INSIGHT

Government sets out agenda for big changes to regulation of payments and digital assets

By Simun Soljo, Elyse Adams, David Rountree, Gabor Papdi
Banking Technology Telecommunications

2022 is shaping up to be a big year for reforms 7 min read

On 8 December 2021, the Federal Government released its response to recent reviews and reports on Australia's payments system and the regulation of digital assets.

While very light on detail, the paper nevertheless gives an indication of the Government's policy priorities in relation to payments and fintech, and the timeframes for future regulatory activity. The Government has supported most of the recommendations it has received in recent reviews, and 2022 is shaping up as a big year for both consultation and implementation of some potentially far-reaching reforms.

Key takeaways

The Government's response paper — 'Transforming Australia's Payments System' — addresses the recent Review of the Australian Payments System (Payments System Review), the report of the Senate Select Committee on Australia as a Technology and Financial Centre (Senate Report) and the Parliamentary Joint Committee Corporations and Financial Services Report on Mobile Payment and Digital Wallet Financial Services (Joint Committee Report).

Payments
  • The Government supports amending the Payment Systems (Regulation) Act 1998 (PSR Act) to broaden the activities subject to designation and the imposition of standards and access regimes, and for the Treasurer to have a direct designation power. Consultation on this will commence in early 2022 and advice will be provided to Government by mid-2022.
  • The Government supports the creation of a novel kind of Australian financial services licence (AFSL) for payment functions. The functions to be covered, and the obligations attaching to the licence, will be the scope of consultation commencing in early 2022 with advice to be provided to the Government by the end of 2022 – mandatory compliance with the ePayments Code and centrally set technical standards are likely to be two obligations unique to this 'payments AFSL'.
Digital assets
  • The Government supports the creation of licensing regimes for digital currency exchanges and custodians of digital assets. Consultation on the design of those regimes will commence in early 2022 with advice due to Government by mid-late 2022.
  • Treasury and the Reserve Bank of Australia (RBA) will further investigate the viability of a retail central bank digital currency (CBDC) in Australia in 2022.
  • The Government supports the creation of an appropriate regulatory structure for innovative new corporate structures such as decentralised autonomous organisations, and will consult further on this issue.
Mobile payments and digital wallets
  • The Government supports many of the recommendations made in relation to mobile payments and digital wallets in the Joint Committee Report, and generally notes that the recommendations will be broadly addressed in its proposed response to the Payments System Review recommendations.

Payment system regulation

The Government indicates it has agreed to all but one of the recommendations of the Payments System Review, and Treasury will consult further and advise the Government during the course of 2022 on the implementation of these recommendations. Broadly, it will involve the Treasurer taking a more active role in payment system regulation and a single, tiered licensing framework for payments functions via a new payments-specific AFSL.

Treasury will commence consultation on the following proposals in early 2022 and provide advice to the Government by mid-2022:

  • Overhaul the PSR Act to modernise relevant provisions and arrangements within it. This may be broader than merely expanding the definition of 'payment system', which was a key recommendation of the Payments System Review.
  • Give the Treasurer power to designate a payment system on national interest grounds (this power would co-exist with the RBA's current designation power under the PSR Act) and to direct other regulators to develop regulatory rules for, and give binding directions to operators of, or participants in, payments systems.
  • Determine a list of payments functions that will be subject to the licensing regime recommended by the Payments System Review.

Consultations on the following proposals will commence in early 2022 and advice will be provided to the Government by the end of 2022:

  • Develop a tiered licensing framework for payments within the AFSL regime (a 'payments AFSL') that is based on the particular payment function. This is expected to also include stored-value facilities, to implement a recommendation in the Council of Financial Regulators' Regulation of Stored-value Facilities in Australia report and the Joint Committee Report.
  • Mandate compliance with the ePayments Code for 'payments AFSL' holders and consult on updating the ePayments Code and bringing it into regulation (the paper does not provide a timeframe for advising the Government on this proposal, but if it will form part of the new payments AFSL framework then Treasury is likely to advise Government about it at the same time as the licence). This was also recommended in the Joint Committee Report.
  • Imposing common access requirements for payment systems – in line with the Senate Report's recommendation, this is expected to result in common access requirements for at least the New Payments Platform.

Treasury will also consult in early 2022 about giving the RBA power to authorise industry standard-setting bodies (including AusPayNet) to set technical standards that payments AFSL holders will be required to comply with, and influence those standards to ensure they are consistent with the licencing regime and broader strategic objectives of the payments system.

In the paper the Government also commits to establishing a regular payments forum to facilitate coordination and alignment in approach and policy outcomes between the various payments regulators in the Treasury portfolio, plus AUSTRAC, as recommended by the Payments System Review. This payments forum will be established in early 2022.

The Government does not agree with the Payments System Review's recommendation to establish payments industry convenor, noting that Treasury will seek to provide this function via engagement with industry experts moving forward.

Digital assets

The paper indicates that, generally speaking, the Government agrees in principle with the recommendations in the Senate Report, which are directed at establishing a regulatory regime for digital assets like cryptocurrencies. As above, in relation to payment system regulation, the proposals are for further consultation rather than concrete regulatory law reform.

Treasury will commence consultation on the following proposals (which the Government agrees to in principle) in early 2022, with advice to be provided to Government by mid-2022:

  • What functions of digital currency exchanges are appropriate to be licensed by ASIC and what licensing obligations should be imposed – this may result in a new regime for digital currency exchanges that is similar to the Australian market licence regime.
  • A custody or depository regime for digital assets.

Treasury will commence consulting on the following proposals (which the Government agrees to in principle) in early 2022, with advice to be provided to Government by the end of 2022:

  • A token-mapping exercise to identify relevant characteristics of digital assets.
  • Consultation with industry on an appropriate regulatory structure for innovative new corporate structures such as decentralised autonomous organisations (DAOs).

The paper also states that Treasury will, together with the RBA, conduct a review of the viability of a retail CBDC. The review will commence in the second half of 2022 and advice will be provided to the Government by the end of 2022. Interestingly, on the same day that this paper was issued, the RBA announced that its recent trials in relation to the viability of a wholesale CBDC had returned positive results.

The paper states that the Government does not agree with the Senate Report recommendation to provide an income tax discount for companies that undertake digital asset mining in Australia which is powered by renewable energy sources.

Matters which were merely noted, with a commitment to further review or consult include:

  • Clarifying AML/CTF regulations and enacting the FATF 'travel rule' into domestic AML/CTF legislation – AUSTRAC will further engage with industry and global counterparts on AML/CTF issues.
  • Amending the capital gains tax provisions in relation to digital currencies so that only transactions which result in a 'genuine' capital gain or loss give rise to a CGT event – the Board of Taxation will review the taxation of digital transactions and assets more generally, and the Australian Taxation Office will be asked to provide more expansive interim guidance.
  • De-banking issues – the Council of Financial Regulators will be asked to work with relevant agencies to consider the possible causes of, and policy responses to, de-banking, which is a common complaint among businesses focusing on digital assets. Treasury will issue terms of reference for this work and request advice by mid-2022.

Mobile payments and digital wallets

Many of the recommendations included in the Joint Committee Report are aligned with the recommendations made under the Payments System Review. As such, the Government is generally supportive of the proposals, and notes they are generally addressed by the responses to the Payments System Review recommendations or are otherwise consistent with those recommendations. The only key exceptions to this are where the Government notes that the recommendation is a matter for an independent body, such as the ACCC, AFIA or the Joint Committee itself.