CP 381: Updates to INFO 225 Digital assets: Financial products and services

CP 381: Updates to INFO 225 Digital assets: Financial products and services

CONSULTATION PAPER 381

Updates to INFO 225: Digital assets: Financial products and services

December 2024

About this paper

This consultation paper is about ASIC’s guidance on digital assets and related products. It sets out our proposals to update Information Sheet 225 Crypto-assets (INFO 225) to provide further guidance about our interpretation of how the Corporations Act 2001 applies to crypto- and digital assets. It also sets out our proposals for licensing entities that provide financial services in relation to crypto- and digital assets that are financial products. Note: Draft updated Information Sheet 225 Digital assets: Financial products and services is available on our Consultations webpage under CP 381.

CONSULTATION PAPER 381: Updates to INFO 225: Digital assets: Financial products and services © Australian Securities and Investments Commission December 2024 Page 2

About ASIC regulatory documents

In administering legislation ASIC issues the following types of regulatory documents.

Consultation papers: seek feedback from stakeholders on matters ASIC

is considering, such as proposed relief or proposed regulatory guidance. Regulatory guides: give guidance to regulated entities by:  explaining when and how ASIC will exercise specific powers under legislation (primarily the Corporations Act)  explaining how ASIC interprets the law  describing the principles underlying ASIC’s approach  giving practical guidance (e.g. describing the steps of a process such as applying for a licence or giving practical examples of how regulated entities may decide to meet their obligations). Information sheets: provide concise guidance on a specific process or compliance issue or an overview of detailed guidance. Reports: describe ASIC compliance or relief activity or the results of a research project.

Document history

This paper was issued on 4 December 2024 and is based on the legislation as at the date of issue. As at the date of this paper, the Government and Treasury are in the process of developing policy proposals to regulate digital asset facilities (DAFs) and digital asset platforms (DAPs). This paper is not intended to, and does not, provide guidance about these proposals.

Disclaimer

The proposals, explanations and examples in this paper do not constitute legal advice. They are also at a preliminary stage only. Our conclusions and views may change as a result of the comments we receive or as other circumstances change.

CONSULTATION PAPER 381: Updates to INFO 225: Digital assets: Financial products and services © Australian Securities and Investments Commission December 2024 Page 3

Contents

The consultation process ....................................................................... 4 A The proposed updates to INFO 225 ............................................... 6

Background to INFO 225 ................................................................... 6

The need to update INFO 225 ........................................................... 7 Our overall approach to the update ................................................... 8 The worked examples in INFO 225 ................................................. 10 ‘Stablecoins’ and wrapped tokens ................................................... 11

B Licensing of digital asset businesses and their ongoing

obligations ...................................................................................... 14 ASIC’s approach to licensing digital asset businesses ................... 14

Consideration of AFS licence applications and ongoing

obligations ........................................................................................ 17 Further work on financial market and CS facility licensing .............. 22 C Regulatory and financial impact .................................................. 23 Key terms ............................................................................................... 24 List of proposals and questions .......................................................... 26

CONSULTATION PAPER 381: Updates to INFO 225: Digital assets: Financial products and services © Australian Securities and Investments Commission December 2024 Page 4

The consultation process

You are invited to comment on the proposals in this paper, which are only an indication of the approach we may take and are not our final policy. As well as responding to the specific proposals and questions, we also ask you to describe any alternative approaches you think would achieve our objectives. We are keen to fully understand and assess the financial and other impacts of our proposals and any alternative approaches. Therefore, we ask you to comment on:  the likely compliance costs;  the likely effect on competition; and  other impacts, costs and benefits. Where possible, we are seeking both quantitative and qualitative information. We are also keen to hear from you on any other issues you consider important. Your comments will help us develop our policy on licensing firms providing financial services relating to digital assets that are financial products. In particular, any information about compliance costs, impacts on competition and other impacts, costs and benefits will be taken into account if we prepare a Regulation Impact Statement: see Section C, ‘Regulatory and financial impact’.

Making a submission

You may choose to remain anonymous or use an alias when making a submission. However, if you do remain anonymous, we will not be able to contact you to discuss your submission should we need to. Please note that we will not treat your submission as confidential unless you specifically request that we treat the whole or part of it (such as any personal or financial information) as confidential.

Please refer to our privacy policy f

or more information on how we handle personal information, your rights to seek access to and correct personal information, and your right to complain about breaches of privacy by ASIC.

Comments should be sent by 28

February 2025 to:

Digital Assets Team

Australian Securities and Investments Commission

GPO Box 9827

Melbourne VIC 3001

email: digital.assets@asic.gov.au

CONSULTATION PAPER 381: Updates to INFO 225: Digital assets: Financial products and services © Australian Securities and Investments Commission December 2024 Page 5 What will happen next?

Stage 1 4 December 2024 ASIC consultation paper released

Stage 2 28 February 2025 Comments due on the consultation paper Stage 3 Q2 2025 Updated INFO 225 released, along with other accompanying documents following consultation

CONSULTATION PAPER 381: Updates to INFO 225: Digital assets: Financial products and services © Australian Securities and Investments Commission December 2024 Page 6

A The proposed updates to INFO 225

Key points

Information Sheet 225 Crypto-assets (INFO 225), as it is currently named, provides guidance to persons offering products and services in relation to crypto- and digital assets. It sets out our views regarding when a crypto- or digital asset, or related product, may be a financial product. It also discusses when someone may be providing a financial service that requires a licence from ASIC. We consider that now is an appropriate time to update INFO 225. Digital asset markets have evolved significantly in recent years, with many new products and services being offered. We propose to update INFO 225, subject to feedback from this consultation. Draft updated INFO 225 includes a range of worked examples. See the draft in the attachment to this consultation paper.

Background to INFO 225

1 Digital asset markets have evolved significantly over the last 10 to 15 years, since the bitcoin white paper was first published. The industry has grown from hundreds of digital asset tokens to tens of thousands now. In Australia, there are currently over 360 digital currency exchanges (DCEs) registered with the Australian Transaction Reports and Analysis Centre (AUSTRAC).

2 Chapter 7 of the Corporations Act 2001 (Corporations Act) is drafted in a

broad and technologically neutral way. The Corporations Act provides that financial products are facilities through which a person makes a financial investment, manages financial risk or makes non-cash payments. There are also specific inclusions and exclusions from this general definition.

3 Our first published guidance on crypto-assets, and how the definitions of

financial products in the Corporations Act may apply to crypto-assets and related products and services, was released in 2017 as Information Sheet 225 Initial coin offerings (as it was then known). This came after Information Sheet 219 Evaluating distributed ledger technology (INFO 219), also in

2017. An update in 2018 introduced the term ‘crypto-asset’ into INFO 225.

4 INFO 225 w as updated in 2019, adding further information and broader

consideration of when crypto-assets and related products may be financial products, and can interact with the existing financial services laws.

5 It was further updated in 2021 to add good practice guidance for investment

products providing exposure to crypto-assets. This followed Consultation

CONSULTATION PAPER 381: Updates to INFO 225: Digital assets: Financial products and services © Australian Securities and Investments Commission December 2024 Page 7 Paper 343 Crypto-assets as underlying assets for ETPs and other investment products (CP 343) and Report 705 R esponse to submissions on CP 343 Crypto-assets as underlying assets for ETPs and other investment products (REP 705). T he title was changed at that time to Information Sheet 225 Crypto-assets to more accurately reflect the scope of the guidance already included.

The need to update INFO 225

6 The digital asset market has continued to develop significantly in recent

years, with new digital asset products and services being offered. In line with the continued expansion and emerging offerings in digital asset markets, our regulatory approach also continues to evolve. We consider that now is an appropriate time to update INFO 225. This is facilitated by the existing regulatory regime being principles-based and providing sufficient flexibility to regulate digital assets that are financial products.

7 Since the last substantive update relating to the core guidance about crypto-

assets in 2019, there have been a number of domestic and international developments, including: (a) new digital asset products and services being offered; (b) increasing calls from industry for clearer guidance about how ASIC views the existing regulatory perimeter; (c) the publication of Policy reco mmendations for crypto and digital asset markets— final report ( PDF 695 KB) and the Final rep ort with policy recommendations for decentralized finance (DeFi) (PDF 574 K B) by the International Organization of Securities Commissions (IOSCO). They set out policy recommendations for IOSCO member jurisdictions to address concerns in crypto- and digital asset markets in support of greater international consistency; (d) the firming of our views on parts of the existing regulatory perimeter through our ongoing work in: (i) reviewing licence and relief applications and reports of misconduct; (ii) liaison with industry (bilateral, multilateral and through ASIC’s Innovation Hub); (iii) considering the outcomes of domestic legal cases; and (iv) monitoring developments overseas, where approaches have firmed up.

CONSULTATION PAPER 381: Updates to INFO 225: Digital assets: Financial products and services © Australian Securities and Investments Commission December 2024 Page 8

Links with proposed law reforms

8 The Government is proposing to introduce a regulatory framework for

entities providing access to, and holding, digital assets, or other assets that support the issuance of digital assets. 9 The proposal paper states: ‘… the proposed framework does not displace the existing financial services laws. This means it will still be necessary to distinguish between entitlements and arrangements that are financial products and those that are not.’ Therefore, clarifying what constitutes a financial product under current financial services laws will remain essential even with these reforms. In this context, our proposed updates to INFO 225 complement the Government’s proposed reforms. Note: See Regulating digital asset platforms (P DF 927 KB), October 2023, p. 17.

10 In many comparable overseas jurisdictions, there has been a similar dual

process of regulating some crypto- and digital assets under current laws and supplementing this with some law reform to address, to the extent possible, any gaps. For example, in Europe, the Markets in Crypto-Assets Regulation (MiCA) covers crypto-assets that are not financial instruments. Crypto-assets that are financial instruments are covered by the existing laws. The United Kingdom, Hong Kong and Singapore also distinguish between crypto- and digital assets that come within the existing regulatory perimeter and those that are regulated (or proposed to be regulated) following law reforms. Note: On the EU approach, see the ESMA draft guidelines on the qualification of crypto-assets as financial instruments (PDF 631 KB), consultation paper, January 2024.

11 In addition, the Government is currently progressing with law reforms in

relation to licensing payment service providers under the Corporations Act: see Payments system modernisation (regulation of payment service providers). This includes a proposed re gulatory regime for ‘payment stablecoins’. INFO 225 is intended to provide guidance about the current regime and, as such, we recognise that it will need to be updated to reflect changes to the proposed licensing of payment service providers, and ‘payment stablecoins’ in particular, if those reforms are implemented.

Our overall approach to the update

Proposal

A1 We propose to update INFO 225, subject to feedback from this consultation. See draft updated INFO 225 in the attachment to this consultation paper.

CONSULTATION PAPER 381: Updates to INFO 225: Digital assets: Financial products and services © Australian Securities and Investments Commission December 2024 Page 9

Your feedback

A1Q1 Are there any topics or guidance that have not been included in draft updated INFO 225 that you think should be? Please provide details. A1Q2 Are there any topics or guidance that were included that you think should not have been included? Please provide details. A1Q3 Do you agree that the good practice guidance in INFO 225 directed to responsible entities is applicable to providers of custodial and depository services that provide custody of digital assets that are financial products? Are there any good practices that you would like added (e.g. on staking services)? Please provide details.

Content of the proposed updates

12 The proposed changes to draft updated INFO 225 include: (a) adding guidance on a facility for making a financial investment (s763B of the Corporations Act); (b) decreasing the focus on the role of initial coin offerings, as this is only one method for selling digital assets to consumers; (c) adding further discussion of the typical financial services that we expect an entity would apply for when applying for or applying to vary an Australian financial services (AFS) licence, and noting the application process; (d) including 13 worked examples to outline how ASIC interprets the existing financial product definitions applied to hypothetical scenarios; (e) extending the good practice guidance directed to responsible entities in INFO 225 to also apply to providers of custodial and depository services; (f) adding a section to address applications for relief and granting no-action letters; (g) adding consideration of the design and distribution obligations; and (h) edits to consolidate concepts, improve flow and provide further details and clarifications, where appropriate.

13 The current version of INFO 225 is titled ‘Crypto-assets’. We propose as

part of this update to change the title of INFO 225 to ‘Digital assets’, and use this term throughout. This reflects that ‘digital assets’ is a broader concept that includes other arrangements such as tokenised versions of traditional financial products like securities and interests in managed investment schemes.

CONSULTATION PAPER 381: Updates to INFO 225: Digital assets: Financial products and services © Australian Securities and Investments Commission December 2024 Page 10

14 We intend for INFO 225 to continue to be a ‘living document’ and be

updated in line with the evolution of digital assets.

The worked examples in INFO 225

Proposal

A2 We propose to include the worked examples as set out in draft updated INFO 225.

Your feedback

A2Q1 Do you have comments on any of the proposed worked examples? Please give details, including whether you consider the product discussed may/may not be a financial product. A2Q2 Are there any additional examples you would like to see included? Please give details of the suggested example(s), and why you consider the digital asset discussed may/may not be a financial product. A2Q3 For any of these examples, are there any unintended consequences? If so, what are these and what do you propose in response?

Rationale

15 The worked examples help to demonstrate how the current financial product

definition and concepts apply to some hypothetical digital asset scenarios under the existing regulatory regime. The examples include: (a) Example 1—exchange token; (b) Example 2—native token staking service; (c) Example 3—in -game non-fungible tokens (NFT); (d) Example 4—yield -bearing stablecoin; (e) Example 5—gold asset referenced token; (f) Example 6—membership NFT; (g) Example 7—token representing a claim for pre-paid services; (h) Example 8—fundraising for a new blockchain; (i) Example 9—meme coin; (j) Example 10—tokenised concert ticket; (k) Example 11—tokenised security ; (l) Example 12—contract for difference over a digital asset; and (m) Example 13—digital asset wallet.

