Reforming Australia’s anti-money laundering and counter-terrorism financing regime

We agree that the term ‘digital currency’ and its definition require updating to better account for the range of assets that can be issued on blockchains. Paper 4 proposes adopting the terminology of ‘digital asset’ to align with other Australian Government developments.

We support a whole-of-government approach to reforms. While the emerging policy frameworks for digital asset platforms and stablecoins target different regulatoory outcomes from the AML/CTF regime, it is nonetheless important to rationalise the AML/CTF regulatory perimeter against those designed for consumer protection, financial stability and other concerns. However, this does not necessarily mean that the same term must be used across different pieces of legislation, unless their definitions are also aligned. If definitions differ, there is a risk of inadvertently creating more complexity.

From our standpoint, there appear to be challenges in harmonising the definition of digital asset across the AML/CTF and Treasury reviews. Treasury has adopted a broad functional definition of the term ‘digital asset’. However, for AML/CTF purposes, an outcomes-based definition centered on the use of assets for payments or investment purposes may be more efficient, as well as offering better alignment with international standards.

We suggest the following:
- Should the AG proceed with the term ‘digital assets’ for better alignment with Treasury’s work, we would suggest clear joint guidance highlighting where the two definitions differ, and the resulting regulatory implications.
- Alternatively, the AG may consider adopting a different term from Treasury - for instance, the term “virtual asset”, which is widely understood internationally.

While there is broad international consensus that NFTs should be regulated for AML/CTF purposes where they are used for payment or investment, there is not yet consensus how this line should be drawn in practice. Jurisdictions such as Japan have sought to provide guidance by drawing boundaries based on the price of an NFT or the number of outstanding units - an approach that has the appeal of clarity and simplicity, but may be rigid and difficult to future-proof.

We would recommend that the department: (i) take time to consider international practice as it develops, drawing reference from jurisdictions such as the European Union; and (ii) in due course, provide guidance to intermediaries on the scenarios in which NFTs may be subject to AML/CTF regulation through illustrative case studies.

IFTI reporting obligations would entail material costs to digital asset service providers. We understand that the proposals would align the information required for IFTI reporting with that to be collected under the Travel Rule. This alleviates the need for a DCE or DASP to collect new information expressly for IFTI reporting. While this will help manage implementation costs, we envisage that the reporting process will require costly systems and process changes.

The consultation paper states that IFTI reporting comprises a large portion of AUSTRAC’s financial intelligence, and provides a baseline measurement of ‘normal’ cross border transactions. While we strongly support proactive intelligence gathering, AUSTRAC to carefully assess how cost-effective IFTI reporting is in the digital asset context, taking into consideration sector-specific characteristics such as the following:

(i) In the digital asset space, IFTI reporting is unlikely to be comprehensive because cross-border transfers can be made peer-to-peer without an intermediary. It would also be difficult to verify the geographical location of a counterparty.
(ii) In addition, the effectiveness of IFTI reporting may be limited by challenges in determining whether a transaction is ‘cross-border’. For a start, many digital asset service providers serve users in multiple jurisdictions, and/or may be licensed or seeking licensing in multiple places.
(iii) There may also be other ways to gather information on a baseline measurement of ‘normal’ cross-border transactions rather than IFTI reporting. This could include, for instance, analysing on-chain flows.

If IFTI reporting is to be extended to the digital asset sector, consideration should be given to the implementation timeline. First, it will be important to provide DCEs or DASPs finalised requirements well in advance of the requirements going live. Second, given that the quality and comprehensiveness of IFTI reporting also depends on effective Travel Rule implementation, we suggest that these requirements be phased in sequentially. DCEs or DASPs should have sufficient time to ensure that the Travel Rule is bedded down before IFTI reporting obligations take effect.

Please refer to attached PDF