Submission to Australian Treasury consultation on CASSPrs - second draft on 20 May 2022

DRAFT 20 May 2022

Director – Crypto Policy Unit
Financial System Division
The Treasury
Langton Crescent
By email only:

Dear Director,

Crypto asset secondary service providers: Licensing and custody requirements

Thank you for the opportunity to provide feedback on the proposed regulation of crypto asset secondary service providers (CASSPrs).

Some opening and closing remarks, observations and recommendations are set out below for your consideration.

Opening remarks

Whilst the proposed licensing and custody requirements might assist with some protections to consumers from unwanted behaviours of centralised exchanges etc, that protection could be delivered with relatively minor amendments to the existing law that triggers the requirement to hold an Australian Financial Services Licence (AFSL).

In the same way that the existing AFSL regime would be superficial without the foundational principles of financial market infrastructure and legislation that regulates capital and financial market formation and activity, the CASSPr regime in and of itself is superficial without initial or concurrent action on the foundational policy issues.

A “safe shop front” for CASSPr crypto asset activities – which includes custody, storage, brokering, exchange and dealing services, and operating a market in crypto assets for retail consumers – won’t in isolation contribute to meaningful consumer protection, financial stability and fair, orderly and transparent token markets. This is because tokens are typically issued by decentralised autonomous organisations (DAOs) using blockchain technology that anyone in the world can access.

The fact that globally accessible tokens can be bought and sold at any time without a clearly identifiable human or legal counterparty and can live for as long as the blockchain lives, creates vast challenges for any one country to effectively regulate token activities and markets. Since no one country can effectively regulate tokens issued by DAOs, policymakers around the world should seek to reach consensus on minimum standards that warrant legal recognition of a DAO.

The word ‘recognition’ has been used purposefully instead of ‘regulation’ or ‘registration’ because DAOs are evolving and need freedom to innovate, albeit with minimum standards. Genuine innovation from DAOs does not and should not seek to avoid the objective of existing laws (e.g. to deter, prevent and detect money laundering and terrorism financing, to pay tax, to deter and punish misleading and deceptive and fraudulent conduct) but a clear space is needed for DAOs to experiment and test whether different processes and automation can better achieve the objectives of existing laws whilst for example, preserving or enhancing privacy of consumers.

Minimum standards of an ‘Australian legally recognised limited liability DAO’ are set out in this submission but in the least should include clear and prominent warnings to consumers that the technology is experimental and presents known and unknown risks because it is not regulated by or within the Australian financial services laws. In addition, the minimum standards should require blockchain analytics capability (automated and/or with human input) and evolving processes to identify, deter, block and remove suspicious or criminal activity with the token/s of a DAO.

A benefit of Australian legal recognition of a DAO is that its token or tokens could then be included within the activities that a CASSPr can provide to retail consumers. If members of the DAO have not undertaken and published their ‘Australian legal recognition DAO assessment’, a CASSPr could be permitted to determine whether the minimum standards are met based on the information publicly available and this would be an ongoing, not static, obligation upon the CASSPr.

The nuances of blockchain technology as open-source technology, a public ledger, global, autonomous, on all the time, and generative of evolving global governance models, poses a different set of policy problems than those applicable to an unlisted centralised company raising capital, a centralised company listing its shares on a national stock exchange and being subject to the market operating rules of that exchange, or a centralised company offering custody services. The nuances of blockchain technology are the source of the foundational policy issues before Australia (and the rest of the world) to solve for and are worth solving as a strategic priority if we assume the global digital economy will increasingly rely on blockchain-based infrastructure for financial market transactions and non-financial transactions (e.g. identify verification).

  1. Focus on foundational policy issues before a CASSPr regime

    The proposed CASSPr regime, and the harms it seeks to protect against, is one part of a bigger picture and cannot be considered in isolation – although it could continue alongside consideration of the foundational policy issues. Policy effort and resources should be directed at the economic opportunities and foundational policy gaps that will result in the maximum amount of medium- and long-term net benefit to Australia and Australians.

    The pipeline of innovation from DAOs, tokens, and the token activities that are possible with autonomous protocols are key economic priorities. Without this innovation, or confidence of innovators to continue this innovation, the risk increases that CASSPrs have less tokens, or lesser tokens of good quality, to list, exchange, arrange, deal in and custody on behalf of users.

