk that most ICOs or token generation events will be considered a managed investment scheme requiring the token-issuing entity to hold an AFSL to conduct the sale. ASIC has said that it expects entities that do not have an AFSL to be able to justify a conclusion that their token or ICO is not an interest in a managed investment scheme or any other type of financial product. 

Unfortunately, ASIC’s updated INFO 225 does not provide clear guidance on how entities can undertake a token offering which is compliant with the obligations of a managed investment scheme operated by an AFSL holder relating to matters such as custody or secondary trading of cryptoassets or provide any categories of crypto token which will not be considered by ASIC to be financial products. There have been no reported decisions on whether this reversal of the onus of proof is valid, but cooperation with regulators is highly recommended.

There are no specific rules or restrictions governing investment in ICOs. The Treasury is expected to release the results of a consultation around ICOs in the fourth quarter of 2019 or the first quarter of 2020, which may contain more information.

Security token offerings

What rules and restrictions govern the conduct of, and investment in, security token offerings (STOs)?

STOs would typically involve the offer of a token which would be considered a financial product under the Corporations Act. Issuers must hold an AFSL with suitable authorisation to make the offer and comply with the disclosure requirements under the Corporations Act, including the requirement that any retail investor must be given a regulated disclosure document such as a prospectus or product disclosure statement. Further requirements can apply depending on the nature of the financial product being offered.

Stablecoins

What rules and restrictions govern the issue of, and investment in, stablecoins?

Stablecoins are regulated under ASIC’s guidelines set out in INFO 225. Thus, if the stablecoin meets the definition of a ‘financial product’, the issuer must obtain an AFSL and the standard Corporations Act provisions relating to financial products will apply.

Most stablecoins derive their value by backing a different, more stable asset. This usually results in the stablecoin being classified as a derivative (ie, a financial product) under the Corporations Act.

Airdrops

Are cryptoassets distributed by airdrop treated differently than other types of offering mechanisms?

Cryptoassets distributed by airdrop are generally not treated differently than other types of offering mechanism. Issuers planning to distribute a cryptoasset via an airdrop must consider the same Corporations Act requirements as any other issuer.

From a recipient’s tax perspective, the Australian Tax Office is yet to publish specific guidance on cryptoasset airdrops. In the absence of specific guidance, airdrops other than those occurring under an ICO should be treated as either an asset for capital gains tax purposes or a revenue asset received for no consideration. Consequently, the full amount of any gain or loss should be taken into account for tax reporting.

Advertising and marketing

What laws and regulations govern the advertising and marketing of cryptoassets used for investment and financing?

A person will be conducting financial and related activities whenever they publish ads in Australia that are reasonably likely to induce Australians to acquire a financial service or product. Marketing a product itself may constitute a regulated activity requiring that entity to hold an AFSL, unless an exemption applies.

The ASIC Act provides for consumer protection surrounding the advertising and marketing of financial services, including prohibitions on misleading or deceptive conduct.

Ads and promotional material in respect of credit products must comply with the National Consumer Credit Protection Act 2009, including displaying a credit licensee’s Australian credit licence number on all printed ads.

Ads and promotional material in respect of financial products must comply with the Corporations Act and include:

  • the identity of the issuer or seller;
  • confirmation that a product disclosure statement is available; and
  • a statement that a person should consider the product disclosure statement in deciding whether to acquire or continue to hold a product.

Whether or not a financial product is involved, promoters must ensure that the marketing of cryptoassets does not involve misleading or deceptive conduct or statements in accordance with the Australian Consumer Law.

Trading restrictions

Are investors in an ICO/STO/stablecoin subject to any restrictions on their trading after the initial offering?

While contractual restrictions between investors and issuers regarding trading after a token issue are common, there are no specific legislative or regulatory restrictions on investors trading such assets.

Crowdfunding

How are crowdfunding and cryptoasset offerings treated differently under the law?

Equity crowdfunding and cryptoasset offerings are treated very differently in Australia. The regulatory framework for equity-based crowd-sourced funding (CSF) was expanded by the Corporations Amendment (Crowd-Sourced Funding for Proprietary Companies) Act 2018, allowing eligible proprietary companies to raise up to A$5 million using CSF.

