DLT and cryptocurrencies
FinTechs belonging to this category offer financial services using crypto currencies. This category also includes FinTechs utilising blockchain and distributed ledger technologies (DLT) upon which Bitcoin and Ethereum are based, among others. FinTechs develop and do research in this field in order to create new services – e.g. crypto currency exchange markets, wallet providers, NFTs-related services, new payment services, "smart contracts" or new clearing and settling services.
Attitude of the country towards financial services using crypto currencies
Whilst there has been unequivocal intensification of regulatory scrutiny in Australia, particularly following the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in 2019, it is understood that blockchain technology and crypto assets provide businesses with an opportunity to position themselves as pioneers in Australia’s ever-growing payments, lending, investment, wealth management, custodial services, and new digital asset spaces. This, coupled with the increased investment in blockchain technology and crypto assets (of various types) on companies’ balance sheets, means that crypto is very much in the spotlight as far as regulators and policymakers are concerned.
Similarly, regulatory intervention and oversight have become front-of-mind concerns for both businesses and investors. The challenge in successfully regulating any new technology (crypto-assets and associated blockchain technology included) is balancing the desire to drive business opportunity and responsible innovation in Australia, whilst also balancing the need to protect consumers (among various other considerations). In contemplation of some of these challenges, the Australian Senate Select Committee on Financial Technology and Regulatory Technology (Committee) recently released its final report, which contains a list of recommendations to address several issues affecting the competitiveness of Australia’s digital asset, technology, and finance industries (Report). The Report was based on more than 100 submissions, including from the Australian Taxation Office, Reserve Bank of Australia and the Australian Securities and Investments Commission, as well as various other interested private and public bodies.
However, it is worth noting that the Report merely provides a potential “road map” for the regulatory and legal future of crypto-asset, distributed ledger technology and other technological advancements in Australia. Ultimately, time will tell as to the extent that the Australian government implements the recommendations contained in the Report.
Obligations and requirements to provide financial services using crypto currencies described above
Pursuant to the CA, where a digital asset meets the definition of a 'financial product' it is subject to regulatory oversight from ASIC. Companies dealing with financial products must hold an AFSL or an Australian Market Licence (depending on the circumstances). Similarly, an entity which ‘carries on a financial services business in Australia’ must hold an AFSL authorising the person to provide the relevant financial services.
An exemption from the requirement of holding an AFSL is available to APRA-regulated bodies (including authorised deposit-taking (ADI) institutions) where the services provided are those which APRA has regulatory or supervisory responsibilities over and the services are provided only to wholesale clients (as defined under the CA). The provision of financial products and services by an ADI to a retail client generally requires an AFSL. At present in Australia, most crypto-assets that are currently available to Australian retail investors (via Australian-based digital currency exchange providers or overseas-based trading platforms) fall outside of ASIC's regulatory perimeter, meaning that companies offering these products do not need to hold an AFSL or a Market Licence.
Additional comments regarding the legal situation for financial services using crypto currencies or what FinTech’s must be aware of in this business area
Digital asset businesses are required to register with the Australian Transaction Reports and Analysis Centre (AUSTRAC) to (insofar as is possible) manage potential anti-money laundering and counter-terrorism financing risks. However, the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act) currently only regulates businesses offering digital currency exchange services between fiat currency (i.e. the Australian dollar) and digital currency are regulated for anti-money laundering and counter-terrorism purposes. As such, the AML/CTF Act does not regulate transaction exchanges which exchange crypto-assets with other crypto-assets.
The ambit of Australian AML/CTF regulations will likely be expanded in the short term to better deal with crypto-to-crypto exchanges, transfers of crypto currency on behalf of customers, safekeeping, or administration of crypto currency (i.e. custodial wallet providers) and in the provision financial services relating to an issuer’s offer and/or sale of crypto currency (e.g. Initial Coin Offerings or ICOs). However, until such time as further regulatory clarity is provided, the legal situation remains opaque with respect to financial service providers utilising crypto assets as part of their existing business models.
Market size for financial services using crypto currencies and biggest companies in this business area
It is difficult to find reliable numbers as to the current size of the market in Australia (let alone the size of the opportunity). However, some estimates put the crypto-exchange industry in Australia at around $60m as at the start of 2022.
Additional comments regarding the economic situation for financial services using crypto currencies or what FinTech’s must be aware of in this business area