At the end of a significant year for the Australian digital asset industry, ASIC has published its Consultation Paper 381 (Consultation Paper), which outlines proposed updates to ASIC’s guidance in Information Sheet 225 (INFO 225) to persons offering products and services in relation to crypto and digital assets.
ASIC’s proposed updates reflect the regulator’s evolving interpretation of how the Corporations Act 2001 (Corporations Act) applies to crypto- and digital assets since INFO 225 was last updated in October 2021.
In this alert, we provide a synopsis of the following key things to know:
- Background – where this fits in and why it matters.
- Key proposals, which primarily focus on regulatory characterisation and licensing.
- Feedback that is requested by ASIC.
- ASIC’s approach to applications and potential further future regulatory updates.
Feedback is invited by ASIC and is due to ASIC by 28 February 2025. We expect that input from the digital asset industry and other financial sector participants will provide especially valuable insight, given the ongoing fast pace of development in this sector.
Key things to know
Quick background
The Corporations Act sets out the existing legislative framework for when an Australian financial services licence (AFSL) is required for financial services provided in relation to financial products. It also prescribes when an Australian market licence or clearing and settlement (CS) facility licence is required. ASIC has previously issued INFO 225 to provide some guidance on how ASIC interprets the provisions of the Corporations Act applying to crypto- and digital assets. The digital asset market is however evolving significantly, and ASIC has deemed it appropriate to update INFO 225. This is against the backdrop of new digital asset products and services being offered, increasing calls from industry for clearer guidance about how ASIC views the existing regulatory perimeter, the firming of ASIC’s own views and the publication of policy recommendations for crypto and digital asset markets by the International Organisation of Securities Commissions (IOSCO).
ASIC’s latest proposals are significant. Not only do they provide much awaited further guidance in relation to the application of the Australian financial services (AFS) regulatory regime to digital assets, they also set out ASIC’s proposed transitional approach for AFS license applicants seeking to provide digital asset related financial services.
These proposed updates are consistent with the application of the law relevant to digital assets and financial services in Australia, as well as the work undertaken so far by the Australian Government and Commonwealth Treasury to develop policy proposals to regulate digital asset facilities and platforms. You can read more about these policy proposals in our alert here.
Other important areas of adjacent reform that are likely to affect the digital asset industry relate to:
Feedback requested by ASIC in this area:
(a) Whether there are any topics or guidance that have not been included in draft updated INFO 225 that should be.
(b) Whether there any topics or guidance that were included that should not have been included?
(c) Whether the good practice guidance in INFO 225 directed to responsible entities is applicable to providers custodial and depository services that provide custody of digital assets that are financial products, and whether there any good practices that you would like added (e.g. n staking services)?
What is changing?
The proposed updates include:
- More guidance on characterisation: adding guidance on a facility for making a financial investment whilst decreasing the focus on the role of initial coin offerings.
- Custody: extending the guidance directed at responsible entities to apply to provider of custodial and depository services.
- DDO: adding consideration of design and distribution obligations.
- Licensing applications: adding further discussion on the financial services ASIC expects to be relevant to an application to apply for or vary an AFSL and noting the application process.
- Relief: adding a section on applications for relief and granting no-action letters.
- Examples: including 13 worked examples which outline how ASIC interprets the existing financial product definitions applied to hypothetical scenarios, and questions in relation to the development of additional examples to cover stablecoins and wrapped tokens. More on this below.
Asset and scenario characterisation
Worked examples
Some key content in the draft updated INFO 225 that will be of particular interest to industry are the proposed worked examples.
ASIC has proposed 13 worked examples of particular tokens and other scenarios. The following table summarises ASIC’s draft position on whether or not these are “financial products” for the purposes of the Corporations Act. Of course, these are based on the facts of the worked example – such characterisations are always highly fact-dependent.
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Worked example by ASIC
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Financial product considered by ASIC
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Example
uses 2
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Example 1
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Exchange token |
Likely to be a facility for making a financial investment |
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Example 2
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Native token staking service |
Likely to be facilities for making financial investment and potentially managed investment schemes |
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Example 3
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In-game non-fungible tokens (NFT) |
Unlikely to be a facility for making a financial investment |
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Example 4
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Yield-bearing stablecoin |
Likely to be an interest in a managed investment scheme |
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Example 5
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Gold asset referenced token |
Likely to be an interest in a managed investment scheme |
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Example 6
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Membership NFT |
Unlikely to be a managed investment scheme |
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Example 7
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Token representing a claim for pre-paid services |
Unlikely to be a managed investment scheme |
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Example 8
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Fundraising for a new blockchain |
Initial fundraising likely to be a managed investment scheme and new token would be a managed investment scheme if there is pooling or use in a common enterprise to generate financial benefit |
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Example 9
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Meme coin |
Unlikely to be a security or any other type of financial product |
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Example 10
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Tokenised concert ticket |
Unlikely to be a security or any other financial product |
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Example 11
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Tokenised security |
Tokenised bonds are likely to be a debenture |
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Example 12
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Contract for difference over a digital asset |
Likely to be a derivative |
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Example 13
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Digital asset wallet |
The service is likely to be a non-cash payment facility |
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NB. For clarity, the table above reflects ASIC’s draft guidance, for which it invites feedback.
