AUSTRALIA: An Introduction to FinTech Legal

CHAMBERS 2023 OVERVIEW - STIRLING & ROSE

“In the next decade, we expect to see Fintech, ESG and regulation continue to converge. This will create new opportunities for sustainable and responsible investing, as well as for financial inclusion. We also expect to see more innovation in the way financial services are delivered, with a focus on customer experience.”

GPT-3 “forecast Fintech” as at 16 November 2022 

Above is a concise summary of our outlook for Fintech in Australia for 2023, with one small difference. The announcement was written entirely by AI, specifically the GPT-3 machine learning tool which uses neural networks to comprehend and generate text from simple instructions. In this case, “forecast Fintech”.

Our GPT-3 experiment is a clear snapshot of the progress in technology in a field which is notoriously challenging. GPT-3, provided with (good) data and on an enterprise basis, demonstrates how well-defined data structures can be parsed by technology to improve productivity and efficiency.

Why data? Data is a major theme in Fintech and will remain so. To date, money has been issued and exchanged as either a static analogue (notes and coins) and now digital (0's and 1's) field. Currently, you might express a financial position as “I have $100”, or something costs $100. Going forward, money will be programmable and collect data.

We call this shift the move to “complex money”. Complex money is a digital and programmable medium of exchange that is data-producing and collecting, divisible and subject to endless variations in issuers, dealers, features, rights, obligations, and remedies. For example, $100 in the future may be composed of a pool of data rights, CDBCs (more below), emission units (more below), crypto assets (more below) and sets of rights and obligations that link, for example, to credit activities or interplay with taxation or gambling.

The shift to complex money and the inclusion of programmable crypto assets in finance will not be without complexity. The recent fallout from the collapse of major international centralised crypto institutions such as Three Arrows Capital and FTX, together with the collapse in value of the TerraUSD stablecoin and LUNA cryptocurrency have resulted in significant value destruction and a flight of investor liquidity from the Web3 Fintech market. Precisely because of this, greater traditional institutional uptake of Web3 may eventuate as clearer regulatory guardrails are put in place to protect consumers and investors.

Accordingly, the key trends for Australia’s 2023 Fintech landscape are ESG, crypto specific regulation, greater consumer protections and privacy rights in respect of digital platforms, payment systems projects and the rise of complex money.

1 ESG  

1.1 The push to net zero globally is forecast to cost $9.2 trillion globally and $3.1 trillion in APAC alone. ESG is likely to be a major driver of Fintech in Australia.

1.2 Australia's ESG Fintech ecosystem sits within the auspices of Singapore’s audacious Project Greenprint which establishes an ESG marketplace to bring together investors, founders and institutions and an ESG data ecosystem to record and verify data.

1.3 While regulators have not mandated ESG reporting in Australia nor disclosing information pursuant to the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) recommendations, ASIC has suggested that organisations may need to contemplate ESG risks in their financial statements. This has been broadly accepted by companies and, as of March 2022, 95 of the ASX200 have made net zero pledges and 103 are disclosing against TCFD in some capacity. 20 of Australia’s peak business and finance bodies welcomed the International Sustainability Standards Board’s draft sustainability standards in a joint response. The principal consequence is that while there were no major regulatory developments, mandatory ESG disclosures in companies’ annual reporting pursuant to the Corporations Act 2001 (Cth) is increasingly the de facto position if not de jure.

1.4 Australia’s Fintech ESG ecosystem, as it relates to carbon trading, is ahead of its global peers. Several local players have developed carbon trading platforms, and a handful are utilising distributed ledger technology in the space. Greater regulatory clarity in respect of digital carbon tokens alongside other digital tokens is expected in 2023 (see token mapping and Federal Treasury’s CASSPrs consultation below).

2 Consumer protection regulation 

2.1 The Australian Competition & Consumer Commission (ACCC) released its interim report on regulatory reform of digital platform services. The ACCC’s recommendations include:

a. economy-wide measures to prohibit unfair trading practices and strengthen unfair contract terms laws which would apply to digital businesses. This covers a spectrum of practices, including:

(i) limitations on consumer choice in data and privacy;

(ii) conduct designed to discourage user action; and

(iii) user interfaces designed to confuse, manipulate or impede consumer decision-making;

b. digital platform-specific consumer measures, which include:

(i) processes to prevent and remove scams, harmful apps and fake reviews;

(ii) internal dispute resolution standards; and

(iii) access of consumers and small businesses to an independent ombuds scheme; and

c. a new power to make mandatory codes of conduct that apply to designated digital platforms that provide a single type of digital platform service. These codes of conduct would build on broad principles in the legislation to allow sufficient flexibility to address competition issues that may arise over time.