CSF offers can be made only by eligible CSF companies, including:

  • unlisted public companies with less than:
    • A$25 million in consolidated gross assets; and
    • A$25 million in annual revenue; and
  • proprietary companies which:
    • maintain a minimum of two directors;
    • prepare annual financial and directors’ reports in accordance with accounting standards;
    • have their financial reports audited once they raise A$3 million or more from CSF offers; and
    • comply with the related party transaction rules that apply to public companies.

Other obligations applicable to CSF offers include:

  • an investor cap of A$10,000 per year per company for retail investors;
  • a CSF offer document containing minimum information; and
  • a five-day cooling-off period for investors.

In addition, CSF offers must be made by the holder of an AFSL or on a platform operated by a CSF intermediary holding an AFSL. The latter is the more common approach.

Cryptoasset offers which are the offer of a financial product are regulated in accordance with the standard Corporations Act. Issues of cryptoassets which are not financial products are not regulated, other than in relation to misleading and deceptive conduct.

Transfer agents and share registrars

What laws and regulations govern cryptoasset transfer agents and share registrars?

There are no specific legislation or regulations relating to cryptoassets, nor is there any specific recognition of any blockchain share registries.

Anti-money laundering and know-your-customer compliance

What anti-money laundering (AML) and know-your-customer (KYC) requirements and guidelines apply to the offering of cryptoassets?

The Anti-money Laundering and Counter-Terrorism Financing (AML/CTF) Act 2006 imposes obligations regarding the prevention of money laundering and terrorism financing on entities providing designated services. Entities which operate a business of a crypto-to-fiat digital currency exchange are deemed to be providing a designated service and must:

  • be registered as a digital currency exchange with the Australian Transaction Reports and Analysis Centre (AUSTRAC);
  • conduct KYC identification;
  • monitor and report, including reporting transfers of physical currency of A$10,000 or more and international funds transfer instructions;
  • provide suspicious matter reporting;
  • have a compliant AML/CTF programme in place; and
  • submit annual compliance certificates with AUSTRAC.
Sanctions and Financial Action Task Force compliance

What laws and regulations apply in the context of cryptoassets to enforce government sanctions, anti-terrorism financing principles, and Financial Action Task Force (FATF) standards?

Australia has adopted the FATF Asia-Pacific Group mutual evaluation process, which analyses the effectiveness of the AML/CTF measures. The AML/CTF Act is the relevant legislation which governs any contraventions of the AML/CTF regulations.

Cryptoasset trading

Fiat currency transactions

What rules and restrictions govern the exchange of fiat currency and cryptoassets?

Other than customary tax obligations and criminal law prohibitions, there are no specific restrictions governing the exchange of fiat currency and cryptoassets for users. Businesses providing the service of exchanging of fiat currency for cryptoassets and vice versa must comply with the Anti-money Laundering and Counter-Terrorism Financing (AML/CTF) Act 2006 and be registered as a digital currency exchange.

Exchanges and secondary markets

Where are investors allowed to trade cryptoassets? How are exchanges, alternative trading systems and secondary markets for cryptoassets regulated?

There are no regulatory restrictions on where investors can trade cryptoassets. Exchanges, alternative trading systems and secondary markets for cryptoassets are regulated under the AML/CTF Act. If a cryptoasset is a financial product, an exchange or market operator must have an Australian financial services licence (AFSL) with suitable authorisation.

Custody

How are cryptoasset custodians regulated?

Cryptoasset custodians are regulated only if the cryptoassets stored by the custodian entity are financial products, in which case the custodian must obtain an AFSL with appropriate custodial and depository authorisation in accordance with Australian Securities and Investments Commission (ASIC) Regulatory Guide 1 and Regulatory Guide 133.

Broker-dealers

How are cryptoasset broker-dealers regulated?

Businesses that give advice, deal or provide other intermediary services for cryptoassets that are financial products must hold an AFSL. ASIC requires that broker-dealers interacting with these types of cryptoasset must comply with Regulatory Guide 36 (‘Licensing: Financial product advice and dealing’).

Where the broker-dealer is exchanging cryptoassets for fiat currency (whether Australian or not) or vice versa in the course of carrying on a digital currency exchange business, the broker-dealer must also apply for registration as a digital currency exchange with AUSTRAC and prepare a compliant AML/CTF programme.

Decentralised exchanges

What is the legal status of decentralised cryptoasset exchanges?

