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Peter Reeves, Georgina Willcock and Candice Fraser of Gilbert Tobin assess Australia’s ongoing efforts to regulate the digital currency market

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Who are the regulators providing oversight of digital currencies in Australia?

Depending on the structure of the entity, the rights that attach to a token or coin and the manner in which it is sold, a provider, issuer or promoter of a digital currency may be carrying on a financial services licence business. A person who carries on a financial services business in Australia must hold an Australian financial services licence (AFSL) or be exempt from the requirement to be licensed.

The Australian Securities and Investments Commission (ASIC) is an independent government body and Australia's corporate, markets and financial services regulator that administers the Corporations Act 2001 (Cth). The Corporations Act is the primary legislation for the incorporation and regulation of companies carrying on business in Australia, the offer of securities and financial products, and the provision of other financial services in Australia (including non-cash payment products) and sets out the responsibilities of an AFSL holder.

Providers of designated services must also comply with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (the AML/CTF Act). Compliance with the AML/CTF Act is overseen by the Australian Transaction Reports and Analysis Centre (AUSTRAC). The AML/CTF Act has cross-border application where designated services are provided by a subsidiary of an Australian company or are provided in Australia by a foreign company.

Further, if an entity accepts deposits or offers purchased payment facilities, it must be authorised by the Australian Prudential Regulation Authority (APRA) as an authorised deposit taking institution (ADI) and any tax on revenue on digital currency is overseen by the Australian Taxation Office (ATO), the government entity established for the collection of revenue.

Digital currencies are also subject to the consumer protection provisions, regardless of whether they are regulated financial products (such as securities), as enforced by ASIC and the Australian Competition and Consumer Commission (ACCC).

When do digital currencies fall under the financial services regulations?

A major consideration for entities issuing or promoting digital currencies in Australia (including those offered at initial coin offerings (ICO)) is whether the digital currency constitutes a financial product and consequently triggers the financial services licensing and disclosure requirements in the Corporations Act.

In May 2018, ASIC released updated guidance on ICOs and the features which may cause a token or coin to be characterised as a financial product. Broadly, the characterisation of a digital currency is dependent upon the use for, and rights that attach to, the token or coin. Where a digital currency is categorised as a security or other financial product, the entity advising in relation to, or dealing in, the digital currency may be required to hold an AFSL and comply with applicable disclosure obligations. Where a market for buying and selling of digital currencies that are financial products is created, an Australian market licence may be required in order to operate.

A financial service is defined in the Corporations Act to include the provision of financial product advice, dealing in financial products (as principal or agent), making a market for financial products, operating registered schemes or providing custodial or depository services. The Corporations Act also defines financial product to be a facility through which, or through the acquisition of which, a person makes a financial investment, manages financial risk or makes a non-cash payment (NCP). An NCP is any payment made other than by delivery of Australian or foreign currency in the form of notes and/or coins.


Smart contracts may in some instances alleviate the digital currency being classified as a derivative


A digital currency will be a financial product if it is, amongst other things, an interest in a managed investment scheme (MIS), a security or a derivative or an NCP facility. Managed investment schemes are contract-based schemes, unincorporated vehicles (typically structured as unit trusts or unincorporated limited partnerships) or bodies corporate (typically structured as companies and incorporated partnerships).

Where purchasers of a digital currency contribute assets (including fiat or other digital currencies) to gain an interest in a scheme, the assets are pooled with other investors, and the purchaser does not have day to day control over the scheme, this may be classed as an MIS. Companies may seek to avoid this characterisation by attempting to frame entitlements or interests received by the purchasers as a receipt of a purchased service, however, the characterisation is dependent on the pooling of funds from purchasers or the use of those funds under the arrangement.

Where a digital currency has features pertaining to rights in a company, including equity ownership, voting and some right to future profits, it will likely be considered a security. This applies even where tokens are developed on a pre-existing blockchain.

The issue of a digital currency, particularly through the ICO process, can involve the contribution of fiat or digital currency to fund the development and operation of a business (including the creation of a platform which the tokens or coins are to be used). As the contribution is likely to lead to an increase in value in the business and thereby an increase in value in the digital currency held for that business, the token or coin may be characterised as a security and the company may be subject to the same disclosure requirements that apply to initial public offerings of private to public companies.

If a cryptocurrency derives its value from (or is pegged to) an underlying reference asset (such as a share, commodity or currency) with variations dictated by the movements in price of that reference asset, that token may be considered a derivative. The use of smart contracts may in some instances alleviate the digital currency being classified as a derivative.