CONSULTATION PAPER 381: Updates to INFO 225: Digital assets: Financial products and services © Australian Securities and Investments Commission December 2024 Page 11

16 These hypothetical worked examples are designed to help you think about

the concept of a financial product more broadly, and how it might apply to digital assets and related products. However, these examples are not exhaustive. They are ASIC’s views on those specific sets of hypothetical scenarios. While hypothetical, the examples are informed by real products and arrangements that we have observed: (a) in the media and public commentary; (b) in the digital asset marketplace; (c) in licence applications; and (d) in discussions with businesses, international stakeholders and regulators, including businesses considering using the Enhanced regulatory sandbox, and contacting ASIC’s Innovation Hub. 17 We have adopted the following general principles in the worked examples: (a) some digital asset products may meet the definition of more than one financial product (e.g. a particular digital asset product may be both a debenture and a non-cash payment facility); (b) even where a digital asset, when sold by itself, may not be a financial product, when it is bundled together with one or more other products or services, the overall arrangement may amount to a financial product; and (c) when analysing whether a financial product exists, you should consider not just the digital asset token, but all of the rights, benefits, expectations and product features inherent to, attaching to, and being offered together with the token. 18 The inclusion of these worked examples aims to strike a balance between: (a) reflecting the calls from industry to include more detailed guidance in INFO 225—some have called for a list of which specific digital assets and related products ASIC considers are financial products; and (b) keeping the guidance principles-based which is general enough to cater for the broad range of products and services in the market (and the likelihood of significant further innovation in the sector in the short to medium term), and noting that the rights and benefits of a digital asset can change over time. ‘Stablecoins’ and wrapped tokens

Proposal

A3 We are considering whether to develop additional examples for INFO 225 on wrapped tokens and ‘stablecoins’ that may be financial products. We are seeking feedback on the practical implications for businesses.

CONSULTATION PAPER 381: Updates to INFO 225: Digital assets: Financial products and services © Australian Securities and Investments Commission December 2024 Page 12

Your feedback

A3Q1 Do you think it would be helpful to include an example of a wrapped token and/or a ‘stablecoin’ in INFO 225? If so, do you have any suggestions on the features of the potential examples in paragraphs 20–21? A3Q2 What are the practical implications for businesses (e.g. for issuers or intermediaries) if wrapped tokens or ‘stablecoins’ with these features were classified as financial products? Please give details.

A3Q3 Would any transitional provisions or regulatory relief be

needed to facilitate transition from regulation of a wrapped token or a ‘stablecoin’ as a financial product under the current law to the Government’s proposed approaches to ‘stablecoins’ and wrapped tokens? Please give details.

Rationale

19 We are considering the application of the current law to wrapped tokens and

tokens that are marketed as ‘stablecoins’.

20 We consider that a wrapped token with the following features may be a

financial product (specifically a derivative): (a) a company offers a product that enables a digital asset (normally only available on its ‘native’ blockchain) to be represented on a different blockchain; (b) the version that is on the different blockchain has added functionality and lower fees; (c) the price of the wrapped token changes in line with the price of the native token, but the prices are not identical; and (d) any subsequent holder of the wrapped token can redeem it for the native token.

21 We consider that a ‘stablecoin’ with the following features may be a

financial product (specifically a non-cash payment facility): (a) the digital asset token is marketed as a non-interest-bearing ‘stablecoin’; (b) the token expected to maintain a stable price and value in Australian dollars (AUD), and the tokens are issued at par value (i.e. one token equals one AUD); (c) the company will redeem, or buy back, the tokens at par value in exchange for fiat money, on demand from any holder (subject to any relevant know-your-customer (KYC) requirements); (d) the money received by the company is recorded as an asset, and the requirement to repay is recorded as a liability, on the company’s balance sheet; and

CONSULTATION PAPER 381: Updates to INFO 225: Digital assets: Financial products and services © Australian Securities and Investments Commission December 2024 Page 13 (e) the company will either hold the money raised from token sales in a bank account or use it to purchase low-risk investments (e.g. Australian Government Securities).

22 We are considering whether to develop a wrapped token and a ‘stablecoin’

example based on the above features for INFO 225 (in addition to the existing yield-bearing ‘stablecoin’ in Example 4).

23 It appears to us that wrapped tokens and ‘stablecoins’ with these features

may be financial products. We are aware that stakeholders may have a range of views on these digital assets and their legal treatment. Further, the conclusions drawn may have practical implications for digital asset businesses. Before finalising our view, we would benefit from feedback on these digital assets and their regulatory classification, and the practical implications for businesses.

24 We are also aware that the potential application of the current law as

discussed above may be materially different from how the Government’s proposed payment service licensing and DAF/DAP reforms may potentially apply to ‘stablecoins’ and wrapped tokens Note: See Regulating digital asset platforms (P DF 927 KB), October 2023 and Payments system modernisation (regulation of payment service providers), December 2023.

25 We are interested in feedback on any practical implications and transitional

issues that may arise from these particular digital assets. This feedback can include any potential suggestions for relief from the existing financial services regime that may be appropriate, including to facilitate a smooth transition to the expected future state for these digital assets under the proposed law reforms.

CONSULTATION PAPER 381: Updates to INFO 225: Digital assets: Financial products and services © Australian Securities and Investments Commission December 2024 Page 14

B Licensing of digital asset businesses and their

ongoing obligations

Key points

The updates to INFO 225 do not impose any new regulatory obligations. However, publication of our updated guidance may prompt some people to consider their regulatory status under current Australian laws and decide that they need to apply for a licence or vary an existing licence. We are consulting on a proposed transitional approach that could include a conditional, class no-action position. This would be available to firms providing services in relation to digital assets that are actively and in good faith applying for one or more licences from ASIC. This section also sets out our proposed approach to licensing digital asset businesses under the AFS licensing regime. It also indicates ASIC will undertake further work relating to market and clearing and settlement facility licences. In general, we will regulate digital asset products that are financial products in a similar way to ‘traditional’ financial products of the same kind.

ASIC’s approach to licensing digital asset businesses

26 The updates to INFO 225 do not impose any new regulatory obligations or

requirements—they simply clarify our interpretation of existing financial services laws, including when a digital asset, or related product, is a financial product. It is your responsibility to determine whether your offerings, in relation to digital assets that are financial products, require you to hold one or more licences with the appropriate authorisations.

27 We consider that many digital assets (whether alone or in combination with

other products or services) are financial products under the Corporations Act.

Our transitional approach

Proposal

B1 We are considering a class no-action position for digital asset businesses that are in the process of applying for or applying to vary an AFS licence, Australian market licence or clearing and settlement (CS) facility licence. We propose that it would have the following scope and conditions: (a) it would only apply to financial services in relation to digital assets that are financial products;

CONSULTATION PAPER 381: Updates to INFO 225: Digital assets: Financial products and services © Australian Securities and Investments Commission December 2024 Page 15 (b) it would only apply to persons that had commenced operations in Australia before the date of this consultation paper; (c) for AFS licence applications, it would apply from the time a person lodges a licence application or variation application (that has not been rejected as incomplete or deficient in any material respect) to cover their digital asset products and services, provided they lodge the application no later than six months from the date our updated INFO 225 is published; (d) for an Australian market licence or a CS facility licence, it would apply from the time a person informs ASIC in writing of its intention to lodge a licence application or variation application to cover their digital asset products, provided they inform ASIC no later than six months from the date our updated INFO 225 is published, and provided the licence application or variation application is lodged within 12 months of the date the person informed ASIC in writing of its intention; (e) it would last until the licence application has been either withdrawn or decided upon (i.e. a licence has been granted or refused); (f) the person would have to be a member of the Australian Financial Complaints Authority (AFCA); (g) if the person is not an Australian company or resident, it would have to register as a foreign company (including appointing a local agent under s601CF of the Corporations Act); (h) the no-action position would not be available in relation to crypto lending/earn products and derivatives referencing digital assets (other than wrapped tokens— see proposal A3); and (i) ASIC may notify a person in writing that the no-action position does not apply to them (from the date of the notice).

Your feedback

B1Q1 Do you agree that ASIC should progress with a class no- action position as proposed here? If not, please give reasons. B1Q2 Are the proposed conditions appropriate? Are there any additions or changes to the proposed conditions that will be more effective for investor protection? B1Q3 Do you agree that the class no-action position should be dependent on a person lodging an AFS licence application or written intention to apply for a market and/or CS facility licence? If not, please explain and suggest an alternative. B1Q4 Should there be a deadline for applying for an AFS licence or commencing pre-lodgement discussions in relation to a market and/or a CS facility licence? Please provide reasons. B1Q5 For product issuers, should the no-action position extend to other obligations—for example, to prepare a Product Disclosure Statement (PDS)? Why or why not?

CONSULTATION PAPER 381: Updates to INFO 225: Digital assets: Financial products and services © Australian Securities and Investments Commission December 2024 Page 16

Rationale

28 Updates to our guidance about the current financial services laws do not

generally have a transition period. However, we recognise that persons involved with digital assets and related services will need time to comply with the law (e.g. apply for a licence, prepare a PDS).

29 As such, we are considering providing a no-action position in relation to

firms that are actively and in good faith applying for a licence, or licence variation. It would apply to conduct occurring from the date of their application until their application is finalised (i.e. decided upon or withdrawn). For market and CS facilities licences, it would apply to conduct occurring from the time a person informs ASIC in writing of its intention to lodge a licence application or variation application. The no-action position would only apply to licensing breaches, not other misconduct (e.g. false or misleading statements, or fraud).

30 We are considering excluding from the no-action position conduct in relation

to: (a) crypto lending/earn-type products (where an intermediary acts for the customers in lending, or investing, crypto-assets belonging to the customer to generate a return for them); and (b) derivatives referencing digital assets (except for wrapped tokens).

31 Our initial view is that there is a greater level of certainty in the market about

these products. For crypto lending/earn-type products, our enforcement actions have already provided increased clarity to the industry. For derivatives (e.g. contracts for difference and futures), we have not heard significant concerns about a lack of clarity in the application of the definition of a derivative.

32 Our no-action position would be subject to several conditions as set out in

proposal B1. These conditions are designed to ensure that firms relying on the no-action position are subject to Australia’s key consumer dispute resolution body (AFCA) and Australian courts.

33 The proposed conditions are also designed to preserve ASIC’s ability to take

compliance and enforcement action if serious issues arise and in ASIC’s view it is in the public interest to take action. Note: Our overall approach to no-action letters is set out in Regulatory Guide 108 No- action letters (RG 108). An ASIC n o-action position by its nature does not prevent third parties (e.g. consumers) from taking legal action (see RG 108.19).

CONSULTATION PAPER 381: Updates to INFO 225: Digital assets: Financial products and services © Australian Securities and Investments Commission December 2024 Page 17 Consideration of AFS licence applications and ongoing obligations

Proposal

B2 The existing AFS licence processes, regulatory guides and conditions will apply to persons providing financial services in relation to digital assets, including those that are based on the type of financial product involved.

Your feedback

B2Q1 Do you agree that the same regulatory obligations should apply to digital asset and traditional financial products of the same category (e.g. securities, derivatives)? Please explain your response and provide specific examples. B2Q2 Are there any aspects of ASIC’s guidance that may need to be tailored for digital assets that are financial products? B2Q3 Do you agree that the approach proposed for custodial and depository services is appropriate for holding custody of digital assets? Do you agree that extending the omnibus client accounts is appropriate for digital assets that are financial products? Please explain, providing examples, if relevant.

B2Q4 In relation to organisational competence, what are your

views on what ASIC could consider in applying Option 5 in Regulatory Guide 105 AFS licensing: Organisational competence (RG 105) for entities providing f inancial services in relation to digital assets that are financial products? B3 We propose to tailor licence authorisations in relation to certain digital assets that are derivatives, and for digital assets that are ‘miscellaneous financial investment products’.

Your feedback

B3Q1 In relation to the authorisations sought during an

AFS licence application, do you agree that the existing

authorisations are generally appropriate to digital asset service providers? B3Q2 Do you agree with the proposal to tailor the derivatives and miscellaneous financial investment product authorisations? Are there any others that you would recommend?

Rationale

34 The principles underpinning the Corporations Act are generally

technologically neutral. The existing Corporations Act obligations generally apply to digital asset financial services businesses as they do to traditional financial services businesses. As with traditional financial services businesses, some of the obligations are general and others depend on which specific financial products or services the business is providing.

CONSULTATION PAPER 381: Updates to INFO 225: Digital assets: Financial products and services © Australian Securities and Investments Commission December 2024 Page 18

35 For example, where you carry on business to deal in a particular digital asset

that is a security under the Corporations Act, you will need an AFS licence with the authorisation to deal in securities (unless an exemption applies) and comply with existing AFS licence obligations that apply to dealing in securities.

36 The general obligations of an AFS licensee (e.g. to provide financial services

efficiently, honestly and fairly; have adequate arrangements to manage conflicts of interest; and have adequate risk management arrangements) apply equally to AFS licensees providing digital asset related services. However, what is ‘adequate’ may be different for such firms due to the unique business models, issues and risks involved.

37 The risks associated with new technologies such as blockchain and

distributed ledgers may warrant a different approach from adhering to the general principles. Therefore, the nature of a digital asset service provider licensee’s operations, systems, controls, etc., in meeting the general requirements applicable to financial services businesses may be different from traditional financial products, and we expect these to be fit for purpose.

