AUSTRAC’s ‘Use It or Lose It’ Initiative: Addressing Inactive Digital Currency Exchanges to Mitigate Financial Crime Risks

The Imperative of Purity: AUSTRAC’s ‘Use It or Lose It’ Initiative for Digital Currency Exchanges

Abstract

The Australian Transaction Reports and Analysis Centre (AUSTRAC), Australia’s financial intelligence unit and anti-money laundering and counter-terrorism financing (AML/CTF) regulator, has launched a significant ‘Use It or Lose It’ initiative targeting inactive digital currency exchanges (DCEs). This comprehensive report delves into the intricate context, multifaceted objectives, and profound implications of this regulatory action. It meticulously analyzes its anticipated impact on the evolving cryptocurrency sector, examining how it reinforces Australia’s broader financial crime prevention framework. Furthermore, the report explores the inherent complexities associated with the regulation of digital currency exchanges, emphasizing the critical importance of maintaining an accurate, current, and robust registry to proactively deter and prevent the exploitation of the financial system by sophisticated criminal enterprises.

1. Introduction: The Evolving Landscape of Digital Currency Regulation

In April 2025, AUSTRAC, the cornerstone of Australia’s efforts to combat financial crime, formally announced a landmark ‘Use It or Lose It’ campaign. This initiative represents a targeted and strategic response to the burgeoning issue of dormant and inactive digital currency exchanges (DCEs operating within the Australian jurisdiction. The core premise of the campaign is to compel DCEs that are no longer actively engaged in providing designated services to voluntarily withdraw their registrations from AUSTRAC’s oversight or face the imminent prospect of administrative cancellation. This decisive action unequivocally underscores AUSTRAC’s steadfast commitment to safeguarding the integrity and resilience of Australia’s financial ecosystem, thereby mitigating the systemic risks posed by the potential exploitation of inactive or defunct exchanges by nefarious criminal organizations.

The global digital currency landscape has undergone a profound transformation over the past decade, moving from a niche technological curiosity to a mainstream asset class and payment mechanism. Australia, like many developed nations, has witnessed a parallel surge in the adoption and proliferation of cryptocurrencies. This rapid evolution, while fostering innovation and economic growth, has simultaneously presented significant regulatory challenges. The inherent characteristics of digital currencies – their decentralized nature, global reach, speed of transactions, and often pseudonymous aspects – render them attractive vectors for illicit activities such as money laundering, terrorist financing, fraud, and sanctions evasion. AUSTRAC, charged with the dual mandate of financial intelligence gathering and regulatory enforcement under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act), has been at the forefront of adapting its supervisory frameworks to address these emerging threats. The ‘Use It or Lose It’ campaign is a testament to this adaptive and proactive regulatory posture, signalling a shift towards greater emphasis on the active maintenance and accuracy of regulatory registries. This report will provide an in-depth analysis of this initiative, contextualizing it within Australia’s broader AML/CTF strategy and exploring its potential ramifications for both the regulated entities and the broader financial integrity of the nation.

2. Background: The Proliferation and Perils of Dormant Digital Currency Exchanges

Digital currency exchanges occupy a critical nexus within the modern financial system, acting as indispensable conduits for the conversion between traditional fiat currencies and various cryptocurrencies, as well as facilitating cryptocurrency-to-cryptocurrency trades. Their operational model typically involves matching buyers and sellers, holding customer funds in digital wallets, and executing transactions on blockchain networks. This pivotal role places them firmly within the scope of AML/CTF regulation, as they are susceptible to exploitation for layering and integration phases of money laundering (AUSTRAC, 2024).

As of April 2025, AUSTRAC’s registry indicated a substantial number of 427 registered DCEs operating in Australia (Finance Magnates, 2025; Cointelegraph, 2025). While this figure reflects a vibrant and growing sector, a significant and concerning proportion of these registered entities were identified as inactive. The existence of a large number of dormant registrations presents a formidable challenge to regulatory oversight and poses a material risk to national financial security. These inactive exchanges, though ostensibly benign, can be repurposed or clandestinely acquired by criminal elements seeking to create a veneer of legitimacy for their illicit operations. Such entities can be utilized as shell companies or front organizations to obscure the origins of illicit funds, facilitate fraudulent schemes, or even enable proliferation financing, which involves funding the acquisition of weapons of mass destruction (AUSTRAC, 2022).

AUSTRAC’s identification of this systemic vulnerability prompted the initiation of the ‘Use It or Lose It’ campaign. The core motivation behind this campaign is to clean the regulatory slate, ensuring that only actively operating and compliant DCEs remain on the official register. This proactive measure is designed to mitigate the risks associated with dormant entities, which include:

• Exploitation for Money Laundering and Terrorist Financing: Criminals can acquire dormant registrations to establish what appears to be a legitimate business, using it to process illicit funds without establishing new, auditable operational histories. This can involve setting up new accounts under the dormant entity’s registration, making it harder for law enforcement to trace the true beneficial owners or the source of funds. The anonymity or pseudonymity inherent in some crypto transactions, coupled with a ‘legitimate’ exchange facade, creates a potent tool for illicit finance.
• Facilitation of Scams and Fraud: Inactive exchanges could be co-opted or cloned by scammers to create phishing websites or fraudulent investment schemes. A seemingly official AUSTRAC registration could lend false credibility to these operations, leading consumers to believe they are interacting with a legitimate entity, thereby increasing the success rate of deceptive practices.
• Regulatory Arbitrage and Weakening of Oversight: A bloated and inaccurate registry hinders AUSTRAC’s ability to effectively monitor the sector. Resources could be diverted to supervise entities that are no longer operational, while genuine risks posed by active, potentially non-compliant exchanges might receive less scrutiny. It also creates a perception of lax oversight, which could attract illicit actors to Australia.
• Reputational Damage to the Sector: The continued presence of dormant, potentially compromised entities on the registry erodes public trust in the legitimate cryptocurrency industry. High-profile cases of crypto-related fraud or money laundering linked to such entities can tarnish the reputation of the entire sector, hindering legitimate innovation and adoption.

