The fintech and Web3 industries are in for a big 12 months as the Australian government seeks to tighten regulation for financial service providers.
Since the introduction of the Australian financial services (AFS) regulatory regime in 2001, the Australian financial services industry has undergone a radical transformation, in part driven by fintech and Web3 solutions.
Many services and products offered no longer fit squarely within the definitions set by the 2001 regime, causing uncertainty about who is to be licensed, which services and products are regulated, whether recipients of these services and products are adequately protected and, inevitably, what enforcement action is to be taken by the financial services regulator, the Australian Securities and Investment Commission (ASIC). This uncertainty has been a drag on growth in these sectors and, in some instances, resulted in enforcement action for technical breaches of applicable laws against entities whose attempts to comply were thwarted by this uncertainty.
Over the past 18 months, there has been significant engagement by the Federal Government and Treasury on potential changes to the regulation of the tech industry to provide greater certainty and improve consumer outcomes, including proposed reforms to the regulation of digital asset and payment facilities, and discussions regarding the introduction of a central bank digital currency in Australia. Currently before the Parliament is also legislation that will require providers of “buy now pay later” products to hold an Australian credit licence and comply with the National Consumer Credit Protection Act 2009 (Cth) and the credit code (including modified responsible lending obligations). Additionally, ASIC is in the process of updating its guidance on crypto asset regulation. All of these developments are important for fintech and the Web3 industry.
Below is a snapshot of what fintech and Web3 businesses could expect to see in the next 12 months and beyond.
1. To be, or not to be: the question of digital assets as financial products
Currently in Australia, the regulation of digital assets largely depends on the extent to which the product meets the definition of ‘financial product’. This means that some (but not all) digital assets are financial products, and some (but not all) digital asset providers are required to be licensed. In 2024, we saw the uncertainty culminate in various court proceedings between ASIC and fintechs (see discussion below).
However, fintechs may soon have greater certainty of their regulatory obligations as the Australian Government seeks to introduce a new category of financial product – the digital asset facility.
Interestingly, the new proposed form of financial product will not be the digital asset itself (thus avoiding debates between ASIC and fintechs as to whether a digital asset is a debenture, an interest in a managed investment scheme or some other financial product could still arise). Instead, according to the Government’s consultation paper from October 2023 (Digital Asset Paper), [1] digital asset facilities (DAFs) refer to the asset holding arrangements pursuant to which a service provider holds a digital asset for a consumer, who will typically have a ‘right’ or ‘platform entitlement’ to receive their asset back in the future.
DAFs would include both custody-only arrangements (under which the service provider simply holds the digital asset for the consumer) as well as digital asset platforms (multi-faceted platforms where consumers can also transact in platform entitlements).
If introduced, DAF providers will be subject to the usual obligations arising in connection with financial products (such as the requirement to hold an AFS licence) unless an exemption otherwise applies. However, DAF providers should also expect to have further obligations which are unique to the DAF financial product. Additional requirements which the Government is considering include the imposition of standards in relation to consumer contracts and the four ‘financialised functions’ (token trading, token staking, asset tokenisation and funding tokenisation).
While the exposure draft of the DAF regulation was initially slated to be released in 2024, it is now expected sometime in 2025. If and when the legislation is passed by Parliament, DAF providers will likely have a 24 month transition period during which they will need to take all necessary steps to ensure compliance with the new laws, including applying for the relevant AFS licence authorisations during the second half of that period.
2. INFO 225 update
On 29 October 2024, ASIC advised that it will release its consultation paper on its update to Information Sheet 225 (INFO 225) in relation to crypto-assets shortly before Christmas 2024.
Last re-issued in October 2021, INFO 225 provides high level guidance on when a crypto-asset may be a financial product under the current law. It is possible that the update will address the judgments handed down by the Federal Court in 2024 in relation to enforcement actions taken by ASIC, such as the following:
- ASIC v Block Earner:[2] In this case, ASIC successfully argued that the “Earner” product constituted a managed investment scheme and was therefore a financial product. Broadly, the Earner product allowed customers to exchange Australian dollars into cryptocurrency which could then be loaned to Block Earner. Interest would accrue on the loan and, at the end of term, Block Earner would return the borrowed cryptocurrency to the customer (in the form of Australian dollars) and pay any accrued interest. Interestingly, no penalty was imposed by the Court which, amongst other things found, that Block Earner had acted honestly and made a genuine attempt to comply with the regulatory requirements – a decision which ASIC has appealed.
- ASIC v Finder Wallet:[3] In this case, ASIC was unsuccessful in its argument that the “Finder Earn” product constituted a debenture and was therefore a financial product. Broadly, the Finder Earn product allowed customers to deposit Australian dollars into their account and convert the same into “TrueAUD” (a stablecoin pegged against the Australian dollar). In return for transferring legal ownership in the TrueAUD to Finder Wallet, customers would receive, upon the arrangements coming to an end, an amount in Australian dollars which was equivalent to the value of the TrueAUD plus interest. In disagreeing with ASIC, the Court held that the Finder Earn product did not satisfy two key elements of a debenture – there was no money being deposited or lent, and there was no undertaking to repay. ASIC has appealed this decision.