ASIC has indicated that in circumstances where the issue of tokens or coins constitute a loyalty scheme (ie where people are rewarded with tokens to spend with that issuer or third party), they may fall under NCP facility category as a financial product (unless an exemption applies). Therefore, facilities through which cryptocurrency is used to pay for goods and services may be classified as NCP facilities. To deal or advise on NCP facilities, an AFSL is required with a specified authorisation for NCP products.

Are there any anti-money laundering obligations for investors and corporates relating to digital currency?

The AML/CTF Act imposes obligations for reporting entities and entities carrying on designated services. Reporting entities include providers of financial services (including remittance dealers and digital currency exchanges), bullion dealers and entities providing gaming or gambling activities. Relevantly, designated services include the issue or sale of tokens or coins characterised as a security or a derivative. Digital currency exchange providers fall within the scope of the regime and are required to register with AUSTRAC in order to operate. A penalty of up to two years' imprisonment and a fine of up to A$105,000 ($68,600 approximately) may apply for failing to register. Registration with AUSTRAC does not constitute Government endorsement or approval. Entities selling digital currencies that fall within the scope of the AML/CTF Act must conduct customer verification, perform ongoing due diligence and reporting, and keep records for seven years.

Flow of currency in or out of Australia is not restricted however all transfers of more than A$10,000 must be reported to AUSTRAC. Unless a reporting entity is exempt, it must also submit compliance reports to AUSTRAC as part of an AML/CTF programme.

AML/CTF obligations on businesses will require investors to provide identification documentation at the point of purchase and prior to participation in regulated ICOs and on an ongoing basis.

Are there any privacy and data protection obligations that may apply to digital currencies?

Collection and disclosure of personal information (which includes all identification information) in Australia is governed by the Australian Privacy Principles (APPs) found in the Privacy Act 1988 (Cth). The obligations apply to entities carrying on business in Australia and collecting information from Australian residents, even if that entity has no physical presence in Australia. The APPs require such entities to have a privacy policy and processes in place designed to protect personal information collected and held. Entities who disclose personal information overseas (ie to cloud storage providers in countries other than Australia) must take reasonable steps to ensure that the APPs are complied with by the receiving entity and can be held accountable for privacy breaches by the receiving overseas entity.

With the introduction of the Privacy Amendment (Notifiable Data Breaches) Act 2017 (Cth), additional obligations have been imposed upon organisations with aggregate group revenue of A$3 million or more requiring notification to the privacy commissioner and individuals affected if an eligible data breach occurs.

What protections are in place for retail and institutional investors in digital currency?

Financial products and services can currently be marketed to retail clients in Australia regardless of the underlying risk and complexity, the asset class or investment structure, provided the relevant disclosure and licensing requirements are met. However, a government consultation has recently taken place in relation to the Treasury Laws Amendment (Design and Distribution obligations and product intervention powers) Bill 2018. The bill proposes to introduce amendments to the Corporations Act for the purpose of protecting retail clients by imposing additional restrictions upon offerors and distributors of financial products. These obligations would require offerors to identify their appropriate target market, distribute products in a manner that is likely to result in products being marketed to the identified market and to review the arrangements frequently. Under the proposed regime, ASIC would be given the powers to enforce compliance.

Consumer protection regulation in Australia remains primarily focused on conduct and disclosure.


If the issued coins are characterised as equity for tax purposes, the ICO proceeds should not be taxable to the issuer


If a digital currency is characterised as a financial product, various requirements for the protection of retail investors will be triggered. For instance, the Corporations Act requires any offer of a financial product to a retail client to be accompanied by relevant disclosure documents that satisfy regulatory requirements (unless an exemption applies). Disclosure documents may comprise a product disclosure statement or a prospectus, and a financial services guide. Disclosure requirements do not apply where a financial product is offered to wholesale clients, sophisticated, or professional investors. Generally, wholesale clients include a person who either: invests A$500,000 or more; has net assets of more than A$2.5 million or gross income of at least A$250,000 in the last two financial years; or is a professional investor (for example, an AFSL holder, APRA regulated bodies, trustees of superannuation funds, listed entities, or persons controlling at least A$10 million). A retail client is anyone that does not fall within the definition of a wholesale investor.

