Australian Stablecoin Redemption Rights & Regulatory Framework for a 1:1 Peg

Introduction

For any stablecoin issuer in Australia, maintaining a 1:1 peg is fundamentally a matter of legal and contractual compliance, not just technical design. The Australian regulatory framework, enforced by bodies like the Australian Securities and Investments Commission (ASIC) and the Treasury, prioritises an enforceable right to redemption as the primary test for whether a stablecoin is a legitimate payment tool. This focus on a legally binding promise, often governed by the Corporations Act 2001 (Cth), is the cornerstone for securing an Australian Financial Services Licence (AFSL) and ensuring the price stability of payment stablecoins.

This guide moves beyond technical mechanics to provide a legal and contractual blueprint for stablecoin issuers. It explains how to draft the essential redemption clauses in your terms and conditions to satisfy regulatory scrutiny and reduce the risk of license denial. Moreover, it details how to ring-fence reserve assets legally to protect them from an issuer’s insolvency, addressing one of the key risks associated with the stablecoin market.

Interactive Tool: See If Your Stablecoin Redemption Process Meets Australian Law

The Legal Promise to Redeem & Contractual Obligations

The Issuer’s Contractual Obligation

For Australian regulators, a stablecoin’s 1:1 peg to a fiat currency is not merely a technical feature or a marketing target; rather, it is a legally enforceable contractual obligation.

To secure an AFSL, a stablecoin issuer must transform the peg from an aspirational goal into a binding promise documented in its terms and conditions. This requirement ensures that a user has a clear and direct right of redemption against the issuer.

This legal framework stems from the classification of payment stablecoins as tokenised Stored Value Facilities (SVFs), a classification that directly impacts stored value and digital wallet providers.

Under the proposed legislation, a tokenised SVF is defined by specific characteristics:

• The holder’s right to redeem a fixed amount of money.
• A right that is exercisable only by the person who possesses the digital token.

Therefore, the redemption right is not an optional feature, but the core legal element that defines the product and brings it within ASIC’s regulatory perimeter.

Key Elements of a Compliant Redemption Clause

To satisfy ASIC’s requirements, the redemption clause within a stablecoin issuer’s Terms and Conditions (T&Cs) must be drafted with precision. It needs to create an unambiguous and enforceable right for the holder.

A compliant clause must contain several essential components:

• Creation of a binding obligation: The T&Cs must explicitly state that the stablecoin issuer is legally obligated to redeem the tokens for fiat currency upon request, as language that suggests discretion (such as “we reserve the right to redeem”) is insufficient.
• Specification of a fixed denomination: The clause must define the exact redemption value, which should be a fixed 1:1 ratio in a single fiat currency, for instance, one token for one Australian dollar.
• A right linked to the token: The redemption right must be attached to the possession of the digital token itself, ensuring the right travels with the token when it is transferred, rather than being tied to a specific user account.
• Clear redemption mechanics: The process for exercising the redemption right must be clearly outlined, including specifying the channels for making a request, any necessary identity verification steps, processing timeframes, and the method for paying out the fiat currency.

Defining an Unconditional Right to Redeem

ASIC guidance requires that holders have an “unconditional” right to redeem their stablecoins, but this term requires careful interpretation. It does not prohibit all conditions; rather, it disallows any condition that would convert the redemption right into a discretionary benefit controlled by the issuer.

Permissible conditions are those that are reasonable and clearly disclosed, such as:

• Satisfying standard Anti-Money Laundering (AML) and Know Your Customer (KYC) checks.
• Meeting a commercially reasonable minimum redemption threshold.
• Adhering to standard settlement timing windows and processing cutoffs.

Conversely, conditions that are considered impermissible because they undermine the redemption right include:

• Clauses that give the issuer sole discretion to suspend redemptions without predefined triggers.
• Blanket force majeure clauses that do not specify a path to reinstatement.
• Terms that subordinate the holder’s redemption rights to the claims of other creditors.