    Sound regulatory reform should have clearly defined objectives and provide targeted methods to address the identified harms. These objectives should be clearly identified and articulated before, or as a minimum in parallel to the assessment of whether the proposed CASSPr regime is an appropriate regulatory approach.

    There are foundational policy priorities (set out below) that should be considered before a CASSPr regime can be properly developed or scrutinised. If the policy effort does not commence by tackling the foundational policy issues, the CASSPr regime and other attempts to regulate and tax tokens would perpetuate the confusion that stems from the foundational issues and would introduce further regulatory confusion leading to jurisdictional arbitrage.

    Greater, sustainable economic impact would flow from solving the foundational policy issues at the heart of this innovation:

    (a) clarifying ‘money’ and ‘currency’ status for fully fiat-collateralised fiat currency pegged stablecoins;

    (b) characterisation of DAOs and what constitutes a ’sufficiently globally decentralised’ organisation for legal and tax purposes; and

    (c) a legal and tax regime that regulates and taxes token activities instead of relying on characterisation of the token at the time of issue by an issuer.

    New or amended law around privacy enhancing standards and requirements for identification and verification of identity and customer due diligence, in the context of managing anti-money laundering and counter-terrorism financing risk, would flow from the nature of token activities and the extent to which analytics and other technology (such as ‘zero-knowledge KYC’) is readily available and reliable.

  2. The economic opportunity for Australia is to strategically prioritise policy resources

    The speed and priority in which policy resources are directed will have a significant impact on Australia’s ability to attract and retain the best kind of blockchain and digital assets innovation in the next five years.The next five years are the critical years to form Australia’s footing to participate in the decentralised digital economy.

    Australia has this opportunity now but is also at risk of falling behind other key competitor jurisdictions like the UK, Canada, Singapore and the US amidst accelerated efforts internationally to amend or introduce law to attract the best kind of blockchain and digital asset innovation. The rapid pace of change in innovation and adoption of blockchain technologies and token use cases requires a decisive and strategic policy response that acknowledges the significant challenge for regulation and regulators to keep pace with innovation domestically and internationally.

    Jurisdictional and regulatory arbitrage opportunities will only increase in the next five years, strengthening the case for Australia to take great care in strategically prioritising policy resources.

  3. Foundational policy issues

    The foundational policy focus areas in order of priority should be as set out in the table below, and as further explained in the following sections:

    Provide ‘currency’ or ‘currency equivalent’ status to fiat currency pegged stablecoins that are fully fiat collateralised, for Australian legal and tax purposes.

    Assumption: The use and adoption of ‘fully fiat-collateralised’, fiat currency pegged stablecoins by the ‘mainstream’ (i.e. retail investors and consumers, small, medium and large businesses) will occur rapidly once they are offered by well-known financial institutions which is anticipated in 2022 and 2023. The term ‘fully fiat-collateralised’ will need to be defined. Clear labelling of ‘fully fiat-collateralised’ stablecoins will assist in informing the market of risky and riskier stablecoins such as crypto-collateralised and algorithmically-collateralised stablecoins.

    By 1 November 2022, with retrospective effect (subject to minimum conditions) from ~ September 2018 (launch of USDC and GUSD).

    Legal recognition to DAOs, where legal recognition grants limited liability and introduces a definition of ‘sufficiently globally decentralised’ organisation.

    Assumption: The adoption and use of DAOs to coordinate capital and people around the world will only increase.

    The term ‘sufficiently globally decentralised’ (SGD) will need to be defined. If the SGD test is met, as well as the minimum standards for Australian recognition of the DAO, the Digital Activities Act applies and existing laws (e.g. Corporations Act, AML/CTF Act, Income Tax Assessment Acts) do not apply to the token activities. A DAO team may have non-binding reference back to the requirements of existing laws and guidance in relation to the application of those laws as if the DAO was centralised and managed in and from Australia.

    A minimum standard for Australian legal recognition of the DAO could be to require the DAO to publish an analysis against existing laws as to why the protocol and/or token/s are not the ‘same asset/liability, with same risks’ as a premise for why existing laws are not fit for purpose for the particular innovation proposed by the DAO.