AUSTRAC’s campaign is not an isolated event but forms part of a broader, sustained effort to enhance the robustness of Australia’s AML/CTF framework and to specifically address vulnerabilities within the digital currency space. Previous actions include targeted campaigns against remitters and DCEs (AUSTRAC, 2025, February 17) and orders for audits of significant global crypto exchanges operating in Australia (AUSTRAC, 2025, August 22). This ongoing proactive stance reflects AUSTRAC’s mandate to not only react to financial crime but to preemptively dismantle avenues for its occurrence, aligning with its strategic goals outlined in the National Risk Assessments (AUSTRAC, 2024; AUSTRAC, 2022).

3. Objectives of the ‘Use It or Lose It’ Initiative: A Multi-pronged Approach to Financial Integrity

AUSTRAC’s ‘Use It or Lose It’ initiative is driven by several interconnected strategic objectives, each vital for bolstering Australia’s financial integrity and consumer protection. These objectives extend beyond mere administrative tidiness, aiming to profoundly reshape the operational landscape for DCEs.

3.1. Enhancing Consumer Confidence and Market Integrity

By systematically ensuring that only actively operating, compliant, and legitimate DCEs retain their registration status, AUSTRAC endeavors to significantly bolster public trust in the nascent yet rapidly expanding cryptocurrency sector. The presence of numerous inactive entities on a public registry can create confusion for consumers, making it challenging to differentiate between active, reputable service providers and dormant, potentially vulnerable ones. A streamlined and accurate registry provides a clear signal to consumers that entities listed are subject to ongoing regulatory scrutiny and are expected to meet stringent compliance obligations.

Increased consumer confidence is crucial for the sustainable growth of any financial market. When consumers perceive that a sector is well-regulated and that their funds are protected from illicit activities, they are more likely to engage with legitimate service providers. Conversely, a sector perceived as rife with fraud or weak oversight will deter mainstream adoption and investment. By removing dormant entities, AUSTRAC directly addresses a potential vector for scams and fraudulent activities that could exploit a seemingly legitimate registration to deceive unsuspecting individuals (Cointelegraph, 2025; Mirage News, 2025). This proactive approach contributes to fostering a healthier, more transparent, and ultimately more trusted cryptocurrency market in Australia.

3.2. Preventing Criminal Exploitation and Mitigating Systemic Risk

One of the paramount objectives of this initiative is the pre-emptive prevention of criminal exploitation. Inactive exchanges present an attractive target for organized crime groups, money launderers, and terrorist financiers. These dormant entities can be acquired, their registrations usurped, or their operational frameworks hijacked with relative ease compared to establishing an entirely new, fully compliant entity from scratch. Once acquired, such entities can be repurposed to serve as sophisticated fronts for illicit financial flows, providing a seemingly legitimate conduit for the layering and integration stages of money laundering.

Specific mechanisms of exploitation include:

• Shell Companies: A dormant DCE can be resurrected as a shell company, offering purported crypto services while its primary function is to obfuscate the true source and destination of funds. This allows criminals to bypass initial customer due diligence (CDD) checks that would be applied to a newly established entity.
• ‘License Renting’: In some cases, criminals may ‘rent’ the registration details or even the dormant entity itself, without formal acquisition, to add a layer of perceived legitimacy to their illicit operations. This is particularly concerning if the original registrants have not maintained adequate security or oversight of their defunct operations.
• Fraud and Identity Theft: A dormant registration could be used to impersonate a legitimate business, facilitating various forms of fraud, including investment scams or phishing operations that harvest personal financial information.
• Terrorist Financing and Proliferation Financing: While less visible, these activities require access to financial channels that appear legitimate. A compromised DCE, even a dormant one, could serve this purpose, posing direct threats to national security (AUSTRAC, 2022).

By removing these dormant entities from the official registry, AUSTRAC significantly curtails the pool of easily exploitable assets, thereby directly mitigating the risk that Australia’s financial system could be inadvertently used to facilitate serious and organized crime (Reuters, 2024).

3.3. Improving Regulatory Oversight and Operational Efficiency

Maintaining an accurate and up-to-date registry of DCEs is not merely an administrative exercise; it is fundamental to the effective execution of AUSTRAC’s regulatory mandate. A clean registry enables AUSTRAC to exercise targeted and efficient regulatory oversight, ensuring that its resources are concentrated on active entities that require ongoing supervision and compliance monitoring. Conversely, a registry cluttered with inactive or defunct entries can dilute supervisory efforts, leading to inefficient resource allocation and potentially allowing active non-compliant entities to evade detection.

Effective regulatory oversight entails:

• Accurate Risk Profiling: With a precise understanding of the active entities, AUSTRAC can conduct more accurate sector-wide risk assessments and tailor its supervisory activities to specific high-risk areas within the digital currency space. This data-driven approach is critical for a regulator operating in a dynamic technological environment.
• Efficient Enforcement: Knowing which entities are truly operational allows for more efficient enforcement actions. If an audit or investigation is required, having an up-to-date registry ensures that regulatory efforts are directed at the correct, active entities.
• Streamlined Communication: A current registry facilitates effective communication between AUSTRAC and the regulated industry, ensuring that important guidance, policy updates, and warnings reach the relevant operational businesses.
• Enhancing Data Quality: The initiative encourages all regulated entities, active or not, to review and update their registration details, leading to an overall improvement in the quality and reliability of regulatory data. This data is invaluable for strategic analysis and policy formulation.