38 We think that an appropriate default position is that the existing AFS licence

requirements, conditions and processes should apply to those digital assets that are financial products, and to businesses providing financial services in relation to those products. Note: ASIC has modification and exemption powers, in certain circumstances: see Regulatory Guide 51 Applications for relief (RG 51) on A SIC modification and exemption powers.

39 The International Organization of Securities Commissions (IOSCO)’s

recommendations in relation to crypto- and digital assets apply a principle of ‘same activity, same risk, same regulation/regulatory outcome’. Many international regulators have applied this principle. The Government’s proposed reforms adopt a ‘similar activity, similar risk, same regulatory outcome’ approach. Note: See IOSCO, Policy recommendations for crypto and digital asset markets (PDF 696 KB), final report, November 2023 and Regulating digital asset platforms (PDF 927 KB), October 2023, p. 17.

Authorisations and information to be provided in proofs

40 Currently, we consider that the existing AFS licence authorisation (product

and service) options in the licensing form are generally appropriate for digital asset businesses. An entity will select the mix of financial products and financial services they propose to offer in their licence application (e.g. if they wish to deal in digital assets that are securities they will need to select ‘deal’ and ‘securities’ in the licence application form).

CONSULTATION PAPER 381: Updates to INFO 225: Digital assets: Financial products and services © Australian Securities and Investments Commission December 2024 Page 19

41 We generally do not believe that the licensing forms need digital asset

specific authorisations (e.g. to separate ‘digital assets that are securities’ from securities more generally). This recognises the principles-based approach in the Corporations Act. This would mean: (a) entities that already have an AFS licence will be authorised to undertake the various financial services relating to digital assets that are financial products already contained on their AFS licence; and (b) entities that seek an AFS licence for digital asset related financial services will be authorised to provide financial services in relation to both traditional and digital asset versions of those financial products.

42 However, at this stage we think two new financial product authorisations

could be considered for inclusion on an AFS licence: (a) Derivatives: We consider that it would be beneficial, no matter the outcome of the approach to proposal A3 (related to the potential example on wrapped tokens), to tailor licences that authorise financial services in relation to some digital assets that are derivatives that do not involve leverage or margin requirements. This tailoring would allow us to target the application process in recognition that some digital assets that are derivatives will not include risks associated with leverage and margining. If an entity indicates they will deal in derivatives that are digital assets that do not involve leverage or margin, the entity would not be authorised to provide services in relation to other derivatives (i.e. contracts for difference, options, perpetual futures) or digital assets that are derivatives involving leverage and/or margin (these would require the broader ‘derivatives’ authorisation). (b) Facility for making a financial investment: Draft INFO 225 highlights the potential for some digital assets to be a facility for making a financial investment (under s763A and 763B of the Corporations Act), and not a specific type of financial product (e.g. under s764A of the Corporations Act). In ASIC’s current licensing approach, where a product does not meet an existing specific product type, an entity selects ‘miscellaneous financial facility’ (see Regulatory Guide 2 AFS Licensing Kit: Part 2— Preparing your AFS licence or variation application (RG 2) at RG 2. 156).

43 At this time, we also do not think we will need to publish any new or

additional proofs for firms to provide with their AFS licence application: see Regulatory Guide 3 AFS Licensing Kit: Part 3— Preparing your additional proofs (RG 3). A dditional proofs are issued when we require further particulars from you to assist us with assessing your application. Whether additional proofs are issued depends on the nature of your application and which AFS licence authorisations you have applied for.

CONSULTATION PAPER 381: Updates to INFO 225: Digital assets: Financial products and services © Australian Securities and Investments Commission December 2024 Page 20

44 In many cases, ASIC issues further requisitions to applicants for additional

documents or information. We intend to use this process to supplement the standard proofs. We will consider publishing some sample questions or topics that these requisitions may cover so that applicants can consider if they can be addressed within the existing proofs. We may also incorporate these questions as standard requisitions in the initial letter that we currently issue to acknowledge that we have accepted the application for lodgement. Some potential topics could include: (a) which digital asset types or related products you intend to offer, and which categories of financial products they likely are; (b) further details on your cyber security arrangements; (c) further details on asset-holding arrangements between you and your customer, and arrangements between you and external service providers (e.g. technology solutions, sub-custodians); (d) additional evidence in meeting organisational competence; and (e) on-boarding processes, including approach to KYC requirements, particularly when offering financial products to wholesale investors only (e.g. whitelisting addresses).

Standard AFS licence requirements

45 Our normal approaches to the key AFS licensee and ongoing requirements

will apply to digital asset firms, including but not limited to: (a) the standard financial requirements contained in Regulatory Guide 166 AFS licensing: Financial requirements (RG 166); (b) the general obligation to have adequate compensation arrangements, as described in Regulatory Guide 126 Compensation and insurance arrangements for AFS licensees (RG 126); (c) ensuring responsible managers have the organisational competence described in RG 105; (d) the requirements for providing personal or general financial product advice to retail clients described in Regulatory Guide 146 Licensing: Training of financial product advisers (RG 146).

Custodial and depository services

46 For entities providing custodial and depository services, the existing

requirements as detailed in ASIC C orporations (Custody Standards for Providers of Custodial and Depository Services) Instrument 2024/17 and summarised in Regulatory Guide 133 Funds management and custodial services: Holding assets (RG 133) will apply. These apply whether the custodial service relating to digital assets that are financial products is incidental or not under RG 166.

CONSULTATION PAPER 381: Updates to INFO 225: Digital assets: Financial products and services © Australian Securities and Investments Commission December 2024 Page 21

47 This could mean some existing licensees (e.g. trustees of wholesale

unregistered managed investment schemes) may need to reconsider their arrangements for custody of digital assets, where our updated guidance has prompted a reconsideration of their regulatory status.

48 Digital assets raise some unique custody issues. We have already provided

some good practice guidance on custody of digital assets in INFO 225 and guidance remains in the updated version (also see paragraph 12(e) above).

49 We are aware that some digital asset businesses currently operate omnibus

client accounts. We may consider extending the consideration of omnibus accounts (s912AAC(5) of the Corporations Act as inserted by ASIC Instrument 2024/17) to any digital asset t hat is a financial product. Omnibus accounts supported by record-keeping requirements are allowed for securities, derivatives and deposit-taking facilities.

Conflicts of interest

50 AFS licensees must have in place adequate arrangements for managing

conflicts of interest to meet s912A(1)(aa) of the Corporations Act. Regulatory Guide 181 Licensing: Managing conflicts of interest (RG 181) details our guidance about the need to control, avoid and disclose conflicts of interest. At this time, we do not think this principled guidance needs to change for businesses providing financial services relating to digital assets that are financial products.

51 However, consistent with IOSCO’s recommendations, we recognise that

conflicts of interest may be more acute with digital asset firms because of the structure of these businesses. We view our approach in RG 181 as an appropriate starting point for the conflicts of interest requirements on AFS licensees. We note that additional conflicts of interest obligations apply when an entity is a participant in, or an operator of, a licenced financial market. We currently think elements of these additional conflicts of interest obligations are relevant to firms dealing in digital assets that are financial products. Note: See IOSCO, Policy recommendations for crypto and digital asset markets (PDF 696 KB), final report, November 2023.

Internal and external dispute resolution

52 The existing requirements around internal and external dispute resolution

will continue to apply without change to AFS licensees providing financial services to retail clients relating to digital assets that are financial products: see Regulatory Guide 271 Internal dispute resolution (RG 271) and Regulatory Guide 267 Oversight of the Australian Financial Complaints Authority (RG 267). We do not see any obstacles for entities providing financial services relating to digital assets that are financial products from adhering to these requirements.

CONSULTATION PAPER 381: Updates to INFO 225: Digital assets: Financial products and services © Australian Securities and Investments Commission December 2024 Page 22

Further work on financial market and CS facility licensing

53 We recognise that some service providers of digital assets that are financial

products may be operating or seek to operate a financial market, and potentially a CS facility that may require licences from ASIC.

54 Our current view is that the legislative regime for financial markets and

CS facilities is sufficiently flexible to cover a range of business models, including markets relating to digital assets that are financial products. This flexibility means obligations can be adjusted based on the offering.

55 Consistent with the current guidance, we have high expectations of entities

operating a market and CS facilities with retail client participation. We will consider applications on a case-by-case basis, and will consider whether further guidance is needed dependent on how the digital assets sector evolves. The Reserve Bank of Australia is a co-regulator of CS facilities in Australia.

CONSULTATION PAPER 381: Updates to INFO 225: Digital assets: Financial products and services © Australian Securities and Investments Commission December 2024 Page 23

C Regulatory and financial impact

56 In developing the proposals in this paper, we have carefully considered their

regulatory and financial impact. On the information currently available to us we think they will strike an appropriate balance which: (a) provides protections for consumers dealing with entities providing services relating to digital assets that are financial products; (b) promotes integrity in the markets for digital assets that are financial products; (c) provides a pragmatic approach to licensing service providers; and (d) ensures digital asset service providers are regulated appropriately under the existing financial services regime.

57 Before settling on a final policy, we will comply with the Australian

Government’s Policy Impact Analysis (PIA) requirements by: (a) considering all feasible options, including examining the likely impacts of the range of alternative options that could meet our policy objectives; (b) notifying the Office of Impact Analysis (OIA) if regulatory options are under consideration; and (c) preparing an Impact Analysis (IA) or an IA equivalent (Independent Review) if our proposed option has more than a minor or machinery impact on business or on the not-for-profit sector.

58 All IAs are submitted to the OIA for approval before we make any final

decision, or if an IA equivalent—to the OIA for agreement. Without an approved IA or agreed IA equivalent, ASIC is unable to give relief or make any other form of regulation, including issuing a regulatory guide that contains regulation.

59 To ensure that we are in a position to properly complete any required IA or

IA equivalent, please provide us with as much information as you can about our proposals or any alternative approaches, including: (a) the likely compliance costs; (b) the likely effect on competition; and (c) other impacts, costs and benefits. See ‘The consultation process’, p. 4.

CONSULTATION PAPER 381: Updates to INFO 225: Digital assets: Financial products and services © Australian Securities and Investments Commission December 2024 Page 24

Key terms

Term Meaning in this document

AFS licence An Australian financial services licence under s913B of the Corporations Act that authorises a person who carries on a financial services business to provide financial services Note: This is a definition in s9. AFS licensee A person who holds an AFS licence under s913B of the

Corporations Act

ASIC Australian Securities and Investments Commission

ASIC Instrument

2024/17 (for example)

An ASIC instrument (in this example numbered 2024/17)

AUSTRAC Australian Transaction Reports and Analysis Centre

Corporations Act Corporations Act 2001, including regulations made for the purposes of that Act CP 343 (for example) An ASIC consultation paper (in this example numbered 343) crypto-asset A digital representation of value or contractual rights that can be transferred, stored or traded electronically, and whose ownership is either determined or otherwise substantially affected by a cryptographic proof CS facility A clearing and settlement facility as defined in s768A of the Corporations Act

DAF Digital asset facility

DAP Digital asset platform

DCE Digital currency exchange

DDO (design and

distribution obligations) The obligations in Pt 7.8A of the Corporations Act financial market Has the meaning given in s767A of the Corporations Act, and includes a facility through which offers to acquire or dispose of financial products are regularly made or accepted

CONSULTATION PAPER 381: Updates to INFO 225: Digital assets: Financial products and services © Australian Securities and Investments Commission December 2024 Page 25

Term Meaning in this document

financial product Generally, a facility through which, or through the acquisition of which, a person does one or more of the following:  makes a financial investment (see s763B);  manages financial risk (see s763C);  makes non-cash payments (see s763D) Note: See Div 3 of Pt 7.1 of the Corporations Act for the exact definition. In addition to the general categories above, this specifies certain things as being included or excluded from the definition.

INFO 225 (for

example)

An ASIC information sheet (in this example numbered

225)

IOSCO International Organization of Securities Commissions

KYC Know-your-customer

PDS A Product Disclosure Statement—a document that must be given to a retail client for the offer or issue of a financial product in accordance with Div 2 of Pt 7.9 of the

Corporations Act

Note: See s9 for the exact definition. Pt 7.8 A part of the Corporations Act (in this example numbered 7.8), unless otherwise specified

REP 705 (for

example)

An ASIC report (in this example numbered 705)

retail client A client as defined in s761G and 761GA of the Corporations Act and Div 2 of Pt 7.1 of the Corporations

Regulations 2001

RG 166 (for example) An ASIC regulatory guide (in this example numbered 166) s912B (for example) A section of the Corporations Act (in this example numbered 912B), unless otherwise specified wholesale client A client who is not a retail client as defined in s761G of the Corporations Act and Div 2 of Pt 7.1 of the

Corporations Regulations 2001

CONSULTATION PAPER 381: Updates to INFO 225: Digital assets: Financial products and services © Australian Securities and Investments Commission December 2024 Page 26

List of proposals and questions

Proposal Your feedback

A1 We propose to update INFO 225, subject to

feedback from this consultation. See draft updated INFO 225 in the attachment to this consultation paper. A1Q1 Are there any topics or guidance that have not been included in draft updated INFO 225 that you think should be? Please provide details.

A1Q2 Are there any topics or guidance that were

included that you think should not have been included? Please provide details.

A1Q3 Do you agree that the good practice guidance

in INFO 225 directed to responsible entities is applicable to providers of custodial and depository services that provide custody of digital assets that are financial products? Are there any good practices that you would like added (e.g. on staking services)? Please provide details.

A2 We propose to include the worked examples as

set out in draft updated INFO 225.

A2Q1 Do you have comments on any of the

proposed worked examples? Please give details, including whether you consider the product discussed may/may not be a financial product.

A2Q2 Are there any additional examples you would

like to see included? Please give details of the suggested example(s), and why you consider the digital asset discussed may/may not be a financial product.