Prohibitions in the Corporations Act include the advertisement or publication of statements that directly or indirectly refer to an offer of securities or is reasonably likely to induce people to apply for the securities (unless an exemption applies), and the practice of selling securities through unsolicited personal sales contact (or hawking).

Consumer protection rules that apply to the provision of financial services and financial products (which may include digital currencies) are contained in the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act). The ASIC Act provides protection for consumers against misleading or deceptive conduct, false or misleading representations and unconscionable conduct, and may extend to conduct that takes place outside of Australia by an entity that is incorporated in, or is carrying on business within, Australia. Prohibitions also apply in relation to commercial transactions between sophisticated investors.

Where a digital currency is not characterised as a financial product, consumer protections under the Australian Consumer Law set out at Schedule 2 to the Australian Competition and Consumer Act 2010 (Cth) still apply. Specifically, sellers and promoters of digital currency are prohibited from engaging in unconscionable, or misleading or deceptive conduct, and must ensure that tokens or coins are fit for their intended purpose.

ASIC has the power, delegated by the ACCC, to disrupt the distribution of cryptocurrencies that are financial products and has the power to take action against a seller in relation to misleading or deceptive conduct in the course of marketing or an ICO (regardless of whether it involves a financial product. ASIC guidance indicates that misleading or deceptive conduct in relation to ICOs may include:

  • using social media to create the appearance of greater levels of public interest;
  • creating the appearance of greater levels of buying and selling activity for an ICO or a cryptocurrency-asset by engaging in (or arranging for others to engage in) certain trading strategies;
  • failing to disclose appropriate information about the ICO; or
  • suggesting that the ICO is a regulated product or endorsed by a regulator when it is not.

What are the considerations for foreign financial services providers wanting to provide financial services in Australia?

Foreign financial services providers (FFSPs) wanting to carry on business in Australia must register with ASIC and, in some circumstances, create a branch, or incorporate a subsidiary in Australia. The Corporations Act will apply to entities marketing and issuing digital currencies in Australia and FFSPs carrying on a financial services business in Australia are required to hold an AFSL, unless relief is granted or an exemption applies. Whether an entity is taken to be carrying on a business in Australia will depend on the level of system, repetition or continuity associated with that entity's business activities in Australia.

If an FFSP holds authorisations to provide particular financial services in their home jurisdiction, they may be able to passport into Australia and provide those services to wholesale clients in Australia without holding an AFSL. This relief is subject to various conditions being satisfied by the FFSP (including evidencing registration under the laws of its home jurisdiction and appointing a local agent). The FFSP must disclose to clients that it is exempt from holding an AFSL and that it is regulated by the laws of a foreign jurisdiction.

Australia currently has passport arrangements with the regulators in the US, the UK, Germany, Hong Kong, Singapore and Luxembourg. The instruments effecting passport relief are currently under review but remain in effect until October 2018.

Where the digital currency is considered to be a regulated financial product, and an entity outside of Australia wishes to market their tokens or coins to Australian residents, they will not be permitted to engage in marketing activities unless the licensing and disclosure requirements are met. An entity may respond to requests for information from Australian residents, provided the service provider is from outside of Australia, and there was no marketing or other conduct in Australia that induced the investor to make the inquiry.

What rules are in place surrounding the regulation of ICOs?

An entity wanting to offer tokens or coins through an ICO must first clarify how the ICO is structured and what legal rights attach to the coin or token. Depending on these factors, an ICO may fall within the characteristics of a financial product bringing the ICO into the ambit of the financial services regulatory regime. The entity offering the ICO, promoters and distributors may be required to hold an AFSL. At the time of writing several regulated financial product ICOs are planned in Australia.

Regardless of how ICOs are marketed and how tokens are described in marketing material, it is the actual characteristics and rights that attached to the token that will determine whether the token or coin is a financial product. If the ICO is an offer of financial product to a retail client then an offer must be accompanied by the relevant disclosure documents.

In all ICOs, whether or not a financial product is offered and whether or not the token issuer is located overseas, all marketing material (including the whitepaper, website pages, terms and conditions, and other promotional material) would need to be reviewed to ensure no statements are made that would be considered misleading or deceptive, and a privacy policy would need to be provided. A breach of these rules at ICO stage may result in enforcement action by ASIC through powers delegated by the ACCC which can include prohibiting token or coin sales.

What are the areas relating to digital currencies that will be regulated shortly?

