House of Representatives

Explanatory Memorandum

(Circulated by authority of the Attorney-General, the Hon Mark Dreyfus KC MP)

SCHEDULE 6 - SERVICES RELATING TO VIRTUAL ASSETS

498. This Schedule amends the terminology of 'digital currency' to 'virtual asset' across the AML/CTF Act (by amending section 5 of the AML/CTF Act), updates the corresponding definition of 'virtual asset' (section 5B), and extends AML/CTF regulation to additional virtual asset-related services for VASPs (replacing the current concept of digital currency exchange providers in the AML/CTF Act). The term 'virtual asset' is consistent with the FATF terminology.

499. Virtual assets are an increasingly popular conduit to represent, store and move value, and the sector. The technologies and concept of digital currencies has continued to evolve since the Anti-Money Laundering and Counter-Terrorism Financing Amendment Bill 2017 extended the AML/CTF regime to digital currency exchange providers in 2017.

500. In October 2018, FATF Recommendation 15 was amended to require countries to apply AML/CTF regulation to the virtual asset-related services (referred to as 'limbs' of the definition of 'Virtual Asset Service Provider') outlined below:

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exchanges between virtual assets and fiat currencies (first limb)

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exchanges between one or more other forms of virtual assets (second limb)

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transfers of virtual assets on behalf of a customer (third limb)

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safekeeping or administration of virtual assets (fourth limb), and

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participation in and provision of financial services related to an issuer's offer and/or sale of a virtual asset (fifth limb).

501. The FATF has identified these activities as posing a high illicit financing risk. These services can be used to move funds globally, instantaneously and facilitate pseudo- anonymous or anonymity-enhanced transactions. ^[1]

502. Currently, the AML/CTF Act only covers the first limb of this definition, under designated service item 50A in table 1 of section 6. This item regulates the exchanges between virtual asset and fiat currency. Bringing the additional services in the FATF's definition of 'Virtual Asset Service Provider' (specifically, the second to fifth limbs) within the scope of AML/CTF regulation will ensure the AML/CTF Act remains up-to-date and robust against potential exploitation by criminals in this rapidly growing sector.

503. To address regulatory gaps, the amendments in the Bill would also capture additional concepts like non-fungible tokens that function as a medium of exchange, as well as governance tokens, which are used to regulate participation in decentralised autonomous organisations (DAOs), in the definition of 'virtual asset' at new subsection 5B(2). Further, the 'generally available to members of the public without any restriction on its use' element of the existing definition has been removed. This is to address a regulatory gap created by the emergence of stablecoins minted on public blockchains, where the issuer only intends for it to be used by a subset of the public.

504. The third limb of the FATF's definition of a 'Virtual Asset Service Provider' (transfers of virtual assets on behalf of a customer) will be captured by the new streamlined value transfer services. Please refer to Schedule 8 for further detail on these amendments.

505. For clarity, the intention is that businesses that provide any virtual asset-related designated services are required to register with AUSTRAC as 'registered virtual asset service providers' where the AML/CTF Act's geographical link principle is satisfied.

Part 1—Main Amendments

Anti-Money Laundering and Counter-Terrorism Financing Act 2006

Items 1, 2, 4 and 7

506. These Items repeal the existing definition and associated terminology of 'digital currency' in the AML/CTF Act and replace it with the new terminology of 'virtual asset'.

507. Item 5 inserts the new term 'virtual asset' in the definition of 'property' used in the AML/CTF Act.

508. The definition of 'virtual asset' is provided in Items 16 and 17 of this Schedule (see below). This change aligns with the FATF terminology of 'virtual asset' and allows for a broader understanding of what would constitute these assets than 'digital currency'.

Item 3 – Section 5

509. Item 3 inserts a new definition of the term 'casino' into section 5 of the AML/CTF Act. It establishes that for the purposes of the AML/CTF Act, a casino operating under a license granted under a law of a State or a Territory would not be captured under the definition of 'registrable virtual asset service' and 'registrable remittance service'. New section 12 regarding the definition of a registrable remittance service excludes casinos as defined in the AML/CTF Act, so that they are not required to register as remitters. However, the definition will not capture casinos operating without a licence who provide registrable virtual asset services (see Item 10 of this Schedule), so they will be captured by the AML/CTF regime.

