Regulation of crypto exchanges to include capital adequacy, responsible manager requirements

Senator Andrew Bragg has detailed key aspects of the Australian Government’s plans for the regulation of cryptocurrency exchanges, indicating that the proposed requirements on crypto exchanges will include:

• A special category of crypto market licence, similar to but separate from a traditional securities market licence such as those held by the ASX;
• Capital adequacy requirements, including a minimum level, along with a floating component linked to the exchange’s scope and scale; and
• Local custody requirements for digital assets to be domiciled in Australia, which itself could be a new category of licence for Australian crypto custodians.

The proposals will be part of a consultation paper to be published prior to the Federal election, which must take place by 21 May 2022.

Senator Bragg detailed the proposed changes in an address delivered today by Senator Andrew Bragg to the 2022 APAC Blockchain Conference in Sydney, saying that he had already consulted with industry leaders, experts and Treasury officials.

In addressing capital adequacy, Senator Bragg said: 

“The idea of a $2 company running billions of dollars in AUD equivalent trades each year is a real risk to consumers and the economy overall. I do not want to see the crypto markets become the next $2 company which hits consumers when they go to the wall”

The Australian custodian regime is reportedly going to be modelled on a similar regime developed by the U.S. State of Wyoming, which precipitated the creation of digital asset banks such as Avanti, recently rebranded as “Custodia Bank”.

Senator Bragg said that the reforms may mean the number of crypto exchanges operating in Australia, which AUSTRAC says is more than 450, may drop to 20 or 30.  It is not clear whether consideration has been given to the negative impacts of this limited choice in services will have on Australian consumers.

As we wrote about previously, including in our recap of 2021 and what’s ahead for 2022, Senator Bragg chaired the Select Committee on Australia as a Technology and Financial Centre, which delivered its final report last year recommending a program of sweeping reforms in the digital asset sector.  

Besides the crypto exchange requirements that Senator Bragg spoke about today, the Government also plans to implement the remaining recommendations from the Committee report, including issues of taxation of digital transactions and assets, licensing for payments businesses, and getting advice on the impact of “de-banking”.

The contents of this article do not constitute legal advice and it is not intended to be a substitute for legal advice and should not be relied upon as such.  It is designed and intended as general information in summary form, current at the time of publication, for general informational purposes only.  You should seek legal advice or other professional advice in relation to any particular legal matters you or your organisation may have.