The Senate Select Committee on Australia as a Technology and Financial Centre delivered its third and final report on 20 October 2021. The Committee took evidence from businesses, industry groups, academics and regulators in relation to the regulation of digital assets in Australia, “de-banking” practices affecting Australian FinTechs and other businesses, and several other issues relating to Australia’s position as a technology and financial centre.
The report makes 12 recommendations across these areas which, in particular, will provide what the executive summary claims is a “clear regulatory framework for the digital assets sector in Australia”.
Relevantly for tax practitioners, the report states that taxation rules for digital assets require “further clarification”. In particular, the rules around CGT for cryptocurrency and digital assets need to be updated to ensure that new types of technology structures are appropriately accounted for, and digital asset transactions only create a CGT event when they genuinely result in a clearly definable capital gain or loss.
An extract from the ‘Executive Summary‘ on digital assets, is as follows.
Cryptocurrency and digital assets
The scale and speed with which cryptocurrencies and other digital assets have progressed in recent years has surprised governments, regulators and policy makers. With a global market now totalling in the trillions of dollars, the tremendous potential of blockchain technology and decentralised finance is becoming recognised by mainstream institutions and investors. Recent survey data shows that 25 per cent of Australians either currently or have previously held cryptocurrencies, making Australia one of the biggest adopters of cryptocurrencies on a per capita basis.
While other jurisdictions have moved forward in attempting to create regulatory frameworks that give market participants certainty and provide consumer protections, Australia has not yet introduced fit-for-purpose regulatory systems for these emerging technology sectors. This is creating uncertainty for project developers, businesses, investors and consumers. Two prominent Australian-founded digital currency exchanges (DCEs) have recently gained regulatory licenses in Singapore and the UK respectively, showing what Australia is missing out on by not developing an appropriate framework here.
Chapter 2 of this report outlines the current regulation of this sector in Australia and overseas, while Chapter 3 sets forth the many proposals put forward by submitters and witnesses on how digital assets could be properly regulated in Australia in order to promote innovation and attract investment while providing appropriate safeguards for investors and consumers.
The committee has put forward a series of eight recommendations to address these issues.
Firstly, it is clear that the current regulation of DCEs, which is generally limited only to registration with AUSTRAC, is inadequate for businesses that in some cases are dealing with asset volumes in the billions of dollars. A properly designed Market Licence for this sector will assist the sector to mature and create confidence.
Secondly, an appropriate regime for custodial and depository services for digital assets is required. Custody arrangements for digital assets present some unique risks that are not analogous to traditional assets, which must be carefully thought through in the development of appropriate requirements. Given the scale of Australia’s existing industry for custody of traditional assets, there is significant scope for Australia to benefit from becoming a leader in the digital assets space.
Thirdly, a token mapping exercise is required to classify the various types of crypto-asset tokens and other digital assets being developed in the market, to ensure that the regulatory classifications for these assets are fit-for-purpose. This exercise should take account of the various approaches to classifying digital assets that have occurred in other jurisdictions in recent years.
A new Decentralised Autonomous Organisation legal structure is needed to ensure that emerging types of blockchain-based organisations can be established with clarity as to how they can operate in Australia. This approach has already been trialled in other jurisdictions, and in practical effect will operate similar to a limited liability company.
A review of the Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) regulations is required to ensure that these regulations are fit-for-purpose and do not undermine innovation. In particular, issues around the implementation of the Financial Action Task Force ‘travel rule’ have been raised with the committee as requiring attention.
Taxation rules for digital assets require further clarification. In particular, the rules around Capital Gains Tax (CGT) for cryptocurrency and digital assets need to be updated to ensure that new types of technology structures are appropriately accounted for, and digital asset transactions only create a CGT event when they genuinely result in a clearly definable capital gain or loss.
The opportunities associated with digital asset infrastructure were highlighted in evidence to the committee, as well as the energy intensity of cryptocurrency ‘mining’ practices. The committee is recommending a tax concession for digital asset miners operating in Australia who source their own renewable energy.
Finally, the committee heard about both the opportunities and risks associated with Central Bank Digital Currencies (CBDCs). The committee considers that Treasury should conduct a policy review on the potential for a retail CBDC in Australia, to ensure these issues are continuing to be appropriately explored in the Australian context.
[Tax Month – October 2021 – Previous Tax Month] 23.10.21 [LTN 203, 21/10/21]
