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PAYMENT SYSTEM MODERNISATION

Piper Alderman

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Australia February 14 2024

Introduction Piper Alderman welcomes the opportunity  to provide a submission on
Treasury’s  consultation on Payments System  Modernisation: Regulation of
payment  services providers (the Paper) and provide  input towards Australia’s
regulatory  approach to the payment services industry,  specifically on the
proposed regulation of  payment stablecoins and payment  stablecoin issuers. As
one of Australia’s oldest law firms with a  national reach, Piper Alderman also 
operates one of the larger specialist teams  in Australia focused on payments, 
blockchain and crypto-assets. We have deep  technical and legal experience in
the crypto￾asset space, having served Australian and  international projects
over the last 7 years,  and having provided numerous submissions  to the
Government’s consultations  concerning regulatory approaches to crypto￾assets,
including the recent Regulating  Digital Asset Platforms consultation.  We
advise start-ups, funds, digital currency  exchanges and financial institutions,
analyse  crypto-asset related products and services,  act in controversies,
advise on taxation and  assist in restructuring matters. Our lead  partner,
Michael Bacina, the principal author  of our submission, has been ranked for 5 
consecutive years as one of a select few  Band 1 Fintech lawyers by the
prestigious  Chambers & Partners and is presently Chair  of Blockchain
Australia. Our submission and comments are set out  in the enclosed Appendix.
This submission  has been prepared by Michael Bacina,  Partner and Steven
Pettigrove, Special  Counsel of the Blockchain Group and  Financial Services and
Fintech team at Piper  Alderman. The views within are the authors’  own and
should not be taken as being  representative of the views of the other  partners
of Piper Alderman. We take a politically neutral position when  considering
policy, underpinned by a belief  in the economic and social benefits of 
technology and innovation, and a focus on  what regulation means at a practical
level  for both businesses and their customers  and users. We would be pleased
to discuss any aspects  of our submission further and participate in  any
parliamentary hearings concerning draft  legislation. Thank you for considering
our submission. Michael Bacina Partner Steven Pettigrove Special Counsel 3.   
Payment System Consultation The development of blockchain and  distributed
ledger technology continues to  gather pace internationally and  domestically,
touching a wide range of  industries including finance, social media, 
entertainment, ticketing and gaming, among  others.  Against this backdrop, a
number of jurisdictions, including the European Union  (EU), United States, the
United Kingdom  (UK), Singapore and Hong Kong, are actively  exploring and
implementing new regulatory  frameworks for the issuance and trading of  digital
assets and stablecoins. As a digital  asset which purports to maintain a stable 
value relative to one or more assets or  currencies, stablecoins have been a
priority  for focus for regulators and policy makers  due to the rapid adoption
of stablecoins, the  potential consumer benefits, and risks of  consumer harm. 
The Paper is a welcome step in formulating  draft legislation to reform existing
payment  services regulations, and we commend the  Treasury’s foresight in
addressing the  regulation of payment stablecoins as part of  these reforms. We
believe the proposals in  the Paper are an important companion to  the work
being done to develop a fit for  purpose regulatory regime for regulating 
digital asset platforms.  1 Response to Public Consultation on Proposed 
Regulatory Approach for Stablecoin-related  Activities published by the Monetary
Authority of  Singapore on 15 August 2023 (MAS Consultation  Response), page 3. 
2 Reserve Bank of Australia, Stablecoins: Market  Developments, Risks and
Regulation, Bulletin –  December 2022 (available here: 
https://www.rba.gov.au/publications/bulletin/2022/de
c/stablecoins-market-developments-risks-and￾regulation.html).  3 See
Crypto-assets and Global “Stablecoins” published by the FSB (available here: 
The case for stablecoin regulation Stablecoins, or specifically Payment 
Stablecoins (as defined in the Paper) are  emerging as a new class of digital
assets  with the potential to become a widely used  payment instrument.1
According to the  Reserve Bank of Australia, the total value of  stablecoins on
issue reached around  US$150 billion in May 2022.2 Payment  Stablecoins have
strong use cases in cross￾border remittance and payment  applications, and
enable broader digital  innovation by permitting persons and  entities to own
and exchange value in a  digitally native, well-understood and  relatively
stable asset. The Financial Stability Board (FSB) has stated  that stablecoins
“have the potential to bring  efficiencies to payments, and to promote 
financial inclusion”.3 According to the United  States Federal Reserve4: 
Stablecoins have the potential to spur growth  and innovation in payment
systems, allowing  for faster, cheaper payments. Because  stablecoins can be
used to transfer funds near  instantaneously peer-to-peer between digital 
wallets for potentially low fees, stablecoins  may lower payment barriers and
exert  pressure on existing payment systems to  provide better services. In July
2023, the FSB recommended that  authorities comprehensively regulate,  supervise
