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Digital Currency Exchanges becoming mainstream – bit by bit

Background

On 3 April 2018, new laws and policy principles were introduced to regulate the operation of Digital Currency Exchanges (DCEs) in Australia. DCEs are businesses that exchange digital currency for fiat currency (e.g. Dollars, Euros, Chinese Yuan) and vice versa.

These changes are a substantial step to providing increased regulatory certainty for DCEs and their customers in Australia.

Importantly, if a DCE commences operating in Australia and applies for registration with the Australian Transaction Reports and Analysis Centre (AUSTRAC) on or before 14 May 2018, the DCE can continue operating its business without being registered until AUSTRAC makes a determination on its application.

Key changes

The main change is the long-awaited introduction of amendments to the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act). The amendments require DCEs to register their business with the AUSTRAC before engaging in digital currency exchange services. The amendments also set out the process for registration, the establishment of the Digital Currency Exchange Register and penalties for breaches of the registration requirements.

A set of policy principles and exemptions have also come into effect, which creates a ‘transition period’ allowing DCEs to continue operating while working through the registration process. AUSTRAC will exercise leniency towards DCEs during the transition period and only take enforcement action if a DCE fails to take reasonable steps to comply with the AML/CTF Act.

Transition period

The transition period rules will apply differently to currently operating DCEs and new DCEs.

For currently operating DCEs, the business can continue operating without being registered, if it applies for registration on or before 14 May 2018 and applies for enrolment on the Reporting Entities Roll before 11 June 2018.

For new DCEs:

  • if the business starts operating on or before 14 May 2018, the business can operate without being registered if it applies for registration on or before 14 May 2018, and applies for enrolment on the Reporting Entities Roll before 11 June 2018
  • if the business starts operating after 15 May 2018, the business cannot operate unless it is registered with AUSTRAC.

For all DCEs, AUSTRAC will show leniency regarding enforcement action until 2 October 2018. During this time, AUSTRAC may only take enforcement action if a DCE fails to take reasonable steps to comply with the AML/CTF Act. Examples of ‘reasonable steps’ include:

  • complying with any breaches of the AML/CTF Act as soon as practicable
  • implementing a transition plan, which outlines actions and timeframes to achieve compliance
  • allocating sufficient resources to enable compliance.

Once the transition period ends, it is likely that AUSTRAC will be diligent and prompt in pursuing enforcement action. The penalties that apply to breaches of the DCE obligations range from two to seven years imprisonment and $105,000 to $420,000.

Process for enrolment and registration

A DCE can enrol and register with AUSTRAC using an online process based on the AUSTRAC business profile form.

The DCE will need to provide certain information to AUSTRAC, including:

  • national police certificates and checks for certain personnel
  • certain information in relation to the business entity.

Based on the application form, foreign companies (whether or not they are registered in Australia) can apply for enrolment and registration. However, AUSTRAC requires the foreign company to provide certain information including any registration details, company history and details regarding any previous legal infringements.

What action is required to address the new laws

All businesses that either currently or intend to operate a digital currency exchange in Australia should act quickly to enjoy the benefits of the transition period. Key actions include:

  • setting up the entity for the DCE business
  • starting the enrolment and registration process with AUSTRAC
  • obtaining the necessary police checks
  • ensuring senior management understand the obligations for a DCE under the AML/CTF regime and manifest the appropriate support
  • implementing a transition plan, which outlines actions and timeframes to achieve compliance with the AML/CTF Act.

Please contact us if you need more information or would like assistance with setting up a DCE or the enrolment and registration process. Our team includes the former General Counsel of AUSTRAC, Russell Wilson, who understands the new requirements for DCEs as he advised AUSTRAC on its implementation of similar requirements when the current AML/CTF regime was established in 2006, and the inclusion of a similar scheme for remittance sector providers subsequently.