Ring-Fencing Reserve Assets & User Protection

The Importance of Segregating Reserve Assets

A primary concern for both the Treasury and ASIC is the risk of a “run” on a stablecoin issuer.

If an issuer becomes insolvent, it is critical that stablecoin holders are not treated as unsecured creditors. This classification would force them to compete with other creditors for a share of the company’s general assets.

To prevent this scenario, the legal framework requires reserve assets to be “ring-fenced” through specific measures:

• Ensuring assets backing the stablecoins are legally and operationally separated from the issuer’s own operational funds.
• Protecting the reserve in the event of the issuer’s liquidation so it remains available to meet redemption requests.
• Holding the assets strictly for the benefit of the users, rather than as general assets of the company.

The ultimate test of this protection is “insolvency remoteness.”

This legal concept ensures that if the issuer fails, specific protections apply:

• A liquidator cannot use the reserve assets to pay off other debts, such as office rent or staff salaries.
• The liquidator is legally obligated to return those assets directly to the token holders.

Structuring a Compliant Trust for Asset Protection

The most effective way to achieve legal separation of reserve assets is by placing them in an express trust governed by Australian law.

Simply opening a separate bank account is not enough. The trust must be formally structured to be legally effective against insolvency risks.

Ultimately, this structure legally proves that the reserve assets belong to the token holders, rather than the issuer.

A compliant trust requires a clear declaration, typically in a formal trust deed, that identifies several key elements:

• The trust property, which refers to the specific reserve assets being held.
• The beneficiaries, specifically the stablecoin holders who are treated as a class.
• The trustee, acting as the entity responsible for holding the assets, which can be the issuer or an independent trustee company.
• The trust purpose, explicitly stating that the assets are held exclusively for meeting redemption obligations.

To maintain compliance, the trust deed must prohibit the use of reserve assets for any purpose other than fulfilling redemptions and paying disclosed fees.

Furthermore, the issuer’s operational bank accounts must be kept demonstrably separate from the trust account. This is crucial because any commingling of funds could completely invalidate the trust structure.

For enhanced protection and to satisfy regulators more easily, issuers may consider appointing an independent, licensed trustee company to manage the reserve assets.

ASIC’s Audit Frequency & Reserve Transparency Expectations

Meeting Monthly & Quarterly Disclosure Obligations

Under the Treasury’s exposure draft legislation, providers of tokenised SVFs face strict transparency rules.

To comply with these rules, a key requirement is the mandatory publication of an online statement detailing:

• The current reserve assets held by the provider.
• Any outstanding liabilities associated with the facility.

Importantly, this statement must be published within the first seven days of each calendar month.

In addition to monthly disclosures, ASIC’s Stablecoin and Wrapped Token Relief Instrument 2025/867 imposes further reporting obligations.

After four months of operation, stablecoin issuers are required to publish quarterly reserve reports that must confirm:

• The reserves consist entirely of cash or cash equivalents.
• These assets fully cover all tokens currently in circulation.

Failure to comply with these ongoing disclosure obligations, which form part of your AFSL general obligations, carries significant consequences. Under the exposure draft legislation, non-compliance or publishing misleading information can result in:

• Severe civil and criminal penalties for the entity.
• Up to five years of imprisonment for responsible officers.

Annual Audit Requirements & Standards

Beyond monthly and quarterly reporting, stablecoin issuers are also subject to an annual independent audit.

Specifically, this requirement mandates that:

• An audited report must be prepared by a qualified, independent auditor after 16 months of issuance.
• The report serves as a crucial component of ASIC’s ongoing monitoring of AFSL holders.

The audit must provide a comprehensive verification of the issuer’s reserves.

Specifically, the auditor is required to confirm several key points:

• The reserve assets exist and are held in the manner described in the issuer’s disclosures.
• The reserve assets are legally segregated from the issuer’s general company assets.
• The value of the reserves equals or exceeds 100% of the outstanding tokens as of the reporting date.
• The assets held in reserve meet the eligibility criteria specified by ASIC, such as being cash or cash equivalents.