A2Q3 For any of these examples, are there any

unintended consequences? If so, what are these and what do you propose in response?

A3 We are considering whether to develop

additional examples for INFO 225 on wrapped tokens and ‘stablecoins’ that may be financial products. We are seeking feedback on the practical implications for businesses. A3Q1 Do you think it would be helpful to include an example of a wrapped token and/or a ‘stablecoin’ in INFO 225? If so, do you have any suggestions on the features of the potential examples in paragraphs 20-21?

A3Q2 What are the practical implications for

businesses (e.g. for issuers or intermediaries) in providing services in relation to wrapped tokens and/or ‘stablecoins’ that are financial products? Please give details.

A3Q3 Would any transitional provisions or regulatory

relief be needed to facilitate transition from regulation of a wrapped token or a ‘stablecoin’ as a financial product under the current law to the Government’s proposed approaches to ‘stablecoins’ and wrapped tokens? Please give details.

CONSULTATION PAPER 381: Updates to INFO 225: Digital assets: Financial products and services © Australian Securities and Investments Commission December 2024 Page 27

Proposal Your feedback

B1 We are considering a class no-action position for

digital asset businesses that are in the process of applying for or applying to vary an AFS licence, Australian market licence or clearing and settlement (CS) facility licence. We propose that it would have the following scope and conditions: (a) it would only apply to financial services in relation to digital assets that are financial products; (b) it would only apply to persons that had commenced operations in Australia before the date of this consultation paper; (c) for AFS licence applications, it would apply from the time a person lodges a licence application or variation application (that has not been rejected as incomplete or deficient in any material respect) to cover their digital asset products and services, provided they lodge the application no later than six months from the date our updated INFO 225 is published; (d) for an Australian market licence or a CS facility licence, it would apply from the time a person informs ASIC in writing of its intention to lodge a licence application or variation application to cover their digital asset products, provided they inform ASIC no later than six months from the date our updated INFO 225 is published, and provided the licence application or variation application is lodged within

12 months of the date the person informed

ASIC in writing of its intention; (e) it would last until the licence application has been either withdrawn or decided upon (i.e. a licence has been granted or refused); (f) the person would have to be a member of the Australian Financial Complaints Authority (AFCA); (g) if the person is not an Australian company or resident, it would have to register as a foreign company (including appointing a local agent under s601CF of the Corporations Act); (h) the no-action position would not be available in relation to crypto lending/earn products and derivatives referencing digital assets (other than wrapped tokens—see proposal A3); and (i) ASIC may notify a person in writing that the no-action position does not apply to them (from the date of the notice).

B1Q1 Do you agree that ASIC should progress with

a class no-action position as proposed here? If not, please give reasons. B1Q2 Are the proposed conditions appropriate? Are there any additions or changes to the proposed conditions that will be more effective for investor protection?

B1Q3 Do you agree that the class no-action position

should be dependent on a person lodging an

AFS licence application or written intention to

apply for a market and/or CS facility licence?

If not, please explain and suggest an

alternative. B1Q4 Should there be a deadline for applying for an

AFS licence or commencing pre-lodgement

discussions in relation to a market and/or a CS facility licence? Please provide reasons.

B1Q5 For product issuers, should the no-action

position extend to other obligations—for example, to prepare a Product Disclosure Statement (PDS)? Why or why not?

CONSULTATION PAPER 381: Updates to INFO 225: Digital assets: Financial products and services © Australian Securities and Investments Commission December 2024 Page 28

Proposal Your feedback

B2 The existing AFS licence processes, regulatory

guides and conditions will apply to persons providing financial services in relation to digital assets, including those that are based on the type of financial product involved.

B2Q1 Do you agree that the same regulatory

obligations should apply to digital asset and traditional financial products of the same category (e.g. securities, derivatives)? Please explain your response and provide specific examples.

B2Q2 Are there any aspects of ASIC’s guidance that

may need to be tailored for digital assets that are financial products?

B2Q3 Do you agree that the approach proposed for

custodial and depository services is appropriate for holding custody of digital assets? Do you agree that extending the omnibus client accounts is appropriate for digital assets that are financial products?

Please explain, providing examples, if

relevant.

B2Q4 In relation to organisational competence, what

are your views on what ASIC could consider in applying Option 5 in Regulatory Guide 105 AFS licensing: Organisational competence (RG 105) for entities providing financial services in relation to digital assets that are financial products?

B3 We propose to tailor licence authorisations in

relation to certain digital assets that are derivatives, and for digital assets that are ‘miscellaneous financial investment products’.

B3Q1 In relation to the authorisations sought during

an AFS licence application, do you agree that the existing authorisations are generally appropriate to digital asset service providers? B3Q2 Do you agree with the proposal to tailor the derivatives and miscellaneous financial investment products authorisations? Are there any others that you would recommend?

CP 381: Updates to INFO 225 Digital assets: Financial products and services

Attachment to CP 381: Draft updated INFO 225

Digital assets: Financial products and services Note: This draft information sheet is an attachment to Consultation Paper 381 Updates to INFO 225: Digital assets: Financial products and services (CP 381).

This

is Information Sheet 225 (INFO 225). It is directed to businesses and people offering products and services in relation to digital assets generally. It will help you to understand your obligations under the Corporations Act 2001 (Corporations Act) and the Australian Securities and Investments Commission Act 2001 (ASIC Act) if: • your busi ness is involved with digital assets— for example, crypto-assets, crypto tokens, utility tokens, asset-referenced tokens, stablecoins, or tokenised assets (including where the underlying assets may be financial products or other assets), whether there are elements that are decentralised or not (e.g. exchanges, intermediaries, digital asset wallet providers, operators of decentralised finance platforms, asset managers and custodians) • you are, or are considering, issuing or selling digital assets, dealing in (including establishing a platform to trade or facilitate payments) or advising on digital assets or whether to raise funds or otherwise, or offering other products or services related to digital assets. INFO 225 is not, and is not intended to be, an exhaustive discussion of: • all the relevant Australian laws, regulations, ASIC guidance or ASIC relief about financial products and services • how digital assets and any related products, however structured, fit into the existing financial services regime, or • your legal and regulatory obligations. It is your responsibility to ensure you understand and comply with all relevant and applicable Australian laws and regulatory requirements. Note: The scope of what is and is not a financial product differs slightly between the Corporations Act and the ASIC Act.

© Australian Securities and Investments Commission December 2024 Page 2 Links to other supporting documents are included throughout INFO 225. Guidance in INFO 225 should be read together with that broader material. The hypothetical worked examples in INFO 225 are not exhaustive. They are designed to help you think about these issues, but each product needs to be assessed on its own facts and circumstances. In the examples, we indicate whether the digital asset or related product is likely or unlikely to be a financial product and, if so, which financial product. Any given digital asset or related product could potentially meet more than one financial product definition in the Corporations Act (e.g. a digital asset could potentially meet the definitions of both a debenture and a non-cash payment facility). The digital assets sector is rapidly evolving. INFO 225 is based on current law. As at the date of this update (XXXX 2025), the Government is considering amendments to the legislative settings for some digital asset service providers (PDF 926 KB), as well as for payment service providers. Anti-money laundering reforms relating to the digital assets sector also recently passed both Houses of Parliament. This information sheet may be updated in due course to reflect these developments. This information sheet now uses the term ‘digital assets’ (it previously referred to ‘crypto- assets’). However, it is intended to apply to a wide range of digital and crypto-assets, whether described as digital assets, crypto-assets, virtual assets, tokenised assets, tokens or coins. INFO 225 also refers to the Australian Consumer Law. However, it does not cover Australian legislation administered by other regulators who oversee digital assets and digital asset service providers, such as the Australian Transaction Reports and Analysis Centre (AUSTRAC), the Australian Taxation Office (ATO) and the Reserve Bank of Australia (RBA). Consumers should read information and warnings about crypto-assets on our MoneySmart website. You are only protected by the financial services laws ASIC administers to the extent that the digital asset and related services are subject to those laws. If you invest in something that is unlicensed and unregulated in Australia, it is harder to get help if things go wrong. This information sheet addresses the following questions: • Part A: When could a digital asset be or involve a financial product? • Part B: When are you providing a financial service in relation to digital assets or related products? • Part C: What else should you consider when offering a financial product and financial service? • Part D: When could a digital asset exchange become financial market infrastructure? • Part E: What should you consider when offering retail investors exposure to digital assets via a regulated investment vehicle? • Part F: Where can I get more information? For a discussion of distributed ledger technology see Information Sheet 219

Evaluating

distributed ledger technology (INFO 219).

© Australian Securities and Investments Commission December 2024 Page 3 The use of offshore or decentralised structures does not mean that key obligations under Australian laws do not apply or can be ignored (see Regulatory Guide 121 Doing financial services business in Australia (RG 121)). Australian laws apply where the digital asset is promoted or sold in Australia, including from offshore. We encourage entities to use their innovative technology to build their products and services in a way that complies with the intention of the laws in place to safeguard consumers and the integrity of financial markets in Australia. Note: INFO 225 does not comment on when someone in a ‘decentralised finance’ (or DeFi) arrangement may require a licence, or what might be considered ‘true DeFi’. Whether a person needs a licence in these circumstances is dependent on the individual facts of each DeFi arrangement and the person’s role and offering in the arrangement.

Part A: When could a digital asset be or involve a financial product?

Entities and their advisers need to consider all the rights and benefits attached to the digital asset, as well as the rights and benefits attached to the arrangements provided in connection with the digital asset. This includes the way in which the products will be offered and used in practice. This analysis is critical to determining whether the digital asset, and/or arrangement related to the digital asset, is a financial product. Our experience suggests that many people seek to raise money from the public or privately to fund a particular project (e.g. an enterprise) by issuing digital assets. If the digital asset, or a related product, is a financial product, the issuer will need to comply with the relevant provisions of the Corporations Act, such as Australian financial services (AFS) licensing requirements and/or other regulatory requirements. These regulatory requirements are in place to maintain the integrity of Australia’s financial markets and to protect consumers and investors. If you are operating without a licence or without being an authorised representative of a licensee, you should be prepared to substantiate and justify why the digital asset(s) or related products or arrangements are not a regulated financial product (and why you are not undertaking a financial service or operating a market or clearing and settlement facility that requires a licence – see Part B and Part D). You should be able to justify this in relation to all aspects of your offering. For example, a project may in some circumstances feature multiple types of digital assets and involve one or more arrangements which may need to be assessed individually and then in combination. This section considers types of digital assets made available to consumers in Australia and whether the Corporations Act might apply to them as various types of financial products. It addresses the following questions: • When could a digital asset, or product involving digital assets, be: o a facility for making a financial investment? o interests in a managed investment scheme (‘scheme’)? o an offer of a security (e.g. a share or a debenture)? o a derivative? o a non-cash payment facility?

© Australian Securities and Investments Commission December 2024 Page 4 Even where a digital asset, when sold by itself, may not be a financial product, when bundled together with one or more other products or services, there may be a financial product offered. Where it is reasonable to assume that the relevant parties treat two or more arrangements as a single arrangement, the Corporations Act treats it as a single arrangement (section 761B of the Corporations Act). This would also mean that a person giving advice on or dealing in that aggregated arrangement would be providing a financial service (see Part B). For example, a digital asset that is capable of being used to generate a return as part of a staking arrangement (whether this is part of securing a blockchain or participating in certain governance arrangements) might not be a financial product of itself. However, if some of that digital asset was bundled with a service of also running the staking arrangement (e.g. a node) on behalf of the customer, the bundled arrangement may be a financial product (a facility for making an investment) and the seller of the bundled arrangement may be dealing in a financial product.

Rights and benefits attached to digital assets

The rights and benefits attached to digital assets, or products involving digital assets, are a key consideration in assessing the legal status of those digital assets and products as a financial product. These rights and benefits can be described in a ‘white paper’, a document issued by the business making the offer or sale of the digital asset. Rights and benefits may also be determined from other circumstances (e.g. by how the digital asset is marketed to potential clients, advertising materials, communications with clients and other documentation which sets out legal rights and benefits attached to a digital asset and its related arrangements). What is a ‘right’ should be interpreted broadly. Rights that may arise in the future or on a contingency, and rights that are not legally enforceable are included. The rights and benefits may change over time with changes in the features or uses of the digital asset, how common use of the digital asset evolves (see discussion below related to a facility for making a financial investment), and any changes to the marketing of the digital asset. For convenience, in some places this information sheet refers to whether particular digital asset ‘tokens’ are likely to be a financial product. This is a short-hand expression – what we are in fact referring to is the bundle of rights, benefits, expectations and product features that are associated with a particular token as offered to the public. Some of the rights and benefits are enforceable, others are more in the nature of a statement about the intentions of the offeror, and others are more a consequence of the code used in the smart contracts associated with the digital asset. When we refer to the legal status of a ‘token’ it should generally be understood as a reference to the legal status of the overall arrangement that includes the token as offered to the public. This means that a ‘token’ is not separated from its associated bundle of rights, benefits, expectations and features for the purpose of being traded on a digital asset or crypto platform. Generally, we understand that when you trade a ‘token’ you are transferring the rights associated with that token, in the same way as trading shares transfers the rights associated with those shares.