3. NCP facilities are out, payment products and services are in
The regulation of payments through the AFS licensing regime is currently limited to financial services provided in connection with facilities through which a person makes or arranges to make a non-cash payment (the “NCP facility”). Consequently, the licensing regime doesn’t apply to a number of payment service providers (PSPs) who carry out key functions in the payment services space. The transformation of this space and desire to the regulate the activities of certain PSPs, necessitates an update to the regulatory regime for payments.
According to the Australian Government’s consultation paper from June 2023[4] and follow-up paper in December 2023,[5] the proposal is to:
- replace the existing NCP facility concept with the broader concept of a facility through which a person “uses a payment product” (or similar); and
- introduce a new category of financial services – the provision of payment services.
In broad terms, these reforms would result in the regulation of the following payment functions:
| Stored-valued facilities (SVF) | A form of payment product. SVFs are facilities through which consumers may load and store funds to, and withdraw funds from, their account. Consumers are able to direct the movement of their stored funds, e.g. for the purposes of paying for goods or services or transferring funds to another person. The current proposal is for SVFs to capture both traditional SVFs (e.g. pre-paid cards) as well as payment stablecoin facilities (see below), but the Government also appears to be exploring the option of regulating payment stablecoin facilities as a payment product separate to the SVF. |
| Payment stablecoin (PSC) facilities | Broadly speaking, PSCs can be considered a form of cryptocurrency that has its value tied to fiat currency, and PSC facilities can be regarded as facilities through which PSCs are issued to and redeemed by consumers for fiat currency. PSCs are digital assets. Accordingly, if both proposals are introduced, PSC service providers may need to consider if their platform is a payment product as well as a DAF (as discussed above). |
| Payment Instruments | A form of payment product. Payment instruments refer to personalised or individualised sets of procedures that allow a payer to instruct the entity holding its funds to initiate a transfer to a payee. |
| Cross-border Transfer services | A form of payment product. Includes facilities through which funds are transferred into and/or out of Australia. |
| Payment Facilitation Services | A form of payment product which involves the service provider entering into possession of funds for the purposes of facilitating a transfer between a payer and payee, including for the purpose of acquiring, aggregating, disbursing or otherwise transferring funds within Australia. |
| Payment Technology and Enablement Services | A form of payment service. Includes payment specific services which enable a transfer of funds to occur, but which do not involve the service provider entering into possession or control of the funds. This may include services in relation to authentication, authorisation, routing and the capture and transfer of payment credentials and other payment data. |
| Payment Initiation Services | A form of payment service. Includes services by a third-party in connection with the initiation of payments, upon request from the customer, from payor to payee (e.g. sending payment instructions). |
As is the case with the proposed DAF reforms, while the exposure draft of the new PSP licensing regulation was initially proposed to be released in 2024, it is now expected sometime in 2025.
4. CBDCs
In September, the Reserve Bank of Australia (RBA) released a report on a central bank digital currency (CBDC). The report explored the role of both a wholesale and retail CBDC and concluded that there is no clear public interest use case for a retail CBDC in Australia as yet (primarily due to the availability of fast payments through Australia’s New Payment Platform and the small proportion of its population that is unbanked). However, the report noted that one of the opportunities for a retail CBDC was to reduce transaction costs.
Reducing transaction costs is a key focus for the RBA, who separately released a Merchant Card Payment Costs and Surcharging Issues Paper on 15 October 2024 and is seeking feedback from stakeholders. Card payments are already the dominant payment method in Australia and continue to grow, partly driven by the growth in online shopping where no alternative payment option exists. The RBA is exploring policies for reducing these fees including:
- imposing additional disclosure obligations with respect to merchant, interchange and card scheme fees, to support more informed choices by consumers and merchants and increase competition amongst networks and payment service providers;
- reducing the existing caps on interchange fees, imposing a maximum range between the highest and lowest interchange rates by network or reducing interchange caps for small business transactions; and
- reinstating bans on merchants from surcharging either debit transactions, transactions on all card networks or only transactions on those networks subject to interchange regulation.
Absent a CBDC, perhaps stablecoins will facilitate cheaper online payments and drive competition in the near term.
Interestingly, one of the potential wholesale CBDC use cases noted was to support the settlement of the tokenisation of financial and other assets on distributed ledger technology platforms. Private sector solutions will also support such transactions – with such solutions already starting to emerge and expected to go live in 2025, further highlighting the importance of the draft legislation being released by Treasury.
In 2025, the RBA is also expected to complete its joint project with the Digital Finance CRC which explores the uses of digital money such as wholesale CBDCs in supporting the settlement of transactions in the tokenised asset market. In 2025, the Treasury and the RBA are also expected to engage with stakeholders, industry experts as well as the general public in relation to their CBDC work.
Final thoughts
Given the upcoming Federal election in 2025, the release of the exposure draft legislation in relation to the new DAF and PSP regulatory frameworks, and projects regarding CBDCs, may be delayed. If/when these reforms are legislated, fintech and Web3 industries will hopefully have greater clarity on their regulatory and licensing obligations in Australia.
1 Regulating digital asset platforms | Treasury.gov.au
2 Australian Securities and Investments Commission v Web3 Ventures Pty Ltd [2024] FCA 64.
3 Australian Securities and Investments Commission v Finder Wallet Pty Ltd [2024] FCA 228.
4 Licensing of payment service providers – payment functions | Treasury.gov.au
5 Payments System Modernisation (Regulation of Payment Service Providers) | Treasury.gov.au