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28 5月 2024
Insight
On 2 May 2024, the Commonwealth Attorney General’s Department released its second stage consultation papers on reforming Australia’s anti-money laundering and counter-terrorism financing (AML/CTF) regime. In response to the feedback from the first stage consultation paper, the Department broke the consultation materials into 5 parts, detailing proposed reforms to the AML/CTF regime (Consultation Paper 2).
Following on from our discussion on the impact of the reforms on financial institutions more generally, in this article we focus on the key takeaways impacting digital assets and digital asset service providers. We also consider the recent guidance issued by the Australian Sanctions Office on sanctions compliance for digital currency exchanges, and how it impacts AML/CTF compliance.
While the AML/CTF Act has regulated activities involving the exchange between digital assets and fiat currency for some time, the regime is set to be significantly expanded in the proposed changes detailed in Consultation Paper 2. These changes seek to address Australia’s international commitments and will result in a number of activities currently outside the regime being subject to AML/CTF requirements. With changes proposed to the regulation of digital asset platforms under the Australian Financial Services Licence (AFSL) regime, there are a number of regulatory reforms that digital asset service providers should remain aware of.
Expanding the range of regulated digital asset services
What is the current approach and what did Consultation Paper 1 propose?
As detailed in Consultation Paper 2, the Financial Action Task Force (FATF) has been focussed on uplifting standards in connection with digital asset related services for a number of years. Since October 2018, the expectation of the FATF is that countries will apply AML/CTF regulation to the following services, when done on behalf of another person:
- Exchanges between digital assets for fiat currency, and vice versa;
- Exchanges between one or more forms of digital assets;
- Transfers of digital assets;
- Safekeeping and administration of digital assets; and
- Participation in and provision of financial services related to an issuer’s offer and/or sale of a digital asset.
In the FATF’s March 2024 report on the status of countries in implementing its recommendations, Australia was noted as having implemented certain AML/CTF measures in respect of digital assets (or virtual assets as termed by FATF) but with the enactment of the travel rule outstanding.1
However, Australia’s current AML/CTF regime, with regards to digital assets, only regulates exchanges between “digital currency” and fiat currency, and vice versa (i.e. item 1 of the FATF list).2 This approach places a large emphasis on the central role of digital currency exchange providers, in particular their use as “on” and “off” ramps between digital and fiat currencies.
Consultation Paper 1, released in April 2023, proposed reforms to the AML/CTF regime to incorporate the remaining four digital asset services outlined by the FATF into the AML/CTF regime.
What does Consultation Paper 2 propose?
Consultation Paper 2 proposes more specific detail in the respect of the proposal to extend the AML/CTF regime to capture all five digital asset connected services required to be regulated by the FATF.
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FATF identified activity |
The proposed designated service in Consultation Paper 2 |
Insights |
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Exchange of digital assets for fiat currency, and vice versa
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Exchanging or making arrangements for the exchange of digital assets for money (or vice versa) where the exchange is provided in the course of carrying on a digital asset business. The customer is the person whose digital asset or money is exchanged. |
This is proposed to be an amendment to the existing designated service under item 50A of table 1 of section 6 of the AML/CTF Act. The proposed change is that the existing designated service would expand to include “arranging”. Consultation Paper 2 states that the additional wording of “arranging” is intended to capture “the participation in, and provision of, financial services related to an issuer’s offer and sale of a digital asset”. However, this is also proposed to be a specifically contemplated new designated service (see below). It is therefore not clear the intended impact of this expanded item 50A as a stand alone change. While the consultation paper suggests that the change is in respect of the “issuer’s” offer and sale, by including this in item 50A, the proposed amendment appears to regulate arranging in respect of secondary sales of digital assets whereas the FATF expectation is specifically in relation to the issuer’s offer and issuance (and covered in the proposed new designated service described below). |
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Exchange between one or more forms of digital assets |
Exchanging, or making arrangements for the exchange of, one digital asset for another where the exchange is provided in the course of carrying on a digital asset business. The customer is the person whose digital asset is exchanged. |
This would be a marked shift from the current regulatory perimeter in the AML/CTF Act, with no need for fiat to be involved in the relevant activity. We expect that this would be of particular interest to businesses that are involved in facilitating exchanges between two or more digital assets. We also expect that there will be some practical questions of defining when a person is carrying on a digital asset business and providing the relevant service in the context of “decentralised” platforms (including those which enable swaps of two or more digital assets). Given that the scope of the definition to what is a digital asset, including potentially capturing non-fungible tokens (NFTs) is also subject to question in Consultation Paper 2 (see further below), we expect that this proposed designated service will also be of interest to any business facilitating transfers between NFTs and other digital assets. |
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Safekeeping and /or administration of digital assets or instruments enabling control over digital assets |
Providing custodial services of a digital asset or a private key on behalf of a person, where the services are provided in the course of carrying on a digital asset business. The customer is the person whose digital asset or private key is held in custody. |
This proposed service targets the custodial service arrangements. Custodial services for digital assets are also the regulatory focus in Treasury’s Regulating Digital Asset Platforms paper. See our article here. Consultation Paper 2 is clear that the intended scope of this designated service includes custody of one or more private keys in a multi-signature arrangement. The proposed designated service would not require sole control for a service provider to be in scope. We expect that this designated service would cover many crypto asset exchanges and platforms currently registered with AUSTRAC as digital currency exchanges. |
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Transfers of digital assets |
This service is intended to be captured in the streamlined “value transfer services” proposed in Consultation Paper 2. |
See our article here which considers the expanded value transfer concept. |
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Participation in and provision of financial services related to an issuer’s offer and/or sale of a digital asset |
Providing a financial service (defined as a designated service in Table 1 of the Act) relating to an issuer’s offer or sale of a digital asset, where the service is provided in the course of carrying on a digital asset business participating in the offer or sale. The customer is defined in the relevant item in Table 1 of section 6 of the Act. |
This amendment is intended to expand the designated service to capture financial services related to an issuer’s offer and sale of a digital asset. In practice, and in accordance with the FATF Recommendations, this could include early backers that facilitate the offer of a new issuance or are otherwise involved in the sale. |
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Amending the definition of “digital currency”
What is the current approach and what did Consultation Paper 1 propose?
