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.

Law stated date

Correct on

Give the date on which the above content is accurate.

15 November 2019.