Ultimately, by improving the accuracy of its registry, AUSTRAC strengthens its capacity to enforce compliance with AML/CTF obligations, thereby reinforcing the overall resilience of the Australian financial system against criminal infiltration (Gambling Insider, 2025).

4. Regulatory Framework and Compliance Obligations for Digital Currency Exchanges

Australia’s regulatory architecture for combating money laundering and terrorism financing is primarily anchored in the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) and its associated Rules and Regulations. This legislative framework places significant obligations on a wide array of financial service providers, including digital currency exchanges, which were brought under AUSTRAC’s regulatory purview in 2018 (Web3AU, 2025).

Under the AML/CTF Act, any entity that provides ‘designated services’ involving the exchange of digital currency for fiat currency (e.g., Australian dollars) or vice versa, or exchanges one form of digital currency for another, is classified as a Digital Currency Exchange (DCE) and is mandated to register with AUSTRAC. This requirement extends to operators of cryptocurrency ATMs, which facilitate cash-to-crypto or crypto-to-cash transactions. Registration is not merely a formality; it signifies a commitment to upholding the stringent compliance obligations designed to detect, deter, and disrupt financial crime.

Registered DCEs are subject to a comprehensive suite of AML/CTF obligations, which include, but are not limited to:

4.1. Customer Identification and Verification (Know Your Customer – KYC)

DCEs are legally required to verify the identity of their customers before providing any designated services. This process, known as Customer Due Diligence (CDD) or Know Your Customer (KYC), is fundamental to preventing fraudulent activities and obscuring the identity of illicit actors. Requirements typically involve:

• Collecting identifying information: Such as names, residential addresses, dates of birth, and government-issued identification numbers.
• Verifying information using reliable and independent sources: This can involve electronic verification against government databases, physical document checks, or biometric verification.
• Understanding the nature and purpose of the business relationship: Assessing the customer’s typical transaction patterns and expected activities.
• Beneficial Ownership: Identifying and verifying the ultimate natural person(s) who own or control a customer that is a corporate entity or trust, to prevent the use of complex structures to hide criminal beneficial owners.
• Ongoing CDD: Periodically reviewing customer information to ensure it remains current and accurate, especially for higher-risk customers or when triggers for review occur.

Effective KYC is a critical barrier against criminals using DCEs for illicit purposes, as it makes it significantly harder to open accounts under false pretenses.

4.2. Record-Keeping Obligations

DCEs must maintain comprehensive and accurate records of all transactions, customer identification information, and any suspicious matter reports filed. These records serve as a vital audit trail for law enforcement and regulatory investigations. Key requirements include:

• Transaction records: Details of senders and recipients, amounts, currencies, timestamps, and purpose of transactions.
• Customer due diligence records: All documents and information gathered during the identification and verification process.
• AML/CTF program records: Documentation of the exchange’s internal policies, procedures, risk assessments, and training records.
• Retention period: Records must typically be kept for a period of seven years from the date of the transaction or the end of the business relationship, whichever is later.

Accurate record-keeping is essential for reconstructing financial trails during investigations into money laundering, terrorist financing, or other financial crimes.

4.3. Reporting Obligations

AUSTRAC’s role as Australia’s financial intelligence unit heavily relies on timely and accurate reports from regulated entities. DCEs have several key reporting obligations:

• Suspicious Matter Reports (SMRs): DCEs must report any activity they suspect may relate to money laundering, terrorist financing, proliferation financing, or other serious crimes, regardless of the transaction amount. SMRs are a critical source of financial intelligence for AUSTRAC and partner law enforcement agencies.
• Threshold Transaction Reports (TTRs): While less common for pure crypto-to-crypto transactions, DCEs that handle cash transactions exceeding AUD$10,000 (or the foreign currency equivalent) must report these to AUSTRAC. This applies to cryptocurrency ATM operators or exchanges that offer significant cash-in/cash-out services.
• International Funds Transfer Instructions (IFTIs): Although primarily for traditional financial institutions, if a DCE facilitates an instruction for an international funds transfer (which could be argued for certain cross-border crypto remittances involving regulated entities), reporting may be required. This is an evolving area of interpretation.
• AML/CTF Compliance Reports: DCEs are generally required to submit annual compliance reports to AUSTRAC, outlining their adherence to the Act and their AML/CTF program.

These reporting obligations enable AUSTRAC to gather, analyze, and disseminate critical financial intelligence to detect and disrupt criminal activities, contributing directly to national security outcomes (AUSTRAC, 2024).

4.4. Developing and Maintaining an AML/CTF Program

Each DCE must develop and implement a comprehensive AML/CTF program tailored to its specific business risks. This program outlines the internal controls, policies, and procedures the exchange has in place to mitigate the risks of financial crime. Key components typically include:

• Risk assessment: Identifying and assessing the money laundering and terrorism financing risks associated with their customers, products, services, delivery channels, and geographical locations.
• Internal controls: Policies and procedures for KYC, record-keeping, reporting, and staff training.
• Appointment of an AML/CTF Compliance Officer: A designated individual responsible for overseeing the program’s implementation and compliance.
• Independent Review: Regular independent reviews of the program’s effectiveness to identify weaknesses and ensure ongoing suitability.
• Employee Training: Ensuring all relevant staff are adequately trained to recognize and respond to financial crime risks.

The ‘Use It or Lose It’ initiative intrinsically reinforces the importance of these compliance obligations. It sends a clear message that registration with AUSTRAC is not a passive status but an active commitment to maintaining robust AML/CTF controls and keeping registration details current. Non-compliance can lead to severe penalties, including substantial civil monetary penalties, injunctions, and even criminal charges, as evidenced by AUSTRAC’s past enforcement actions against major financial institutions and crypto exchanges.