There is no specific legislation or regulations which consider the legal status of decentralised exchanges. Depending on the characteristics of the decentralised exchange, it is likely to still be captured under the AML/CTF Act as a digital currency exchange which is required to be registered with AUSTRAC. A decentralised exchange is likely to be an unincorporated association, as would almost all decentralised autonomous organisations.

Peer-to-peer exchanges

What is the legal status of peer-to-peer (person-to-person) transfers of cryptoassets?

There is no prohibition on the exchange of cryptoassets on a peer-to-peer basis. The operation of a peer-to-peer digital currency exchange will require an AFSL if the tokens on the exchange are financial products. An exchange business must also be registered as a digital currency exchange if it facilitates the transfer of cryptoassets for fiat currency.

Trading with anonymous parties

Does the law permit trading cryptoassets with anonymous parties?

For individuals, there are no explicit legislative or regulatory restrictions on trading cryptoassets with anonymous parties.

For businesses operating a digital currency exchange or providing another designated service, they must comply with the AML/CTF Act, which includes not providing a service to anonymous users. More than 250 global digital currency exchanges are registered in Australia.

Foreign exchanges

Are foreign cryptocurrency exchanges subject to your jurisdiction’s laws and regulations governing cryptoasset exchanges?

The AML/CTF Act provisions relating to digital currency exchanges apply to anyone that provides a registrable digital currency exchange service to users in Australia.

Under what circumstances may a citizen of your jurisdiction lawfully exchange cryptoassets on a foreign exchange?

Subject to criminal laws prohibiting citizens from engaging in money laundering, terrorist financing or other criminal acts, there are no restrictions on a citizen participating in the lawful exchange of cryptoassets on a foreign exchange.

Taxes

Do any tax liabilities arise in the exchange of cryptoassets (for both other cryptoassets and fiat currencies)?

Yes. The Australian Tax Office’s current views on the taxation treatment of cryptocurrencies are contained in four 2014 taxation determinations.

In Taxation Determination 2014/25, the commissioner expressed the view that bitcoin is not foreign currency for the purposes of Division 775 of the Income Tax Assessment Act 1997.

In Taxation Determination 2014/26, the commissioner expressed the view that bitcoin is a capital gains tax asset for the purposes of Section 108-5(1) of the Income Tax Assessment Act. This determination also sets out that:

  • a disposal of bitcoin may give rise to a capital gains tax if the capital proceeds exceed the cost base of the tokens. Capital proceeds can include the market value of other property given for the disposal. There appears to be a somewhat widespread misapprehension in the marketplace that disposals between various cryptocurrencies do not give rise to gains and that only conversion to fiat currency crystallises a gain – which is incorrect;
  • if the first element of the cost base of a token is A$10,000 or less and the token qualifies as a personal use asset, the gain may be disregarded under the personal use exemption; and
  • in some cases, a gain on the disposal of cryptocurrency may be on income account (in which case the capital gain is disregarded). Taxpayers should refer to Taxation Ruling TR 92/3 for guidance on these points.

In Taxation Determination 2014/27, the commissioner expressed the view that bitcoin held for the purposes of sale or exchange in the ordinary course of a business is trading stock for the purposes of Division 70. This determination also sets out that:

  • bitcoin held by a taxpayer carrying on a business of mining and selling bitcoin or a taxpayer carrying on a bitcoin exchange business will be considered trading stock; and
  • bitcoin received as a method of payment by any business that sells goods will also be considered to be trading stock of that business where the bitcoin is held for the purpose of sale or exchange in the ordinary course of business.

In Taxation Determination 2014/28, the commissioner expressed the view that the provision of bitcoin by an employer to an employee in respect of their employment is a property fringe benefit for the purposes of the Fringe Benefits Tax Assessment Act 1986. The determination also sets out that:

  • bitcoin is ‘any kind of property other than tangible property’ for Fringe Benefits Tax Assessment Act purposes. The provision of it to an employee is therefore a property fringe benefit; and
  • bitcoin will not be a property fringe benefit if it is salary or wages.

Fringe benefits are taxed differently than salary or wages.

Cryptoassets used for payments

Government-recognised assets

Has the government recognised any cryptoassets as a lawful form of payment or issued its own cryptoassets?

The government has recognised cryptoassets as a lawful form of payment only in the sense that it has acknowledged that cryptoassets can be used in the same way as other non-cash consideration in barter transactions. However, no cryptoasset is recognised as legal tender in Australia and the government has yet to accept any cryptoasset as a means of payment.