and oversee global stablecoin 
https://www.fsb.org/work-of-the-fsb/financial￾innovation-and-structural-change/crypto-assets￾and-global￾stablecoins/#:~:text=Stablecoins%20have%20the%
20potential%20to,and%20to%20promote%20financi al%20inclusion).  4 Gordon Y Liao
and John Caramichael,  Stablecoins: Growth Potential and Impact on  Banking,
January 2022 (available here: 
https://www.federalreserve.gov/econres/ifdp/files/ifd p1334.pdf). 4.
arrangements and their associated  functions and activities, and enforce 
relevant laws and regulation effectively.5 It  defines “global stablecoins” as
follows: A stablecoin with an existing or potential reach  and use across
multiple jurisdictions and  which could become systemically important in  and
across one or many jurisdictions, including  as a means of making payments
and/or store  of value. Against this backdrop, we commend  Treasury’s approach
is seeking to establish a  fit-for-purpose framework for Payment  Stablecoins.
The regulation of Payment  Stablecoins has the potential to foster  broader
adoption of stablecoins and related  innovation in digital finance by giving 
businesses and consumers confidence to  adopt and use stablecoins more widely. 
Regulation is needed to address core  consumer harms, such as the risk of
de-peg  events where a stablecoin’s market value  diverges from the value of its
reference  asset, unbacked stablecoins, misuse of  reserve assets, and
redemption issues.  The need to establish a regulated class of  stablecoins was
highlighted by the  Luna/Terra fiasco. In May 2022, Terra or  UST, a so-called
algorithmic stablecoin,  which purported to maintain a stable value  to the
United States dollar by allowing  holders to swap UST for its sister token, 
Luna, at any time for USD$1.00. The value of  the stablecoin collapsed to zero
in May 2022  wiping out its USD$18 billion market  capitalisation effectively
overnight.  In this submission, we offer our views with  regards to the Paper’s
proposal to regulate  5 Financial Stability Board, High-level  Recommendations
for the Regulation, Supervision  and Oversight of Global Stablecoin
Arrangements:  Final Report, 17 July 2023 (available here: 
https://www.fsb.org/wp-content/uploads/P170723- 3.pdf) Payment Stablecoins,
focusing on the  following aspects:  a) definition of Payment Stablecoins in
the  proposed regulatory framework; and b) jurisdictional considerations and 
interaction with digital asset facilities. Definition of Payment Stablecoin The
Paper adopts the following definition of  Payment Stablecoin:  a) a digital
representation of monetary value  intended or purported to maintain a stable 
value relative to a fiat currency;  b) issued by a payment stablecoin issuer;
and  c) capable of being redeemed for:  i) Australian dollars (AUD); or  ii)
another fiat currency only where there is active marketing or selling in 
Australia, at face value through a claim provided by a  payment stablecoin
issuer to a customer. We note the following matters in relation to  this
definition: (a) “Relative to a fiat currency”  We agree with the Paper’s
proposal to focus  on Payment Stablecoins that reference a  single fiat currency
at this stage, rather than  a basket of fiat currencies or other  commodities.
This is consistent with the  focus of regulatory proposals in Singapore6 and the
UK7. The EU’s Markets in Crypto￾Assets Regulation (MiCA) goes further in  6 MAS
Consultation Response. 7 DP 23/4: Regulating cryptoassets Phase 1:  Stablecoins
published by the UK Financial Conduct  Authority published on 6 November 2023
(DP23/4). 5. seeking to regulate both “e-money tokens”  referencing one single
fiat currency and so￾called “asset referenced tokens” which  reference the value
of an asset or  combination of them, including multiple  official currencies.8
This focus addresses  both the main use case for stablecoins (i.e.  as a
digitally native means of payment which  maintains a stable value) and the core
risk  of consumer harm (i.e. widespread  commercial or consumer adoption of a 
purportedly fiat backed stablecoin which  fails to maintain a stable value or
de-pegs  from its reference asset).  (b) “Capable of being redeemed for
Australian  dollars or another fiat currency only where  there is active
marketing or selling in Australia” We recommend that Treasury confine its  focus
to Payment Stablecoins which  reference a select group of highly liquid and 
widely used fiat currencies. An approach  similar to the UK and Singapore’s
should be  preferred. The UK plans to focus first on fiat￾backed stablecoins9,
while Singapore’s MAS  is seeking to regulate only Singapore issued  single
currency stablecoins (SCS) that  reference its own and G10 fiat currencies.10
The meaning of the phrase “active  marketing or selling in Australia” is
unclear.  For example, this could be taken to mean all  currencies that are
available to be  exchanged over the counter at foreign  exchange services, such
as Travelex.  8 MiCA, Article 3. 9 DP23/4, page 3. Alternatively, it could
include all currencies  that are available for exchange with a  Westpac travel
money card. It also poses the  risk that certain stablecoins may become 
regulated as Payment Stablecoins overnight  on the basis that “active marketing
or  selling” of the reference fiat currency  changes overtime.  Focusing on the
G10 fiat currencies (or G11  if one includes the Danish krone) offers the 
benefit of limiting the Payment Stablecoin  regime only to the most heavily
