The Australian Treasury released a document on 21 March 2025 titled “Developing an innovative Australian digital asset industry.”
It sets out a strategy for regulating digital assets, including payment stablecoins, in Australia.
The primary aim is to enhance transparency, strengthen consumer protections, promote the adoption of emerging technologies, and ensure Australia remains competitive on the global stage. The approach builds on existing financial services legislation to provide consistent oversight and robust safeguards for users, while addressing risks such as fraud, market manipulation, and the potential loss of consumer funds. The Treasury plans to collaborate with the Australian Securities and Investments Commission (ASIC) and industry stakeholders to implement these changes effectively, with draft legislation scheduled for consultation in 2025.
We have concerns however, that the document suggests significant influence by centralised exchanges, not dissimilar to the current role of banks, which ultimately contradicts a significant benefit of blockchain based digital assets, removing middlemen and external influence.
Recommendations to Enhance Self-Custody and Reduce Exchange Influence
Below are several recommendations to refine the proposed framework, with a focus on supporting self-custody of digital assets and reducing reliance on centralised exchanges. These suggestions aim to empower individuals and foster a more balanced digital asset ecosystem:
1
Promote Education on Self-Custody Practices
Recommendation:
Incorporate provisions or incentives to develop educational initiatives that teach individuals about self-custody options, such as hardware wallets, software wallets, and secure key management techniques. This would enable users to manage their assets independently.
Rationale:
The current emphasis on regulated entities, such as exchanges, may unintentionally encourage dependence on third parties. Supporting self-custody aligns with the decentralised principles of digital assets and mitigates risks associated with exchange vulnerabilities, such as security breaches or insolvency.
2
Provide Regulatory Clarity for Non-Custodial Solutions
Recommendation:
Establish clear exemptions or streamlined regulations for non-custodial services and tools, such as wallet providers that do not retain control of user funds, distinguishing them from custodial exchanges.
Reason:
The reliance on existing financial services laws risks imposing disproportionate compliance burdens on non-custodial innovators, potentially stifling progress. Offering regulatory clarity would encourage the development of self-custody solutions.
3
Introduce Tax Incentives for Self-Custodied Assets
Recommendation:
Implement tax benefits or simplified reporting requirements for individuals who hold digital assets in self-custody rather than on exchanges. For example, a reduced capital gains tax rate could apply to assets held in personal wallets for a specified duration.
Reason:
Financial incentives could encourage users to shift away from exchanges, reducing their dominance while promoting long-term asset retention and personal accountability for security.
4
Develop Decentralised Identity and Verification Standards
Recommendation:
Formulate standards for decentralised identity solutions that allow individuals to meet Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements without depending on exchanges, integrating these with self-custody wallets.
Reason:
Exchanges currently serve as centralised hubs for compliance, consolidating control, though decentralised alternatives would enable users to maintain privacy and custody while adhering to regulatory obligations.
5
Impose Restrictions on Exchange Custodial Authority
Recommendation:
Introduce stricter requirements for exchanges, such as mandating timely options for users to withdraw assets to self-custody wallets or setting limits on the proportion of user funds held in hot wallets (online storage) versus cold storage.
Reason:
Such measures could curb excessive control by exchanges and encourage users to move assets off-platform, reducing the concentration of funds and associated risks if an exchange fails.
6
Enhance Consumer Protections with Self-Custody Focus
Recommendation:
Require regulated entities to provide explicit warnings about the risks of custodial services (e.g. loss due to hacks) alongside practical guidance on self-custody, rather than focusing solely on protections within the custodial framework.
Reason:
The current approach prioritises safety within regulated systems, potentially overlooking the advantages of self-custody, however, a balanced perspective, including education on managing self-custody risks, would offer users greater autonomy and informed decision-making.
7
Facilitate Integration with Decentralised Finance (DeFi)
Recommendation:
Include provisions to explore how self-custody can align with DeFi platforms, potentially through pilot programs or regulatory sandboxes that test non-custodial financial services outside the exchange model.
Reason:
DeFi provides viable alternatives to centralised exchanges, yet the document’s focus on traditional financial structures may marginalise these innovations. Supporting DeFi could diminish exchange influence and bolster self-custody adoption.
The Treasury’s framework offers a sound starting point for regulating digital assets in Australia, but its reliance on centralised entities like exchanges risks reinforcing their dominance. By adopting these recommendations, the framework could better balance consumer protection with the promotion of self-custody, fostering a more resilient and decentralised digital asset landscape. These adjustments would empower individuals, reduce systemic risks tied to exchanges (e.g. FTX), and harness the broader potential of blockchain technology.
The scheduled 2025 consultation provides an ideal opportunity to refine the approach based on input from stakeholders.