Item 8 – Section 5

510. Item 8 inserts a definition of a 'registered virtual asset service provider' in section 5 of the AML/CTF Act, which replaces the previous terminology of a 'registered digital currency exchange provider', but retains the previous definition, for the purpose of reflecting the changes in terminology. This updated terminology aligns with FATF's nomenclature which uses the term 'Virtual Asset Service Provider'.

Item 9 – Section 5 (definition of registrable digital currency exchange service)

511. Item 9 repeals the existing definition of 'registrable digital currency exchange service' in section 5 of the AML/CTF Act as it is no longer required.

Item 10 – Section 5

512. Item 10 inserts a new definition of 'registrable virtual asset service' in section 5 of the AML/CTF Act. The definition includes the virtual asset-related designated services brought in under items 46A, 50A, 50B and 50C in table 1 of section 6 of the AML/CTF Act. Businesses who offer services regulated under items 29 and 30 in table 1 of section 6 of the AML/CTF Act (see Item 17 of Schedule 8 below) are also required to register, where the transfer of value relates to the transfer of virtual assets.

513. Reporting entities who offer any registrable virtual asset services will be required to register with the AUSTRAC CEO, except where they are a financial institution (such as an ADI, a building society or a credit union) or casino. This is because such businesses are already subject to regulation by APRA, as well as state and territory regulators.

514. Item 10 also provides the AUSTRAC CEO with the power to make AML/CTF Rules to clarify and prescribe what is not a registrable virtual asset service. This is to ensure that the definition of what is not a registrable virtual asset service may remain flexible as the virtual asset sector continues to evolve.

Items 11, 13, 14 and 15

515. These Items amend the definitions of 'registration' and 'threshold transaction' in section 5 of the AML/CTF Act to reflect the new terminology of 'virtual asset'.

Item 12 - Section 5 (definition of stored value card )

516. Item 12 amends the existing definition of a 'stored value card' in section 5 of the AML/CTF Act to clarify the regulatory perimeter of the broad definition of a stored value card.

517. When this term was originally included in the AML/CTF Act, it was drafted to be sufficiently broad to cover virtual cards. However, the breadth of the definition has caused uncertainty. Recommendation 19.1(g) of the 2016 Statutory Review recommended redrafting the definition to provide industry with greater guidance as to what a stored value card can include. This recommendation was addressed as part of the Anti-Money Laundering and Counter-Terrorism Financing Amendment Act 2017. However, since this amendment, stakeholders have raised that it remains unclear whether the definition captures Keno-related products and accounts. Historically, lotteries and Keno-related products have been explicitly exempted from the AML/CTF Act, as they have been deemed to be low risk. Further, the broad definition has created uncertainty around whether other kinds of accounts, including already regulated bank accounts and gambling accounts, are captured.

518. Chapter 80 of the AML/CTF Rules was introduced as an interim measure to clarify that accounts and cards or other instruments only used for monetary value in relation to a lottery are not captured by the definition of a stored value card. The new definition includes the current exclusions in Chapter 80, as per paragraph (e) and subparagraph (f)(v) of the definition.

519. The new definition largely retains (a) to (c) of the existing definition, with no substantial conceptual changes, but instead updates the exclusions in paragraph (d) to (g) to bring clarification to the broad definition.

520. Item 12 amends the definition by updating paragraph (d) to exclude 'a debit or a credit card', replacing 'a debit card or a credit card (whether real or virtual) linked to an account provided by a financial institution'. The amendment here is to clarify that all debit cards and credit cards, regardless of whether the card has been provided by a bank or non- bank, will be excluded under the definition.

