The Senate committee tasked with reviewing fintech and regtech in Australia has handed down its final report, providing eight recommendations focused on how digital assets should be regulated.
Among those recommendations within the Senate Select Committee on Financial Technology and Regulatory Technology's final report [PDF] is a call for the federal government to create a market licence for digital currency exchangers (DCE).
After reviewing submissions from industry stakeholders, the committee found the current regulation of DCEs, which is generally limited only to registration with Austrac, is inadequate for businesses that in some cases deal with asset volumes in the billions of dollars.
Most crypto assets that are currently available to Australian retail investors fall outside of ASIC's regulatory perimeter, meaning that companies currently offering these products do not need to hold an AFS licence or a market licence. As such, the committee is recommending the creation of a new category of market licence that enables DCEs to demonstrate a high level of commitment to consumer protection and operational integrity, without imposing obligations that are onerous as it would drive local operators out of the market.
In making that recommendation, the committee said the new DCE Market Licence category should include, at minimum, requirements relating to capital adequacy, auditing, and responsible person tests.
With most digital assets, including crypto assets, currently not meeting the legislative definitions for financial products and services, the committee has also recommended for the Treasury Department to conduct a token mapping exercise to classify the various types of crypto asset tokens and other digital assets being developed in the market.
This is to ensure the regulatory classifications for these assets are fit-for-purpose, the committee said.
"This exercise should take account of the various approaches to classifying digital assets that have occurred in other jurisdictions in recent years," it said in the report.
Along with calling for the federal government to classify digital assets, the committee has recommended for government to establish and formally recognise Decentralised Autonomous Organisation company structures, which has been used more often in the digital assets space.
Responding to concerns that there is a lack of certainty around how fintech businesses are debanked, the committee has also called for a new process for debanking that should be anchored around the Australian Financial Complaints Authority.
"Debanking is debilitating. It destroys the ability of Australia's small business to disrupt and deliver new ideas," committee chair and Liberal Senator Andrew Bragg said.
The committee has also recommended a new regime for custodial and depository services for digital assets to be created. It said the regime should sit within the Treasury department.
Over the past year, the committee has also been considering the merits of a travel rule. A travel rule, if ratified, would require financial institutions to pass certain information onto another financial institution to provide more transparency regarding cryptocurrency movement.
The travel rule was recommended by the Financial Action Task Force (FATF) in May as it believed the rule would aid in preventing terrorists and other criminals from having unfettered access to electronically-facilitated funds transfers for moving their funds and for detecting such misuse when it occurs.
The committee did not provide a stance on whether the travel rule should be implemented, but recommended for the government to continue considering the technological solutions required for the travel rule to be adopted without undermining legitimate digital asset businesses.
In late August, Austrac and Home Affairs representatives told the committee that there is currently no technological solution capable of appropriately enforcing the travel rule.
"I think it depends on the way that [the travel rule] is implemented so a technological solution that takes a lot of the legwork out of that would be a game changer. [But] we are not at the point where, globally, there is such a technological solution," Home Affairs assistant secretary Daniel Mossop said at the time.
Tax wise, the committee has recommended the Capital Gains Tax (CGT) regime be amended so digital asset transactions only create a CGT event when they genuinely result in a clearly definable capital gain or loss, which it said may require the creation of a new CGT asset or event class that enables specific concessions or exemptions to be applied.
Other tax recommendations made by the committee included providing companies that undertake digital asset "mining" activities with a 10% company tax discount if they source renewable energy for these activities.
With the committee's delivery of the final report, it has wrapped up the last phase of its inquiry, bringing an end to the inquiry which first kicked off in October 2019.
As of June, 17% of Australians owned cryptocurrency, with a further 13% of Australians planning to buy cryptocurrency in the next 12 months, the report said.