5. Implications for the Cryptocurrency Sector: Reshaping the Australian Digital Asset Landscape

AUSTRAC’s ‘Use It or Lose It’ campaign is poised to exert significant and wide-ranging implications across the Australian cryptocurrency sector. These implications will manifest in market structure, operational costs, security paradigms, and the overall perception of the industry.

5.1. Market Consolidation and Enhanced Competition

The most immediate structural implication is a likely acceleration of market consolidation. The systematic removal of inactive or defunct exchanges from AUSTRAC’s register will inevitably lead to a reduction in the sheer number of registered entities. While this might appear to decrease competition on the surface, it is more accurately seen as fostering a healthier, more robust form of competition among actively operating and genuinely compliant DCEs.

• Pros: A more consolidated market, populated by fewer but stronger players, is generally associated with higher standards of operation, better consumer protection measures, and greater stability. Legitimate, well-resourced exchanges that prioritize compliance and security are more likely to thrive. This strengthens the overall integrity of the market, potentially attracting more institutional investment and traditional financial players who have historically been wary of the crypto sector’s perceived lack of regulation.
• Cons: There is a potential, albeit lower, risk that consolidation could lead to reduced choice for consumers or create higher barriers to entry for innovative, smaller startups. However, AUSTRAC’s focus is on compliance, not market share, so well-run new entrants with robust AML/CTF programs should still find avenues to participate.

This consolidation can create a ‘flight to quality,’ where both consumers and institutional partners gravitate towards exchanges that demonstrate superior compliance and operational resilience, thereby raising the industry benchmark.

5.2. Increased Compliance Costs for Active Entities

For DCEs that choose to remain active and registered, the initiative implicitly signals an era of heightened regulatory scrutiny and the imperative for exemplary compliance. This will invariably translate into increased compliance costs. These costs are not merely punitive but represent necessary investments in robust AML/CTF frameworks. They include:

• Technology Investments: Upgrading and maintaining sophisticated KYC/CDD systems, transaction monitoring software (often leveraging AI and machine learning), and secure record-keeping infrastructure.
• Personnel and Training: Hiring skilled compliance officers, data analysts, and cybersecurity experts. Regular and comprehensive training for all staff on AML/CTF obligations and emerging risks.
• Legal and Advisory Fees: Engaging legal counsel and compliance consultants to ensure policies and procedures remain aligned with evolving regulatory expectations.
• Audit and Review Costs: Regular independent audits of AML/CTF programs, as mandated by the Act, become even more critical.

While these costs can be substantial, particularly for smaller exchanges, they are essential for mitigating financial crime risks. The long-term benefit is a more resilient and trustworthy financial system, which ultimately benefits all legitimate participants. For inactive entities, the initiative forces a cost-benefit analysis: the cost of maintaining compliance versus the simplicity and risk reduction of withdrawing registration.

5.3. Enhanced Security Measures and Operational Resilience

The ‘Use It or Lose It’ campaign, while directly focused on regulatory registration, indirectly promotes enhanced security measures across the sector. DCEs that aim to maintain their active status will likely reassess and strengthen their overall operational security. The threat of criminal exploitation of dormant entities underscores the importance of not just AML/CTF compliance, but also robust cybersecurity and data protection protocols.

• Cybersecurity: Active exchanges will need to fortify their defenses against hacking attempts, data breaches, and other cyber threats. A compromised exchange, even if compliant in theory, can still be used by criminals to launder funds or steal assets.
• Data Protection: Ensuring the secure storage and handling of sensitive customer information (collected during KYC) is paramount. Compliance with privacy regulations (like Australia’s Privacy Act) becomes intertwined with AML/CTF compliance.
• Operational Resilience: The initiative encourages entities to have clear succession plans, robust internal controls, and mechanisms to swiftly respond to unforeseen operational disruptions or compliance breaches.

By prompting a holistic review of their operational framework, the initiative contributes to making Australian DCEs more resilient against both external threats and internal weaknesses, which is vital for consumer protection and systemic stability.

5.4. Reputational Advancement for Australia

Globally, jurisdictions are grappling with the effective regulation of digital assets. Australia’s proactive ‘Use It or Lose It’ campaign enhances its reputation as a responsible and forward-thinking regulator in the international arena. It signals Australia’s commitment to aligning with international best practices set by bodies like the Financial Action Task Force (FATF) and demonstrates a serious approach to combating financial crime within the digital asset space (Currency Insider, 2025).

This strengthened international standing can facilitate greater cross-border cooperation in tackling transnational financial crimes involving cryptocurrencies, as other jurisdictions will have more confidence in the integrity of Australian-regulated entities and the reliability of AUSTRAC’s data. It reinforces Australia’s position as a jurisdiction that seeks to foster innovation responsibly, rather than at the expense of financial security.

6. Challenges in Regulating Digital Currency Exchanges: A Persistent Regulatory Conundrum

Regulating digital currency exchanges presents a unique and persistently evolving set of challenges that test the adaptability and foresight of national and international regulatory bodies. These challenges stem from the very nature of the technology, its global reach, and the rapid pace of innovation.

6.1. Anonymity and Pseudonymity of Cryptocurrencies

While blockchain transactions are often transparent (publicly viewable on a ledger), the identities of the participants are typically pseudonymous, meaning they are represented by alphanumeric wallet addresses rather than real-world names. This characteristic complicates the identification of illicit activities and the tracing of funds back to their ultimate beneficial owners. Key difficulties include:

• Mixers and Tumblers: Services designed to obscure the trail of cryptocurrency transactions by pooling and mixing funds from multiple users. These services are frequently exploited by criminals to launder illicit proceeds, making it exceptionally difficult to follow the money.
• Privacy Coins: Cryptocurrencies like Monero and Zcash are specifically engineered with enhanced privacy features, making transaction details, sender/recipient addresses, and amounts extremely difficult, if not impossible, to trace. This presents a significant hurdle for financial intelligence units.
• Non-KYC Exchanges and P2P Trading: While regulated exchanges implement KYC, a thriving ecosystem of decentralized exchanges (DEXs) and peer-to-peer (P2P) platforms often operates outside traditional regulatory frameworks, facilitating transactions without identity verification. This creates significant blind spots for regulators.
• Wallet Management: The ease with which individuals can create multiple non-custodial wallets (where users control their own private keys) adds layers of complexity to tracking funds and attributing them to specific individuals.

