Post: Crypto and digital assets: policy, regulation and innovation

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Good afternoon, everyone. Thank you for joining me – and thank you to Blockchain APAC for the invitation to speak today.

I would like to begin by acknowledging the traditional owners and custodians of the land on which we meet today – the Gadigal people of the Eora nation. I pay my respects to their elders past, present and emerging – and extend that respect to Aboriginal and Torres Strait Islander people here today.

As each of you is acutely aware, there are a range of significant regulatory reforms on the horizon for the crypto sector.

Today I want to comment on these proposed changes – with a particular focus on ASIC’s role to date, our remit more broadly and, most importantly, the outcomes we are hoping to see.

Before I come to that, however, I want to begin by setting out ASIC’s approach to innovation – and why we believe that effective regulation can help promote it.

ASIC’s approach to innovation
You may be familiar with the concept of the ‘regulatory trilemma’ – something ASIC’s Chair, Joe Longo, has spoken about a number of times previously. The regulatory trilemma puts forward the idea that supervision of financial innovation can at best achieve two of the following three objectives:

Consumer protection
Market integrity
Encouraging financial innovation
There is doubtless a tension between these seemingly competing factors. But ultimately the challenge of good regulation is to strike a workable balance between all three.

In ASIC’s view, regulation and enforcement help to foster trust – and trust is essential to every part of the financial system – crypto and decentralised finance included. A system with limited oversight, that is opaque, unpredictable and unreliable – leading to widescale investor losses or market manipulation or abuse – will ultimately fail to thrive.

For ASIC’s part, we seek to promote the growth of responsible innovation in financial services by balancing our approach to enabling innovation with consumer protection and market integrity outcomes.

One way we do this is through our Innovation Hub. One of the Hub’s functions is to assist fintech and regtech start-up and scale-up businesses navigate the regulatory framework. Since 2015, we have provided informal regulatory assistance to over 900 entities.

A number of entities involved with crypto assets or using blockchain technology have accessed the Hub for assistance and had the benefit of the Enhanced Regulatory Sandbox, which ASIC administers on behalf of the Government.

We also host a number of forums which bring together a range of industry representatives and government agencies, and meet regularly with domestic and international peer regulators to discuss trends in innovation.

One example of our activities in the field of financial innovation – which I believe will be of particular interest to this audience – is tokenisation.

Proposals to tokenise financial products and other ‘real world’ assets have been increasing recently – and we have been monitoring broader developments in this area.

ASIC worked closely with the RBA on its trial of a Central Bank Digital Currency. We supported the pilot – which tested some token-based products and services supported by the CBDC – by assessing use cases and providing relief from the Corporations Act to several participants.

We have seen some banks piloting stablecoins, as a step to facilitate broader tokenised offerings – as well as proposals from financial market infrastructures.

We can see significant operational and other changes that may have material flow-on impacts to financial markets – and will be increasing our focus on tokenisation going forward.

Questions we will be considering include:

How does tokenisation fit in the current regime?
What, if anything, may be required by way of law reform or guidance?
What are the opportunities and risks?
How can we effectively address the cross-border issues and dynamics?
Some types of tokenisation will be regulated through the current regulatory regime, while others will be regulated through the Government’s digital asset platform proposal.

Which brings me to the topic doubtless front of mind for most in this audience: regulatory reform.

Proposed regulatory reforms
As you will be aware, there are a range of regulatory reforms and related developments in train.

Last October, the Government released its proposed framework for regulating digital asset platforms. Under these proposals, digital asset platforms would be incorporated within the existing financial services framework. This would involve introducing a new type of financial product called a ‘digital asset facility’.

Platform providers will require an Australian Financial Services Licence, granted by ASIC, to operate their platforms, if these reforms are enacted as proposed. This proposal follows on from Treasury’s consultation in 2022 on crypto asset secondary service providers, and the 2023 token mapping exercise.

In December last year, the Government released a consultation paper on regulating payments services providers, which includes a proposal to regulate payments stablecoins.

So, what is ASIC’s view of and role in these reforms?

In short, our desired outcome is a clear set of rules that maintain market integrity and mitigate the risks to consumers and investors – backed by mechanisms that promote compliance with these rules and enable us to enforce them effectively.

The word outcomes here is an important one. What matters most are the regulatory outcomes.

While there are different approaches to regulating the crypto asset industry globally, one area of increasing cohesion is the consensus that is developing on the intended outcomes.