© Australian Securities and Investments Commission December 2024 Page 5 When could a digital asset be, or involve, a facility for making a financial investment? What is a facility for making a financial investment? A facility through which, or through the acquisition of which, a person makes a financial investment is a financial product under the Corporations Act (section 763A and 763B). The key elements are that: • the client gives money or money’s worth to another person and any (or all) of the following apply: o the other person uses the contribution to generate a financial return, or other benefit, for the client, o the client intends that the other person will use the contribution to generate a financial return, or other benefit, for the client (even if no return or benefit is in fact generated), and/or o the other person intends that the contribution will be used to generate a financial return, or other benefit, for the client (even if no return or benefit is in fact generated), and • the client has no day-to-day control over the use of the contribution to generate the return or benefit. To note on this definition: • ‘money’s worth’ is a broad concept that includes a wide range of potential types of contributions • the ability to withdraw from a facility or vote on matters is not sufficient for a person to be considered as having day-to-day control of the use of the funds • it looks at how the facility is ‘commonly’ used by people that acquire the product, even if a specific person acquired the product for some other purpose • a facility does not cease to be a financial product merely because it was acquired by a person other than the person to whom the product was originally issued, and that person who acquired the product is not making a financial investment.

Application to digital assets

Often the price or value of a digital asset is directly or indirectly linked to the success of a business or project (an enterprise). This is particularly the case where digital assets are expressly issued as a way to raise funds for a particular enterprise, with the funds to be used in that enterprise. As noted above, rights and benefits attached to or associated with the digital asset should be interpreted broadly, and can extend beyond the standard terms and conditions and initial disclosures (such as in a ‘white paper’).

© Australian Securities and Investments Commission December 2024 Page 6 Some digital asset projects involve a buy-back or other benefits so that the holders may receive a return if the enterprise is a success. Others involve a right to receive discounts or other promotions linked to the enterprise. Other initiatives give an expectation of capital gains from the increase in the value of the digital asset if the enterprise or project funded by the digital asset is successful.

Example 1

Company A runs a digital asset exchange. They issue a digital asset where the relevant ‘white paper’ outlines it is to raise funds to assist in the development of the exchange. The token was marketed as a way of contributing to, supporting and potentially obtaining a financial return, or other benefit, by ‘investing in’ the project, and at least some consumers bought the tokens on that basis. The token’s price on the exchange (and on any other exchange) was expected to and does go up and down based on the perceived success of, and general sentiment towards, Company A’s exchange. The white paper stated that Company A intends to (but is not obliged to) buy back the tokens at a certain price if Company A’s exchange achieves certain success metrics (e.g. based on revenue, trading volume and profit). Company A’s digital asset is likely to be a facility for making a financial investment. It involves members of the public contributing money or money’s worth which is used in a business project where both the business and the investors intend the money to be used to generate a financial return (e.g. the token increases in value and the token is intended to be bought back by the exchange if the project is successful). The investors do not have day-to-day control over how the funds are used (even if there is a voting mechanism to consider certain matters).

© Australian Securities and Investments Commission December 2024 Page 7

Example 2

Company B runs a digital asset exchange. It offers its customers the ability to ‘natively stake’ certain native digital assets to support verification of blockchain transactions, where the blockchain uses a ‘proof of stake’ consensus mechanism. Company B markets its staking services as a way of earning a return on otherwise idle digital assets. Company B takes a small share of the staking revenue as a fee for providing the services. For all digital assets made available to stake, Company B allows customers to stake with no minimum balance, withdraw their staked assets instantaneously, and participate in staking at any time. However, the underlying processes for staking on the relevant blockchains have restrictions, such as: • a minimum staking balance • the digital assets must be locked for a minimum period of time, or there is an inbuilt delay in returning unstaked assets, and • limits on the number of individuals who can participate in staking at one time. Company B’s facilities for staking these digital assets are likely to be facilities for making a financial investment (and potentially managed investment schemes). This is because in each staking facility there is a contribution of money’s worth (being the digital asset) which is pooled or used in a common enterprise by Company B to generate a financial return or other benefit for the investor, and the investors do not have day-to-day control of the facilities. In each facility, the rights and benefits from Company B’s facility differ from and exceed what the client would get if they undertook to stake the digital assets without the services of Company B. For example, Company B’s facilities allow clients to stake digital asset balances below the minimum for that particular blockchain.

Example 3

An online gaming company, Company C, develops a game that uses a public blockchain to store and record ownership of in-game items that can be purchased (with digital assets or fiat currency) or received by playing the game. These are marketed as limited edition or unique items, that are both collectables and can be used in the game. These non-fungible tokens (NFTs) are used as ‘skins’ to change the appearance of in- game characters or items used by such characters for in-game play. The NFTs are first sold, or received over time through success in playing the game, to players by Company C. The NFTs are also tradeable on secondary markets and the prices of the NFTs can change based on buyer and seller interest. Company C does not make any comments or representation in their white paper or marketing materials that the contribution used to buy the NFTs will be used to generate a financial return, or other benefit, for the player (other than the utility of playing the game) or that the NFTs should be bought because of an expectation that the prices will increase. The NFTs are unlikely to be a facility for making a financial investment because the contributions are not, nor are they intended to be, used to generate a financial return, or other benefit for the customer. There is also no suggestion that the customer intended their contribution to be used for that purpose, even if some bought an NFT for speculative purposes.

© Australian Securities and Investments Commission December 2024 Page 8 When could a digital asset be, or involve, interests in a managed investment scheme? What is a managed investment scheme? A managed investment scheme is a form of collective investment vehicle. It is defined in the Corporations Act and has three elements, as summarised in Figure 1. Figure 1: Is the digital asset an interest in a managed investment scheme?

Do people contribute money or money’s

worth as consideration to acquire rights to benefits produced by the scheme (whether the rights are actual, prospective or contingent, and whether they are enforceable or not)?

Will any of the contributions be pooled or

used in a common enterprise to produce financial benefits, or benefits consisting in rights or interests in property (e.g. using funds raised from contributors to develop the platform), for the people who hold interests in the scheme?  The scheme is unlikely to be a managed investment scheme

Do the contributors have day-to-day

control over the operation of the scheme? —t he right to be consulted (e.g. vote on proposals), or to give directions (e.g. to enter, withdraw or change investment allocations) is not sufficient.  The scheme is likely to be a managed investment scheme

YES

NO

YES

NO

YES

Typ

ically, in Australia, traditional managed investment schemes (sometimes called managed funds) operate with a trust structure to hold the assets contributed by the investors (or purchased using those contributions). However, a trust structure is not required for the arrangement to be a managed investment scheme (some schemes are enterprise or contract-based schemes).

© Australian Securities and Investments Commission December 2024 Page 9

Application to digital assets

As noted above, ‘rights’ and ‘benefits’ should be interpreted broadly. If the digital asset represents an interest in a scheme with the three elements described above, the digital asset issuer is likely to be offering interests in a managed investment scheme. This is the case whether or not the digital asset is marketed as an investment. In some cases, digital asset issuers may frame the entitlements received by contributors as a receipt for a pre-purchased service (e.g. lower trading fees, computer storage services). Whether such an arrangement may be a managed investment scheme depends on the specific facts.

Example 4

Company D issues a digital asset which is marketed as a yield-bearing stablecoin. They state that the digital asset token is expected to maintain a stable price and value in Australian dollars (AUD). Company D uses the funds raised from the sale of the token to purchase a range of bank deposits and Commonwealth Government Securities, and holds these assets on trust. Holders of the token have a right to redeem their tokens for Australian dollars. Company D states that the stable value of the token will be achieved by linking the token to assets held in the trust. The token is marketed as a ‘yield-bearing stablecoin’ that earns ‘yield’ through holders receiving new tokens over time based on the returns generated from the trust assets. New tokens are issued to existing holders based on the returns generated from the underlying assets (less the fees and costs of running the fund), providing a financial return to holders. A large number of investors buy the token because of the proposition of a stable value and that it also offers a return. These tokens are a useful way to ‘hold funds’ while waiting to make other digital asset investments, and also as a way to settle digital asset transactions or participate in decentralised finance arrangements. Company D’s digital asset is likely to be an interest in a managed investment scheme. Investors receive a token for contributing money or money’s worth, that contribution is pooled together and the investors do not have day-to- day control over the operation of the scheme. The funds contributed generate several benefits, which can be financial benefits and benefits consisting of rights or interests in property. For example, a token that is stable in value and is able to be used for making payments has benefits over other tokens that have highly volatile prices.

© Australian Securities and Investments Commission December 2024 Page 10

Example 5

Company E issues a gold-linked digital asset token. They promote the token as having a price that is linked to the price of gold. In practice, the price of the tokens in the secondary market does seem to generally track the price of gold. Company E uses the money raised from token sales to purchase spot gold and other gold- related investments (e.g. financial products such as gold-related futures and options), and holds them in a trust. Each token represents an interest in the trust holding the gold or gold-related assets. Company E’s digital asset token is likely to be an interest in a managed investment scheme. Investors contribute money which is pooled to purchase gold and gold-related assets. While the gold-linked token may not generate cash flow, it has the potential for capital gains based on changes to the value of the underlying gold assets, which is a financial benefit. Investors also do not have day-to-day control over the use of the funds.

Example 6

Company F runs a business selling books to the general public. They offer a membership program to customers that, for a fee, gives the customer access to member-only events and discounts. Membership is recorded on a public blockchain, through ownership of an NFT. The tokens are tradeable. The digital asset token issued by Company F is unlikely to be a managed investment scheme. While Company F uses the money or money’s worth raised from selling the memberships for its business, the contributions are not used to generate financial benefits for the members.

Example 7

Company G operates a lawn mowing business. It has issued digital assets to pre-sell their services to grow their business. A holder of one token is entitled to have one square metre of grass mown on one occasion. The tokens are tradeable. Company G undertook an initial token sale to distribute the tokens. There is currently a fixed supply of tokens, and Company F has made representations that they will not issue any further tokens. In issuing the tokens to the public, Company F outlined that they intend the proceeds from the token sale to fund the development of the business. While the tokens are tradeable and the price can fluctuate, each token remains redeemable for the same amount of future service. The fluctuations in the token’s price could be attributable to the popularity of the service as the business grows and the number of similar competing businesses in the locality. The digital asset issued by Company G is unlikely to be a managed investment scheme. While Company G uses the money’s worth raised for its business, the contributions are not used to generate financial benefits for the members (i.e. the benefits for holders attributable to each token are largely fixed).

© Australian Securities and Investments Commission December 2024 Page 11

Example 8

Company H is seeking to establish a new blockchain. They issue an initial token (H1) to raise funds from supporters. H1 is intended to be time-limited, and supporters receive one H1 token per AUD of value contributed, whether they provide fiat currency or digital assets. In the white paper, Company H states that when the new blockchain is operational, H1 tokens will be cancelled and holders will be given new tokens (H2) equal to the number of H1 tokens they hold. Company H intends the new H2 tokens to have ongoing use in the new blockchain ecosystem (e.g. to pay transaction fees) and they will be tradeable. The H2 tokens are expected by the social media followers of the project to begin trading at more than $1 per token. After 12 months, the blockchain launched. The H1 tokens were cancelled and holders were given H2 tokens as promised. On initial launch, additional H2 tokens were available to the general public for purchase for $2 each from Company H’s treasury. The process for operating the blockchain also means new H2 tokens are issued over time as people contribute effort and work to process transactions and secure the network. The H2 tokens are popular and increase in value over time (due to Company H’s ongoing development of new functionality). The initial fundraising involving the H1 tokens is likely to be a managed investment scheme. Initial supporters contributed money or money’s worth which was pooled by Company H to be used in the common enterprise of developing the blockchain enterprise. Contributors did not have day-to-day control of the enterprise and expected to receive valuable benefits at the end (the H2 tokens). Whether or not the new H2 token is a managed investment scheme would depend on whether money or money’s worth contributed to acquire the H2 token (whether from the return of the H1 tokens from the initial fundraising, later purchases or otherwise) is pooled or used in a common enterprise to be used to generate a financial benefit to holders of the H2 token, where the holders of the H2 token do not have day-to-day control of the enterprise.

Australian laws apply

If an issuer of a digital asset or a product involving digital assets is operating a managed investment scheme offered to retail investors, it will likely need to hold an AFS licence authorising it to act as a responsible entity, comply with the AFS licence obligations and comply with some additional obligations applying to responsible entities. If a person issues a digital asset or a product involving digital assets and is operating a wholesale managed investment scheme they may need to obtain an AFS licence with the correct authorisations and must have an appropriate process to ensure that only wholesale clients invest in the managed investment scheme. For guidance on licensing arrangements for issuers of wholesale managed investment schemes, see Information Sheet 251

AFS

licensing requirement for trustees of unregistered managed investment schemes (INFO 251).

© Australian Securities and Investments Commission December 2024 Page 12

Part D includes more information about good practices for managed investment schemes

offering exposure to digital assets, such as custody, registration and disclosure.  More about managed investment schemes When could a digital asset be, or involve, an offer of a security? What is a security? The most common type of security is a share. An option to acquire a share by way of issue is considered to be a ‘security’ under the Corporations Act. A share is a collection of rights relating to a company. There are a range of types of shares that may be issued. Most shares issued by companies that offer shares to the public are ‘ordinary shares’ and carry rights regarding the ownership of the company, voting rights in the decisions of the body, some entitlement to share in future profits through dividends, and a claim on the residual assets of the company if it is wound up. Most shares issued in Australia come with the benefit to shareholders of limited liability as well.  More about shares A debenture is also a ‘security’ under the Corporations Act. Debentures are a way for businesses to raise money from investors. The business issuing the debenture promises to repay the investor the money deposited with or lent to the business, usually with interest, at a future date. Debentures may be secured or unsecured.  More about debentures

Application to digital assets and ICOs

When an initial coin offering (ICO) is undertaken to fund a company (or to fund an undertaking that looks like a company) then the rights attached to the issued digital asset may fall within the definition of a security – which includes a share or the option to acquire a share in the future, or a debenture – or an interest in a managed investment scheme. In 2017–2018, ICOs were an important process for primary market sales of digital assets. The process looks similar to an initial public offering (IPO) or crowd-funding sale. Other approaches to sales and distribution of digital assets have evolved. The bundle of rights and benefits referred to above may help determine if a digital asset sold during one of these approaches is a security (or an interest in a managed investment scheme). If the rights attached to the digital asset (which are generally found in the ‘white paper’ for the digital asset, but may be found in other materials) are similar to rights commonly attached to a share – such as an ownership interest in the body, voting rights in decisions of the body or some right to participate in profits of the body – then it is likely that the digital asset is a share. If the digital asset gives the purchaser a right to acquire shares in the company at a time in the future (e.g. if it lists on a licensed market) then this may be an option.