These features pose fundamental challenges to the ‘follow the money’ principle central to financial crime investigations, demanding sophisticated analytical tools and international collaboration to overcome.

6.2. Rapid Technological Advancements and Innovation

The digital currency ecosystem is characterized by relentless innovation. New blockchain protocols, token standards, decentralized finance (DeFi) applications, non-fungible tokens (NFTs), and decentralized autonomous organizations (DAOs) emerge with astonishing speed. This rapid technological evolution creates a perpetual ‘catch-up’ game for regulators:

• Evolving Financial Instruments: Regulators must constantly assess whether new forms of digital assets or services fall under existing legal definitions (e.g., security, currency, commodity) or require new legislative frameworks. The regulatory classification of assets like NFTs remains an area of active debate in many jurisdictions.
• DeFi Challenges: Decentralized finance platforms often operate without central intermediaries, relying on smart contracts and automated protocols. This makes it challenging to identify the ‘responsible’ entity for AML/CTF compliance, as there may not be a clear legal person to regulate. The concept of ‘Virtual Asset Service Providers’ (VASPs) under FATF guidance is continuously being stretched to encompass these new models.
• The ‘Travel Rule’ Implementation: The Financial Action Task Force’s ‘Travel Rule’ (Recommendation 16) requires VASPs to obtain and transmit originator and beneficiary information for crypto transfers above a certain threshold. Implementing this rule in the pseudonymous and often fragmented crypto landscape presents significant technical and operational hurdles for DCEs and regulators alike.
• Interoperability: The growing interoperability between different blockchains and the emergence of cross-chain bridges create additional complexities in tracing assets across disparate networks.

Regulators need to develop agile and technology-neutral frameworks that can adapt to these changes without stifling legitimate innovation.

6.3. Global Jurisdictional Issues and Regulatory Arbitrage

Cryptocurrencies inherently transcend national borders. A transaction initiated in Australia can be routed through an exchange in a different country and end up in a third, making traditional jurisdictional boundaries less relevant for enforcement. This global reach creates several challenges:

• Forum Shopping: Criminals can exploit disparities in national AML/CTF regulations by selecting jurisdictions with weaker oversight to conduct illicit activities. This regulatory arbitrage undermines the effectiveness of national regimes.
• Cross-Border Enforcement: Investigating and prosecuting financial crimes involving digital currencies often requires extensive international cooperation, information sharing, and mutual legal assistance. This can be hampered by differences in legal frameworks, data privacy laws, and political will.
• Lack of Harmonization: While the FATF provides global standards, the actual implementation and interpretation of these standards vary significantly between countries. This lack of consistent regulatory harmonization creates gaps that illicit actors can exploit.
• Data Sovereignty: Collecting and sharing data across borders raises complex questions about data privacy, ownership, and jurisdiction, particularly when dealing with sensitive financial intelligence.

Addressing these global challenges necessitates enhanced multilateral cooperation, consistent application of international standards, and a shared commitment to combating financial crime across jurisdictions.

6.4. Resource Intensiveness for Regulators and Industry

Effective regulation of the digital currency sector demands significant resources from both regulators and the regulated industry:

• Specialized Expertise: Regulators need highly specialized staff with expertise in blockchain technology, cryptography, data science, and financial crime investigation. Recruiting and retaining such talent is challenging.
• Technological Infrastructure: Investing in advanced analytical tools, AI/ML capabilities, and forensic software to track crypto transactions and analyze large datasets is essential but costly.
• Industry Burden: For DCEs, compliance is resource-intensive, requiring dedicated compliance teams, robust technology, and ongoing training. This can disproportionately impact smaller businesses.

Balancing the need for robust regulation with the desire to foster innovation and avoid placing undue burdens on legitimate businesses remains a delicate act for AUSTRAC and its global counterparts.

7. AUSTRAC’s Pivotal Role in Combating Financial Crime: A Multi-faceted Approach

AUSTRAC stands as Australia’s linchpin in the national and international effort to combat money laundering, terrorism financing, and other serious financial crimes. Its mandate under the AML/CTF Act 2006 extends beyond mere regulatory oversight, encompassing a crucial role as a national financial intelligence unit (FIU). This dual function equips AUSTRAC with a comprehensive set of tools to detect, deter, and ultimately disrupt criminal abuse of the financial system.

7.1. Financial Intelligence Gathering and Analysis

At its core, AUSTRAC is an intelligence agency. It collects vast quantities of financial transaction data from over 17,000 regulated entities across more than 100 industries, including DCEs. This data includes:

• Suspicious Matter Reports (SMRs): These are critical intelligence leads, where regulated entities report transactions or activities they suspect are related to criminal conduct. SMRs often provide the initial alert for emerging financial crime trends or specific illicit networks.
• Threshold Transaction Reports (TTRs): Reports of physical cash transactions over AUD$10,000.
• International Funds Transfer Instructions (IFTIs): Reports of electronic funds transfers into or out of Australia, regardless of amount.
• Cross-Border Movement of Physical Currency (CPM): Reports by individuals transporting AUD$10,000 or more in physical currency (or foreign currency equivalent) across Australian borders.

