Do I Need an AFSL for a Digital Wallet or E-Wallet Service Under New Legislation

Introduction

In Australia, the regulation of digital wallet and e-wallet services is a critical consideration for any payments system provider. Under the Corporations Act 2001 (Cth), a digital wallet is often classified as a Non-Cash Payment (NCP) facility, which is a type of financial product that generally requires the provider to hold an Australian Financial Services Licence (AFSL). The regulatory landscape is currently evolving, with new draft legislation proposed for 2025 aiming to modernise the financial services regime to better address new and emerging payments, including digital asset platforms and stablecoins, to enhance consumer protection.

Determining whether an AFSL is necessary depends on the specific structure and function of the wallet. This guide provides a technical breakdown of the key regulatory triggers, including the “store of value” test, the important distinction between “issuing” and “arranging” a facility, and the strategic use of exemptions. It also addresses specific compliance obligations for wallet providers, such as those for custodial services involving a digital asset and the risks associated with holding client funds.

Understanding Non-Cash Payment (NCP) Facilities

Defining the Non-Cash Payment Facility 

Under section 763D of the Corporations Act 2001 (Cth), an NCP facility is defined as any arrangement that allows a person to make payments without the physical delivery of currency. This broad definition captures most modern digital payment systems, including digital wallets that move value electronically.

This classification is the primary trigger for requiring an AFSL, as an NCP facility is legally considered a “financial product.” The regulatory focus is on the payment arrangement itself, not the underlying technology.

For instance:

• The case of Australian Securities and Investments Commission v BPS Financial Pty Ltd [2024] FCA 457 clarified that a crypto wallet arrangement was the regulated financial product, while the blockchain it operated on was not.
• If your platform provides the system that enables users to pay, it is likely operating an NCP facility.

New Legislation & Modernised Payment Regulation

The Australian government is navigating payments system modernisation by reforming the regulation of payment service providers, with changes expected in 2025. Draft legislation aims to amend the Payment Systems (Regulation) Act 1998 (Cth), updating the definitions of “payment” and “payments systems” to formally include new and emerging methods like digital wallets.

This amendment will ensure the Reserve Bank of Australia can regulate digital wallet providers, promoting competition and stronger consumer protection.

These reforms will introduce a new core licensing regime for payment service providers, creating a graduated regulatory framework. This approach tailors obligations based on the provider’s function and risk profile. For example:

• A digital wallet that only passes payment instructions through to a bank will be subject to different regulations than a wallet that holds customer funds.
• Stored value facilities, such as prepaid accounts or stablecoin issuers, will face specific oversight.

Additionally, the new legislation introduces a ministerial power to designate certain payment platforms as presenting risks of national significance. This would subject them to additional oversight from regulators to ensure the stability and safety of Australia’s financial system.

Understanding the ‘Store of Value’ Test

Distinguishing Between Pass-Through & Stored Value Wallets

A critical factor in determining if a digital wallet requires an AFSL is the “store of value” test. This test distinguishes between two main types of wallets: pass-through and stored value.

A pass-through wallet, such as Apple Pay or Google Pay, acts as a technological conduit, transmitting payment instructions from a user’s linked bank account or card to a merchant. These wallets are often considered technical services rather than financial products because they do not hold customer funds.

Key characteristics of a pass-through wallet include:

Characteristic	Description
No Fund Holding	No customer balance is held or recorded by the wallet operator.
Settlement Responsibility	The user’s bank or card issuer remains responsible for the transaction settlement.
Technical Structure	The wallet functions as a technology wrapper over an existing regulated financial product.

In contrast, a stored value wallet allows users to load funds and maintain a balance directly within the application for future use. This model is common in neobank apps and services like PayPal.

If a wallet allows customers to preload funds or holds money without an immediate payment instruction, it is considered a stored value facility.

Regulatory Implications for Wallets Holding User Balances

If a digital wallet functions as a stored value facility, it has significant regulatory implications. Under Australian law, a wallet that holds a user balance is almost always classified as an NCP facility under section 763D of the Corporations Act 2001 (Cth). This classification makes the wallet a financial product, which triggers licensing obligations.

When a user can deposit funds that are controlled by the wallet provider before being sent to a payee, the provider is considered to be “issuing” a financial product. Consequently, the issuer of the stored value wallet is generally required to hold an AFSL. This requirement applies because the user relies on the wallet provider to make payments on their behalf from the stored balance.