© Australian Securities and Investments Commission December 2024 Page 13

Example 9

A private individual (Ms I) issues a ‘meme coin’ token named after a well-known historical figure. The money collected is not used in Ms I’s business or for any other commercial enterprise. The coin does not provide holders with any rights. While the price of the coin goes up and down, it is not connected with the success or otherwise of Ms I’s (or anyone else’s) business. Ms I’s coin is not affiliated with any particular blockchain or digital asset exchange and is not promoted as a method of making payments or pay transaction fees. Ms I’s coin is unlikely to be a security or any other type of financial product, such as a facility for making a financial investment. While it does involve the potential for capital gain (a type of financial return), there does not appear to be a sufficient connection between the use of initial funds raised and any potential capital gain, nor does any potential capital gain appear to be linked to the efforts of the issuer.

Example 10

Company J issues a tokenised concert ticket. The holder of the token is entitled to general admission seating to a major upcoming concert event in Sydney. The token is transferable and whoever holds the token at the time of the concert is able to enter the venue. The price of the token does increase somewhat in the lead up to the event, which is sold out. The token is not able to be used to make payments generally and it does not carry any other entitlements. Company J’s concert token is unlikely to be a security or any other type of financial product, such as a facility for making a financial investment. While it does involve the potential for capital gain (a type of financial return), there does not appear to be a sufficient connection between the use of initial funds raised and any potential capital gain, nor does any potential capital gain appear to be linked to the efforts of the issuer.

Example 11

Company K provides the service of helping corporate entities issue corporate bonds (debentures) on a blockchain. This ‘tokenisation’ involves a range of processes that means the blockchain records the holdings of the bond. The bonds have the typical features of a traditional bon d, such as a promise to repay principal and to pay interest. The tokenisation does not result in fractionalisation of the bonds. The tokenised bonds issued are likely to be a debenture (and, therefore, a security). Whether or not Company K requires a licence from ASIC will depend on the range of services they offer (e.g. whether they deal, make a market or operate a market in the tokenised bonds – see Part B and Part D).

Australian laws apply

Where it appears that an issuer of a digital asset is offering a security, the issuer will generally need to prepare a prospectus if the offering is to retail investors.

© Australian Securities and Investments Commission December 2024 Page 14 By law, a prospectus must contain all information that consumers reasonably require to make an informed investment decision. Generally, a prospectus should include audited financial information. Where an offer document is, or should have been, a prospectus and that document does not contain all the information required by the Corporations Act, or includes misleading or deceptive statements, consumers may be able to withdraw their investment before the securities are issued or pursue the issuer and those involved in the sale of the security for the loss. For more details about the information a prospectus should contain see Regulatory Guide 228 Prospectuses: Effective disclosure for retail investors (RG 228). If the digital asset offering is, or involves, a debenture and is sold to retail investors, further obligations apply under Chapter 2L of the Corporations Act. There is also specific guidance for disclosures to retail investors (see Regulatory Guide 69 Debentures and notes: Improving disclosures for retail investors (RG 69)). When could a digital asset be, or involve, a derivative? What is a derivative? Section 761D of the Corporations Act provides a broad definition of a derivative. It is an arrangement which satisfies the following conditions: • under the arrangement, a party to the arrangement must, or may be required to, provide at some future time consideration of a particular kind or kinds to someone, and • that future time is not less than the number of days, prescribed by regulations for this purpose, after the day on which the arrangement is entered into, and • the amount of the consideration, or the value of the arrangement, is ultimately determined, derived from or varies by reference to (wholly or in part) the value or amount of something else. The definition in section 761D also includes a non-exhaustive list of examples of what the ‘something else’ may be. It could be, for example, a share, a share price index, a bond, a bond price index, a pair of currencies, a commodity, a basket of commodities, a digital asset or a digital asset index. ‘Consideration’ could be the delivery of other financial products. The statutory definition of a derivative in section 761D includes some exceptions, such as: • certain deferred sales of tangible property (section 761(3)(a)) • a ‘contract for the future provision of services’ (section 761(3)(b)), that also need to be assessed in understanding if the digital asset or related product is a derivative.

© Australian Securities and Investments Commission December 2024 Page 15

Application to digital assets

A digital asset or arrangement related to digital assets may be, or involve, a derivative if it is priced based on, or referenced to, factors such as the price of another financial product, underlying market index or asset price moving in a certain direction before a time or event which resulted in a future payment by one party to the arrangement being required as part of the rights or obligations attached to the digital asset. Some examples of digital assets or related products that might be derivatives include: • digital assets where the price references a ‘real-world’ asset (i.e. assets that are not ‘crypto native’; whether or not that asset is a financial product, such as gold or real estate) – this can include some digital assets such as some ‘algorithmic stablecoins’ • wrapped digital assets, which are digital assets where the price is derived from another digital asset – this can include wrapping between blockchains (i.e. between ‘Layer 1s’), and some processes to represent a digital asset on what are called ‘Layer 2s’ • contracts for difference (CFDs), options, forwards or futures that reference one or more digital assets, including perpetual futures. The price of the digital asset does not have to precisely match the price of the underlying to be a derivative.

Example 12

Company L offers contracts that allow a client to speculate in the change in value of an underlying digital asset (with or without leveraged returns). Clients do not actually acquire an interest in the underlying digital asset but they can make or lose money depending on whether the price of the underlying digital asset goes up or down. The contracts offered are likely to be derivatives.

Australian laws apply

Where an issuer of a digital asset, or related product involving digital assets, is making an offer of a derivative they need to have an AFS licence with appropriate authorisations to issue that product (unless an exemption applies). Where a person provides other financial services in relation to derivatives such as arranging or advising, then they need to have an AFS licence with appropriate authorisations to provide those services (see Part B). Over-the-counter (OTC) transactions of derivatives, such as CFDs in digital assets and digital assets that are derivatives, by AFS licensees and other ‘reporting entities’ may be subject to the transaction reporting requirements (see Derivative transaction reporting). Further, each party to a derivative which is not issued on a financial market is taken to be an issuer of it (section 761E(5) of the Corporations Act).

© Australian Securities and Investments Commission December 2024 Page 16 When could a digital asset be, or involve, a non-cash payment facility? What is a non-cash payment facility? A person makes a non-cash payment if they make a payment, or cause a payment to be made, otherwise than by the physical delivery of Australian or foreign currency in the form of notes and/or coins. A facility through which, or through the acquisition of which, a person makes (or can make) non-cash payments to more than one person is generally a financial product. The provision of financial services in relation to such facilities generally requires an AFS licence (see Regulatory Guide 185 Non-cash payment facilities (RG 185) for further guidance). Many non-cash payment facilities involve standing arrangements where the client can make multiple payments over the course of time using the standing facility (e.g. a debit card account). However, the meaning of ‘makes non-cash payments’ in the Corporations Act also allows for the possibility of payments being made by passing the ownership of a non-cash payment facility from one person (the payer) to another person (the payee). This is an example of a facility ‘through the [disposal and] acquisition of which’ a person makes a payment, being a type of bearer instrument.

Application to digital assets

The definition in the Corporations Act of when a person makes a non-cash payment is broad enough to cover performing monetary obligations by means other than fiat currencies. It can include payments using, for example, loyalty points or digital assets. Digital assets designed for use in payments may be a non-cash payment facility in themselves. For example, many tokens are expressly designed to be used for, and are promoted as a means to make, payments between users. They are designed to be used as a store of value and a means of payment, and for this reason are sometimes described as ‘electronic cash’. Some digital assets are used to make payments directly to the issuer or developer of those tokens. However, to the extent that these payments can only be made to ‘one person’, being the developer or decentralised autonomous organisation (DAO), that digital asset is unlikely to be a non-cash payment facility due to the single payee exemption in section 763D(2)(a)(i) of the Corporations Act. Whether or not a facility involving digital assets is a non-cash payment facility will depend on the terms and features of the arrangement. If the facility provides the holder with a right or ability to use a digital asset as a form of value to make a payment, it may be a non-cash payment facility. Digital asset wallets made available to consumers, whether custodial or non-custodial, may be non-cash payment facilities where they are designed to enable users to make direct payments to other users through the digital asset wallet. For example, some digital asset wallets have a ‘pay anyone’ feature that allows users to transfer digital assets to any other user, even those who do not use the same digital asset wallet service (e.g. by nominating a destination address on a public blockchain).

© Australian Securities and Investments Commission December 2024 Page 17

Example 13

Company M offers a non-custodial digital asset wallet service and issues their own proprietary stablecoin token on a public blockchain. The digital asset wallet service allows a client to instruct Company M to transfer their token to another address or digital asset wallet issued by Company M. The service can also be used to transfer the token to any other address or digital asset wallet that accepts these tokens. Company M markets this service as a convenient way for its clients to make payments to third parties. Company M’s digital asset wallet service itself is likely to be a non-cash payment facility. It is a facility through which clients can and do make payments to third parties, using Company M’s token or other tokens, and Company M’s marketing promotes the wallet as having that functionality.

Australian laws apply

If you are providing financial services in relation to a non-cash payment facility (e.g. providing advice or dealing), an AFS licence may be needed. For general information on non-cash payment facilities, including the exemptions that can apply, see RG 185, and see Part B on financial services. How do overseas categorisations of digital assets translate to the Australian context? A number of international regulators have issued guidance on the application of their securities, payments and financial services laws to digital assets, and have defined the function of a range of digital assets (e.g. security tokens, utility tokens and exchange tokens). These categorisations do not necessarily translate to equivalent products in Australia. It is important to always consider the particular rights and benefits of an individual digital asset in relation to current Australian law to determine whether it is regulated as a financial product or whether the services you provide are regulated as the provision of financial services in Australia. The definition of a financial product in Australia is often broader than in other jurisdictions. Similarly, the definition of financial services in Australia can vary compared to other jurisdictions. It is your responsibility to understand and comply with all relevant and applicable Australian laws in relation to the products and services you provide or propose to provide.

Part B: When are you providing a financial service in relation to

digital assets or related products? What is a financial service? The Corporations Act outlines a range of ‘financial services’ that can be provided in relation to a financial product. Entities are generally required to hold an AFS licence to carry on a financial services business in Australia (see AFS Licensing Kit (Regulatory Guides 1 to 3) for

© Australian Securities and Investments Commission December 2024 Page 18 guidance on what ASIC will require if you apply for an AFS licence). This will include demonstrating that your responsible managers are competent to provide those services (see Regulatory Guide 105 AFS licensing: Organisational competence (RG 105)), and your controllers, officers and responsible managers are fit and proper (see Information Sheet 240 AFS licence applications: Providing information for fit and proper people and certain authorisations (INFO 240)). Examples of typical financial services include: • dealing in a financial product— this includes a range of conduct including applying for or acquiring, varying, disposing and underwriting. It also includes issuing a financial product • providing financial product advice (general and personal advice) • making a market for a financial product, and • providing a custodial or depository service. There are other specific financial services, but these are the core services relevant to most financial products. You typically will only need to hold an AFS licence if you are carrying on a financial services business in Australia (see RG 121).

Financial services that may apply to digital assets

When does a digital asset service involve advice? Recommending or stating an opinion about a digital asset, or product involving digital assets, that is a financial product may be financial product advice, where the person stating the opinion intends to influence a person to make a decision in relation to the financial product. This may include making comparisons between two digital assets where at least one of them is a financial product, or making comparisons between a digital asset and a traditional financial product. For example, giving advice about the relative merits of investing in certain digital assets versus certain shares may be financial product advice. See

Information Sheet 269

Discussing financial products and services online (INFO 269). When does a digital asset service involve dealing? Dealing includes buying and selling (whether for yourself or on behalf of another person) and issuing (i.e. creating and making available) a financial product. A person or company issuing a digital asset, or product related to digital assets, that is a financial product will be providing the financial service of issuing. A business buying pre-existing digital assets from, or selling pre-existing digital assets to, clients (consumers or other businesses) will be providing the financial service of dealing. Arranging for another person to deal in financial products is also a form of dealing. For example, a business that assists people with buying or selling digital assets that are financial products may itself be dealing in financial products (e.g. acting as a broker). However, subject to some exceptions, dealing on your own behalf is not a financial service. Note: The use of the term ‘arranging’ in the context of the Corporations Act does not necessarily have the same meaning in other legislative contexts. See Regulatory Guide 36 Licensing: Financial product advice and dealing (RG 36).

© Australian Securities and Investments Commission December 2024 Page 19 When does a digital asset service involve market making? A person generally makes a market when they regularly state prices at which they regularly offer to buy or sell financial products on their own behalf, and others can respond to those offers. This business model is common both for traditional financial products and digital assets. Where some or all of the digital assets are financial products, the market-making business will be providing a financial service. When does a digital asset service involve custody? A person provides a custodial and depository service where they hold financial products or a beneficial interest in the financial product on trust for, or on behalf of, their clients. Where this service is provided in relation to digital assets where some or all of them are financial products, the custodial service will be a financial service. The manner in which the assets are held, subject to the terms of the arrangement, is important in understanding if there is a financial service being offered. Where a person controls the private keys related to an address on a public blockchain, they will likely be providing a custodial and depository service. Offering a ‘self-custody’ solution, or self-hosted wallet product, is unlikely to amount to providing a custodial and depository service.