The AML/CTF Act currently adopts the term “digital currency”. This is defined as a digital representation of value that:
- functions as a medium of exchange, a store of economic value, or a unit of account;
- is not issued by or under the authority of a government body;
- is interchangeable with money (including through the crediting of an account) and may be used as consideration for the supply of goods and services; and
- is generally available to members of the public without any restriction on its use as consideration.
Additionally, “digital currency” incorporates any means of exchange or digital process or crediting declared to be a digital currency by the AML/CTF Rules. No such Rules have been made to date.
Consultation Paper 1 did not include consideration of the definition of ‘digital currency’. However, since Consultation Paper 1, terminology used by Government in this space has evolved, including as reflected in the Treasury’s Regulating Digital Asset Platforms Proposal Paper.
What does Consultation Paper 2 propose?
The Attorney General’s Department is proposing to adopt the terminology of “digital asset”, or alternatively “crypto asset” or “virtual asset”, to replace “digital currency”. This change is also aligned with other Australian Government developments, including the Regulating Digital Asset Platforms Proposal Paper.
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Our Insights We welcome the use of terminology that is consistent across regulatory frameworks. However, we note that:
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Other proposals under Consultation Paper 2
Consultation Paper 2 incorporates digital assets and digital asset service providers into a number of other proposed reforms relating to remittance and payments. For a detailed analysis of those reforms more broadly, view our article here.
Ensuring the integrity of digital asset servicers providers
As part of the AUSTRAC CEO’s proposed powers to prohibit persons for lack of suitability, fitness or propriety, an individual may be barred from providing digital asset servicers or controlling, or performing functions involved in carrying on, a digital asset service business (including as an officer, manager, employee or in some other capacity).
The reforms could also empower the AUSTRAC CEO as part of registration, suspension and cancellation of registration decisions to consider:
- the capacity of a digital asset service provider and its key personnel to comply with the AML/CTF Act and Rules; and
- whether key personnel connected with the applicant are fit and proper.
Any decision would be subject to procedural fairness and administrative review. As part of the digital asset facility reforms as well as payment service provider reforms, there will be many circumstances that digital asset service providers regulated under the AML/CTF Act will be likely to require an AFSL. The AFSL regime also has a fit and proper requirement. We would expect this will be an area where consideration is given to the reforms to ensure that the regulatory regimes are not duplicative or inconsistent.
To the extent that digital asset service providers are already issuing, dealing, or advising in relation to financial products, ASIC has recently focused on this in several enforcement proceedings alleging that some platforms require the issuer of the arrangements to hold an AFSL. We recently discussed the latest outcome against BPS Financial Pty Ltd, which issued the ‘Qoin Wallet’ and ‘Qoin’ digital asset, in our article here.
Other changes to value transfer services, travel rule and IFTIs
Other changes proposed in Consultation Paper 2, as explored further in our article here, include:
- streamlining the regulation of value transfer services. This includes the oversight of digital asset service providers, as well as financial institutions and remittance service providers, simplifies the regulation of payments;
- applying travel rule obligations to all digital asset transfers where digital assets are transferred from one financial institution or digital asset service provider to another; and
- extending international fund transfer instruction (IFTI) reporting obligations to digital asset transfers.
Sanctions risks for Digital Asset Service Providers
Digital assets and services provided in connection with them have also be in the spotlight of the Australian Sanctions Office (ASO).
The ASO recently issued an advisory alert to digital currency exchanges (DCE) in relation to sanctions compliance.3 The activities of DCEs are clearly within the focus of the ASO which also calls out the obligations of DCE providers under the AML/CTF Act.
With Consultation Paper 2 specifically calling out the implementation of sanctions controls in an AML/CTF compliance framework, we expect that sanctions compliance more generally will gain more attention. DCE providers should review the guidance from the ASO in the implementation of an appropriate control framework,
The ASO recommends a number of risk mitigation strategies, including:
- pre-transaction wallet or customer screening;
- post-transaction screening to determine the ultimate source and destination of the funds;
- awareness of high-risk wallets that are being advertised in fundraising efforts of designated entities (including designated terrorist groups or entities); and
- if a wallet has been linked to the activities of a cyber-criminal (i.e. ransomware payments), undertake additional due diligence to ensure sanctions risks are not enlivened.
What is next?
The treatment of digital assets and services connected to digital assets are under the microscope of regulators and are part of multiple pieces of government consultations. All businesses engaged in activities connected with digital assets should consider these reforms, regulatory announcements and enforcement actions as a whole to ensure that proper consideration is given to forward planning of the business.
Businesses should consider engaging with the consultation process to ensure that any impacts that might not have been considered in the consultation materials are raised with the Attorney General’s Department. Submissions on Consultation Paper 2 close on 13 June 2024.
- See FATF Status of implementation of Recommendation 15 by FATF Members and Jurisdictions with Materially Important VASP Activity, https://www.fatf-gafi.org/content/dam/fatf-gafi/publications/VACG-Table-Jurisdictions-2024.pdf.coredownload.pdf
- As well as for gaming chips or other betting instruments.
- https://www.dfat.gov.au/sites/default/files/advisory-digital-currency-exchanges-sanctions-compliance.pdf
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The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
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