521. Item 12 inserts paragraph (e) which relates to the exclusion of 'an account for the purposes of items 1 to 3 of table 1 in section 6 or items 11 to 13 of table 3 in section 6'. This legislates the exemption in Rule 80.2(1), but provides clarification on the types of accounts that are to be excluded for the purposes of the definition. The intent is that the new account exclusions prevent duplication with the regulation of services related to accounts under section 6 of the AML/CTF Act, being items 1 to 3 from table 1 and designated services items 11 to 13 from table 4. Item 12 also provides in paragraph (f)(i) that unless prescribed by the AML/CTF Rules that 'a thing that is intended to give access to monetary value in a debit card or credit card account' is not to be considered a stored value card. This is similar to the current exclusion under paragraph (e)(i), except that the restriction to debit card or credit card account 'provided by a financial institution' has been removed as per the above.

522. The new paragraph (f)(ii) relating to 'a gaming chip or token, or a betting instrument' will remain an exclusion to the definition (previously paragraph (e)(ii)).

523. New paragraph (f) also adds:

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'a virtual asset (whether or not pegged to any currency)' in paragraph (f)(iii), and

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'a thing that stores, or gives access to, virtual assets (whether or not pegged to any currency)' in paragraph (f)(iv).

524. This reflects the terminology changes, and clarifies that virtual assets themselves are not stored value cards. This is to address the potential overlaps between a stored value card product and a virtual asset product, and provide clarification when considering new technologies, such as stablecoins which might otherwise be considered to store 'monetary value'.

525. Current Rule 80.2(2) of the AML/CTF Rules is codified in the definition under paragraph (f)(v). This provides that unless prescribed by the AML/CTF Rules, a card or other thing that only stores or provides access to monetary value for the purposes of purchasing an entry into a lottery or redeeming winnings in respect of a lottery where the monetary value is denominated in a currency or pegged by its issuer to a currency stored in a form other than physical currency is excluded.

526. Paragraph (g) retains the rule-making power for the AUSTRAC CEO to exclude things that are not to be taken to be a stored value card, to clarify the regulatory perimeter in response to the emergence of new products and technologies in future.

Item 16 – Section 5

527. Item 16 amends the term 'digital currency' to instead refer to a 'virtual asset' under section 5 of the AML/CTF Act and provides a reference to section 5B for its updated definition (further detailed in Item 17 of this Schedule, see below).

528. Item 16 also introduces the new concept of a 'virtual asset safekeeping service' to the list of definitions in section 5 of the AML/CTF Act. This definition has been included in order to capture limb four of the FATF's definition of a VASP (the safekeeping and administration of virtual assets or instruments enabling control over virtual assets). This limb covers circumstances such as where a VASP holds a virtual asset or private keys to the virtual asset of another person in the course of carrying on a business. This designated service applies where a person has control of the private key associated with virtual assets belonging to another person, as well as persons in a multi-signature arrangement where the holder of the virtual assets needs several digital signatures to perform a transaction from a custodial wallet. The term 'private key' is intended take on its ordinary meaning. ^[2]

529. The inclusion of the qualification 'under an arrangement between the provider of the service and the customer, or between the provider of the service and another person with whom the customer has an arrangement (whether or not there are also other parties to any such arrangement)' at paragraph (a) in the definition of 'virtual asset safekeeping service' is intended to exclude a person who solely provides a software application (such as a software developer), but does not engage in direct safekeeping or administration of the virtual assets.

530. Item 16 also replaces the term 'Digital Currency Exchange Provider Register' with the term 'Virtual Asset Service Provider Register'. The underlying meaning of this term remains the same and remains in section 76B of the AML/CTF Act.

Item 17 – Before section 6

531. Item 17 inserts an updated definition of a 'virtual asset' into section 5B of the AML/CTF Act. The definition of a 'virtual asset' replaces the definition of 'digital currency', providing greater clarity on the scope of digital representation of value to be regulated for AML/CTF purposes.

532. The new definition replaces the previous definition of digital currency, notably removing the requirement to be generally available to members of the public without any restriction on its use. The updated definition establishes that a virtual asset is a digital representation of value that meets the following criteria:

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functions as a medium of exchange, a store of economic value, unit of account or an investment (paragraph 5B(1)(a)),

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is not issued by or under the authority of a government body (paragraph 5B(1)(b)), and

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can be transferred, stored or traded electronically subparagraph (5B(1)(c)).