AUSTRAC’s expertise lies in its ability to analyze this immense volume of data using sophisticated analytical techniques, including data matching, network analysis, and predictive modelling. By connecting seemingly disparate pieces of information, AUSTRAC can identify patterns, uncover hidden relationships between individuals and entities, and map out complex criminal networks. This intelligence is then disseminated in actionable reports to domestic law enforcement (e.g., Australian Federal Police, state police forces), national security agencies (e.g., ASIO), and revenue collection agencies (e.g., ATO), enabling them to launch or advance investigations that lead to arrests, asset seizures, and convictions.

7.2. Regulatory Enforcement and Supervision

Beyond intelligence, AUSTRAC is the primary regulator for AML/CTF compliance in Australia. This involves:

• Monitoring Compliance: AUSTRAC monitors regulated entities’ adherence to their obligations under the AML/CTF Act and Rules. This includes assessing the adequacy of their AML/CTF programs, customer identification procedures, and reporting practices.
• Guidance and Education: AUSTRAC provides extensive guidance, industry advisories, and educational materials to help businesses understand and meet their compliance obligations. This includes specific guidance tailored to the digital currency sector.
• Audits and Investigations: Where non-compliance is suspected, AUSTRAC conducts audits and investigations. These can range from routine compliance reviews to in-depth forensic investigations into specific alleged breaches.
• Enforcement Actions: AUSTRAC has a range of enforcement powers, including:
  • Issuing Infringement Notices: For minor breaches.
  • Imposing Civil Penalties: Substantial fines for serious and systemic non-compliance, as seen in high-profile cases involving major banks and global crypto exchanges (e.g., AUSTRAC’s enforcement action against Binance Australia, which included an audit order, AUSTRAC, 2025, August 22).
  • Seeking Court Orders: Including injunctions and declarations of contravention.
  • Criminal Referrals: Referring matters to the Commonwealth Director of Public Prosecutions for criminal prosecution in cases of severe and deliberate breaches.

This robust enforcement capability serves as a powerful deterrent, compelling regulated entities, including DCEs, to prioritize and invest in strong AML/CTF controls. The ‘Use It or Lose It’ initiative falls squarely within this supervisory mandate, designed to enhance the accuracy and integrity of the regulated population.

7.3. International Collaboration and Partnerships

Financial crime, particularly in the digital asset space, is inherently transnational. AUSTRAC plays a critical role on the international stage, collaborating with global partners to combat these borderless threats:

• Egmont Group of Financial Intelligence Units: AUSTRAC is an active member of the Egmont Group, a global network of FIUs that facilitates the secure exchange of financial intelligence to combat money laundering and terrorist financing. This network is invaluable for tracing illicit funds across multiple jurisdictions.
• Financial Action Task Force (FATF): AUSTRAC actively contributes to the development and implementation of international AML/CTF standards set by the FATF, particularly those pertaining to virtual assets and Virtual Asset Service Providers (VASPs).
• Bilateral and Multilateral Agreements: AUSTRAC maintains strong bilateral relationships with FIUs and law enforcement agencies globally, facilitating direct intelligence sharing and operational cooperation.
• Capacity Building: AUSTRAC often shares its expertise and provides technical assistance to other countries, particularly in the Asia-Pacific region, to strengthen global AML/CTF capabilities.

7.4. Public-Private Partnerships: The Fintel Alliance

Recognizing that government agencies cannot combat financial crime in isolation, AUSTRAC champions public-private partnerships. A prime example is the Fintel Alliance, a world-first initiative that brings together government agencies, financial institutions, and the private sector (including cryptocurrency businesses) to share information, develop joint strategies, and coordinate efforts to disrupt serious financial crime. This collaborative model enhances Australia’s collective intelligence and operational capabilities, enabling a more agile response to emerging threats.

7.5. Risk Assessments

AUSTRAC regularly conducts national risk assessments, such as the National Money Laundering Risk Assessment (AUSTRAC, 2024) and the Proliferation Financing National Risk Assessment (AUSTRAC, 2022). These reports identify and analyze key money laundering and terrorism financing threats and vulnerabilities within Australia’s financial system, including those specific to the digital currency sector. These assessments inform AUSTRAC’s regulatory priorities, guidance, and enforcement strategies, ensuring a risk-based approach to financial crime prevention. The ‘Use It or Lose It’ initiative directly addresses a vulnerability identified through such ongoing risk assessments: the potential for dormant entities to be exploited.

Through these interconnected functions, AUSTRAC serves as a critical guardian of Australia’s financial system, working tirelessly to protect it from criminal abuse and safeguard national security.

8. International Perspectives on Regulating Digital Currency Exchanges: Harmonizing Global Efforts

The borderless nature of digital currencies necessitates a harmonized and collaborative approach to regulation at an international level. While national jurisdictions like Australia implement their own frameworks, these are often guided by, and contribute to, global standards. The Financial Action Task Force (FATF) stands as the preeminent international body in this regard.

8.1. The Financial Action Task Force (FATF) and its Guidance

The FATF is an inter-governmental body established in 1989 to set standards and promote effective implementation of legal, regulatory, and operational measures for combating money laundering, terrorist financing, and other related threats to the integrity of the international financial system. Its influence on global AML/CTF policy, including for digital currencies, is profound.

• Recommendation 15 (New Technologies): This key recommendation advises countries to identify and assess the money laundering and terrorist financing risks arising from new technologies, and to apply AML/CTF measures to mitigate these risks. It explicitly brought virtual assets and Virtual Asset Service Providers (VASPs) under the scope of FATF standards.

• Guidance for Virtual Assets and Virtual Asset Service Providers (VASPs): First issued in 2019 and periodically updated, this comprehensive guidance details how FATF standards should apply to virtual assets and VASPs. It clarifies that VASPs, which include DCEs, crypto ATM operators, and entities facilitating transfers of virtual assets, are ‘reporting entities’ and must be regulated for AML/CTF purposes. This means they must:

  • Be licensed or registered.
  • Implement robust Customer Due Diligence (CDD) and Know Your Customer (KYC) procedures.
  • Conduct ongoing transaction monitoring.
  • Maintain detailed records.
  • Report suspicious transactions to their national FIU.
  • Implement and maintain an AML/CTF program.

