Australia: New licensing and custody obligations for Crypto Asset Secondary Service Providers (CASSPrs)

LegalVision | Chris Elias | Apr 17, 2022

The Australian Federal Government recently released a consultation paper (Consultation Paper), setting out the Government’s proposed approach to licensing and regulating crypto asset secondary service providers (CASSPrs). This article unpacks the Consultation Paper, examines proposed concepts such as the CASSPr and definitions, and concludes with our early thoughts on the proposed legislative framework.

Consultation Paper Summary

The Consultation Paper covers the following:

  1. general overview of the crypto asset ecosystem in Australia;
  2. the existing regulatory framework, and the actual and perceived regulatory gaps;
  3. the proposed new licensing regime for CASSPrs;
  4. proposed mandatory custody obligations to safeguard private keys held by CASSPrs; and
  5. the Federal Government’s current categorisation of crypto assets.

See:  Australian government gives nod to 6 world-leading crypto reforms

Challenges and Gaps in the Law

The Government has recognised the following challenges and gaps within the existing regulatory framework:

  1. Is it a ‘financial product’? The difficulty in determining whether or not crypto assets fall within the definition of a financial product and which laws apply because of their variety of features and rights and increasingly novel use cases;
  2. Consumer risk: Consumers are exposed to high risk when making investments in crypto assets, and the current framework does not provide adequate consumer protection in the event of cybersecurity, operational or financial failures of service providers;
  3. Misperception of regulation: Consumers may assume that crypto assets and services are subject to regulatory oversight comparable to businesses that provide financial services; and
  4. Prevention of crime and fraud: Current AML/CTF laws relevant to CASSPrs do not apply a fit and proper person or good character tests, which may strengthen community protection against criminal activity.

See:  Australia: Senate Committee releases report on cryptocurrency, digital assets, de-banking and other issues

Principles and Scope of Proposed Regime

The Consultation Paper identifies the need to introduce a licensing regime to cover certain CASSPrs who provide retail customers access to crypto assets that are not financial products. However, this regime would not apply to:

  • decentralised platforms and protocols; or
  • crypto assets that are financial products, as they will need to comply with the financial services regime.

In addition to this regime, obligations under the Australian Consumer Law and AML/CTF laws will continue to apply.

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