Check any crypto news outlet in Australia and you will not see so much of a focus on crypto prices as you will on news about shifting regulations and compliance requirements. The landscape for Australian crypto is becoming more regulated and sophisticated all at the same time.
Crypto custody providers and self-managed super funds (SMSFs) are showing more appeal for those interested in digital assets. Knowing more about them, their requirements, and risks is an important step in knowing whether you want to proceed with that type of investment.
What is a Crypto Custody Provider?
Crypto custody providers are third-party companies that store and manage digital assets securely on behalf of institutions and individuals. Their purpose is to protect those crypto assets from loss, theft, and insolvency by using advanced security measures like multi-signature wallets, hot and cold storage, and strict regulatory compliance.
Many crypto custody providers also offer additional resources like asset reporting. In some cases, some custody providers even give clients access to yield-generating protocols and/or crypto staking.
Requirements for Crypto Custody Providers in Australia
Australia already has a set of crypto custody rules in place thanks to a proposed licensing framework that would require crypto custodial service providers and exchanges to obtain an Australian Financial Services License (AFSL). Below is a list of the current requirements for crypto custody providers:
A Financial Services Licence. As mentioned above, custodial service providers and crypto exchanges are required to obtain an AFSL while operating under the Corporations Act.
Operational Standards. In addition to an AFSL, providers must be able to show that they maintain adequate financial and operational resources, operate “honestly, efficiently, and fairly”, and have the necessary dispute resolution processes in place.
Asset and Consumer Protection. All providers must follow rules similar to that of ASIC’s Regulatory Guide 133. This guide outlines explicit expectations when it comes to holding and managing client assets in a secure manner. Additionally, current regulations ban unfair contracts and misleading conduct while also mandating stronger transparency for consumers, providing a more thorough layer of protection.
Product Design and Distribution Obligations (PDDOs): Finally, providers are required to ensure that all products meet the needs of their target market and are distributed through appropriate channels.
Potential Exemptions. Exemptions to these requirements, rare as they may be, do exist. For instance, small operators could be potentially exempt should they have less than $5,000 per customer in holdings or process less than $10 million in total transactions each year.
Enforcement and Sanctions of Requirements
Regulatory compliance is a must for all entities required to adhere. Those entities that fail to do so face strict regulatory fines, punishment, and sanctions. These vary depending on the penalty but can include fines of up to $16.5 million or 10% of their annual turnover.
Self-Managed Super Funds (SMSFs)
On the other hand, SMSFs also face a specific set of legal requirements. These funds allow for the appointment of a trustee or trustees that manage the underlying funds in the account. All members of the fund must be trustees, and the investments within must be made with the purpose of retirement in mind. Moreover, they must be made in compliance with superannuation laws and be made at market value.
Administrative and Legal Requirements
SMSFs have a specific set of legal and administrative requirements in Australia. The first is that each fund must have either individual trustees or a corporate trustee appointed. A legal trust deed must also be set up, establishing the fund and setting forth the underlying rules.
In order to establish an SMSF, the fund itself must be established in Australia or otherwise possess assets in Australia. Moreover, it must be controlled and centrally managed in Australia in order to qualify. Finally, at least half of all accumulated entitlements for active members are required to belong to Australian residents.
Each SMSF is subject to an annual audit from an independent auditor that has been appointed for that specific purpose. Moreover, the audit must be completed before any annual returns are lodged. Finally, the fund must lodge an annual return with the Australian Taxation Office (ATO) every year.
Operational and Investment Requirements
SMSFs also face operational, investment, and member requirements. For starters, the sole purpose for running the fund must be in order to provide retirement benefits for the underlying members. There must also be a written investment strategy that sets out things like what the fund will invest in, how it will hold those assets, and how it will realise the assets in order to meet the members’ retirement goals and meet the objectives of the fund.
Each of the investments made under the fund should be on a commercial “arm’s length” basis, which means that they must at least closely reflect true market value. Furthermore, the fund is required to have demonstrated a clear legal ownership of assets.
There are also specific restrictions on investments. No one associated with the fund should receive any sort of present-day benefit from one of the underlying investments. Borrowing under the fund is restricted, though there are specific circumstances that can be met through limited recourse borrowing arrangements (LRBAs).
Each SMSF can have no more than six members per fund. Members are required to be at least 18 years old and may not be legally disqualified from acting as a member. Finally, all members must be involved in the decision-making process as either trustees or directors of the corporate trust.
Benefits of SMSFs
In Australia, there are a number of benefits to be had by investing in an SMSF. The first is that it offers a greater level of control and flexibility when it comes to investment type, strategic borrowing, and accumulation within accounts.
There are inherent tax advantages as well. For starters, taxes on earnings in an SMSF are at 15%, dropping to 0% when the fund hits the pension phase. That’s lower than business profit or personal income tax rates. Capital gains tax benefits include a 50% discount for assets held over 12 months.
Asset protection and estate planning are also available. An SMSF can protect assets from potential creditor claims should legal challenges or bankruptcy arise. That can be an invaluable thing when leaving assets to family.
Speaking of leaving assets to family, there is also estate planning control. With more control on how assets are distributed upon death, the trust deed is able to specify rules for distribution as well as the various beneficiaries. All of these tend to be much more specific than using a traditional public fund.
The Wave of the Future?
More and more Australians are making the trek into the digital assets space. As they do so, the need for crypto custody and SMSFs will only continue to grow. With the right knowledge and risk tolerance, it doesn’t take long to become involved in either type of investment and lower the barrier that has previously kept individuals from investing in crypto.