• The ‘Travel Rule’ (Recommendation 16): A particularly significant aspect of the FATF guidance is the application of the ‘Travel Rule’ to VASPs. This rule requires VASPs to obtain and transmit certain originator and beneficiary information (name, account number, physical address, etc.) for virtual asset transfers above a de minimis threshold (typically USD/EUR 1,000). The implementation of the Travel Rule presents substantial technical and operational challenges for the crypto industry, given the pseudonymous nature of blockchain transactions and the lack of a standardized global messaging protocol for VASP-to-VASP information exchange.

FATF’s ongoing emphasis is on a ‘risk-based approach,’ urging jurisdictions and VASPs to identify, assess, and understand their specific money laundering and terrorist financing risks, and then implement proportionate measures to mitigate them. AUSTRAC’s ‘Use It or Lose It’ initiative directly aligns with FATF’s recommendations by seeking to ensure that only legitimate, supervised VASPs operate within its jurisdiction, thereby strengthening the overall integrity of the VASP sector.

8.2. Comparative Regulatory Approaches in Other Jurisdictions

While FATF sets the overarching standards, the implementation details vary across major jurisdictions, reflecting different legal traditions, market structures, and risk appetites:

• United States: The US employs a fragmented regulatory approach, with multiple agencies having jurisdiction. The Financial Crimes Enforcement Network (FinCEN) considers crypto exchanges as Money Service Businesses (MSBs) and requires them to register and comply with AML/CTF obligations. The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) regulate crypto assets they classify as securities or commodities, respectively. This multi-agency approach can create complexities for businesses seeking clarity.
• European Union: The EU has been moving towards a harmonized framework. Its 5th Anti-Money Laundering Directive (AMLD5) brought crypto exchanges and custodian wallet providers under AML/CTF regulations, requiring registration and customer identification. The proposed Markets in Crypto-Assets (MiCA) regulation aims to create a comprehensive, pan-European framework for issuing and providing services related to crypto assets, addressing market integrity, consumer protection, and financial stability, alongside AML/CTF.
• United Kingdom: The Financial Conduct Authority (FCA) supervises crypto asset businesses for AML/CTF purposes, requiring registration. Similar to Australia, the UK has seen a robust crackdown on unregistered or non-compliant firms.
• Singapore: The Monetary Authority of Singapore (MAS) is widely regarded as a forward-thinking regulator, having implemented the Payment Services Act (PSA), which licenses and regulates digital payment token (DPT) service providers, including for AML/CTF purposes. Singapore emphasizes a risk-based, technology-neutral approach to foster innovation while managing risks.

Common threads across these jurisdictions include mandatory registration/licensing, stringent KYC/CDD, transaction monitoring, and suspicious activity reporting. However, differences persist in the scope of regulated activities, the classification of digital assets, and the specifics of Travel Rule implementation.

8.3. Challenges of Global Coordination and Regulatory Arbitrage

Despite the efforts of FATF and individual jurisdictions, the global coordination of crypto regulation remains challenging. The speed of innovation often outpaces legislative processes, leading to regulatory gaps. These gaps, coupled with varying enforcement capacities and political priorities, create opportunities for regulatory arbitrage, where illicit actors strategically choose jurisdictions with weaker oversight. The need for truly harmonized international standards, consistent enforcement, and seamless cross-border information sharing remains paramount to effectively combat transnational financial crime facilitated by digital assets. AUSTRAC’s ‘Use It or Lose It’ initiative is a national effort that contributes to these global objectives by strengthening Australia’s part of the international financial integrity chain.

9. Recommendations for Enhancing Regulatory Effectiveness in the Digital Currency Sector

Building upon AUSTRAC’s proactive ‘Use It or Lose It’ initiative and acknowledging the persistent challenges in regulating digital currency exchanges, several strategic recommendations can further strengthen Australia’s AML/CTF framework and foster a more secure and innovative digital asset ecosystem:

9.1. Establish Clear, Adaptive, and Future-Proof Guidelines

While the AML/CTF Act provides a foundational framework, the rapid evolution of digital assets necessitates equally dynamic regulatory guidance. AUSTRAC should continue to develop and update comprehensive regulations and interpretive guidance that addresses the unique characteristics of new digital currencies, DeFi protocols, NFTs, and other emerging blockchain applications. Key aspects include:

• Technology-Neutral Principles: Regulations should focus on the function and inherent risks of an activity, rather than being overly prescriptive about specific technologies. This allows the framework to remain relevant as technology evolves.
• Clarity on Asset Classification: Provide clear and consistent guidance on how different types of digital assets (e.g., utility tokens, security tokens, stablecoins, NFTs) are classified under Australian law and which regulatory obligations apply to them. This reduces ambiguity for businesses and investors.
• Proportionality and Risk-Based Approach: While ensuring robust compliance, the guidelines should apply a proportionate risk-based approach, differentiating obligations based on the size, complexity, and risk profile of the DCE. Smaller, lower-risk entities might benefit from simplified compliance pathways, provided core AML/CTF principles are upheld.
• Regular Review and Consultation: Implement a structured process for periodic review and updating of regulations, coupled with extensive public and industry consultation, to ensure they remain effective and responsive to market developments.

