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27th January, 2022

Overhaul of payment systems legislation on the cards

The Federal Government has flagged its intention to shake up Australia’s regulatory framework for payment systems, which could mean clearer rules for the treatment of cryptocurrency and buy now, pay later offerings.

These days there are myriad ways to make payments for goods and services outside of traditional cash and card payment methods.

Some of the more popular payment methods that have emerged include cryptocurrency, digital wallets, and ‘buy now pay later’ options. More recently, people have also been using Non-Fungible Tokens (NFTs) as a new method of purchasing the right to use various asset types.

While payment methods are evolving rapidly, the regulations that govern payment systems in general have largely remained the same since their most recent enactment in 1998, which has meant new modes of payment have been left mostly unregulated.

The absence of a regulatory framework specifically designed for these innovative payment methods has been the source of much controversy, with many disputes relating to these payments left unresolved in Australia, and instead settled by laws in foreign countries – leaving those using such payments methods without adequate protection.

But late last year, after the government received 41 recommendations from three independent reviews on how to regulate innovative payment systems, Treasurer Josh Frydenberg promised Australians that 2022 will see a major overhaul taking place to the country’s payment systems regulations, with rules around novel payment methods to be written directly into the law.

“If we do not reform the current framework, it will be Silicon Valley that determines the future of our payment system,” Frydenberg said at the time. “Australia must retain its sovereignty over our payment system.”

Previous payment rules minted in the last millennia

The Payment Systems Act 1998 is the official set of regulations that govern payment systems in Australia, and at present, it sits as a one-size-fits-all set of rules for all monetary transactions.

‘Payment system’ as a term is defined in the legislation as ‘a funds transfer system that facilitates the circulation of money, and includes any instruments and procedures that relate to the system’.

The legislation gives various powers to the Reserve Bank of Australia (RBA) when it comes to the designation of payment systems, the imposition of access regimes, and dealing with payment disputes.

Many of these laws are connected to the Consumer and Competition Act 2010.

But the regulations in their current form do not incorporate the nuances of innovative payment methods, especially when it comes to the way in which payment licensing operates.

Proposed regulatory changes for payments

The stated aim of the proposed overhaul to the payment systems regulations is to provide more protection to the consumer, create more transparency, and give the Treasurer additional power to intervene in circumstances where new payment types come to the foray and reach beyond the existing framework.

Reining in payment systems such as ‘buy now pay later’ and the use of digital wallets that are facilitated by big tech companies is also a key component of the overhaul, with the new and improved regulations set to increase the level of consumer protection when using such technologies.

Existing frameworks are set to be replaced with nuanced and risk-based regulatory requirements, and the ambiguity around the use of cryptocurrencies and NFTs and their impact on overall tax affairs will be addressed.

The overhaul will also examine the rules around ‘de-banking’ – a process that enables financial institutions to deny banking access to certain people.

Two-phased consultation process pending election result

Additional consultation between industry and government and within the government itself will be required before any changes are put into place.

The first round of consultations is set to be held in early 2022, and will focus on the straightforward issues that can be addressed and implemented quickly. The more complex issues will be dealt with during a second round of consultations that is expected to take place in the second half of 2022.

With the Federal elections likely to occur in May this year, much of what the Treasurer has promised will remain tentative until the election results are in.

Hopes for a clearer outlook on crypto

Of all the changes being made to the innovative payment systems space, clarity around the use of cryptocurrency and the associated tax ramifications are likely to be the most notable for business owners.

For years now, business owners, especially those that work in the fintech sector, have been using cryptocurrencies to pay staff, raise funds and distribute equity to shareholders. Some have even allowed customers to use crypto to pay for products and services.

But, given the lack of clarity surrounding the tax implications of using crypto in these ways, many businesses have opted not to use these systems at all.

With a more clear-cut version of the how the Australian Taxation Office will treat cryptocurrency transactions, a greater uptake in the use of these payment systems may emerge, with the aim of further embedding innovation in payments into our lives.

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