The Distinction Between Issuing & Arranging

When You Are Considered to Be Issuing a Facility

Under Australian financial services law, you are considered to be “issuing” an NCP facility if your business creates, controls, and is legally liable for the product. An issuer is the principal entity that makes the payment facility available to users, thereby bearing the primary regulatory responsibility. This action is a financial service that generally requires you to hold an AFSL.

According to section 761E of the Corporations Act 2001 (Cth), you are likely the issuer of your digital wallet service:

Indicator of Issuing	Description
Control of Terms	Your business controls the rules and terms of the facility.
Direct Fund Acceptance	Your business accepts customer funds directly into the system.
Legal Obligation	Your business undertakes the legal obligation to make payments from customer balances.
Operational Control	Your business operates the stored value product and controls the settlement process.

Regulators focus on the economic substance of the arrangement. If your terms and conditions establish that you owe the money to the user, you are the issuer.

The case of ASIC v BPS Financial Pty Ltd [2024] FCA 457clarified that even if a business is an authorised representative of a licensee, it can still be deemed the issuer if it acts on its behalf, developed the product, and the contractual relationship is with the end-user.

The Role of an Arranger & Intermediary

Operating as an arranger or intermediary involves arranging to deal in financial services by connecting users to a financial product that is issued by a separate, licensed entity. This distinction is critical for structuring a fintech business model to manage licensing obligations. An arranger facilitates a client’s access to or use of an NCP facility but does not create or control it.

You are likely acting as an arranger under section 766C of the Corporations Act 2001 (Cth) if you:

Activity of an Arranger	Description
Introduction to Partner	Introduce users to a payment facility provided by a licensed partner, such as a bank or another AFSL holder.
Technology Front-End	Act as a technology front-end or user interface, while the licensed partner holds all customer funds.
Contractual Party	Ensure the user’s contract is technically with the licensed issuer, not your business.

This structure allows a startup to potentially operate under a partner’s AFSL as an authorised representative or through a distribution arrangement, a model sometimes referred to as AFSL for hire. 

However, if your business markets the digital wallet as its product or exerts significant control over the funds, the Australian Securities and Investments Commission (ASIC) may still classify you as the issuer, regardless of the partnership.

Exemptions & Structuring Options for Australian Businesses

Utilising the Low-Value Exemption & Managing the Cliff Edge

Australian businesses can operate a digital wallet without a full AFSL by using the low-value exemption. This relief is provided under the ASIC Corporations (Non-cash Payment Facilities) Instrument 2016/211 and is a common strategy for startups launching a new payments system.

To qualify for this exemption, the NCP facility must meet strict criteria. The key conditions include:

Condition	Requirement / Limit
Total Funds Held	The total value stored across all customers must remain below $10 million.
Per-User Limit	The maximum amount held for any single client cannot exceed $1,000 at any time.
Product Structure	The facility must not be a component of another financial product.

While this exemption allows wallet providers to test and grow their services, it creates a significant risk known as the “cliff edge.” The moment the total client funds exceed the $10 million threshold, the exemption instantly ceases to apply.

At that point, the business is in breach of the law if it continues to operate without an AFSL, forcing startups to plan for full licensing well before they approach the limit.

Differences Between Closed-Loop & Open-Loop Wallets

The regulatory treatment of a digital wallet also depends heavily on whether it is a “closed-loop” or “open-loop” system. This distinction is critical for determining if an AFSL is required.

A closed-loop wallet is a facility where funds can only be used within a single merchant’s ecosystem. These systems are typically exempt from AFSL requirements because they are not considered NCP facilities due to their limited payment functionality.

Under section 763D(2)(a)(i) of the Corporations Act 2001 (Cth):

• A facility is not a financial product if payments can only be made to one person, who is usually the issuer.
• For example, a store-specific gift card or a coffee shop app where you can only spend the loaded funds at that particular chain would be considered a closed-loop system.

In contrast, an open-loop wallet allows users to make payments at multiple, unaffiliated merchants, transfer funds to other users, or withdraw cash. Because the issuer and the payees are different entities, these wallets are almost always classified as regulated NCP facilities.

This means they trigger AFSL obligations unless another exemption, such as the low-value relief, applies.