9.2. Promote Deeper Industry Collaboration and Information Sharing

Effective financial crime prevention is a shared responsibility. AUSTRAC should continue to foster and deepen collaboration between regulators, industry stakeholders (including traditional financial institutions and technology providers), and law enforcement agencies. This can be achieved through:

• Expanded Fintel Alliance Initiatives: Extend the scope and participation within the Fintel Alliance to include a broader range of digital currency sector participants. This would facilitate richer, more timely intelligence sharing on emerging threats, typologies, and best practices.
• Regulatory Sandboxes and Innovation Hubs: Continue to support regulatory sandboxes and innovation hubs that allow new DLT-based businesses to test innovative products and services in a controlled environment, with direct regulatory engagement. This can help shape future regulation and ensure that compliance is embedded from the outset.
• Industry Working Groups: Establish dedicated working groups focused on specific challenges, such as Travel Rule implementation for VASPs, combating DeFi-related illicit finance, or standardizing data formats for reporting.
• Capacity Building within Industry: Provide accessible training materials and workshops for DCEs, particularly smaller players, to enhance their understanding of AML/CTF obligations and the latest financial crime typologies.

9.3. Invest in Advanced Regulatory Technology (RegTech) and Supervisory Technology (SupTech)

Leveraging cutting-edge technology is essential for regulators to keep pace with the digitally native financial crime landscape. AUSTRAC should significantly invest in and adopt RegTech and SupTech solutions:

• Artificial Intelligence and Machine Learning: Deploy AI/ML tools for enhanced transaction monitoring, anomaly detection, risk profiling, and pattern recognition across large datasets of financial intelligence. This can help identify sophisticated money laundering schemes that traditional rules-based systems might miss.
• Blockchain Analytics Tools: Utilize and develop advanced blockchain analytics capabilities to trace complex crypto transaction flows, identify connections to known illicit addresses, and de-anonymize wallet clusters.
• Automated Compliance Monitoring: Explore SupTech solutions that can automate aspects of compliance monitoring for DCEs, potentially reducing manual burdens while increasing the efficiency and effectiveness of oversight.
• Data Standards and Interoperability: Advocate for and develop standardized data reporting formats for DCEs that facilitate seamless data exchange between regulated entities, AUSTRAC, and international partners, particularly for Travel Rule compliance.

9.4. Enhance Public Awareness and Education on Digital Asset Risks

Empowering consumers and legitimate businesses with knowledge is a critical line of defense against financial crime. AUSTRAC, in collaboration with industry bodies and consumer protection agencies, should intensify efforts to:

• Educate Consumers: Launch targeted public awareness campaigns to inform individuals about the risks associated with digital assets, including investment scams, phishing attacks, and the importance of using regulated and compliant exchanges. Highlight the dangers of unregulated peer-to-peer platforms.
• Inform Businesses: Provide clear, accessible information to businesses on their AML/CTF obligations when dealing with digital assets, even if they are not primarily DCEs but facilitate crypto transactions as a secondary service.
• Promote Due Diligence: Encourage consumers and businesses to conduct their own due diligence on digital asset service providers, including checking AUSTRAC’s register for active registrations.

9.5. Advocate for Stronger International Regulatory Harmonization

Australia, through AUSTRAC, should continue to be a strong voice on the international stage, advocating for greater harmonization of AML/CTF standards for digital assets. This includes:

• Consistent Travel Rule Implementation: Work with international partners to develop practical, interoperable solutions for global Travel Rule compliance, potentially leveraging new technological solutions.
• Shared Best Practices: Facilitate the exchange of best practices in crypto regulation and enforcement with other leading jurisdictions.
• Addressing Regulatory Arbitrage: Advocate for global minimum standards and coordinated enforcement actions to close loopholes exploited by criminals engaging in regulatory arbitrage.

By implementing these recommendations, Australia can further solidify its position as a leader in responsible digital asset regulation, creating a more secure environment for innovation while effectively combating financial crime in the evolving digital age.

10. Conclusion

AUSTRAC’s ‘Use It or Lose It’ initiative represents a timely, strategic, and proactive intervention to address the systemic vulnerabilities posed by inactive digital currency exchanges within Australia’s financial system. By compelling dormant entities to either reactivate their operations and meet stringent compliance standards or voluntarily withdraw their registrations, AUSTRAC is undertaking a critical cleansing of its regulatory registry. This action is not merely administrative but a fundamental step towards enhancing the integrity of the Australian financial system and bolstering its defenses against exploitation by sophisticated criminal entities engaged in money laundering, terrorist financing, fraud, and proliferation financing.

The initiative is poised to yield multifaceted benefits, including a significant enhancement of consumer confidence in the legitimate cryptocurrency sector, a substantial reduction in avenues for criminal exploitation, and a marked improvement in AUSTRAC’s capacity for effective regulatory oversight. By fostering a market comprised of fewer but more robust and compliant DCEs, it aims to cultivate a more secure, transparent, and resilient digital asset ecosystem. This proactive stance aligns Australia with global best practices articulated by the Financial Action Task Force, reinforcing the nation’s commitment to international AML/CTF standards.

However, the campaign also underscores the broader, persistent challenges inherent in regulating the rapidly evolving cryptocurrency landscape. Issues such as the pseudonymity of digital assets, the relentless pace of technological innovation, and the complexities arising from global jurisdictional disparities continue to demand adaptive and forward-thinking regulatory strategies. Overcoming these challenges requires continuous investment in regulatory technology, sustained efforts to foster deeper public-private collaboration, and a steadfast commitment to international harmonization of standards.

In essence, AUSTRAC’s ‘Use It or Lose It’ initiative is a crucial articulation of the principle that participation in the regulated financial sector carries an enduring responsibility. It sends an unequivocal message that registration is not a dormant privilege but an active commitment to compliance, integrity, and the shared national objective of safeguarding Australia’s financial security. As the digital asset space continues its transformative trajectory, such agile and decisive regulatory actions will remain indispensable for navigating its complexities and harnessing its potential responsibly.

References

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