    By 31 December 2023, with retrospective effect (subject to minimum conditions) from either ~ June 2020 (launch of COMP token) or January 2009 (launch of BTC and Bitcoin protocol).

    Introduction of a Digital Activities Act, which defines and distinguishes between ‘data structures’ and ‘data activities’, where cryptographically secured tokens, tokens for short, may be one subset of a data structure.

    A ‘data activity’ subject to the Digital Activities Act could be the activity of using a token as an instrument to raise capital and to grant a right to access discounted goods and services. Listing the token activities that are most likely to face retail consumers and/or do the most harm to the market should be the activities prioritised to work out the grey areas of existing legal and tax rules and set out simplified and clear legal and tax treatment for the issuer and purchaser, especially where a token is multi-characteristic on issue.

    Assumption: Standardisation of tokens, such as the ERC-20 fungible token standard and ERC-721 non-fungible token standard, will continue. This is because global network effects are accessible when building on blockchain infrastructure with standardised token structures.

    The source code of a standardised token is typically functional only. Issuers can add limited additional information into the smart contract source code such as a link to a website with terms and conditions or they can add a controller of the token contract. They can also add, but often don’t add, conditional functionality – for example, the blacklisting feature in the USDC ERC-20 token that prevents transfer of USDC from or to any wallet that is blacklisted but introduces a higher gas cost than tokens that don’t have this conditional functionality.

    Furthermore, the ‘rights’ that seem to attach to a token often do not exist in the source code and only exist in representations made in a white paper, website or social media. So, for example, ERC-20 tokens issued and represented by DAO members and the market as governance tokens with a right to vote can be freely transferred and used for many things other than merely governance. Without the issuer of a token specifying control rights over token transfers or activities, the issuer or a market operator interacting in some way with the token, have no effective supervision or control over the activities of the token.

    Using the ‘standardised’ token is at the heart of building ‘open-source’ and allows token holders to access global network effects of a token that can ‘plug in’ to global blockchain innovation. Whilst a standardised token may be used, a project team ‘adds rights’ by representations in documentation, website or social media rather than changing the ‘source code’ (or data structure). Teams try to avoid any departure from a standardised token so as to allow token holders the benefit of composability of the token with other protocols built on the blockchain network.

    For example, a standard ERC-20 token may be airdropped to provide holders with access to discounts of a business. The standardised nature of an ERC-20 token is such that the ‘access rights’ only attach to the token if the token is used to claim the discount from the business that offers it (the ‘data activity’). Otherwise, the token (as a ‘data structure’) has no other rights and functions as a standardised fungible token. By its standardised nature though, the token could be used with other protocols for token ‘data activities’ such as lending, borrowing, investing, access, identification and verification activities.

    Certain ‘data activities’ may warrant regulation depending on the associated risk assessment of that activity, rather than the ‘data structure’ of the token. A blunt approach to regulate the token itself will create confusion, which is why ‘token mapping’ to characterise the token for legal and tax purposes is unhelpful and instead the exercise should seek to map token ‘data activities’.

    By 31 December 2023, with retrospective effect (subject to minimum conditions) from the same date that is determined for legal recognition of DAOs.

Provide ‘currency’ or ‘currency equivalent’ status to fiat currency pegged stablecoins that are fully fiat collateralised, for Australian legal and tax purposes.

Mainstream financial systems will increasingly adopt and use fiat currency pegged stablecoins (before CBDCs are issued), whether the stablecoin is pegged to the Australian dollar or other fiat currencies. Reference to ‘stablecoin’ in this section does not refer to crypto- or algorithmically-collateralised stablecoins.

Fully fiat collateralised stablecoins have a drastically different risk profile to other types of stablecoins.

Stablecoin issuers, like all issuers, are not captured by the CASSPr regime. Accordingly, issuers and CASSPrs dealing in fiat currency pegged stablecoins would continue to be confused by and/or overburdened by the requirement to obtain multiple licences across financial services, markets, banking and credit, and possibly inappropriate taxation outcomes if ‘currency’ or ‘currency equivalent’ status isn’t available. The scattering of potentially applicable legislation and licensing is a disincentive to consumer protection oriented stablecoin innovation and development.

