DeFi to Fiat Bridges: Navigating Australia’s Regulatory & AFSL Framework

Introduction

Navigating the Australian regulatory framework for a DeFi-to-fiat bridge is essential to ensure compliance in the rapidly evolving legal landscape for the crypto and digital asset sector. As the Australian Government introduces new legislation like the Corporations Amendment (Digital Assets Framework) Bill 2025 (Cth), bridge operators must understand how their products and services, including payment stablecoins, are classified under the Corporations Act 2001 (Cth) as a financial product to maintain market integrity under the oversight of the Australian Securities and Investments Commission (ASIC).

For developers and liquidity providers, obtaining an Australian Financial Services Licence (AFSL) often hinges on whether a platform is “making a market” or operating a non-cash payment facility. This guide provides a detailed overview of the licensing requirements for a digital asset platform, including stablecoins and digital tokens, to help businesses navigate ASIC’s regulatory requirements and Australia’s regulatory landscape with greater certainty.

Making a Market: The s766D Authorisation

Why Your DeFi Bridge Triggers the Market Maker Classification

The determination of whether a DeFi-to-fiat bridge is “making a market” depends on the specific definition within Section 766D of the Corporations Act 2001 (Cth). This provision sets out a functional test that assesses an entity’s conduct in the marketplace. An operator is considered to be making a market if they engage in specific quoting activities that create a reasonable expectation of execution for users.

The key statutory tests under Section 766D are:

• Regular Price Quoting: The entity must regularly state the prices at which it is prepared to buy and sell financial products on its behalf, distinguishing it from brokerage activities.
• Reasonable Expectation of Execution: Other individuals must have a reasonable expectation of successfully completing transactions at the prices quoted by the entity.

For DeFi-to-fiat bridge developers, these criteria directly apply to the core functions of their platforms. A bridge’s automated system that provides continuous and executable conversion rates for a digital asset is highly likely to be viewed as making a market.

Criteria for “Making a Market”	Application to a DeFi-to-Fiat Bridge
Regular Price Quoting	A bridge’s automated system continuously displays buy and sell prices for converting a digital asset to fiat.
On Own Behalf	The bridge operator uses its capital or liquidity pools to honour the quoted prices, acting as the principal in the transaction.
Reasonable Expectation of Execution	Users interact with the bridge with the clear expectation that their conversion will occur at or near the displayed rate.

ASIC’s View on Liquidity & Continuous Quoting

ASIC has provided interpretive guidance that applies the principles of Section 766D directly to the digital asset sector. This guidance, primarily found in Information Sheet 225 (INFO 225), clarifies that if a digital asset is a financial product, any entity regularly quoting prices for it may be making a market.

ASIC’s interpretation emphasises the intent behind the quoting activity, which helps distinguish genuine market-making from other types of trading. The regulator’s focus is on whether the activity is intended to provide liquidity to the market. A bridge’s primary function is to offer a constant source of liquidity for users to move between the DeFi and traditional finance ecosystems.

According to ASIC, market making requires “continuous bid/ask quotes intended to provide liquidity,” a function that:

• Supports market depth.
• Facilitates price discovery, rather than just executing occasional trades.

Therefore, any bridge mechanism that provides continuous and executable quotes on its account likely falls within the Section 766D definition. This exposes the operator to significant regulatory enforcement risk if not properly licensed.

Understanding When a Bridge is a Payment Tool

Key Triggers for NCP Facility Classification

A DeFi-to-fiat bridge may be classified as providing a Non-Cash Payment (NCP) facility, which is a type of financial product under the Corporations Act 2001 (Cth). This classification creates a set of licensing obligations separate from those related to market making. Broadly, an NCP facility is any arrangement that allows users to make payments without using physical cash.

Several specific functions can cause a bridge to be regulated as a payment system. The key triggers for this classification include:

• Facilitating Fiat Off-Ramps: The core purpose of a fiat off-ramp is to enable a payment from the crypto ecosystem into the traditional banking system. The bridge protocol itself serves as the facility through which this value transfer occurs, bringing it within the scope of NCP regulation.
• Integrating with Digital Wallets: When a bridge integrates with wallets to enable seamless fiat conversions, it provides a payment facilitation service. As seen in Australian Securities and Investments Commission v BPS Financial Pty Ltd [2024] FCA 457, it is often the surrounding infrastructure, such as the wallet enabling value transfers, that constitutes the regulated NCP facility, not the underlying asset itself.
• Using Stablecoins for Settlement: The use of fiat-backed stablecoins is generally considered a significant trigger for NCP classification. ASIC’s guidance in INFO 225 clarifies that fiat-backed stablecoins are often considered NCP facilities.

Consequently, a bridge that swaps a volatile crypto asset for a stablecoin before the final fiat conversion is dealing in an NCP facility.

Impact of the Payments System Modernisation Framework

Forthcoming legislative changes are set to formalise and expand the regulation of digital asset payment services, directly impacting DeFi-to-fiat bridges. The Treasury Laws Amendment (Payments System Modernisation) Bill 2025 (Cth) is a key piece of this reform, designed to update Australia’s regulatory framework to address emerging technologies.

This new legislation expands the definition of a “payment system” to explicitly cover crypto asset payment facilitators. A significant change is the introduction of a dedicated framework for payment stablecoins, which will be regulated as Stored-Value Facilities (SVFs).