traded and  liquid fiat currencies, which are most widely  used internationally
and which, as a  reference asset, benefit from strong  monetary oversight and
are most likely to  maintain a relatively stable value.  This approach would
also exclude from  regulation wrapped tokens or stablecoins  referencing
Bitcoin, which has been  recognised as legal tender by El Salvador. It  would
also exclude any stablecoin which  references the digital renminbi (e-CNY). 10
MAS Consultation Response, page 4. 6. (c) “Capable of being redeemed…” We
propose that the phrase “capable of  being redeemed” is modified as this phrase 
may have the inadvertent effect of  rendering a Payment Stablecoin issued  under
the regime outside the definition  where it de-pegs or is no longer capable of 
being redeemed at its issue price (e.g.  because the issuer has become
insolvent).  This would be contrary to Treasury’s  intention in seeking to
regulate Payment  Stablecoins. In this context, it may be more  appropriate to
focus on the redemption  rights granted or promoted by the issuer,  such as
stablecoins “which have, or purport  to have, a right to redemption from the 
issuer”.  (d) “at face value through a claim provided by  a payment stablecoin
issuer to a customer” Importantly, Treasury has identified that  Payment
Stablecoins are bearer assets and  may be transferred to third parties by a 
customer of the issuer who first mints or  purchases the Payment Stablecoin from
the  issuer. The stable value and use of a  Payment Stablecoin is dependent on
that  third party (who may not be a customer of  the issuer, at least until such
time as they  seek to redeem the Payment Stablecoin)  being able to rely on the
Payment  Stablecoins’ asset backing. For this reason,  we consider that the
phrase “through a  claim provided by a payment stablecoin  issuer to a customer”
is somewhat  ambiguous as it does not obviously include  claims by third parties
who may seek to  redeem a Payment Stablecoin for fiat  currency from the issuer.
In substance, the  issuer represents that the Payment  Stablecoin will adhere a
right to redemption  from the issuer by the holder regardless of  whether they
are a customer. This limb of the definition may more  appropriately focus on the
holder’s right to  redeem a Payment Stablecoin from the  issuer at the issue
price. Jurisdictional considerations and  interaction with digital asset
facilities The Paper contemplates that the regulatory  framework for Payment
Stablecoins will  cover issuers that are “carrying on a  financial services in
Australia”, an approach  which is consistent with the existing  financial
services regulatory framework and  therefore well-understood by the financial 
services industry. The proposed reforms  would also apply to overseas-based 
businesses that actively solicit business in  Australia. We agree with this
approach which is  somewhat similar to the UK’s proposed  framework, although
the EU and Singapore  offer alternative approaches: a) The EU will regulate
e-money token  stablecoins that are offered to the  public, or are sought to be
admitted  to trading within the EU. However,  any e-money token that references 
an official currency of a EU member  state shall be deemed to be offered  to the
public within the EU; and b) Given the difficulties in monitoring  and
establishing the adequacy and  availability of reserve assets held  overseas,
Singapore proposes only  to regulate stablecoins (that  reference Singaporean
dollars or a  G10 currency) which are issued in  Singapore. It does not plan to 
outlaw those stablecoins that fall  outside of its currency list or  geographic
reach – stablecoins not  regulated under the proposed  framework will continue
to be  regulated by the Payment Services  Act 2019. Accordingly, Singapore’s 
proposal would, similarly to  Treasury’s proposal, establish a  special class of
digital currencies  which are subject to more stringent  regulatory
requirements. 7. Treasury’s proposal would leave open the  possibility that
unregulated stablecoins  issued overseas could continue to circulate  among
Australian businesses and  consumers. It is likely to be more difficult for 
Australian businesses and consumers to  assess the risks of exchanging and
using  stablecoins which are either unregulated or  regulated under overseas
regulatory  regimes. Importantly, these stablecoins  would also offer no
recourse to a domestic  issuer for redemption or local asset backing.  Depending
on whether an overseas issuer  actively solicits Australian users, it may fall 
outside Australia’s jurisdiction, licensing and  prudential standards. 
Australia’s limited jurisdictional reach offers  significant scope for
regulatory arbitrage or  consumer harm, particularly in the context  of
stablecoins which purport to be backed  by Australian dollars, but which are
not  subject to licensing and supervision in  Australia and where any or all
reserves are  held offshore. 11 DP23/4, Chapter 11. One option to address this
risk is to permit  financial services licensees including  payment facilitators
and digital asset  facilities only to offer and deal in Payment  Stablecoins
issued by a regulated issuer in  Australia. Alternatively, Australia could 
require digital asset facilities to assess  overseas-issued Payment Stablecoins 
against the same regulatory standards  before making them available as
“Approved  Stablecoins”, similar to proposals under  consideration in the UK.1

Piper Alderman - Michael Bacina and Steven Pettigrove

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