See Regulatory Guide 133

Funds management and custodial services: Holding assets (RG 133) for more information on the obligations for custodians. The good practice guidance directed to responsible entities in Part E is also relevant for providers of custodial and depository services in relation to digital assets that are financial products. When and how do you apply for an AFS licence, and what licence authorisations should you seek? Entities are generally required to hold an AFS licence, or operate as an authorised representative of an AFS licensee, to carry on a financial services business in Australia. You need to have the appropriate authorisations before you undertake the services that require such a licence. The AFS Licensing Kit (Regulatory Guides 1 to 3) includes guidance on ASIC’s licensing assessment policy settings and what licence authorisations you may require. The range and mix of licences you will require will depend on: • what type of financial products you are providing financial services for, and • what financial services you are providing. Some entities may be providing a financial service in Australia but do not require a licence for that service due to exemptions from the Corporations Act. These can differ by product and service type. Please refer to the relevant regulatory guides for the specific financial product and service. The AFS Licensing Kit and other regulatory guides also provide guidance on how to apply for your licence. This includes what types of documentation and information you will need to provide to demonstrate organisational competence to offer the financial services.

© Australian Securities and Investments Commission December 2024 Page 20 When engaging with the AFS Licensing Kit, you will need to understand which financial product(s) you are applying to provide financial services for. This relates to both the assessment of the digital assets, and any associated arrangements you offer to customers. For example, if a digital asset or related product is a non-cash payment facility, you will select the ‘non-cash payment products’ product type, and the services that you are intending to provide for that product. We will also consider providing a tailored licence authorisation where the digital asset or related product meets certain criteria. It is important to note that having an AFS licence does not authorise you to provide any and all financial products and financial services. Rather, you are limited to offering the financial products and financial services that are detailed by the authorisations on your licence. Where you are providing a financial service in relation to digital assets that are financial products, we may impose some specific additional or altered licence conditions and obligations. The extent of differences with the traditional financial products and services will depend on the product and service applied for.

Part C: What else should you consider when offering a financial

product and financial service? Are you complying with all relevant Australian laws on an ongoing basis? Entities need to ensure that they comply with all relevant Australian laws. This includes ensuring that all the documents and information they provide to consumers, regardless of the media they use, comply with relevant laws including the Corporations Act, ASIC Act and the Australian Consumer Law, as well as anti-money laundering (AML) and know-your-client (KYC) obligations. Whether or not a financial product is involved, promoters must always ensure that the marketing and disclosures about digital assets do not involve misleading or deceptive conduct or statements. Entities should seek professional advice (including legal advice) on all the facts and circumstances of the issue or sale of digital assets. As the design or features of a digital asset can change over the course of the product development life cycle, entities are expected to seek professional advice and ensure ongoing compliance with the law. What is misleading or deceptive conduct in relation to a digital asset? Australian law prohibits misleading or deceptive conduct, in trade or commerce, in relation to financial services. This applies whether the digital asset is a financial product or not. Australian laws and regulations that prohibit misleading or deceptive conduct may apply even if a digital asset is issued, traded or sold offshore. It is a serious breach of Australian law to engage in misleading or deceptive conduct. Care should be taken to ensure that promotional communications about a digital asset do not mislead or deceive consumers and do not contain false information. It is important to ensure that ongoing disclosures are kept up to date – failure to do so will increase the risk that the information provided about the digital asset could mislead or deceive consumers.

© Australian Securities and Investments Commission December 2024 Page 21

Digital assets that are financial products

For digital assets that are financial products, the ASIC Act and the Corporations Act include prohibitions against misleading or deceptive conduct. Regulatory Guide 234 Advertising financial products and services (including credit): Good practice guidance (RG 234) contains guidance to help businesses comply with their legal obligations not to make false or misleading statements or engage in misleading or deceptive conduct.

Digital assets that are not financial products

For digital assets that are not financial products, the same prohibitions against misleading or deceptive conduct apply under Australian Consumer Law. The Australian Competition and

Consumer Commission (ACCC)’s

Advertising and selling guide provides guidance on how to

ensure advertising complies with the Australian Consumer Law. Are your clients ‘retail’ investors? The Corporations Act imposes additional requirements for entities that provide financial services to retail clients. Entities are expected to know who their investors are to justify a conclusion that exemptions under the Corporations Act for ‘wholesale’ or ‘sophisticated’ investors versus retail clients apply to their financial services. Some important additional requirements are: • additional disclosures through Product Disclosure Statements (PDSs) and financial services guides (FSGs) • the design and distribution obligations (see below) • internal and external dispute resolution arrangements, and • compensation requirements. There are also some additional requirements for specific types of financial products— for example, see above for responsible entities of registered managed investment schemes. What is the link with crowd-sourced funding? Digital assets are sometimes issued as a form of crowd funding for building blockchain, distributed ledger, and other products or services (including funds management). Crowd funding by selling digital assets in an ICO is not the same as ‘crowd-sourced funding’ (CSF) regulated under the Corporations Act. Care should be taken to ensure the public is not misled about the application of the CSF laws to an ICO or digital assets issued in that process. There are specific laws for the CSF regime which reduce the regulatory requirements for public fundraising from retail investors while maintaining appropriate investor protection measures.

© Australian Securities and Investments Commission December 2024 Page 22 The laws require providers of CSF services to hold an AFS licence authorising them to provide this service. This is not an exhaustive discussion of all the relevant Australian laws that apply in relation to providing CSF. It is the responsibility of the entities involved to ensure they comply with all relevant Australian laws.  More about the CSF regime What are the design and distribution obligations? The design and distribution obligations are intended to help retail consumers obtain appropriate financial products. They require issuers and distributors to have a consumer- centric approach to the design and distribution of financial products. In particular: • issuers must design financial products that are likely to be consistent with the likely objectives, financial situation and needs of the consumers for whom they are intended – this includes developing a target market determination • issuers and distributors must take ‘reasonable steps’ that are reasonably likely to result in financial products reaching retail consumers in the target market defined by the issuer, and • issuers must monitor consumer outcomes and review products to ensure that retail consumers are receiving products that are likely to be consistent with their likely objectives, financial situation and needs.  More about the design and distribution obligations What are ASIC’s discretionary powers? ASIC has discretionary powers to grant relief (i.e. by exemption or declaration) from certain legislative provisions. ASIC’s approach to granting relief is outlined in Regulatory Guide 51 Applications for relief (RG 51). Relief can be individual or for a class of persons or products. Generally, we do not have power to grant retrospective relief. To the extent that we can give relief from future consequences of past conduct, our policy is not to do so. In assessing a relief application, we attempt to weigh the commercial benefit and any net regulatory benefit or detriment that would flow from granting the relief sought on the conditions proposed. You can also ask us to grant a no-action letter. This is a letter in which we state to a particular person that we do not intend to take regulatory action over a particular state of affairs or particular conduct. It is not, however, a guarantee that ASIC will not take action in the future, nor is it intended to affect the rights of third parties to take action in relation to any contravention. It is not legal advice and may be withdrawn at any time. See Regulatory

Guide 108

No-action letters (RG 108).

© Australian Securities and Investments Commission December 2024 Page 23

Part D: When could a digital asset exchange become financial

market infrastructure? What is a financial market? A financial market is a facility through which offers or invitations to acquire or dispose of financial products are regularly made or accepted. Anyone who operates a financial market in Australia must obtain an Australian market licence to do so or otherwise be exempted from the requirement to hold an Australian market licence (see Regulatory Guide 172 Financial markets: Domestic and overseas operators (RG 172)). Where a digital asset is a financial product, then any platform that enables consumers or other persons to make or accept offers to buy (or be issued) or sell these digital assets may involve the operation of a financial market. You need just one financial product trading on your market to mean you are operating a financial market. It is important for you to carefully consider what products you allow for trading. Depending on the conduct involved, you may not be operating a market – for example, if you are acting as a market maker or broker (i.e. making or accepting offers to buy or sell digital assets that are financial products on your own behalf, or on behalf of one party to the transaction). A person undertaking this type of conduct, for example, would typically be required to hold an AFS licence rather than a market licence (section 767A(2)(a) of the Corporations Act, and see RG 172 and Part B above). To operate a financial market in Australia, the platform operator will need to hold an Australian market licence unless covered by an exemption (e.g. low volume financial markets). Platform operators must not allow financial products to be traded on their platform without having the appropriate licence as this may amount to a significant breach of the law. If you operate an overseas platform which does not have an Australian market licence, you must ensure that it does not operate as a financial market in Australia (unless you are exempted from the requirement to hold an Australian market licence). This may require you to take steps to prevent Australian clients from accessing financial products on your platform. These steps include (but are not limited to) removing references and links, placing additional warnings and disclosures on the relevant webpages and apps, screening out Australian clients as part of your KYC processes, and introducing geographically based IP restrictions (geoblocking).  More about markets What is a clearing and settlement facility? A clearing and settlement (CS) facility in the Corporations Act is defined as a facility that provides a regular mechanism for the parties to transactions relating to financial products to meet obligations to each other that arise from entering into a transaction, where the obligations are of a kind prescribed by the regulations. Regulatory Guide 211

Clearing and

settlement facilities: Australian and overseas operators (RG 211) provides details on when you need a CS facility licence or exemption. CS facilities include central counterparties and settlement systems.

© Australian Securities and Investments Commission December 2024 Page 24 ASIC and the RBA are co-regulators of CS facilities in Australia and have separate, but complementary, responsibilities for licensing and supervising licenced CS facilities. Depending on how transactions in digital assets that are financial products are cleared and/or settled, you may also be operating a CS facility and require a CS facility licence (see RG 211).

Part E: What should you consider when offering retail investors

exposure to digital assets via a regulated investment vehicle? This section provides guidance to issuers of investment products that provide retail investors with exposure to digital assets. There are many different types of investment vehicles available to retail investors in Australia. The types commonly accessed by investors include: • exchange traded products (ETPs), such as exchange traded funds (ETFs), and structured products (SPs) • listed investment companies (LICs) • listed investment trusts (LITs), and • unlisted investment funds. It is important that you are mindful of the specific legal obligations that apply when operating and offering different kinds of investment products. For example, ETFs, LITs and unlisted investment funds are managed investment schemes. Structured products are generally securities or derivatives. Listed investment companies are public companies. Each of these are regulated by ASIC under the Corporations Act, but the regulatory obligations can differ. In addition, except for unlisted investment funds, these products are typically traded on licensed Australian financial markets. Market operators play an important gatekeeper role in assessing the suitability of products that are admitted to their markets. If you intend to admit your product to a market, the respective market operator will have requirements you must meet. The subsections below provide information on good practices for different types of investment products that provide exposure to digital assets. Issuers of ETPs that reference digital assets should also refer to the additional good practices specific to digital asset ETPs set out in Information Sheet 230 Exchange traded products: Admission guidelines (INFO 230). While this guidance is primarily directed to entities providing digital asset investment products and services to retail investors, it is also good practice for providers of products to wholesale investors to apply this guidance, with a focus on custody and risk management.

© Australian Securities and Investments Commission December 2024 Page 25

Managed investment schemes

Responsible entities (REs) and retail managed investment schemes are regulated under

Chapter 5C of the Corporations Act. REs play a crucial role in ensuring the health of, and

confidence in, the financial system. They are entrusted with the funds of their investors and must comply with their legal obligations as REs, including to act in the best interests of members of the scheme. There are certain key matters that REs must consider when investing the funds of their investors into digital assets, particularly in relation to custody, risk management and disclosure. These key matters are relevant, whether the digital assets are financial products or not.