Minimal law reform is achievable in the next 6 months to support the issue of fully fiat collateralised fiat currency pegged stablecoins that can be treated as ‘money’ or ‘currency’ for legal and tax purposes. Such reform would support innovation in payments, tax, digital government and supply chain management and financing. Suggested law reform is set out at Attachment A.

Critically, Australian currency pegged stablecoins will accelerate learning by our government, policy makers, central bank and other regulators, as well as business and individuals, ahead of any serious design and launch of an Australian CBDC (whether retail or wholesale or a hybrid design that deals with retail and wholesale). Such learning is critical to inform a CBDC design that is trustworthy, reliable, resilient, internationally competitive, and privacy-enhancing. In addition, the ‘mainstream’ (i.e. retail investors and consumers) will largely be introduced to blockchain and digital assets via a stable not volatile form of crypto-asset.

Legal recognition to DAOs, where legal recognition grants limited liability and introduces a definition of ‘sufficiently globally decentralised’ organisation

If a token is issued by a ‘sufficiently globally decentralised’ organisation (not necessarily a decentralised autonomous organisation), is an ‘issuer’ identifiable upon which to impose regulatory obligations? Similarly, if a protocol that can function autonomously is launched by a ‘sufficiently globally decentralised’ organisation, is an operator identifiable upon which to impose regulatory obligations?

Typically, any obligations associated with raising capital via a token issue, or an autonomous protocol accepting token contributions that are pooled to produce a financial benefit, would apply to the ‘issuer’ at the time of ‘issue’. Disclosure with respect to the instrument issued or protocol launched is not always an ongoing obligation in an unlisted environment. Accordingly, when subsequent representations are made by the issuer or an unrelated party about what the token grants access to and there is not another ‘issue’ of those tokens, disclosure to the market typically would not occur nor is it clear who is responsible for that disclosure. There is a policy question as to whether token ‘issuers’ that do not prohibit global transfers and use of the token should be held to the standard and compliance and disclosure of a listed company.

Based on the example above, the policy gap based on existing law appears to be missing or insufficient disclosure. One of the conditions of eligibility for registration as a limited liability DAO in Australia could be the allocation of funds in the DAO treasury wallet, from funds that are raised from a token issue, to secure a core contributor role or team responsible for continuous disclosure to the market. This person or persons should not have to register with any government registry, which some DAO regulation proposals around the world seek to require. The legislation or regulations could propose a template format for the continuous disclosure to ensure minimum standards of timeliness and quality of information to the market.

Again, based on the example above, a policy gap to solve is the potential introduction of protocol (i.e. smart contract) audits prior to the protocol being deployed to the blockchain (from which point the protocol lives forever). Existing protocol audits, ‘security audits’, focus on code vulnerabilities that could be exploited by an attacker which prevent the protocol from functioning as intended, or that could result in loss of tokens or value. Some of the conditions for eligibility for legal recognition as a limited liability DAO in Australia could be the requirement for a security audit as well as a ‘financial market audit’ before the protocol is deployed to the blockchain. Where the team decides to launch the protocol and/or token and risks still exist because mitigation or elimination of the risk is unclear, bug bounty programs and contingency programs to protect consumers should be mandatory. Whilst transparency around assessment, identification and reporting of risks is suggested, the associated downfall is that bad actors become aware of vulnerabilities to exploit.

Obligations to ensure fair, orderly and transparent markets are largely imposed on a market operator. However, where an ERC-20 fungible token contract is deployed to the Ethereum blockchain without control rights specified to the issuer or a third party there is no ability for the token ‘issuer’ or any market operator to intervene in a token transaction or pause trading of that token. Depending on the blockchain consensus mechanism, there may be an ability to communicate with miners or validators to ask that they not verify particular transactions, but this method is untested, unreliable and could introduce risks into the transaction verification protocol. As such, where a standardised token can operate globally and without any control rights or ‘trading halt’ rights, a minimum responsibility imposed upon the issuer should be a requirement to obtain advice and a report from a person experienced in financial markets and web3 token behaviours. This expert’s report should be open to the public and set out aspects of the tokenomics design that could be arbitraged or manipulated to such an extent that the token value could decrease to zero quickly and what mitigation measures are recommended. If the DAO decides to proceed to issue the token and /or deploy the protocol, the market must be strongly and prominently warned of the risks specific to this particular token and protocol.