Under this framework, specific obligations arise:

• The facility through which stablecoins are issued and redeemed will be considered a financial product, requiring the issuer to hold an AFSL.
• This directly affects bridges that use stablecoins, as they become integral components of a regulated payment system.

Distinguishing Between Liquidity Providing & Software Hosting

Where Your Liability Begins as a Liquidity Provider

An entity that controls or operates a liquidity pool for a DeFi-to-fiat bridge is highly likely to be considered as providing multiple regulated financial services under the Corporations Act 2001 (Cth).

This level of involvement goes beyond simply offering technology and extends to running a financial services business. Consequently, this necessitates an AFSL.

Your liability as a liquidity provider begins when your activities trigger specific classifications, including:

• Making a Market: If you actively use a liquidity pool to quote and execute buy and sell orders for digital assets, you are likely making a market under Section 766D of the Corporations Act 2001 (Cth).
• Providing a Custodial Service: When you hold users’ digital assets in a pooled arrangement, you are providing a “custodial or depository service,” which is a distinct financial service requiring its own AFSL authorisation.
• Operating a Managed Investment Scheme (MIS): A liquidity pool in which users contribute assets in exchange for a share of trading fees often creates a complex licensing obligation. This is because it involves pooling contributions to generate a financial benefit, potentially triggering collective investment regulation.

ASIC’s guidance in INFO 225 supports this view, consistently classifying arrangements like pooled staking or yield-bearing stablecoins as regulated activities.

Therefore, if you control the liquidity that users trade against, you are not just a passive participant but an active operator of a multifaceted financial services business.

The Factual Control Test for Software Hosts

In contrast to actively providing liquidity, merely developing and deploying a bridge’s software is generally considered a technical service that falls outside AFSL requirements.

The key distinction lies in whether you exercise control over user assets. To clarify this line, the Corporations Amendment (Digital Assets Framework) Bill 2025 (Cth) introduces a “factual control” test.

Under this test, a person is considered to be in possession of a digital asset if they have the practical ability to transfer it or to exclude others from transferring it.

This assessment focuses on technical reality over legal disclaimers. Even if you claim your platform is decentralised, you are deemed to have factual control if you:

• Hold administrative keys; or
• Can influence a multi-signature wallet to move funds.

This means liability for software hosts is determined by their actual power to intervene in transactions.

If you only publish open-source code and users interact with it through their own self-custodied wallets, you are less likely to be providing a financial service.

However, once you can control, manage, or take possession of user assets, you are likely operating a regulated Digital Asset Platform (DAP) and require an AFSL.

Settlement Risk & Failed Cross-Chain Swaps

Operator Liability for AFSL Holders

Bridge operators who hold an AFSL are bound by specific statutory duties under the Corporations Act 2001 (Cth). These obligations become critical when a cross-chain swap fails, as they set a high standard for managing user assets and maintaining platform integrity. Consequently, a failure to meet these standards can result in significant regulatory action from ASIC, including potential AFSL audits and investigations.

The key duties for licensed operators include:

• Providing services efficiently, honestly, and fairly: Under Section 912A(1)(a) of the Corporations Act 2001 (Cth), a bridge that experiences frequent settlement failures or cannot effectively recover user funds would likely breach the obligation to provide services efficiently, honestly, and fairly.
• Maintaining adequate risk management systems: Section 912A(1)(h) requires licensees to implement robust systems to manage operational and financial risks. For a digital asset platform, this includes conducting independent third-party audits of smart contracts, ensuring atomic settlement through technical solutions such as Hash Time-Locked Contracts (HTLCs), and implementing contingency plans for network failures.
• Access to dispute resolution: Licensed service providers must have both internal and external dispute resolution systems. This includes membership with the Australian Financial Complaints Authority (AFCA), which provides consumers with a formal, low-cost channel to seek remedies for financial losses arising from failed transactions.

Risks & Responsibilities Under General Law

Even if a bridge operator is not licensed, they are not exempt from legal responsibilities. All service providers operating in Australia are subject to general laws that protect consumers and govern contractual relationships. Furthermore, these laws provide avenues for users to seek remedies if a transaction fails and their digital asset is lost.

Operators face liability under two main areas of general law:

• Australian Consumer Law (ACL): The ACL provides consumer guarantees that services must be rendered with due care and skill and be fit for their intended purpose. A bridge that fails to complete a swap could be considered unfit for purpose. The ACL also prohibits misleading or deceptive conduct, which applies to any claims made about the platform’s security or reliability.
• Contract Law: A bridge’s Terms of Service create a binding contract between the operator and the user. While operators may include clauses to limit their liability, such terms can be challenged and found void under the ACL if they are unfair contract terms.

Conclusion

Navigating Australia’s regulatory landscape requires DeFi-to-fiat bridge operators to correctly classify their activities under the Corporations Act 2001 (Cth), primarily distinguishing between “making a market” and operating an NCP facility. An operator’s liability also hinges on whether they are an active liquidity provider with factual control over user assets or merely a software host. All platforms face significant settlement risks from failed swaps under either AFSL duties or general consumer law.

Successfully managing these complex compliance obligations demands specialised legal and regulatory guidance to avoid operating an unlicensed platform. For expert assistance and the development of a tailored compliance framework, contact our AFSL application lawyers at AFSL House to turn your regulatory challenges into strategic opportunities.

Frequently Asked Questions (FAQ)