Web3 technology heralds the future of the internet, promising to transcend conventional web applications and foster decentralised ecosystems, a reality that is already unfolding.
Our current internet landscape is dominated by a handful of corporate entities managing interconnected networks. Web3 seeks to disrupt this oligopoly by leveraging blockchain technology, which comprises distributed ledgers governed collectively, thus democratising control over the internet infrastructure.
Back to the future - what is Web3?
To better understand web3, let’s first revisit its two predecessors. Web1 was created by open
protocols, where individuals shared information to build the technology. This evolved into web2 – when organisations like Facebook and Wikipedia established platforms where individuals could create content that would then be commercialised through their data. In this way, web2 gave control to technology companies.
Web3 returns to a community controlled model but with much smarter technology. Users can control their own content and data with the additional security of verification that removes the potential for scams that are commonplace today. The security features of blockchain mean it’s becoming increasingly popular in financial and investment circles, but it’s also being used by product companies and brands. Cryptocurrency, non-fungible tokens (NFTs) and smart contracts are just some of items that are able to be sold and traded readily leveraging this technology.
One of the biggest challenges early adopters are facing with web3 is the evolving regulatory environment. Many governments are still grappling with how to regulate blockchain transactions and ensure consumers are protected – and Australia is certainly in the midst of that situation.
Australian adoption is on the rise
Almost 25% of Australians own some form of cryptocurrency. This is not surprising given our willingness to embrace a wide range of fintech solutions from digital wallets to investment tools. These tools all have low barriers to entry, are simple to use and improve competition.
With increased use comes the ability to achieve scale. As web3 adoption increases, so does the communal ecosystem that it’s built on – which will improve the security of the technology, ensure its reliability and encourage more innovation.
To ensure more people can benefit from web3, the Australian Government wants to continue to foster innovation while protecting consumers. Internationally, we have seen several situations where unregulated digital assets have led to large consumer losses – something Australia wants to avoid.
The future of web3 regulation
In its efforts to protect consumers and ensure the market is stable, the Treasury released its framework for regulating digital asset platforms for consultation in October last year.
In formulating the framework, the Treasury extensively engaged with industry stakeholders to ensure its suitability and capacity to foster ongoing growth and innovation, while prioritising consumer interests.
The proposed framework leverages Australia’s existing financial regulation, while also tailoring aspects where appropriate. The proposal stipulates the following:
- It adds cryptocurrency to the definition of a financial product and makes it subject to the Australian Financial Services licensing regime overseen by the Australian Securities and Investments Commission (ASIC);
- It introduces the concept of a “digital asset platform” that holds digital assets, like crypto exchanges or brokers. Digital asset platforms that hold over $5 million in total, or over $1,500 for any individual, would also require an Australian Financial Services Licence (AFSL). As holders of an AFSL, digital asset platforms will also be required to meet a range of obligations including providing fair services, managing conflicts of interest, producing product disclosure statements, submitting financial reports and meeting solvency and cash reserve limits;
- Digital asset platforms would also be subject to specific obligations including standard form platform contracts and standards for holding tokens, custody software and transacting in tokens; and
- Digital asset platforms would also have obligations related to their non-financial products. This would include trading, staking, tokenisation and fundraising. These obligations are focused on mitigating risks in their business model and the tokens they offer.
The proposed framework in Australia has drawn on experiences internationally including the European Union, United Kingdom, Canada and Singapore. Rather than regulating the specific tokens, the framework seeks to regulate the digital asset service provider. This approach minimises loopholes and ensures the regime is flexible enough to accommodate new technologies without stifling innovation.
By leveraging an existing and robust regulatory framework, consumer assets will be protected and risk of collapse is minimised. Regulatory scrutiny will also provide consumers with comfort and reduce scams.
There is expected to be more consultation on draft legislation this year and a twelve-month transitional period before the new framework becomes law.
Whether you’re a startup, existing platform or looking to leverage web3 for your business, our team is available to help. For a confidential discussion, contact us today.
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information is for general informational purposes only.