Last November, the International Organization of Securities Commissions (IOSCO) published its recommendations for crypto and digital asset markets.[1] The recommendations place a strong emphasis on addressing governance and conflicts of interest, abusive behaviours, sales and distribution practices, and custody.

As a member of IOSCO and an active participant in its Fintech Task Force, ASIC supports IOSCO’s objective of same activity, same risk, same regulatory outcome.

ASIC will continue to support Treasury in the development of its proposed regulatory regimes – and, when they are finalised, ASIC expects to have a significant role in their initial implementation and ongoing administration.

The final policy settings and legislation are, of course, a matter for Government.

ASIC’s role will be – as it is now – to administer and enforce the laws within our remit.

As you will be aware, under existing law, ASIC only regulates crypto assets and businesses to the extent they involve financial products or financial services. Directors’ duties and other requirements related to companies also apply.

I want to emphasise, though, that the question as to whether a particular crypto asset or related product is a financial product will remain every bit as important if the new regime is legislated as proposed.

To quote from the Treasury’s proposal paper: “In all cases, the existing financial services laws will apply to any transaction involving a financial product”.

In the meantime, we have already begun thinking about implementation – such as our processes and guidance. This includes a number of informal discussions with some in the industry.

So, what does all this mean for the industry and people advising it on the implications of the proposed new regime?

It is likely going to mean significant uplift in the operations of a number of industry participants. The proposal is that platform providers will need to comply with the general obligations for licensees – including operating efficiently, honestly and fairly – alongside other obligations within the Corporations Act.

Some platform providers will face additional obligations, where they undertake what Treasury has called a “financialised function”. For example, if you provide the token trading function, this could mean aspects of the markets regime may apply.

That’s as much as I can say about ASIC’s work on this, at this stage, while we wait for the proposed reforms to be finalised.

Whatever the regime, however, if you are operating a business engaged in digital assets, the onus is on you to satisfy yourself that you are operating within the law. That is, you have the appropriate licences – and that you conduct your business in accordance with the regulatory obligations that apply at any point in time. We provide some guidance, such as in Information Sheet 225 on crypto assets. But ultimately it is your responsibility to ensure you comply.

Where we see misconduct, including where we assess you as needing a licence to offer a product or service, we can take action, as we have demonstrated.

I will now say a few words about our approach to enforcement.

ASIC’s approach to enforcement
ASIC applies a strategic, risk-based approach to enforcement. We cannot take action in every case of misconduct. That being the case, the absence of ASIC action should not be regarded as endorsement or agreement.

Rather, we take action where we see the most serious harm – or a risk of it – and in cases most likely to send a strong message of deterrence to others.

To date, ASIC has taken a range of enforcement action, using existing laws.

We are not afraid to pursue cases where the law might be considered unclear. In our legislative and judicial system, the courts are the ultimate arbiter of these matters. This approach applies to all sectors under our regulatory remit – and is no different for crypto.

In February, for example, the Federal Court found Block Earner engaged in unlicensed financial services conduct when offering its crypto-backed Earner product. The ‘Earner’ product was found to be a managed investment scheme. However, ASIC was unsuccessful in our allegation that the ‘Access’ product was a financial product. I remind you, however, that each case depends on the specific facts in relation to the product, service and/or conduct.

In addition, late last week, the Federal Court found that Finder Wallet had not engaged in unlicensed financial services conduct when offering its Finder Earn product. We are still considering the judgement in that matter.

ASIC has a further two crypto-related matters before the courts currently.

In conclusion, as I hope I have demonstrated, ASIC is committed to supporting innovation in a way that balances the other two regulatory objectives I mentioned earlier – consumer protection and market integrity.

We acknowledge the potential benefits of novel financial products and services, or new ways of offering existing products and services – as long as they are developed and distributed with appropriate regard for consumers, investors, and market integrity.

Both regulators and the regulated population work best when we have a clear set of rules to work within. When those rules are backed by mechanisms that allow us to enforce them effectively – and promote a culture of compliance among the entities that must adhere to them – this can result in enhanced trust from investors in particular classes of assets and in the financial system as a whole.

While there might be different views about the best approach to regulation to deliver that outcome, it’s an outcome on which we can all agree.

For ASIC’s part, we continue to strengthen our knowledge and capabilities in relation to digital assets, ensuring we are directing our resources effectively and building upon our existing expertise in this area.

And in doing so, we will continue to engage constructively with industry participants and their advisers, through opportunities like today’s event.

Thank you for your time – and I now look forward to answering any questions you may have.

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