5 Frequently asked Questions about Setting up a Cryptocurrency Exchange in Australia
Are you thinking of setting up a crypto exchange? Given the number of enquiries we receive on this particular question, we thought it would be useful to set out some key points for you to think about before speaking with us. This article addresses the most Frequently Asked Questions we receive about setting up an exchange and prepares you for talking to lawyers if you’re serious about getting started in the highly regulated Australian jurisdiction.
Crypto currencies, virtual assets and other digital tokens (let’s call them digital currencies) have been part of the daily news cycle for some time now. Due to strong investment returns and regulatory roadblocks in countries outside Australia, it’s no surprise that many people want to set up digital currency exchanges in Australia. As a leading law firm in the cryptocurrency and other-digital-currency markets, we receive frequent inquiries (sometimes multiple times in one day); whether it’s to set up a crypto-education business, crypto-exchange, crypto-fund, digital wallet, distributed finance (DeFi) offering, loyalty token scheme or something so novel it doesn’t yet have a name.
Why read on? We know what we’re on about: we wrote Blockchain Australia’s Code of Conduct for Digital Currency Exchanges, as well as the draft legislation regulating exchanges in another country. We spend a lot of time advising exchanges, ranging from the biggest in Australia to brand new start-ups. We were also involved in round-table discussions with regulators and policy makers when the DCE framework was rolled out in Australia back in April 2018 when you could pick up one BTC for around $USD 9,200.
1. Do I need an Australian Financial Services Licence (AFSL)?
An Australian Financial Services Licence (AFSL) authorises a business to provide financial services in relation to specific financial products to retail or wholesale clients. If your business is based in Australia, or will have Australian customers, you will need to consider whether your exchange will require an AFSL. Whether your exchange business requires an AFSL will depend on how your exchange is structured and what digital currencies or assets are offered on your site. If your exchange business provides a financial service, or the coins listed are financial products, then you will require an AFSL. We can advise you on whether your current or proposed operations will require you to acquire an AFSL.
Watch out for DeFi products. Staking, lending and inflationary protocols that help customers grow their cryptos should be a red flag: if somethings ‘looks and smells’ like a financial product, it just might be. We often advise exchanges on specific offerings. It’s best to get advice before they go live. Unfortunately:
“But all the other exchanges are doing it”
…isn’t an excuse if you’re fronting up to Court or an ASIC investigator.
Whilst ASIC has made it clear that Bitcoin is not a financial product (click here to download ASIC’s Submission to the Senate Inquiry), it has confirmed that some Initial Coin Offerings (ICOs) and other digital currencies are financial products. So, other digital currencies and features of an exchange business – for example facilitating payments, FX conversion or offering a stored value component of the platform – may require a licence.
ASIC also has a handy guide titled Doing Financial Services Business in Australia that is a worthwhile read.
Tip 1: Think about how your proposed exchange will operate by answering the questions below:
- What methods of payment can customers use when they buy digital currency, and how are they paid when they sell digital currencies?
- How do customers deposit and withdraw funds from their own wallet and/or bank account?
- Will your exchange offer its own customer wallet facility, and if so, how will it work?
- How are orders matched?
- What fiat currencies will be used?
- What digital currencies will be available on your exchange?
- Where will customers be located?
- Do you place any restrictions on a customer’s ability to withdraw digital currencies or fiat?
- What customer types will you allow (individuals, companies, etc)?
- How does your business source liquidity for digital currencies?
- If your business will convert fiat currency (including allowing a deposit in one fiat currency and a withdrawal in another fiat currency, for example AUD to USD):
- How do you arrange the conversion?
- Do you allow fiat withdrawals to non-account holders?
- What transaction sizes do you allow?
- Will you hold fiat currency on behalf of customers?
- If your exchange will handle ICO tokens, what rights and obligations will be attached to those tokens?
- Will you exchange involve any other features?
- Consider creating a flow diagram, showing a step-by-step transaction, including:
- Full names of all the parties to typical transactions, including deposit and withdrawal transactions
- Who instructs who in each step of the transaction
- Where the money flows in each step of the transaction – using worked examples and diagrams to illustrate
- Where the digital currency flows in each step of the transaction.
2. How do the Anti-Money Laundering and Counter-Terrorism Financing Laws apply to my exchange?
The Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) laws impose a number of obligations on most digital currency exchange businesses with a geographical link to Australia. If your business will exchange digital currency for fiat currency (whether Australian or not) or vice versa, you are required to:
- Implement an effective, risk-based AML/CTF Program that, amongst other things, outlines your know your customer (KYC) and ongoing customer due diligence procedures
- Enrol as a reporting entity with AUSTRAC and register your exchange on AUSTRAC’s Digital Currency Exchange register
- Report the necessary information to AUSTRAC on an ongoing basis, for example reporting suspicious matters.
- provide you with advice about your potential AML/CTF obligations
- provide you with an AML/CTF Program and Risk Register template, and assist tailor this template to your business and its risks (our AML/CTF template programis bench-marked against the Blockchain Australia Code of Conduct, which we drafted)
- assist with enrolling with AUSTRAC and registering your exchange with AUSTRAC.
- provide training to you and your staff about your AML/CTF obligations and the risks specific to digital currency exchanges.
Tip 2: You should start considering your AML/CTF Program at least a few months before you launch your digital currency exchange. It takes time to tailor your program and consider the money laundering and terrorism financing risks faced by your business. It also takes time to implement the processes and procedures set out in your Program (which may involve engaging with third party providers), to train your staff and to register with AUSTRAC.
3. I have a crypto-to-crypto exchange and do not deal with fiat currency, what does this mean for me?
If your digital currency exchange does not deal with fiat currency and only exchanges one digital currency for another digital currency, you will not be providing the designated service that will bring digital currency exchanges under the Australian AML/CTF Laws. However, you may still be providing another designated service (for example, remittance) and should carefully consider whether or not the AML/CTF laws apply to you before launching.
Tip 3: Although your exchange will not have the obligations imposed on fiat to digital currency exchanges, we recommend you still implement an AML/CTF Program and consider complying with Blockchain Australia Ltd’s Code (we also recommend compliance to the extent possible with the Code for digital currency exchanges caught by the AML/CTF laws). Why? De-banking is still a “thing” in Australia at the time of writing and having robust AML/CTF processes in place will put you in a much better position to get an Australian bank account.
4. What else do I need to consider?
Tip 4: The cost of preparing the Terms and Conditions will depend on the services offered by your cryptocurrency exchange. For example, the terms need to set out things like:
- Who’s responsible for what
- How the platform operates
- Rights and obligations of the parties
- Who holds custody of the digital currencies
- How staking or other financial growth protocols work
- How larger over-the-counter (OTC) transactions differ from ordinary transactions
- …and more boring standard contractual clauses covering risks and liability, termination, jurisdiction and the like.
Even if your exchange does not offer financial products, you still need to comply with the Australian Consumer Law which prohibits misleading and deceptive conduct.
Tip 5: See ASIC’s RG 234: Advertising financial products and services (including credit): Good practice guidance and the ACCC’s Advertising and selling guide for guidance about how to promote your exchange.
5. What do I do now?
If you still have questions after reading these FAQs, or are setting up a digital currency exchange and need further guidance, we suggest seeking legal assistance. You can contact one of the authors of this article who will be able to assist with your queries.