533. Section 5B captures the elements of the FATF definition of 'virtual assets' which forms the basis of AML/CTF regulation of VASPs globally. This covers 'a digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes.' Further, 'investment' was not expressly included as a function in the previous definition of 'digital currency'. 'Investment' is intended to take its ordinary meaning.

534. Paragraph 5B(1)(b) excludes Central Bank Digital Currencies and other government- issued virtual currencies from this definition. Consistent with the FATF definition of 'virtual assets' and related FATF guidance, the definition of 'money' in section 5 will be amended to specify that money includes digital representations of value issued by or under the authority of a government body, and intended to function as money. This is outlined in Item 14 of Schedule 8.

535. This Item further clarifies the scope of a 'virtual asset' by inserting a new subsection 5B(2) to establish that a virtual asset is also a digital representation of value that:

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enables a person to vote on the management, administration or governance of arrangements connected with a digital representation of value (paragraph 5B(2)(a))

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is not issued by or under the authority of a government body (paragraph 5B(2)(b)), and

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can be transferred, stored or traded electronically (paragraph 5B(2)(c)).

536. This is intended to capture concepts such as utility and governance tokens, for example, tokens that govern DAOs. ^[3] Governance tokens have value and can be traded, bought or sold, including by using the services of VASPs. As such, they carry the same level of susceptibility to ML/TF exploitation as other virtual assets.

537. Due to ongoing innovation in the virtual assets sector, subsection 5B(3) empowers the AUSTRAC CEO to make AML/CTF Rules that account for any emerging virtual assets. This will ensure that the AML/CTF regime can respond to emerging technologies that are susceptible to money laundering, terrorism financing or proliferation financing exploitation, and therefore would need to be regulated.

538. Subsection 5B(4) provides a non-exhaustive list of common digital representations of value that are outside the scope of this definition. This includes:

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money as currently defined (paragraph 5B(4)(a))

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digital representations of value used exclusively within a game (for example, Candy Crush gold bars) (paragraph 5B(4)(b))

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customer loyalty or reward points (for example, FlyBuys, Qantas Frequent Flyer points) (paragraph 5B(4)(c))

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similar digital representations of value that are not intended by the issuer to be convertible into another similar digital representations of value or money (paragraph 5B(4)(d)), and

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digital representations of value prescribed by the AML/CTF Rules (paragraph 5B(4)(e)).

Item 18 – Subsection 6(2) (after table item 46)

539. Item 18 inserts new item 46A into table 1 of section 6 of the AML/CTF Act, which constitutes the fourth limb of FATF's definition of a 'Virtual Asset Service Provider'. This designated service should apply to any entity that provides a safekeeping service for virtual assets or private keys, per the above definition of a virtual asset safekeeping service. This would include having the ability to hold, trade, transfer or spend the virtual asset per the owner or user's instructions. For clarity, this does not capture the provision of ancillary infrastructure, such as operators offering cloud data storage.

540. Item 46A does not capture where a professional service provider engages in the activities captured by this designated service, for example, storing a client's virtual assets cold wallet in the professional service provider's safe, unless they are doing so in the course of carrying on a business as a VASP. Similar activities are captured in Part 3 of Schedule 3 in the new 'professional service provider' designated service table in order to cover businesses who may offer such services, but are not VASPs.

Item 19 – Subsection 6(2) (table item 50A)

541. Item 19 updates existing item 50A in table 1 of section 6 of the AML/CTF Act to reflect the new terminology of 'virtual asset', and introduces the concept of 'making arrangements for the exchange of'. The latter amendment intends to reflect, in combination with new item 50C discussed below at Item 20 of this Schedule, the FATF Recommendation 15 requires regulation of the participation in, and provision of, financial services related to an issuer's offer and sale of a virtual asset.

Item 20 – Subsection 6(2) (after table item 50A)

542. Item 20 inserts two new designated services specific to VASPs. These are intended to cover the second and fifth limbs of the FATF definition of a 'Virtual Asset Service Provider'.