Derivatives
ASIC also notes that a digital asset or arrangement related to a digital asset may be, or involve, a derivative and lists examples of these as being:
- Digital asset where price references a ‘real-world’ asset (for example gold or real estate): examples are some ‘algorithmic stablecoins’.
- Wrapped digital assets (price is derived from another digital asset): examples include wrapping tokens between blockchains.
- Contracts for difference: examples are options, forwards or futures that reference one or more digital assets, including perpetual futures.
As always, the facts are critical.
Other scenarios
These hypothetical worked examples are designed to assist industry in thinking about the concept of a financial product more broadly, and how it might apply to digital assets and related products. However, these examples are not exhaustive. They are ASIC’s views on those specific sets of hypothetical scenarios and ASIC’s view on considering specific financial products based on specific facts. It remains each product and service provider’s responsibility to determine whether its product is a financial product and whether its service constitutes a financial service.
Feedback requested by ASIC in this area:
(a) Whether there are any comments on any of the proposed worked examples.
(b) Whether there any additional examples that should be included.
(c) Whether for any of these examples, there are any unintended consequences.
Stablecoins and wrapped tokens
ASIC has flagged in the Consultation Paper that it is considering the application of the current law to ‘stablecoins’ and ‘wrapped tokens’, and are considering whether to develop worked examples that consider the features set out in the table below that may indicate that a wrapped token or stablecoin is a financial product.
ASIC has also noted that it is aware that the potential application of the current law as discussed in the Consultation Paper may be materially different from how the Government’s proposed payment service licensing and digital asset facility and platforms reforms may potentially apply to stablecoins and wrapped tokens.
The following table summarises ASIC’s guidance on the key features of each asset.
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Features of a stablecoin
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Features of a wrapped token
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Example
uses 2
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|
The digital asset token is marketed as a non-interest-bearing ‘stablecoin’. |
A company offers a product that enables a digital asset (normally only available on its ‘native’ blockchain) to be represented on a different blockchain. |
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The token expected to maintain a stable price and value in Australian dollars (AUD), and the tokens are issued at par value (i.e. one token equals one AUD). |
The version that is on the different blockchain has added functionality and lower fees. |
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The company will redeem, or buy back, the tokens at par value in exchange for fiat money, on demand from any holder (subject to any relevant know-your-customer (KYC) requirements). |
The price of the wrapped token changes in line with the price of the native token, but the prices are not identical. |
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|
The money received by the company is recorded as an asset, and the requirement to repay is recorded as a liability, on the company’s balance sheet. |
Any subsequent holder of the wrapped token can redeem it for the native token. |
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The company will either hold the money raised from token sales in a bank account or use it to purchase low-risk investments (e.g. Australian Government Securities). |
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Feedback requested by ASIC in this area:
(a) Whether it would be helpful to include an example of a wrapped token and/or a ‘stablecoin’ in INFO 225 if so, any suggestions on the features of the potential examples in paragraphs 20-21.
(b) What the practical implications are for businesses (e.g. for issuers or intermediaries) if wrapped tokens or ‘stablecoins’ with these features were classified as financial products.
(c) Whether any transitional provisions or regulatory relief is needed to facilitate transition from regulation of a wrapped token or a ‘stablecoin’ as a financial product under the current law to the Government’s proposed approaches to ‘stablecoins’ and wrapped tokens.
Licensing and related obligations
The proposed updates to INFO 225 do not impose any new regulatory obligations on AFS licence holders, and ASIC has flagged that it will regulate digital asset products that are financial products in a similar to way to traditional financial products of that same kind. ASIC has also set out its proposed approach to licensing digital asset businesses under the AFS licensing regime, and will undertake further work relating to market and CS facility licenses.
ASIC flags in the draft updated INFO 225 that:
- The definition of a financial product in Australia is often broader that in other jurisdictions.
- The definition of financial services can vary compared to other jurisdictions.
- Entities should consider whether they are providing a financial service which could involve advice, dealing, market making and custody.
- Entities should ensure that they comply with all relevant laws, which includes the Corporations Act, Australian Securities and Investments Commission Act 2001 as well as anti-money laundering and know-your-client obligations.