4.Clarity to the market could be provided by regulators and/or government articulating how broadly or narrowly the existing legislation is to be interpreted.

The CASSPr regime’s focus on licensing and custody requirements for ‘secondary service providers’ rather than primary service providers or issuers, often which are DAOs – sometimes in substance ‘sufficiently globally decentralised’ and often decentralised by name only – means that the foundational policy issues are not being dealt with. The existing financial services regime in the Corporations Act 2001 (Cth) already captures ‘secondary service providers’ that are dealing, arranging, or making or operating a market in tokens that can be characterised as securities or other financial products. However, the existing regime is not being consistently applied across industry or enforced by Australian regulators.

The ‘policy gaps’ that the proposed CASSPr regime is seeking to solve can be addressed by more active involvement in and contribution to the space by regulators such as the Australian Securities and Investments Commission (ASIC). Continued reference is made by regulators to the ‘regulatory perimeter’ (around the world, not just Australia) but there has not been sufficient information provided to the public about what falls in versus what falls out of the regulatory perimeter. The exercise of clarifying what is ‘in’ and ‘out’ first needs to be undertaken by reference to Australia’s existing laws before a meaningful policy consultation exercise can or should commence.

Greater involvement in the space by regulators requires dedicated resourcing and should incorporate meaningful industry engagement, reviews/investigations, enforcement action, timely consultation as outlier issues are identified and the release of guidance. Effective regulation and supervision of the blockchain and digital assets industry is a welcome initiative to improve minimum standards. However, dedicated and meaningful resourcing of regulators such as ASIC, the ACCC, APRA and AUSTRAC and targeted enforcement action by those regulators using existing law could assist in lifting minimum standards and identifying the true policy gaps worthy of amended or new law. Such resourcing and effort would also assist with speedier identification and response by regulators to behaviour that is harmful to consumers and/or markets.

5. The word ‘crypto asset’ and the definition of ‘crypto asset’ will not lay the appropriate foundation if used across multiple laws

This submission uses the words crypto-asset, digital asset and token interchangeably but with a deliberate and justified preference for the word token. This is because the inclusion of ‘asset’ is limiting and not always accurate and will be less clear and precise as tokens are developed to do more and varied things including representing either an asset or a liability or something else such as identity credentials which are highly sensitive but don’t necessarily have a positive or negative financial value.

In addition, if Australia and other countries move toward the introduction of a Digital Activities Act, then in order to maintain clear separation from the existing financial services, banking, AML/CTF and tax regimes, different foundational language from those regimes needs to be used. Different language that is more articulate than existing legal definitions is necessary to form a proper basis upon which to understand the technology and how its use should be regulated or taxed when the autonomous technology facilitates an activity and when governance is carried out by a ‘sufficiently globally decentralised’ organisation.

To the extent that a ‘data activity’ is in substance the same activity that is regulated as a financial service, such as custody of a financial product, but the DAO meets the SGD test and the core minimum standards of Australian legal recognition of the DAO, further specific minimum standards for the specific activity could apply. As set out in the table above, a specific minimum standard for Australian legal recognition of a DAO could be to require the DAO to publish an analysis against existing laws as to why the protocol and/or token/s are not the ‘same activity/asset/liability, with same risks’ as a premise for why existing laws are not fit for purpose for the particular innovation proposed by the DAO.

A proposed definition and mental model to understand the paradigm shift required for regulatory and tax principles fit for web3 is set out below.

This is a working definition for discussion purposes.

My proposed working definition of tokens derives from an umbrella definition of ‘data structures’:

A representation of attributes, rights or obligations or all in source code, where the 'ability to direct' an action of or because of those attributes, rights or obligations is 'sufficiently linked' to an 'identifier' and where the attributes, rights or obligations 'may change or be multi characteristic' while the data structure is 'at rest' and the 'purpose of interaction with the data structure becomes apparent when the data structure is 'in transit' once an action or transaction is initiated.