There are currently no regulations in Australia that specifically deal with the use of blockchain technology. In March 2017, ASIC released guidance reaffirming that the current regulatory framework is intended to be technology neutral and that businesses considering operating market infrastructure or providing financial or consumer credit services using blockchain technology will still be subject to the compliance requirements that exist under the applicable licences.

The introduction of new legislation that will follow the Exposure Draft of Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2017 (Cth), will allow ASIC the power to proactive action to intervene where a financial product is proposed to be issued. At the time of writing, ASIC has yet to release guidance on the way these powers might be interpreted and exercised.

How is the acquisition and disposal of digital currency treated in Australia from a tax perspective?

The tax implications for investors or holders of cryptocurrency depends upon the intended use of that cryptocurrency. The summary below applies to investors who are Australian residents for tax purposes.

Investors in the business of trading cryptocurrencies (including funds) are likely to be subject to the trading stock provisions. The gain and losses on the sale of cryptocurrencies will be taxable to such investors on revenue account.

In other circumstances, the ATO has indicated that cryptocurrency will likely be a capital gains tax (CGT) asset. The gain on its disposal will be subject to CGT. Capital gains may be discounted under the CGT discount provisions, so long as the investor satisfies the conditions for the discount. The situation in Australia is not resolved as to whether cryptocurrencies are eligible to be CGT assets (and subject to the CGT discount) as a matter of law, considering most users of cryptocurrency have a profit-making purpose by way of selling their coins or tokens (ie they hold the cryptocurrency on revenue account).

Capital losses on cryptocurrencies which are personal use assets are disregarded. This includes cryptocurrencies acquired or kept for personal use or consumption (ie to buy goods or services). Capital gains on personal use assets are only disregarded where the asset was acquired for less than A$10,000.

In the context of an ICO, a coin issuance by an entity that is either an Australian tax resident, or acting through an Australian permanent establishment, will likely be taxable in Australia. The current corporate tax rate in Australia is between 27.5% and 30%. If the issued coins are characterised as equity for tax purposes, the ICO proceeds should not be taxable to the issuer, but all future returns to the token holders will be treated as dividends.

About the author

Peter Reeves
Partner, Gilbert + Tobin

Sydney, Australia
T: +61 2 9263 4290
M: +61 410 542 790
E: preeves@gtlaw.com.au
W: www.gtlaw.com.au

Peter Reeves is a partner in Gilbert + Tobin's corporate advisory group and is an expert and market-leading practitioner in financial services regulation and digital assets. He leads the financial services and fintech practices at G+T.

Peteradvises domestic and off-shore corporates, financial institutions, funds, managers and other market participants in relation to establishing, structuring and operating financial services sector businesses in Australia. He also advises across a range of issues relevant to the fintech and digital sectors, including platform establishment, payment solutions, blockchain solutions, digital fundraising and digital currencies.


About the author

Georgina Willcock
Lawyer, Gilbert + Tolbin

Sydney, Australia
T: +61 2 9263 4202
M: +61 487 700 031
E: gwillcock@gtlaw.com.au
W: www.gtlaw.com.au

Georgina Willcock is a lawyer in Gilbert + Tobin's corporate advisory group with a focus on Australian financial services laws, funds management and anti-money laundering regulation.

Georgina has been involved in a range of transactions and advisory matters, including in relation to the establishment and operation of retail and wholesale funds, private mergers and acquisitions, and compliance with the Corporations Act 2001 (Cth) and Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth). Georgina has also advised on issues relevant to the fintech and digital sectors, including platform establishment, blockchain solutions, digital fundraising and digital currencies.

Georgina is involved in a number of innovation initiatives co-ordinated by Gilbert + Tobin. She participated in a legal hackathon, which Gilbert + Tobin hosted in conjunction with Westpac and LegalVision in January 2016 and which won the award for Innovation in use of Technology at the Financial Times Innovative Lawyers Awards Asia-Pacific 2016.


About the author

Candice Fraser
Lawyer, Gilbert + Tobin

Sydney, Australia
T: +61 2 9263 4669
M: +61 477 477 027
E: cfraser@gtlaw.com.au
W: www.gtlaw.com.au

Candice Fraser is a lawyer in Gilbert + Tobin's corporate advisory group with a focus on financial services laws and regulations including establishing financial services businesses in Australia, and financial technology issues relating to the establishment of platforms, digital currencies and initial coin offerings.

Candice has also advised on general corporate matters including directors' duties, regulatory matters including company and auditor breach reporting, transactional matters related to private share and business sales and acquisitions, and on the application of the Australian consumer law.


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