An extract from The Virtual Currency Regulation Review, 3rd Edition
Introduction to the legal and regulatory frameworki 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
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 ASIC guidance, the following are examples of a virtual currency or TGE that may be a financial product:
- 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;
- it may be used as a payment method that makes it a non-cash payment facility;
- 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;
- 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
- 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.
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.9iii 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.13iv 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.17v 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
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
- they are not widely accepted or used as a payment method;
- they are not an effective store of value due to large fluctuations and strong speculative influences; and
- 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