Key mental model components to understand in critiquing the definition:

• No reference to digital in the definition – it is likely more appropriate to define 'data activities' and then how our activities with data structures should be regulated and taxed, at least until lawyers are involved in drafting ‘smart legal contracts’ where the contractually binding obligations are written into or clearly linked with the source code.

• No reference to person, which allows for organisations with decentralised models of governance.

• No reference to value (either positive or negative), and reference to attributes in addition to rights and obligations, so as to capture identity and credential token ‘data structures’ that may not have a value when at rest or in transit.

• No reference to blockchain or cryptographically secured, so that this term can be used in law and regulation (or recognition and minimum standards) for other technology such as activities possible with artificial intelligence and quantum computing.

• No reference to control - this is highly controversial but concepts of ownership and control could be dealt with separately to the definition of ‘data structures’.

• Introduction of 'data structure' concept provides the foundation upon which data structure and source code standards can be developed where regulatory protections and tax concepts can be built.

• Introduction of concepts of 'at rest' and 'in transit’, ‘sufficiently linked’, and ‘ability to direct’ which will each need to be defined.

• Introduction of concept of identifier which is not linked to human person or known legal structure – digital identity management will be its own ‘data activity’ which may be regulated depending on the use case and risk assessment.

• Introduction of concept of 'purpose of interaction with the data structure becomes apparent when the data structure is 'in transit' once an action or transaction is initiated' to move away from transaction by transaction analysis when the bundle of transactions should be looked at to inform the regulatory and tax approach for the relevant ‘data activity’.

• Assumes a human or artificial person should be entitled to, and will have multiple valid digital identities that can be used in different situations.

• Assumes there will be a need to regulate from the perspective of ‘data activities’, and before the protocol that enables the ‘data activity’ is deployed immutably and permanently to the blockchain, where the ‘data structure’ doesn’t embody the legal rights and obligations that may have been represented in other materials (e.g. white paper and website) at the time of issue, exchange and dealing with the tokens. Not all token activity will necessarily be in relation to a 'digital representation of value or rights’. For example, consider dealing with a token where its value goes to nil. In such case, the source code doesn’t embody any rights (only the surrounding representations create the rights that inform the perception of value).

6. Introduce a simplified digital asset tax regime that covers historical years and at least the next 2 years

With respect to the taxation of digital asset transactions and of DAOs, and in the absence of timely binding guidance from the ATO, a simplified digital asset tax regime should be introduced to cover historical years and at least the next 2 years. This is a realistic assessment of time that it will take the Board of Taxation to properly review and report on the appropriate bases of taxation of digital asset transactions, DAOs and whether tax restructure relief should be afforded where existing structures move to a DAO structure (in order for Australian businesses to remain globally competitive).

The regime could introduce a ‘best efforts’ requirement where the taxpayer is required to document how they have used best efforts to determine their tax obligations. Alongside this, there could be an obligation to adopt a tax position that makes ‘economic sense’. Often, it is unclear at what point of a digital asset transaction (which involves a bundle of transactions and rights) a taxing event or events occur, and the taxpayer can be taxed two or more times on effectively the same transaction which does not make economic sense. It is too costly for retail consumers and investors to pay upwards of $10,000 per protocol and token for tax advice written to the level of a reasonably arguable standard.

7. Industry should codify minimum and best practice token custody standards

Before new legislation is introduced, Treasury should work with industry to codify the minimum and best practice token custody standards into a Code of Conduct. Such a process will assist in greater awareness by policymakers and regulators as to the practical constraints of the existing financial services regime. For example, the requirement to have professional indemnity insurance when the insurance market is not mature enough to provide affordable offerings.

Concluding remarks

Direction of policy resources to legislating the proposed CASSPr regime in isolation without addressing the foundational policy issues considered in this submission will be a suboptimal allocation of resources. As proposed, the CASSPr regime is too similar to the existing financial services regime, seeks to regulate for the same risks (where we place trust in humans to hold, invest or manage our assets) but does not adequately reduce the range of actual risks for consumers of holding or dealing with tokens nor does the CASSPr regime foster a pipeline of safe or safer tokens.

From January 2020, through January 2021, to January 2022 the market capitalisation of the 10 biggest USD-pegged stablecoins has gone from US$5 billion, to US$36 billion, to US$167 billion, respectively. Institutional and consumer adoption, and the pace of that adoption, is expected to hasten, particularly as more fiat currency pegged stablecoins are launched around the world which feel “easier” and “less risky” for retail consumers, businesses and governments to use and experiment with.

