Tranche 2: How Will It Affect Cryptocurrency Exchanges?

As announced by the Attorney-General in April 2023, the Australian Government has been actively consulting on reforms to the AML/CTF regime. The first round of stakeholder consultation took place between April and June last year. The feedback received has been instrumental in shaping the detailed reform proposals now outlined in the second-stage consultation papers. Many of the proposed changes will affect the cryptocurrency sector. In this article we will provide a breakdown on what is expected to change.

Anticipated Reforms in Australia's Cryptocurrency Exchange Regulations

Australia is gearing up for major changes in how cryptocurrency exchanges are regulated, with the tranche 2 proposal set to enhance the current AML/CTF regime. Here's a breakdown of what to expect and how these changes will impact the industry.

Expanding the Scope of Regulated Services

What's New?

The new proposal will expand the range of services that fall under regulation. Currently, only exchanges between digital currency and fiat currency are regulated. The new rules will cover:

  • Exchanges Between Digital Assets: Whether it's swapping Bitcoin for Ethereum or trading NFTs for stablecoins, all forms of digital asset exchanges will be regulated.
  • Transfers of Digital Assets: Any transfer of digital assets, such as sending cryptocurrency from one wallet to another, will be included.
  • Custodial Services: Services that involve the safekeeping and administration of digital assets, like storing cryptocurrency in a digital wallet on behalf of a customer, will now be regulated.

Ensuring Integrity and Due Diligence

Fit-and-Proper Person Tests: AUSTRAC (Australian Transaction Reports and Analysis Centre) will have the power to prohibit individuals who are deemed unfit from managing or controlling digital asset service providers. This ensures that only those with high standards of integrity can operate in the sector.

Nested Services Due Diligence: When an Australian entity provides services to a foreign counterpart, which then services its own customers, enhanced due diligence will be required. This aims to prevent hidden layers of illicit activities.

Streamlining Value Transfer Services

Unified Regulation: The current complex regulatory framework will be simplified. Instead of separate regulations for financial institutions and remittance providers, a streamlined set of rules will apply to all value transfer services, including digital asset transfers.

Intermediary Institution Designation: New rules will define the role of intermediary institutions. These are entities that facilitate transfers without directly engaging with the payer or payee. They will now be required to comply with specific AML/CTF obligations.

Updating the Travel Rule

Expanded Scope: The travel rule, which mandates that information about the payer and payee travels with a transaction, will now apply to remittance providers and digital asset service providers for both domestic and cross-border transfers.

Technical Limitations Consideration: In cases where full information cannot be transmitted due to technical issues, a subset of information sufficient to trace the transaction will be required.

Reforming IFTI Reports

Single IFTI Report: The current system, which requires different reports for electronic funds transfers (IFTI-E) and designated remittance arrangements (IFTI-DRA), will be merged into a single report to simplify the process.

Inclusion of Digital Asset Transfers: Reporting requirements will now include digital asset transfers. This ensures comprehensive monitoring of cross-border financial activities involving cryptocurrencies.

The tranche 2 proposal marks a significant step forward in regulating Australia's cryptocurrency sector. These changes not only align Australia with international standards but also fortify the country's financial system against exploitation by criminals. For detailed insights, you can refer to the comprehensive document by AUSTRAC "Further Information for Digital Currency Exchange Providers, Remittance Service Providers, and Financial Institutions" from May 2024.

Written by
Emma Poposka
Certified AML/CTF Specialist

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