Updates in Digital asset regulation

August was busy with all Treasury, ASIC, the RBA and the Board of Taxation making announcements relating to the regulatory treatment of digital assets, which aim to better understand and enforce their operation within Australia. We explore the announcements and their implications.

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Token mapping to identify how to regulate crypto assets and related services

The ALP has released a statement that it will prioritise ‘token mapping’ work in 2022 in order to identify how crypto assets and related services should be regulated.

Token mapping involves identifying and compiling all digital asset tokens available in Australia, then classifying them by features such as type of crypto asset, underlying code, and any other defining technological features.

On 22 August 2022 from Treasurer indicated that a public consultation paper on ‘token mapping’ will be released soon. While there is no doubt of the usefulness of the token mapping exercise to educate regulators of the intricacies of the crypto asset landscape, it will be interesting to see how crypto regulation is shaped and informed following the conduct of this exercise – and how quickly this exercise can be completed. It will also be useful to see whether and how the Albanese government will take into account the consultation undertaken by the previous Morrison government earlier this year on the proposed introduction of a licensing and custody regime for crypto asset secondary service providers.

The aim of the consultation will be ‘to identify notable gaps in the regulatory framework, progress work on a licensing framework, review innovative organisational structures, look at custody obligations for third party custodians of crypto assets and provide additional consumer safeguards’. It said that any regulation of crypto will strive to balance ’embracing new and innovative technologies’ with ‘safeguarding consumers’.

ASIC Corporate Plan 2022-26 looks at crypto-assets

On the same day as the token mapping announcement (22 August 2022), ASIC released its Corporate plan for the next four years. Following the release of ASIC report which discusses retail interest in crypto-assets and ASIC’s ‘[concern] about the number of people surveyed who reported investing in unregulated, volatile crypto-asset products’, crypto-assets have been included as one of ASIC’s core strategic priorities.

Specifically, ASIC intends to ‘take action to protect investors from harms posed by crypto-assets that fall within our remit’. This includes:

  • taking enforcement action against crypto-assets that mimic traditional products but seek to circumvent regulation;
  • supervising and assessing Product Disclosure Statements and target market determinations of significant regulated crypto offerings; and
  • raising public awareness of the risks inherent in crypto-assets and decentralised finance.

Importantly, ASIC has also stated that it will work with its international peers to develop coordinated international policy regarding crypto-assets and decentralised finance in addition to supporting the development of an effective domestic regulatory framework.

Tax treatment of digital assets

The Board of Taxation released a Consolidation guide in connection with its review of the tax treatment in Australia of digital assets and transactions.

The Consultation Guide identifies various uncertainties as to how the traditional and accepted principles of tax law apply to crypto assets, notably:

  • Where to tax – issues with identifying the taxpayer’s residence, the source of any income arising from crypto assets and taxing rights in a country where entities transact using crypto assets;
  • What to tax – how to characterise relevant assets and transactions and how to attribute profit and recognise losses in relation to crypto assets; and
  • When to tax – whether creating, transacting with and/or processing crypto assets triggers a taxing point.

The Consultation Guide provides a high-level summary of the guidance issued to date by the ATO on how a range of different taxes apply to crypto assets. The Guide also describes, albeit briefly, recent Federal Government activity which has culminated in the Board’s review and some recent OECD developments in the digital asset space.

The Guide then asks 15 questions, grouped into the following broad themes:

  • The current Australian tax treatment of crypto assets and transactions, and emerging tax policy issues.
  • The awareness of the tax treatment of crypto assets by both retail and wholesale investors and those transacting in crypto assets as part of their business.
  • The characteristics and features of crypto assets and transactions in the market.
  • How comparable jurisdictions approach taxing crypto assets and how these international experiences may inform Australia’s approach.
  • Whether changes should be made to Australia’s tax laws in relation to crypto assets.
  • Whether changes should be made to the administration of Australia’s tax laws in relation to crypto assets.

The consultation process will lead to the development of an appropriate policy framework and making recommendations, if necessary, to amend or update tax laws to implement this framework.

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