Custody

The RE of a registered scheme must hold scheme property on trust for members (section 601FC(2) of the Corporations Act). Further obligations in relation to custody are set out in ASIC Corporations (Asset Holding Standards for Responsible Entities) Instrument 2024/16 . Regulatory guidance in relation to these obligations is set out in RG 133. Asset holders also need to comply with financial requirements set out in ASIC Corporations (Financial Requirements for Responsible Entities, IDPS Operators and Corporate Directors of Retail CCIVs) Instrument 2023/647. Regulatory guidance in relation to these obligations is set out in Regulatory Guide 16 AFS licensing: Financial requirements (RG 166). Generally, this will mean that the RE, or its custodian engaged to hold the scheme property, will be required to hold minimum net tangible assets of A$10 million. In meeting these minimum requirements when dealing with digital assets, we consider it good practice that: • the entity responsible for custody has specialist expertise and infrastructure relating to digital asset custody • the digital assets, to the extent that they are not subject to other requirements or exceptions in relation to custodial property, are segregated on the blockchain. This means that unique public and private keys are maintained on behalf of the RE so that the scheme assets are not intermingled with other digital asset holdings • the private keys used to access the scheme’s digital assets are generated and stored in a way that minimises the risk of loss and unauthorised access. For example: o solutions that protect private key material using hardware devices that are physically isolated and that have appropriately limited connectivity to other computing systems (cold storage) are preferred. Private key material should not be held on internet-connected systems or networked hardware (hot storage) beyond what is strictly necessary for the operation of the product o the hardware devices used to hold private key material should be subject to robust physical security practices, and o effective systems and processes for key backup and recovery should be maintained, with geographically distributed backup sites preferred

© Australian Securities and Investments Commission December 2024 Page 26 • signing approaches that minimise ‘single point of failure risk’ are adopted • custodians have robust systems and practices for the receipt, validation, review, reporting and execution of instructions from the RE • REs and custodians have robust cyber and physical security practices for their operations, including appropriate internal governance and controls, and risk management and business continuity practices • the cybersecurity practices and the controls environment of the custodian are independently verified to an appropriate standard – for example, through SOC 1/2, GS 007, ISO 27001/2, NIST CSF or other appropriate certification or attestation Note: See System and organisation controls (SOC) reports 1 and 2 (SOC 1/2), Auditing and Assurance Standards Board, Guidance Statement GS 007 Audit implications of the use of service organisations for investment management services (GS 007), International Organization for Standardization, ISO/IEC 27001:2013 Information technology— Security techniques— Information security management systems— Requirements (ISO 27001), ISO/IEC 27002:2013 Information technology— Security techniques— Code of practice for information security controls (ISO 27002), and ISO/TR 23576:2020 Blockchain and distributed ledger technologies – security management of digital asset custodians and National Institute of Standards and Technology, Cybersecurity Framework (NIST CSF). • REs have access to an appropriate compensation system in the event that digital assets held in custody are lost, and • if an external or sub-custodian is used, REs should have the appropriate competencies to assess the custodian’s compliance with RG 133. The security of private keys is of critical importance. Private keys are necessary to sign transactions that transfer digital assets to new addresses. If private keys are compromised, unauthorised parties can use them to transfer the scheme’s digital assets to addresses (and parties) that are outside the control of the RE. Accordingly, REs and custodians should ensure that the private keys used by the scheme are protected from unauthorised access – both online and offline. For the same reasons, REs and custodians should adopt a transaction signing approach that minimises single point of failure risk. For example, multi-signature or sharding-based signing approaches should be preferred to the use of a single private key to sign transactions. As technology develops, other suitable approaches may also emerge. It is a matter for the RE to determine the most effective approach, considering the benefits and drawbacks of different approaches. In relation to the receipt, validation, review and execution of customer instructions, these processes should include appropriate permissioning so that no one party has control of the entire process. If the structure of the product is such that it only needs to interact with a pre-defined set of addresses – for example, particular dealers, markets or authorised participants – the custodian should consider a whitelist approach, so that transfers can only be made to those pre-defined addresses. In relation to compensation systems, we consider it good practice that REs have access to an arrangement so that members of the scheme can be compensated if digital assets are lost. The precise nature of the arrangement, including what is covered, how much is

© Australian Securities and Investments Commission December 2024 Page 27 covered, and its form – for example, insurance, an asset protection plan or compensation fund – are all matters for the RE to determine, taking into account the nature of its product and its duty to act in the best interest of the members of the scheme. Note: In this context, REs should also consider the regulatory guidance on liability provisions in custody agreements set out in RG 133. In relation to the independent verification of cybersecurity practices and controls environments, we have not mandated specific standards, certifications or attestations that must be achieved by custodians of digital assets. Rather, we consider it good practice that these are independently verified to an appropriate standard, as determined by industry practice, and it is a matter for the RE as to whether they are satisfied with the standards, certifications or attestations that the custodian has achieved. REs should, where appropriate, take the necessary steps to obtain a copy and consider an independent audit of the effectiveness of the controls of a third-party service organisation responsible for custody of assets. Where digital assets are held it is expected this would include controls determined by industry practice for mandated standards, certifications or attestations that are expected for custodians of digital assets. This could be an audit based on GS 007 or a comparable audit from other jurisdictions. Note: As set out in RG 133, a responsible entity or another person engaged by it to hold assets of a registered scheme does not need to hold an AFS licence authorising it to provide a custodial service for this purpose. This is because holding those assets is not a custodial service under section 766E(3)(b) of the Corporations Act. Holding assets is a part of the operation of the registered scheme by the RE. An RE can also indirectly invest in spot digital assets via an intermediary vehicle, such as a different managed investment scheme. Where this structure is employed, we expect the RE to satisfy themselves that the intermediary vehicle is holding the digital assets in line with the above custody good practices.

Risk management

An RE, as an AFS licensee, is required to do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly (section 912A(1)(a) of the Corporations Act). Further, under section 912A(1)(h), an AFS licensee is required to have adequate risk management systems. Regulatory guidance in relation to these obligations is set out in Regulatory Guide 259

Risk management systems of

fund operators (RG 259). In meeting these minimum requirements in relation to digital assets, we consider it good practice for REs to carefully consider the digital asset exchanges used by them or their service providers to access digital assets. In particular: • the RE should be satisfied, based on reasonable due diligence, that any digital asset exchange it relies on: o is a digital currency exchange (DCE) provider registered with AUSTRAC, if required, or is regulated by one or more laws of a foreign country giving effect to the Financial Action Task Force recommendations relating to customer due diligence and record-keeping, and

© Australian Securities and Investments Commission December 2024 Page 28 o implements risk-based anti-money laundering and counter-terrorism financing (AML/CTF) systems and controls that are supervised or monitored by a body empowered by law to supervise and enforce the customer due diligence and record-keeping obligations, and • the RE should ensure that authorised participants, market makers and other service providers that trade digital assets in connection with the product do so on digital asset exchanges that meet the same standard as above. The AML/CTF obligations, among other things, require entities to have customer identification procedures and aim to reduce the risk of digital assets being used to support criminal activity. Research also suggests that market integrity issues are more prevalent on digital asset markets with lower levels of regulation, compliance and transparency. The RE is responsible for ensuring its risk management systems appropriately manage all other risks posed by digital assets. Among other things, this could include implementing or applying relevant standards published by Australian and international organisations as they develop.

Disclosure

Part 7.9 of the Corporations Act sets out the obligations that apply to an RE as an issuer of a

PDS. Further guidance about disclosure is set out in Regulatory Guide 168 Disclosure: Product Disclosure Statements (and other disclosure obligations) (RG 168) and issuers should refer to the ‘Good Disclosure Principles’ outlined in Section C of RG 168. Relevantly, section 1013D of the Corporations Act requires that a PDS must include i nformation – about any significant risks associated with holding the product – that a retail client would reasonably require to make a decision whether to buy the financial product. In the context of investment products that invest in, or provide exposure to, certain digital assets, we consider there must be sufficient information about the characteristics and risks of those digital assets in the PDS. There must also be sufficient information about how the product is intended to operate and how it is expected to generate a return for investors. Types of matters that may be relevant in meeting these minimum requirements may include:

Characteristics of digital assets

• the technologies that underpin digital assets, such as blockchains, distributed ledger technology, cryptography and others • how digital assets are created, transferred and destroyed • how digital assets are valued and traded, including whether the digital assets will be ‘staked’, and • how digital assets are held in custody.

© Australian Securities and Investments Commission December 2024 Page 29

Risks of digital assets

• market risk – historically, digital assets have demonstrated that their investment performance can be highly volatile and there is a risk they could have little to no value in the future • pricing risk – it may be difficult to value some digital assets accurately and reliably for reasons including the nature of their trading, susceptibility to manipulation, and a lack of identifiable fundamentals. Some digital assets may be purely speculative assets • immutability – most digital assets are built on immutable blockchains, meaning that an incorrect or unauthorised transfer cannot be easily reversed and can only be undone by the recipient agreeing to return the digital assets in a separate transaction • political, regulatory and legal risk – government and/or regulatory action may affect the value of digital assets held by the scheme • custody risk – the private keys may be lost or compromised, resulting in digital assets being inaccessible or accessed by unknown third parties without authorisation • cyber risk – the nature of digital assets may mean they are more susceptible to cyber risks than other asset classes, and • environmental impact – to the extent that some digital assets have a large environmental impact, this may raise other risks, such as increased regulation or negative market sentiment, which could affect the value of digital assets held by the scheme. Note: For the avoidance of doubt, this list does not represent mandatory matters for disclosure and should only be regarded as illustrating the types of matters that may be relevant to REs when complying with their disclosure obligations. REs must determine what is appropriate disclosure in the context of the characteristics, operations and risks of their product.

Licensing of scheme operators and registration of schemes

Operators of wholesale schemes that hold digital assets will generally need to hold an AFS licence or be exempt from the requirement to hold a licence. Operators of retail schemes that hold digital assets will need to hold an AFS licence to ‘operate a registered scheme’ where the investors in that scheme are retail. For general information about applying for an AFS licence, refer to the AFS Licensing Kit (Regulatory Guides 1 to 3), which provides an overview of the application process and information on supporting proof documents. We expect that applicants proposing to operate registered schemes that hold digital assets (whether the scheme holds one or more digital assets) will initially apply for ‘named scheme’ authorisation. This authorises the licensee to operate only the specific digital asset registered scheme(s) named on the licence. Consistent with RG 105, we expect applicants to operate two named digital asset registered schemes for at least two years before we will consider granting them a broader ‘kind scheme’ authorisation for digital assets. The ‘kind scheme’ authorisation allows the licensee to operate multiple digital asset schemes without needing to vary the licence with each new scheme.

© Australian Securities and Investments Commission December 2024 Page 30 When applying for these authorisations, the applicant is required to select what kind(s) of assets the scheme will hold. For registered managed investment schemes that will hold digital assets, the applicant should select: • for digital assets that are not financial products, the ‘crypto-asset’ asset kind, or • for digital assets that are also financial products, the asset kind which corresponds to the digital asset class of financial product – for example, the ‘financial assets’ or ‘derivatives’ asset kinds. To establish the ‘crypto-asset’ asset kind to administer our licensing functions we have defined ‘crypto-asset’ as ‘a digital representation of value or rights (including rights to property), the ownership of which is evidenced cryptographically and that is held and transferred electronically by: • a type of distributed ledger technology, or • another distributed cryptographically verifiable data structure.’ Note 1: This definition is deliberately broad to capture the range of assets that could be held by a managed investment scheme. Without limitation, it is intended to encapsulate the full range of ‘digital assets’, ‘crypto-assets’, ‘coins,’ ‘stablecoins’ and ‘tokens’, as those terms are used by the industry. Note 2: This definition helps us to administer the AFS licensing regime for managed investment schemes and should not be taken as a definition of digital assets or crypto-assets for other purposes. Note 3: For the purposes of the AFS licensing above we will retain the term ‘crypto-asset’, even though INFO 225 is now using the broader term ‘digital assets’. In assessing AFS licence applications for the authorisation to operate registered managed investment schemes that hold ’crypto-assets’, for both ‘named scheme’ and ‘kind scheme’ authorisations, whether the digital assets are financial products or not, some of the key matters that we will consider in detail are: • whether the nominated responsible managers can demonstrate both the ‘operate scheme’ and ‘assets under management’ elements of the organisational competence standards set out in RG 105 • the extent to which the applicant can meet the good practices outlined above for the products they will operate – particularly in relation to custody and risk management, and • whether the applicant has appropriate human, financial and technological resources. We also note that: • we will assess the application under relevant policy and, in relation to digital assets that are also financial products, take into account the considerations that apply to financial products of that type generally • applications that relate to digital assets are more likely to be novel applications and our experience to date indicates that assessment of those applications may take more time, and

© Australian Securities and Investments Commission December 2024 Page 31 • we will work with businesses to identify the issues to be addressed in the application and will issue additional guidance if we think that doing so may be helpful to industry. After the operator is licensed, the digital asset scheme(s) it will offer to investors may need to be registered as a managed investment scheme. For more information about scheme registration, refer to our webpage on how to register a managed investment scheme.

Listed investment companies

Listed investment companies (LICs) are public companies incorporated under the Corporations Act and are subject to the law relating to such companies, including Chapter 2D (directors’ duties), Chapter 2M (financial reporting) and section 674 (continuous disclosure). As listed entities, they are also subject to the rules of the market they are listed on. The LIC will appoint an investment manager with an AFS licence but does not generally have its own AFS licence. We expect LICs that provide investors with a material exposure to digital assets to follow the same good practices for custody, risk management and disclosure as registered managed investment schemes. We expect market operators to develop rules for LICs that invest a material portion of investors’ funds in digital assets so that there is a level playing field between them and digital asset ETPs, particularly in relation to permissible underlying digital assets and pricing frameworks (see INFO 230 for further information).

Structured products

Structured products (SPs) are generally classified as securities or derivatives, and the precise legal obligations of an SP issuer will depend on the type of financial product it issues. We expect SPs that offer investors exposure to digital assets to follow the same good practices for custody, risk management and disclosure as registered managed investment schemes. As SPs are a subset of ETPs, these products will also be subject to market operator rule frameworks as they apply to ETPs and our expectations for such products (see INFO 230 for further information).

Part F: Where can I get more information?

Entities that have specific requests or questions about a digital asset solution, or in relation to distributed ledger technology, tokenisation or decentralised finance may contact our Innovation Hub or their existing ASIC contact. The Innovation Hub can help by providing tailored guidance to innovative businesses on how to access information and services relevant to them through the ASIC website. For all inquiries, we strongly encourage entities to carefully consider their proposal and seek professional advice (including legal advice).

© Australian Securities and Investments Commission December 2024 Page 32 We do not provide any advice, assessment or approval of an entity’s compliance with the law, including in relation to the business model adopted.

Related information

• ASIC’s role and the laws we administer • AFS licensees • Fund operators • Market infrastructure licensees • Financial services • Managed funds • Markets • ASIC’s Innovation Hub • Cryptocurrencies – ASIC’s MoneySmart website

Important notice

Please note that this information sheet is a summary giving you basic information about a particular topic. It does not cover the whole of the relevant law regarding that topic, and it is not a substitute for professional advice. We encourage you to seek your own professional advice to find out how the applicable laws apply to you, as it is your responsibility to determine your obligations. You should also note that because this information sheet avoids legal language wherever possible, it might include some generalisations about the application of the law. Some provisions of the law referred to have exceptions or important qualifications. In most cases, your particular circumstances must be taken into account when determining how the law applies to you. Information sheets provide concise guidance on a specific process or compliance issue or an overview of detailed guidance. This information sheet was updated in [XXXX 2025].