Stablecoins get a boost down-under?

As the global pace of stablecoins continues to grow, the Australian financial services regulator, ASIC, has issued an exemption instrument to formally exempt "Distributors" (defined as anyone who isn't a licensed stablecoin issuer) from needing a licence in relation to specific named stablecoins. Australia has a legislative instrument system where the financial services regulator can engage in sweeping rule-making (called class order relief) if it choose to do so. To date this power has not been used to clarify the grey and uncertain areas around crypto, with an approach taken closer to the SEC under Chair Gensler, with very limited and unclear guidance coupled with regulation-by-enforcement, leading to a string of cases with mixed outcomes and ongoing appeals. The move to use a legislative instrument is significant, but small, with only one Named Stablecoin identified in the instrument. The approach may be bigger than it seems, with institutions more likely to adopt a stablecoin if it is considered regulated. Most stablecoins, however, remain out in the cold down under.

The fine print

The instrument specifically relieves distributors from requiring an Australian market licence, or a clearing and settlement licence or a regular broker-dealer licence, but only in relation to a named stablecoin. The first specified stablecoin under the instrument is AUDM issued by Catena Digital Pty Ltd. AUDM is stated to be a fully fiat-collateralised, backed with AUD reserves held in trust at a major Australian bank. It does not pay yield.

The instrument requires that distributors must take reasonable steps to provide or make available to retail clients the most current Product Disclosure Statement of the Named Stablecoin. This is likely to be done by linking to the the disclosure document.

Pathway or byway?

The exemption comes in an ongoing policy vacuum in Australia, with no clear guidance on when a stablecoin must be licensed, or any pathway for licencing. Much more work remains to be done to establish a comprehensive and fit for purpose licensing framework for payment stablecoin issuers.

Any tailored licence conditions which apply to licensed issuers (e.g. disclosure and reserve and redemption requirements) have not been released so the market can only look to what the first Named Stablecoin Issuer has done, making this one small step for ASIC, but not quite a giant leap for the industry. Further details will be required to assess the impact on innovation and consumer protection, the pathway to compliance for other issuers, and inform consumers of the additional checks and balances that will apply to licensed issuers.

The relief is also subject to a number of important limitations. It does not address many stablecoins which are in market and widely distributed. These stablecoins will remain in a regulatory grey zone down under until such time as any of their issuers obtain licensing or a future payment stablecoin framework comes into place there. While distributors will not need a license to deal with Named Stablecoins for fiat to crypto transactions, in practice, they are still exposed to very real risks if they deal in stablecoin pairs (which is a popular use of stablecoins).

The Aussie regulator has previously asserted, without explanation, that they regard most widely traded cryptocurrencies as securities/financial products. Similarly there is no guidance down under on how businesses can obtain licensing for a stablecoin or if overseas licensing will be recognised in Australia. In a recent consultation, updates to guidance was proposed and a finalised version of that guidance has not yet been published. The prevailing uncertainty will keep Australia held back, particularly if regulation-by-enforcement continues. However, ASIC's clear preference appears to be that stablecoin issuers pursue some kind of licensing under the existing AFSL framework pending further legislative reforms.

Conclusion

ASIC has called the relief a pro-innovation move. They are right, but with global stablecoin regulation moving so fast, there is so much more to be done if the Lucky Country wants to entice back the crypto projects which have left.

If the exemption unlocks bank and tradfi usage of named stablecoins, then it may prove to be a significant driver of real-world adoption of stablecoins in Australia, which could have significant flow on effects and might encourage the regulator to use its powers more broadly to support innovation and crypto in a more granular fashion, including providing supportive regulatory clarity and transitional relief as regulation around crypto takes shape globally.

First published on BitsofBlocks.io and reproduced with permission.