Audits should be conducted in accordance with the Australian Standard on Assurance Engagements (ASAE).

When conducting these audits, regulators expect the following:

• The highest level of assurance, known as Reasonable Assurance, under standards like ASAE 3000 or ASAE 3100.
• Recognition that the auditor’s report is a legally significant document, where an adverse finding could trigger an investigation by ASIC.

Legally Disclosing De-Peg Event Protocols

The Legal Duty to Disclose De-Peg Protocols

Under Australian law, failing to disclose the legal reality of a de-peg event can be considered misleading and deceptive conduct. Consequently, issuers have a legal duty to define and disclose their protocols for handling such scenarios.

Furthermore, the Treasury’s exposure draft legislation, influenced by events like the collapse of TerraUSD, mandates that issuers must address a de-peg not as a remote possibility but as a material event with defined legal consequences.

This disclosure obligation is pre-emptive, meaning it is triggered as soon as an event may reasonably be expected to affect the reserve value or the issuer’s ability to meet redemptions. Therefore, your T&Cs and Product Disclosure Statement (PDS) must clearly define these triggers, which include:

• A fall in the market value of reserve assets below 100% of the value of outstanding stablecoins.
• The failure of a counterparty, such as the financial institution holding the reserve assets.
• An operational failure that prevents the processing of redemptions.
• A regulatory action that freezes the issuer’s assets.
• A loss of liquidity in the reserve asset market that hinders timely redemptions.

Crucially, your T&Cs must not allow for a “silent de-peg” where the reserve value falls below par without public notification. Instead, the protocol must specify the precise and narrow conditions under which redemptions may be temporarily suspended.

To ensure compliance, the disclosed plan should outline specific actions and limitations, including:

• Valid reasons for suspension, such as a market infrastructure failure (noting that a fall in the stablecoin’s price on a secondary market is not a valid reason).
• The specific steps the issuer will take to restore the peg.
• Procedures to wind down the facility if necessary, including how any remaining assets will be distributed.

Distinguishing Between Liquidity Crunches & Insolvency

It is a legal requirement for an issuer’s T&Cs to contractually distinguish between a temporary liquidity crunch and a permanent insolvency event. This distinction is critical for managing holder expectations and outlining the issuer’s legal obligations during a de-peg scenario.

To ensure this distinction is clear, legal disclosures must address the two scenarios differently:

• A liquidity crunch refers to a temporary mismatch where the reserve assets are sufficient to cover all outstanding tokens but are not immediately liquid.
• Insolvency occurs when the reserve assets are permanently lost or their value has fallen below 100% of the outstanding tokens, making full redemption impossible.

To provide further clarity, legal disclosures must define the “maximum redemption window,” which is the longest acceptable time to process a redemption request, such as two or five business days. While a delay within this window may be a standard settlement process, exceeding it could signal a liquidity problem requiring immediate disclosure.

Depending on the severity of the delay, different protocols will apply to the situation:

• A liquidity crunch might trigger a temporary suspension of redemptions while assets are liquidated.
• An insolvency event would activate a formal wind-down protocol, often involving a pro-rata distribution of remaining assets to holders.

Avoiding the Redemption Fee Trap

Complying with the Honestly & Fairly Obligation

For any AFSL holder, structuring redemption fees is a critical compliance issue. Under Section 912A(1)(a) of the Corporations Act 2001 (Cth), a stablecoin issuer must provide its financial services “efficiently, honestly, and fairly,” a core tenet of AFSL compliance and regulation.

This obligation is not a vague guideline but an enforceable legal standard, making it crucial to understand the honestly and fairly obligation for Australian Financial Services Licence holders.

A common tactic for failing stablecoins is to introduce punitive redemption fees to discourage holders from exiting. However, if a stablecoin is marketed as maintaining a 1:1 peg but imposes a significant redemption fee, the peg becomes effectively a fiction.