543. Item 20 inserts new item 50B in table 1 of section 6 of the AML/CTF Act, which constitutes the second limb of the FATF definition of a 'Virtual Asset Service Provider' . This service captures where a VASP exchanges one virtual asset for another virtual asset. The intention of new item 50B is to capture the exchange of virtual assets of the same type (for example, Bitcoin exchanged for Bitcoin) or of a different type (for example, Bitcoin exchanged for Ether). The coverage of exchanging virtual assets of the same type is necessary to address the issue of 'mixing' or 'tumbling' virtual assets to obscure traceability. A VASP would not have to provide every element of the exchange or transfer to have their activity captured by this service. For example, captured activities would include acting as a principal, a central counterparty for clearing or settling transactions, an executing facility, or another intermediary facilitating the transaction.

544. Item 20 also inserts new item 50C into table 1 of section 6 of the AML/CTF Act to regulate businesses providing financial services ancillary to initial coin offerings and other situations in which an issuer offers or sells a virtual asset. For example, this could capture businesses accepting purchase orders and funds and buying virtual assets from an issuer to resell and distribute the funds or assets, in addition to underwriting, market making and placement agent activities. The requirement for a business to 'participate' in the offer or sale is intended to exclude incidental financial services such as a bank simply processing payments for their customers to purchase virtual assets under an issuer's offer or sale of a virtual asset if the bank is not otherwise involved in the offer or sale. The sole act of issuing a virtual asset entirely on its own would not be captured by the Item 50C designated service. Issuers who exchange the issued virtual assets (either for money or another virtual asset) or transfer it on behalf of customers will instead be captured under the designated services in items 50A or 50B of table 1 of section 6, or under the designated services relating to the transfer of value in items 29 or 30 (please see Item 17 of Schedule 8 for further detail).

Items 21 to 23 and 25 to 54

545. These Items make amendments to a number of existing provisions of the AML/CTF Act to reflect the new terminology of 'virtual asset'.

Item 24 – Section 19

546. Item 24 makes amendments to the terminology in section 19 of the AML/CTF Act to establish that in determining whether the value of a virtual asset is not less than an Australian dollar amount, the value of the virtual asset is to be translated to Australian currency in accordance with the method specified in the AML/CTF Rules. This is required for the application of potential penalties.

Part 2—Contingent Amendments

Proceeds of Crime Act 2002

Item 55 – Section 338 (paragraph (ea) of the definition of account )

547. This Item repeals paragraph (ea) in the definition of account in section 338 of the Proceeds of Crime Act 2002 (POCA) and substitutes it with a new paragraph that uses terminology associated with virtual assets. Paragraph (ea) would be inserted into the POCA following the commencement of the Crimes and Other Legislation Amendment (Omnibus No. 1) Act 2024 and uses terminology such as 'digital currency' or 'digital currency exchange'.

Item 56 – Section 338 (paragraph (h) of the definition of account )

548. This Item repeals paragraph (h) of the definition of account in section 338 of the POCA and substitutes it with a new paragraph that uses terminology associated with virtual assets. Paragraph 388(h) would be inserted into the POCA following the enactment of the Crimes and Other Legislation Amendment (Omnibus No. 1) Act 2024 and refers to an account relating to 'digital currency'.

Item 57 – Section 338 (definitions of digital currency

and digital currency exchange )

549. This Item repeals the definitions of 'digital currency' and 'digital currency exchange' in section 338 of the POCA. These definitions will be inserted into the POCA following the commencement of the Crimes and Other Legislation Amendment (Omnibus No. 1) Act 2024, however, are no longer required nor appropriate.

Item 58 – Section 338 (paragraph (i) of the definition of financial institution )

550. This Item omits 'digital currency exchange' in section 338 of the POCA and substitutes it with 'registrable virtual asset service'. Paragraph (i) will be inserted into the POCA following the commencement of the Crimes and Other Legislation Amendment (Omnibus No. 1) Act 2024.

Item 59 – Section 338

551. This Item inserts two definitions in section 338 of the POCA relating to a 'registrable virtual asset service' and a 'virtual asset'.