- Entities should consider whether their clients are ‘retail’ investors and bear in mind the design and distribution obligations that are intended to help retail consumers obtain appropriate financial products.
- The obligations to consider when offering retail investors exposure to digital assets via a regulated investment vehicle such as for example exchange traded products, listed investment companies, listed investment trusts and unlisted investment funds.
To this end, ASIC is consulting on a proposed transitional approach that could include a conditional, class no-action position for digital asset businesses that are in the process of applying for or applying to vary an AFSL, Australian market licence or CS facility licence. The proposed scope and conditions are:
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Application
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ASFL, Australian market licence or CS facility licence |
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Eligible services
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Financial services in relation to digital assets that are financial products |
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Eligible applicants
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Persons that had commenced operations in Australia before 4 December 2024 |
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No action applicability window
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In each case it would apply until the licence application has been either withdrawn or decided upon (i.e. a licence has been granted or refused). |
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Mandatory membership
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The applicant must be a member of the Australian Financial Complaints Authority. |
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Foreign companies eligible?
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However, a non-Australian company or resident applicant would have to register as a foreign company (including appointing a local agent under section 601CF of the Corporations Act). |
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Exclusions
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Crypto lending or earn products and derivatives referencing digital assets (other than wrapped tokens, see “Stablecoins and wrapped tokens” above under “Asset and scenario characterisation”). |
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ASIC rejection
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ASIC may notify a person in writing that the no-action position does not apply to them, effective from the date of the notice. |
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Feedback requested by ASIC in this area:
(a) Whether a class no-action position as proposed should be adopted.
(b) Whether the proposed conditions are appropriate. If not, any additions or changes that can be made so that the conditions would be more effective for investor protection.
(c) Whether the class no-action position should be dependent on a person lodging an AFSL application or a written intention to apply for an Australian market licence or C&S facility licence. If not, any alternative to this requisite condition.
(d) Whether there should be a deadline for applying for an AFSL or commencing pre-lodgement discussions in relation to an Australian market licence or C&S facility licence.
(e) Whether the no-action position should be extended to other obligations for product issuers (eg to prepare a Product Disclosure Statement).
AFSL applications and ongoing obligations
Default position of a consistent and technology-neutral approach
ASIC considers that the default position should be that existing AFSL application processes, requirements, regulatory guides and conditions would apply to the provision of financial services in relation to digital assets.
ASIC’s position is expressed to be in view of the “similar activity, similar risk, same regulatory outcome” approach and the principles underpinning the Corporations Act being generally technologically neutral.
At the same time, we are aware of a desire from industry for additional guidance where possible. In this respect, ASIC raises a number of questions to delve into this topic further.
Feedback requested by ASIC in this area:
(a) Whether the same regulatory obligations should apply to digital asset and traditional financial products of the same categories (eg securities or derivatives).
(b) Whether any aspect of ASIC’s guidance should be tailored for digital assets that are financial products.
(c) Whether the approach proposed for custodial and depository services is appropriate for holding custody of digital assets.
(d) Whether the omnibus client accounts arrangement should be extended for digital assets that are financial products.
(e) Whether Option 5 in “Regulatory Guide 105 AFS licensing: Organisational competence” should apply to entities providing financial services in relation to digital assets that are financial products.
Additional opportunities for regulatory development
ASIC also proposes to tailor AFSL authorisations in relation to digital assets that are derivatives and “miscellaneous financial investment products”.
This proposal may of particular interest to industry participants involved in digital asset-related derivatives and other types of digital asset-related products.
Feedback requested by ASIC in this area:
(a) Whether existing authorisations sought in an AFSL licence application are generally applicable to digital asset service providers.
(b) Whether licence authorisations for derivatives, miscellaneous financial investment products or any other products should be tailored.
Case-by-case assessment of applications, with an eye on potential future regulatory updates
ASIC’s view is that the current legislative regime for financial markets and CS facilities is sufficiently flexible to cover a range of business models, including markets relating to digital assets that are financial products.
ASIC has confirmed that:
- (case-by-case review) it will consider applications on a case-by-case basis;
- (retail) it has high expectations of market and CS facility operators serving the retail sector, consistent with current guidance; and
- (further guidance) it will consider whether further guidance is needed dependent on how the digital asset sector evolves, noting the Reserve Bank of Australia’s role as a co-regulated of CS facilities.
Next steps
Submissions in response to the Consultation Paper are due to ASIC by 28 February 2025. This means that there is time to work through the detail of the proposal and participate in this process.
If you would like to discuss the Consultation Paper, or developments in the regulation of digital assets or financial services more generally, please do not hesitate to reach out to our team.
We would be delighted to support.
The authors wish to acknowledge the contributions of Jocelyn Pang and Rachel Duong to this alert.