Over the same period, the market capitalisation of all tokens has gone from US$191 billion, to US$934 billion, to US$2.3 trillion. Total token value locked in decentralised finance (DeFi) applications increased from US$601 million at the start of 2020 to US$239 billion so far in 2022.

The industry is not slowing down.

I thank the global web3 community for their conversations and insights shared with me as I have discussed ideas and concepts with them, and for those that have approved the publication of their votes and comments on each proposal in this submission.

I welcome the opportunity to provide further, necessary detail that supports this high level submission and ultimately a strategic and internationally competitive regulatory environment in Australia.

Yours sincerely,

Joni Pirovich
Blockchain & Digital Assets – Services + Law

Author: Joni Pirovich, Blockchain & Digital Assets Pty Ltd. Email:
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Attachment A

As set out in the recent National Blockchain Pilot Report to the Department of Industry, Science, Energy and Resources by Australia (Aus) Pty Ltd:

a) APRA and the RBA should consider providing guidance to clarify whether a ‘tokenised Australian dollar deposit’ issued by an Australian Deposit-taking Institution (ADI) can be interpreted as ‘currency’ or ‘Australian currency’ under the Currency Act and Reserve Bank Act, which may include specifying at least equal fiat currency must be held in reserve by the ADI to support this characterisation.

b) The Treasurer should consider signing an instrument under the Currency Act to specify a variation from the standard weight applicable to coins, that ‘coins’ issued as fiat currency pegged crypto-assets on a blockchain are a type of composition of coins, or stablecoins, accepted for circulation and that have the status of ‘currency’, which may include specifying at least equal fiat currency must be held in reserve by the ADI to support this characterisation.

c) The ATO should consider providing guidance regarding whether a tokenised Australian dollar deposit can be treated as ‘currency’ for income tax purposes when it represents the unit of account of each Australian dollar, which may include guidance regarding when a fiat currency pegged stablecoin should be treated as a CGT asset, trading stock or a TOFA financial arrangement for income tax purposes.

d) The ATO should consider providing guidance to clarify whether payment of a tax-related liability with a tokenised Australian dollar deposit may be acceptable as ‘currency’ if the private-permission blockchain or control rights specified for the token contract deployed on a public blockchain is considered an ‘electronic funds transfer system’ under subparagraph 3(a) of Regulation 21(a) of the Taxation Administration Regulations 2017.

e) The Governor-General should consider amending Regulation 21(a) of the Taxation Administration Regulations 2017 to allow for tax-related liabilities to be paid in stablecoins that are designated as ‘currency’ or ‘currency equivalent’ which would enable innovation in digital government to keep pace with innovation in the payments system.

f) The Government should consider amending the GST definition of ‘digital currency’ to permit characterisation as a ‘digital currency’ if a fiat currency pegged stablecoin is restricted but still intended to operate as digital currency by a platform or application.

g) The Government should consider amending the definition of an NFP facility to clearly exclude arrangements involving Australian currency pegged stablecoins and could use this amendment to specify the conditions of that exclusion. This could be done by way of regulations under the Government’s regulatory modification powers under Chapter 7 of the Corporations Act.

h) The Government should consider amending the definition of a financial market to clearly exclude arrangements involving Australian currency pegged stablecoins and could use this amendment to specify the conditions of that exclusion. This could also be done by way of regulations under the Government’s regulatory modification powers under Chapter 7 of the Corporations Act.

i) The Council of Financial Regulators, the ATO and the ACCC should consider defining the parameters in which a fiat currency pegged stablecoin can and should be given ‘currency’ status or ‘currency equivalent’ status, as well as the extent of existing licensing obligations that should apply to stablecoin issuers as well as platforms that integrate use of stablecoins until the SVF framework is finalised.

j) The Council of Financial Regulators should consider the issues raised in this report regarding the regulation of fiat currency pegged stablecoins under the proposed SVF framework, particularly those stablecoins that may be issued on public blockchains without control rights which allow use of the stablecoin beyond the anticipated use and jurisdiction of the issuer.

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