The Privacy Legislation Amendment (Enhancing Online Privacy and Other Measures) Bill 2021, which proposes amendments to the Privacy Act 1988 (Cth) to cover informed consent in relation to social media and other online platforms, together with a new online privacy code of conduct, is expected to be introduced to Parliament. This will impact businesses operating online platforms.

3 Web3 

3.1 Web3 Fintech was overshadowed by regulatory action conducted by the Australian Securities and Investment Commission (ASIC) which issued its first civil penalty proceedings in the Federal Court against BPS Financial Pty Ltd (BPS) for allegedly making false, misleading and deceptive representations and engaging in unlicensed conduct regarding a non-cash payment facility involving the Qoin crypto-asset token. BPS was alleged to have represented that Qoin was regulated in Australia and that it was compliant with Australian financial services laws.

3.2 ASIC also placed indefinite interim stop orders on Holon Investment Australia Limited (Holon) to offer or distribute three crypto asset funds managed by Holon to retail investors on the basis of non-compliant target market determinations. These orders were eventually revoked after Holon decided to wind up the schemes.

3.3 ASIC also withdrew FTX Australia’s Australian Financial Services Licence following the Australian entities entering voluntary administration after the broader FTX Group filed for Chapter 11.

3.4 Following volatility in cryptocurrency markets, the above-mentioned regulatory action and high-profile collapses in the cryptocurrency space, Federal Treasury announced that it would release draft legislation to regulate the space in 2023. ASIC has consistently maintained that crypto assets, which are in substance financial products for the purposes of the Corporations Act, will require an Australian Financial Services Licence under that Act.

3.5 Federal Treasury’s announced regulatory timeline is consistent with the IOSCO taskforce on DeFi led by the US Securities and Exchange Commission and the separate taskforce on digital assets led by the UK Financial Conduct Authority. Each IOSCO taskforce is expected to issue final reports in Q4 2023 and will likely inform the Australian position.

3.6 This follows the token mapping exercise announced by the Australian Government which assessed the crypto asset landscape and how crypto assets and related services should be regulated. The Australian Government has been seeking institutional guidance to help structure and shape its approach to regulating crypto assets, which is still currently caught under the Corporations Act.

a. The token mapping exercise follows Federal Treasury’s consultation on the regulation of crypto asset secondary service providers (CASSPrs). CASSPrs encompass a wide range of activities including exchange between crypto assets and fiat currencies; exchange between one or more forms of crypto assets; transfer of crypto assets; safekeeping and/or administration of virtual assets or instruments enabling control over crypto assets; and participation in and provision of financial services related to an issuer’s offer and/or sale of a crypto asset.

b. The overarching objectives of a proposed regulatory regime for crypto assets (and coincidingly Fintech) will be to ensure a fit-for-purpose, technology-neutral and risk-focused regime which would support the AML/CTF regime. A key policy query was whether crypto assets would be captured as “financial products” under the Corporations Act (specifically, sections 763A, 764A and 765A) and CASSPrs would accordingly require an Australian Financial Services Licence, or whether a separate licensing regime should apply to CASSPrs. Another alternative was self-regulation by the crypto industry (though this is at odds with global developments). The substantive content of a separate licensing regime (and consumer protections such as disclosure and market determinations by CASSPrs) remains open.

3.7 Separately, potential usage of crypto assets to facilitate money laundering and offshore transfers has precipitated the Australian Federal Police to establish a dedicated cryptocurrency unit.

4 Payment Systems and Complex Money 

The Reserve Bank of Australia (RBA) announced its involvement in a pilot for an Australian Central Bank Digital Currency (CBDC) as an industry partner of the Digital Finance CRC (a ten-year, $180 million research programme). The initial questions to be addressed by the pilot, which is expected to be completed in mid-2023, include the use cases for a CBDC in Australia vis-à-vis existing payments and settlement infrastructure, the potential economic benefits of an Australian CBDC, and operational, technological, policy and regulatory issues that will need to be addressed by an Australian CBDC.

This local development follows Project Dunbar (in respect of which the RBA was involved together with the BIS Innovation Bank and other global central banks), Project Guardian, Project Ubin (and Ubin+) and Project Orchid, led by the Monetary Authority of Singapore with support from major international banks which explore similar projects in payments and settlements, CBDCs and purpose bound money (PBM).

Payment and settlement systems are and will be a driver of Fintech and a natural fit for distributed ledger technologies. For instance, ANZ’s A$DC stablecoin was used to buy tokenised carbon credits issued by a local carbon trading platform.