Custodial Requirements for Digital Asset Platforms

When is a Custodial or Depository Service Authorisation Required?

Holding a digital asset on behalf of a client triggers the requirement for an AFSL authorisation for providing a “custodial or depository service.” Under section 766E of the Corporations Act 2001 (Cth), this is defined as holding a financial product, or a beneficial interest in one, on trust for a client.

It is important to note that this financial services obligation is separate from any requirements related to issuing an NCP facility.

The Australian government’s 2025 exposure draft legislation further clarifies these obligations by introducing a new type of financial product called a “Digital Asset Platform” (DAP). A DAP is defined as a facility where an operator possesses one or more digital tokens on trust for a client. This reform aims to:

• Close regulatory gaps, and
• Ensure that platforms holding digital assets for clients comply with the existing financial services regime to protect consumers.

Holding Private Keys & Digital Asset Oversight

Controlling the private keys associated with a user’s digital assets is the primary action that classifies a digital wallet or platform as custodial. If your service holds the private keys, you are considered to be providing a custodial or depository service under section 766E of the Corporations Act 2001 (Cth), which necessitates an AFSL authorisation.

In contrast, noncustodial or self-hosted wallets, where the user retains exclusive control over their private keys, generally fall outside this licensing requirement.

Obtaining this authorisation subjects the digital asset platform to significant oversight, including potential AFSL audits & investigations, and tailored compliance standards enforced by ASIC. These obligations are designed to ensure the safekeeping of client assets and include:

Obligation Area	Description
Asset Holding Standards	Complying with specific rules for asset segregation, reconciliation, and independent control testing, as outlined in ASIC’s Regulatory Guide 133.
Financial Requirements	Meeting minimum Net Tangible Assets (NTA) requirements to ensure the business is adequately capitalised.
Platform Rules	Under the proposed 2025 legislation, operators will need to establish clear rules for client onboarding, execution and settlement methods, and disclosure.

Managing Shadow Banking Risks for Payment Startups

The Two-Day Holding Period Rule

Digital wallet providers must be aware of the “shadow banking” risk, which arises when a payments system holds client funds for extended periods. Regulators, including ASIC and the Australian Prudential Regulation Authority (APRA), scrutinise wallets that retain balances for more than two business days without a pending transfer or payment instruction.

This practice is viewed as moving beyond simple payment facilitation and into the realm of deposit-like activities. To mitigate this risk, you should:

• Clearly mandate in your terms of service that funds are held for immediate payment purposes.
• Design the operational structure of your digital wallet to minimise float and ensure funds are settled promptly, typically within a T+2-day timeframe.

Avoiding Classification as a Banking

Action	Description
Mandate in Terms	Clearly mandate in your terms of service that funds are held for immediate payment purposes.
Design for Prompt Settlement	Design the operational structure of your digital wallet to minimise float and ensure funds are settled promptly, typically within a T+2-day timeframe.

Avoiding Classification as a Banking Deposit

If your digital wallet holds customer funds for longer than the two-day period, APRA may classify the activity as “deposit-taking,” which is considered banking business under the Banking Act 1959 (Cth). This reclassification has severe regulatory consequences.

Specifically, it would require your business to obtain an Authorised Deposit-Taking Institution (ADI) licence, a process that is far more complex and demanding than securing an AFSL.

For this reason, many payment startups choose to:

Strategy	Description
Partner with a Licensed Entity	Partner with a licensed Authorised Deposit-Taking Institution (ADI) or AFSL holder.
Act as a Technology Front-End	Structure the service as a technology front-end, allowing the licensed partner to handle the holding of client funds.

This approach enables startups to avoid being classified as a shadow bank and the associated prudential oversight from APRA.

Conclusion

Navigating Australia’s regulatory landscape for a digital wallet requires a technical understanding of whether the service is an NCP facility, its function under the “store of value” test, and your role as the issuer. Key considerations include leveraging available exemptions for startups, fulfilling custodial duties for any digital asset, and managing the critical shadow banking risks associated with holding client funds.

To ensure your payments system is built on a foundation of robust AFSL compliance, it is essential to seek specialised guidance. Contact the AFSL application lawyers at AFSL House in New South Wales today to leverage our trusted expertise and turn your regulatory challenges into strategic opportunities

Frequently Asked Questions (FAQ)