With digital currencies having cemented themselves in daily finance updates, they have begun to attract the wider market. Due to the returns that have been made in cryptocurrencies, and the regulatory roadblocks in countries outside Australia, it is no surprise that many people are planning on setting up digital currency exchanges in Australia. As a leading law firm in the cryptocurrency and other-digital-currency markets, we receive enquiries daily; whether it's to set up a crypto-education business, crypto-exchange, crypto-fund, or something so novel it doesn't yet have a name (but the owner of the idea does, typically, have a vision board plastered with Lamborghini magazine cut-outs).

Setting up a Crypto Exchange? Given the number of enquiries we receive on this particular question, we thought it best to set out some key points so you can read this first, and then arrange to speak with us. This article addresses the most Frequently Asked Questions we receive about exchange setups, and prepares you for talking to lawyers if you're serious about setting up in the highly regulated Australian jurisdiction.

  1. Do I need an Australian Financial Services Licence?

An Australian Financial Services Licence (AFSL) authorises a business to provide particular 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 cryptocurrency coins 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 as to whether your current or proposed operations will require you to acquire an AFSL.

Whilst ASIC has made it clear that Bitcoin is not a financial product ( click here to download ASIC's Submission to the Senate Inquiry), other coins and other features of an exchange business, e.g. payment, FX conversion or stored value component of the platform may mean that you may require a licence.

ASIC has confirmed that some Initial Coin Offerings (ICOs) are financial products.

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 cryptocurrency, and how are they paid when they sell cryptocurrencies?
  • 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?
  • Where will customers be located?
  • Do you place any restrictions on customer ability to withdraw coins or fiat? If yes, please explain.
  • What customer types will you allow (individual only, etc.)?
  • How does your business source liquidity?
  • If your business will convert fiat currency (including allowing a deposit in one fiat currency and a withdrawal in another foreign currency):
    1. How do you arrange the conversion?
    2. Do you allow fiat withdrawals to non-account holders?
  • What transaction sizes do you allow?
  • Will you hold fiat currency (i.e. a store of value) on behalf of customers?
  • If your exchange will handle ICO tokens, then set out what rights and obligations are attached to those tokens.
  • What other features does your exchange have that have not be set out above?
  • Please provide a flow diagram, showing a step-by-step transaction, including fiat money and coin transaction details, from start to finish. See here for some example diagrams (ref: David Veksler).

* click here to download a PDF checklist of the above questions.

  1. 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 exchanges digital currency for fiat currency (whether Australian or not) or vice versa, you are required to:

  • Register your exchange with AUSTRAC;
  • Implement an effective, risk based AML/CTF Program, that amongst other things, will outline your know your customer (KYC) and ongoing customer due diligence procedures; and
  • Fulfil reporting obligations to AUSTRAC.

We can provide you with advice and training with regard to your obligations, an AML/CTF Program template and assistance tailoring this template to your business and its risks, in addition to assistance registering your exchange with AUSTRAC. In fact, we helped the Australian Digital Commerce Association (ADCA) by overseeing the development of a Code of Conduct for digital currency exchanges. Our AML/CTF template program is bench-marked against that Code. If you're an ADCA member, you get a $500 discount on the cost of our templates.

Tip 2: Start considering your AML/CTF Program a few months prior to your cryptocurrency exchange go-live date. It may take some time to tailor your program, have your procedures technologically implemented, train your staff and register with AUSTRAC.

  1. I have a crypto-to-crypto exchange and do not deal with fiat currency, what does this mean for me?

If your cryptocurrency exchange does not deal with fiat currency and only exchanges one cryptocurrency for another cryptocurrency, you will not be providing the designated service that will bring digital currency exchanges under the Australian AML/CTF Laws.

Tip 3: Although your exchange will not have the obligations imposed on fiat to digital currency exchanges, we recommend you have an AML/CTF Program and consider complying with the ADCA Code (we also recommend compliance with the Code for digital currency exchanges caught by the AML/CTF Laws).

  1. What else do I need to consider?

Your exchange will require Terms and Conditions and a Privacy Policy.

Tip 4: Tip The cost of the Terms and Conditions will depend on the services offered by your cryptocurrency exchange.

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.

  1. What do I do now?

If you still have questions after reading these FAQs, or are setting up a cryptocurrency 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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.