By Joni Pirovich, Special Counsel

15 December 2020

Mills Oakley recently provided a submission to the Second Issues Paper released by the Senate Select Committee Inquiry on Financial Technology (FinTech) and Regulatory Technology (RegTech). You can view the submission in full here.

Our submission makes the following recommendations:

Recommendation 1

The Australian Government consider making the Senate Select Committee a permanent feature and extending the purview from FinTech and RegTech to xTech, with submissions accepted and published on a rolling basis and recommendations made and published at least bi-annually.

Recommendation 2

The Australian Government, in conjunction with the Reserve Bank of Australia, consider the following as soon as possible:

1. release of a prototype eAUD (i.e. retail central bank digital currency) that start-ups and existing businesses can experiment with to show what innovation is possible with a native Australian digital dollar;
2. approving certain blockchain-based projects to use a prototype eAUD (or a simple Australian dollar stablecoin), in a sandbox-like environment observable by multiple regulators including the Reserve Bank of Australia;
3. as an interim and transitional measure only, partnering with one or more of the AUD stablecoin projects with a view of mandating one or more as legal Australian digital tender; and
4. undertaking research into the role of an eAUD when the majority of international digital commerce could likely be denominated in USD, EURO or RMB (and likely transacted in USDT, a digital EURO or the DCEP), including research into a scenario where a significant proportion of Australian businesses adopt a foreign sovereign digital currency as their functional currency for business, accounting and tax purposes.

Recommendation 3

The Australian Government consider leading the preparation and release of a multi-agency working taxonomy of Digital Assets to support Australian legal and tax applications, with input from multiple Australian regulators.

A taxonomy that we use regularly in our Blockchain & Digital Assets practice, which deals with legal and tax issues across a number of legal practice areas, covers:

1. Cryptocurrency (other terms include payment tokens, exchange tokens), which is used like money (often with merchants that accept cryptocurrency as payment) and as a speculative asset (often when traded on digital currency exchanges).
2. Crypto-assets (other terms include virtual assets, digital assets), which comprise:
   • Utility tokens (with and without restrictions)
   • Tokenised securities (where the equity or debt instrument is registered with the traditional legal system and the interest is tokenised)
   • Security tokens (the interest only exists digitally by virtue of the token holding and includes governance tokens whether voting rights are delegated or not, Liquidity Provider tokens and certain Non-Fungible Tokens)
   • Stablecoins (fiat-, crypto-, algorithmic-, hybrid-collateralised).
3. Sovereign Digital Currencies, including CBDCs and government-issued or government-mandated cryptocurrencies.
4. Privacy coins, which seek to conceal the sender and / or recipient details to a transaction.
5. Multi-characteristic tokens which include features from one or more categories above, where there may be multiple concurrent intentions and uses of the token and where the legal characterisation and taxation event is more appropriately determined upon disposal or use rather than upon by reference to the issuing entity and time of issue.
6. Multi-tiered token economies which may include at least a governance token and a cryptocurrency for the network to function.
7. Data and media assets including online account logins, digital twins, branding and as consumers can control more of their data, identification vaults and curated data vaults.

Recommendation 4

The Australian Government consider the design and introducing of an opt-in micro tax for digital transactions that allows a tax amount to be collected from all digital transactions and automatically remitted to the Australian Taxation Office (ATO). Existing corporate tax, individual tax and GST regimes would then switch off. The design should have regard to the following transaction types: peer to peer; business to consumer; business to employee or contractor; and business to business.

Recommendation 5

The Australian Government consider amending at least the following laws to ensure that existing investment and fundraising regimes and tax incentives aligned with those regimes are broad enough to cover investments in digital assets (defined above) and to attract capital to innovative Australian projects.

1. Early Stage Venture Capital Limited Partnership (ESVCLP) regime
2. Crowd-sourced equity funding (CSEF) regime
3. Attribution Managed Investment Trust (AMIT) regime
4. Listed Investment Company (LIC) regime
5. Controlled Foreign Entity (CFE) provisions

Recommendation 6

The Australian Government consider adding the following categories to the existing Research & Development (R&D) Tax Incentive:

1. A Special R&D Tax Incentive for areas of innovation that are critical for Australia’s growth and prosperity, such as renewables, health and critical digital infrastructure. This category would allow the R&D entity to receive a greater benefit than current rates and incentivise traditional businesses to undertake or participate in R&D in these critical areas where they otherwise would not have.
2. A Simple R&D Tax Incentive which requires upfront authorisation of the activity/ies as eligible R&D activity/ies by IISA.
3. A Software R&D Tax Incentive which requires upfront authorisation of the activity/ies as eligible R&D activity/ies by IISA and which makes explicit that the costs for all developers involved in the activity/ies in the first 2 years will be treated as eligible R&D expenditure.

Recommendation 7

The Australian Government consider temporarily suspending the more onerous CDR and privacy obligations for xTech during a defined ‘start-up period’ where they:

1. do not deal with “sensitive information”;
2. limit the number of individuals involved to 1,000;
3. apply clear ‘minimum standard privacy rules; and
4. only deal with the personal information of those who, after being clearly informed of the ‘reduced privacy regime’, consent to this for a specified period/product.

Recommendation 8

The Australian Government consider requiring regulators and government agencies to make clear statements in relation to their approach to regulating as well as steps to endorsement or accreditation of decentralised technology solutions such as decentralised identity (DID).

Recommendation 9

The Australian Government consider requiring the Digital Transformation Agency to update its technology procurement guidelines to include ethical and sustainable technology principles, particularly in relation to digital identity software including digital credentials.

Recommendation 10

The Australian Government consider funding a pilot to implement a basic company constitution (i.e. replaceable rules) using ‘Rules as Code’.

Recommendation 11

The Australian Government consider allocating part of the $6.0 million in funding to the Reserve Bank of Australia to actively participate in, experiment with and help coordinate opensource projects and research on CBDC standards which is being undertaken through the Bank of International Settlements Innovation Hub and the Digital Currency Global Initiative (DCGI). Part of this funding could be provided to approved blockchain-based projects to use a prototype eAUD as recommended at 2(b).

Recommendation 12

The Australian Government consider commencing a consultation on the need and role for regulation in token-enabled blockchain-based marketplaces where both sides or all sides of a market are participants and the native token enables incentive-based regulation.

Recommendation 13

The Australian Government consider actively engaging with opensource blockchains, particularly as a validator node in a blockchain with a Proof of Work consensus mechanism and as a forger in a blockchain with a Proof of Stake or Delegated Proof of Stake consensus mechanism.

Recommendation 14

Regulators, in particular ASIC, are encouraged to make public statements on encouraging the adoption of RegTech solutions even while they are in their development phase.

We look forward to discussing our submission and lending assistance to the Committee as the Inquiry progresses.

Please get in contact with Joni Pirovich on +61 3 8568 9629 or [email protected] to discuss.

For further information about our recent experience with Blockchain, Digital Assets & Smart Contracts, see our Capability Statement.