From margins to mainstream: Crypto AFSLs signal industry maturity

By Kate Cooper (pictured), CEO of OKX Australia

Mandating Australian Financial Services Licences (AFSLs) for digital asset platforms and providers shouts one fact loud and clear.

Digital assets are now an integral and consequential component of our mainstream financial services industry.

Treasury’s recent announcement of draft crypto resolution represents a watershed moment the industry has been anticipating for years.

It demonstrates that digital assets are no longer an experimental asset class but a legitimate part of the financial ecosystem deserving of serious regulatory oversight.

As a result, we are now passing from the digital asset “wild west” to what I call the “mild west”, wherein innovation and accessibility combine with the trust and transparency required of any serious financial asset.

And the timing couldn’t be better.

Local inflows into Australian bitcoin ETFs more than doubled this year compared to last year, attracting $148 million so far.

Companies like Standard Chartered and Franklin Templeton are making it easier for institutional investors to enter the crypto space and trade using tokenised money market funds as collateral.

And the first ever major crypto legislation passed by U.S. Congress was signed in July with the “GENIUS Act“, helping to legitimise stablecoins and allow for capital to flow more efficiently from traditional sources to the crypto ecosystem.

So for the sophisticated investors, self-managed super funds and institutional players who have been waiting for regulatory clarity in this space, this legislation provides the trust signal they need.

However, the true test of this legislation will be in its enforcement and implementation.

This means addressing the two-tiered elephant in the room: a system that has so far allowed unregulated actors to operate with little consequence, while leaving responsible operators at a disadvantage.

How did we get here?

The current two-tiered system emerged from a combination of regulatory uncertainty and enforcement challenges.

This resulted in legal complexity around what constitutes “providing services to Australians” – and thus the ability for overseas entities to claim they’re not actively soliciting Australian business – and was exacerbated by a high cost and difficulty of cross-border enforcement in the absence of crypto-specific licensing requirements.

Until now, that is.

Due to this regulatory uncertainty, it was largely up to individual players to decide how they would operate – and which disadvantages they would bear in the process.

For instance, licensed firms that made the decision to approach the Australian market through proper regulatory channels have had to make compromises on product availability and the range of services on offer.

Meanwhile, exchanges serving Australians without local licenses or registrations often position unlimited product availability and higher leverage as their main competitive advantage.

Unless there is proper implementation of mandatory licensing requirements, this two-tiered system risks further pushing Australian users toward unregulated options that may offer fewer consumer protections and limited means for redress.

Additionally, practices like rehypothecation – where customer deposits are invested, traded, or lent elsewhere by the platform for their own benefit – require careful consideration in this regulatory framework.

While rehypothecation is standard practice for traditional banks with established recovery mechanisms, it poses significantly higher risks in the crypto space where there’s no central authority to recover assets if they’re lost. The crypto industry has historically promised to hold customer assets one-to-one, and there are good reasons for this approach.

Greater transparency around such practices, along with appropriate disclosure requirements, will be essential for consumer protection in this evolving regulatory landscape.

Using the consultation period wisely

In the end, Treasury has already engaged in extensive consultation to deliver a comprehensive approach that balances innovation with consumer protection.

But the upcoming consultation period still provides further opportunity for industry to work collaboratively with Treasury to fine-tune critical implementation details.

Firstly, effective anti-avoidance in practice will protect Australian users, and support licensed firms acting in good faith (often at significant financial cost).

Secondly, the industry would benefit from understanding the specific crypto-related obligations beyond standard AFSL requirements.

Thirdly, we need clear rehypothecation disclosure requirements, so the industry has certainty about compliance expectations.

Successful implementation in other jurisdictions, such as Singapore and Hong Kong, has also often included transition periods that allow compliant operators time to meet new requirements while gradually establishing clearer market boundaries.

With thoughtful implementation and industry collaboration, Australia’s digital asset future looks secure.

So let’s work together to ensure the move from the margins to the mainstream is a resounding success.