The Reserve Bank of Australia has previously indicated that while it is monitoring the development of central bank-issued digital currencies elsewhere, it is not currently actively pursuing the issue in Australia. IP Australia is piloting the use of cryptoassets to represent ownership of trademarks for proof or provenance.

Bitcoin

Does Bitcoin have any special status among cryptoassets?

On 28 September 2017 the Australian Securities and Investments Commission (ASIC) issued an information sheet titled “INFO 225 Initial Coin Offerings” (INFO 225 V1), which was most recently updated in May 2019. INFO 225 V1 included an express statement that ASIC did not consider bitcoin to be a financial product. This statement was subsequently removed in the most recent update to INFO 225.

In December 2014 ASIC made a submission to a Federal Senate inquiry into digital currency that, after analysing how a transfer of bitcoin is made using standard bitcoin wallets, such a wallet was not a non-cash payment facility merely because the bitcoin wallet facilitated the direct movement of digital currencies from one person’s wallet to another, with the person initiating the payment retaining ultimate control of the funds (and presumably the lack of a third party or intermediary having any control over or role to play in relation to the funds being transferred from one wallet to another was implicit in this submission).

Bitcoin is the only cryptoasset to have been recognised in this way as not being a financial product.

Banks and other financial institutions

Do any banks or other financial institutions allow cryptocurrency accounts?

No Australian banks offer accounts denominated in cryptocurrency.

Cryptocurrency mining

Legal status

What is the legal status of cryptocurrency mining activities?

Cryptocurrency mining is not a regulated activity, unless it facilitates a clearing and settlement process for cryptoassets that are financial products in accordance with the Corporations Act. While the Australian Securities and Investments Commission (ASIC) refers to this potential in INFO 225, there has been no real-world examples of this provided.

Government views

What views have been expressed by government officials regarding cryptocurrency mining?

The government – as evidenced on ASIC’s moneysmart website – has a cautionary approach to cryptocurrency mining and identifies the risks involved with mining cryptocurrency, such as:

  • fewer safeguards;
  • the fluctuation of value; and
  • the ability for a digital wallet to be stolen.

The website also makes clear that any profits made from mining cryptocurrency should be included in the miner’s assessable income or considered as trading stock if the taxpayer is carrying on a business of cryptocurrency mining. 

Cryptocurrency mining licences

Are any licences required to engage in cryptocurrency mining?

Licences are required only if the mining facilitates a clearing and settlement process for cryptoassets that are financial products in accordance with the Corporations Act. ASIC refers miners to Regulatory Guide 211 (“Clearing and settlement facilities: Australian and overseas operators”). At present, Regulatory Guide 211 does not provide any specific guidance for cryptoasset mining. It is unclear how mining activity in a proof or work system can be understood in the context of clearing and settlement under the Corporations Act.

 

Taxes

How is the acquisition of cryptocurrency by cryptocurrency mining taxed?

Determining tax for cryptocurrency mining is dependent on whether it is undertaken as a hobby, for speculative purposes or as part of carrying on a business.

Hobby miners typically participate in mining to encourage the growth of blockchain in a non-commercial manner. However, the tax implications will turn on whether the taxpayer was acquiring cryptocurrency for the sake of having it, to tinker with, to experience the process or to participate in the community, possibly with an incidental thought that it might be worth something one day, in contrast with an intent to profit, such as speculating on the value of the cryptocurrency or using the cryptocurrency as a long-term store of value (eg, personal savings which are intended to be protected from inflation).

While true hobby mining is difficult to establish, doing so will generally result in the cryptoassets obtained through the mining being considered personal use assets, which are not taxable. Cryptoassets obtained by an individual mining for speculative gain but not in the course of business will generally be assessed as a capital gain or loss.

Where cryptoassets are obtained through mining in the course of carrying on a business, such assets will be treated as trading stock of a business and assessed as taxable income when sold.

 

Blockchain and other distributed ledger technologies

Node licensing

Are any licences required to operate a blockchain/DLT node?

There are no specific licences required to operate or use a DLT or blockchain node.  

The Australian Securities and Investments Commission’s (ASIC’s) INFO 219 sets out a general guidance assessment tool for businesses to identify whether an Australian financial services licence (AFSL) may be required for DLT-based services. This tool includes a set of factors to be considered by the business, such as:

  • Which DLT platform is being used?
  • How will it be run?
  • How does it work?
  • How is the DLT using data?
  • How does the DLT affect others? 
Restrictions on node operations

Is the operation of a blockchain/DLT node subject to any restrictions?