Authors
Michael Zheng | Senior Associate
T +61 3 9258 3393
E michael.zheng@maddocks.com.au
Russell Wilson | Special Counsel
T +61 2 6120 4839
E russell.wilson@maddocks.com.au

Background

On 3 April 2018, new laws and policy principles were introduced to regulate the operation of Digital Currency Exchanges (DCEs) in Australia. DCEs are businesses that exchange digital currency for fiat currency (e.g. Dollars, Euros, Chinese Yuan) and vice versa.

These changes are a substantial step to providing increased regulatory certainty for DCEs and their customers in Australia.

Importantly, if a DCE commences operating in Australia and applies for registration with the Australian Transaction Reports and Analysis Centre (AUSTRAC) on or before 14 May 2018, the DCE can continue operating its business without being registered until AUSTRAC makes a determination on its application.

Key changes

The main change is the long-awaited introduction of amendments to the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act). The amendments require DCEs to register their business with the AUSTRAC before engaging in digital currency exchange services. The amendments also set out the process for registration, the establishment of the Digital Currency Exchange Register and penalties for breaches of the registration requirements.

A set of policy principles and exemptions have also come into effect, which creates a ‘transition period’ allowing DCEs to continue operating while working through the registration process. AUSTRAC will exercise leniency towards DCEs during the transition period and only take enforcement action if a DCE fails to take reasonable steps to comply with the AML/CTF Act.

Transition period

The transition period rules will apply differently to currently operating DCEs and new DCEs.

For currently operating DCEs, the business can continue operating without being registered, if it applies for registration on or before 14 May 2018 and applies for enrolment on the Reporting Entities Roll before 11 June 2018.

For new DCEs:

  • if the business starts operating on or before 14 May 2018, the business can operate without being registered if it applies for registration on or before 14 May 2018, and applies for enrolment on the Reporting Entities Roll before 11 June 2018
  • if the business starts operating after 15 May 2018, the business cannot operate unless it is registered with AUSTRAC.

For all DCEs, AUSTRAC will show leniency regarding enforcement action until 2 October 2018. During this time, AUSTRAC may only take enforcement action if a DCE fails to take reasonable steps to comply with the AML/CTF Act. Examples of ‘reasonable steps’ include:

  • complying with any breaches of the AML/CTF Act as soon as practicable
  • implementing a transition plan, which outlines actions and timeframes to achieve compliance
  • allocating sufficient resources to enable compliance.

Once the transition period ends, it is likely that AUSTRAC will be diligent and prompt in pursuing enforcement action. The penalties that apply to breaches of the DCE obligations range from two to seven years imprisonment and $105,000 to $420,000.

Process for enrolment and registration

A DCE can enrol and register with AUSTRAC using an online process based on the AUSTRAC business profile form.

The DCE will need to provide certain information to AUSTRAC, including:

  • national police certificates and checks for certain personnel
  • certain information in relation to the business entity.

Based on the application form, foreign companies (whether or not they are registered in Australia) can apply for enrolment and registration. However, AUSTRAC requires the foreign company to provide certain information including any registration details, company history and details regarding any previous legal infringements.

What action is required to address the new laws

All businesses that either currently or intend to operate a digital currency exchange in Australia should act quickly to enjoy the benefits of the transition period. Key actions include:

  • setting up the entity for the DCE business
  • starting the enrolment and registration process with AUSTRAC
  • obtaining the necessary police checks
  • ensuring senior management understand the obligations for a DCE under the AML/CTF regime and manifest the appropriate support
  • implementing a transition plan, which outlines actions and timeframes to achieve compliance with the AML/CTF Act.

Please contact us if you need more information or would like assistance with setting up a DCE or the enrolment and registration process. Our team includes the former General Counsel of AUSTRAC, Russell Wilson, who understands the new requirements for DCEs as he advised AUSTRAC on its implementation of similar requirements when the current AML/CTF regime was established in 2006, and the inclusion of a similar scheme for remittance sector providers subsequently.

Authors
Michael Zheng | Senior Associate
T +61 3 9258 3393
E michael.zheng@maddocks.com.au
Russell Wilson | Special Counsel
T +61 2 6120 4839
E russell.wilson@maddocks.com.au