There are no specific restrictions, but where operating a node facilitates a clearing and settlement process for cryptoassets that are financial products under the Corporations Act, the operator must obtain an AFSL and comply with ASIC Regulatory Guide 211.

DAO liabilities

What legal liabilities do the participants in a decentralised autonomous organisation (DAO) have?

This will depend on the nature of the DAO, but the relationship between participants of a DAO can generally be described to be analogous to a general partnership or unincorporated association, putting all stakeholders at risk of being liable for any debts or legal actions that the DOA as a whole may face.

DAO assets

Who owns the assets of a DAO?

This will depend on the nature and characteristics of the specific DAO. However, because most well-known DAOs are established to be completely self-owned and autonomous, legal ownership of any assets controlled by a DAO is unclear. There is no specific legal framework dealing with this in Australia; however, where a DAO acquires an asset through the operation of a smart contract on the network, a court would consider who enabled the smart contract to self-execute, which entities have a controlling portion of interests in the DAO and who has day-to-day control and possession over the asset.

Open source

Is DLT based on open-source protocols or software treated differently under the law than private DLT?

No. The government and regulators take a substance-over-form and technology-neutral approach to implementing and applying the law. Regardless of whether the DLT is open-sourced or private and permissioned, the actual use of the application built on that DLT will inform the regulatory response to that DLT.

From an IP perspective, DLT based on open-source protocols will typically include expectations or licence terms requiring any modifications or additions built onto the open-source code will become subject to the same open source licence as the code used.

Smart contracts

Are smart contracts legally enforceable?

Whether smart contracts are legally enforceable depends on the form of the particular smart contract. The nomenclature ‘smart contracts’ is used for various contractual relationships, including:

  • an unwritten agreement, where inputs and outputs are extremely limited and trust is not required between the parties (eg, a vending machine);
  • a standard written agreement (eg, an agreement for the sale of land);
  • a written agreement incorporating the parties’ reliance on a software driven outcome, where control over the execution of the software process is in the hands of a trusted third party (eg, an escrow service);
  • a written agreement, usually in a human language, incorporating the parties’ reliance on a software driven outcome where the software resides on a blockchain and executes without human intervention; and
  • an agreement, written only in machine-readable computer code, executed entirely without human intervention once entered into, known as ‘the code is the contract’ or even presumptuously as ‘smart contract law’.

A legally enforceable smart contract must meet all of the traditional elements of a binding contract, including intent to create legal relations, consideration and offer and acceptance among others. Any duress, undue influence or unconscionable dealings could render a smart contract void at law, despite being potentially unstoppable digitally. Of particular concern are the most pure ‘the code is the contract’ smart contracts, lacking any notification of their terms which exist only as machine-readable code. The identity of the other party to the contract, or whether that party has capacity to enter into the contract, is usually unknown. The Australian courts have yet to address a smart contract dispute of this kind.

Patents

Can blockchain/DLT technology be patented?

Yes, subject to the same requirements as any other patent application.

Research prepared by IP Australia in November 2018 indicated that Australia is the sixth largest blockchain technology patent destination with 87 patent families having at least one patent application filed. Australian-based applicants represent 35 of the 87 Australian patent families, while US applicants have filed 38 patent families in Australia.

Update and trends

Recent developments

Are there any emerging trends, notable rulings or hot topics related to cryptoassets or blockchain in your jurisdiction?

The key emerging trend to note is greater regulatory and legislative interest and involvement in the blockchain space. China’s accelerating development and imminent release of the world’s first major digitised domestic currency, in conjunction with the ongoing development of globally significant stablecoins (in the form of libra initially, inevitably to be followed by others) has crystallised the need for greater government and regulatory education and attention. Initially, this took the form of Australian Treasury’s consultation on initial coin offerings, and has recently led to the creation of a Senate Select Committee on Financial Technology and Regulatory Technology, headed by Senator Andrew Bragg. As with previous years, the ongoing challenge for regulators will be to keep pace with such innovations and avoid overly reactive policy and unintended regulatory consequences.

Law stated date

Correct on

Give the date on which the above content is accurate.

15 November 2019.