To satisfy ASIC, any fees must be based on a reasonable, cost-recovery model rather than serving as a profit centre or a barrier to redemption. This model should cover verifiable expenses such as:

• Bank transfer costs.
• Compliance costs.

Permissible vs Impermissible Fee Structures

A redemption fee structure is inconsistent with the “efficiently, honestly, and fairly” standard if it is:

• Not cost-reflective.
• Applied inconsistently.
• Set at a level that deters redemption by retail holders.

Permissible redemption fees are those that align with Product Disclosure Statement (PDS) requirements and are calculated on a cost-reflective basis. For instance, a fixed fee per transaction to cover an issuer’s bank transfer and identity verification costs is likely permissible if disclosed.

Conversely, several fee structures common in other financial services are likely to be impermissible for a stablecoin issuer in Australia. These problematic structures include:

• Early redemption fees: Applying a penalty for redemptions within a specific period after purchase creates a de facto lockup of funds, which is inconsistent with the unconditional right to redemption that ASIC requires for payment stablecoins.
• Tiered fees that exclude small holders: A high minimum redemption amount, such as $50,000, combined with a fee structure that makes smaller redemptions economically irrational, effectively denies retail holders access to the redemption mechanism.
• Undisclosed fees: Any fee that is not clearly and completely described in the PDS and T&Cs constitutes a disclosure breach, regardless of whether the fee amount itself is reasonable.
• Dynamic fees adjusted during market stress: Some issuers include terms allowing them to increase redemption fees during periods of high demand, which ASIC is likely to view as an attempt to impair the redemption right precisely when it is most needed by holders.

Conclusion

For stablecoin issuers in Australia, maintaining a 1:1 peg requires a robust legal framework built on an enforceable right to redemption, the legal ring-fencing of reserve assets, and strict transparency through regular audits. These measures transform a technical promise into a contractual obligation, ensuring user protection and satisfying the stringent requirements for obtaining an AFSL.

Navigating this complex regulatory landscape requires specialised legal knowledge. To ensure your stablecoin products and services meet these new standards, contact AFSL House’s lawyers to discuss the requirements for obtaining an AFSL today.

Frequently Asked Questions

What is a tokenised Stored Value Facility or SVF under Australian law?

A tokenised SVF is the legal classification for a stablecoin where the right to redeem a fixed amount of money is attached to a digital token. This redemption right is exercisable only by the person possessing the token and is for a fixed amount in a single currency.

Do I need an Australian Financial Services Licence to issue a stablecoin?

Yes, issuing a stablecoin classified as a tokenised SVF is considered a financial service, so understanding do I need an Australian Financial Services Licence (AFSL) is a critical first step. This is because a tokenised SVF is regulated as a financial product under the Corporations Act 2001 (Cth).

What happens to the reserve assets if my company becomes insolvent?

If reserve assets are properly ring-fenced in a trust, they are legally separated from the issuer’s general assets and are not available to a liquidator to pay other creditors. This structure ensures the assets are protected as trust property and can be returned directly to token holders.

How often must I publish proof of reserves for my stablecoin?

Issuers are required to publish an online statement detailing their reserve assets and outstanding liabilities within the first seven days of each calendar month. Additionally, quarterly reserve reports are required after four months of operation, followed by an annual audited report after 16 months.

Can I suspend redemptions if my stablecoin’s price drops on an exchange?

No, a decline in your stablecoin’s price on a secondary market is not a valid reason to suspend redemptions. Suspensions are only permissible under specific, pre-disclosed conditions related to the issuer’s operational ability to process redemptions, such as a market infrastructure failure.

What are the rules for charging redemption fees?

Redemption fees must be reasonable, based on a cost-recovery model, and clearly disclosed to comply with the “efficiently, honestly, and fairly” obligation under the Corporations Act 2001 (Cth). They cannot be structured in a way that deters redemptions or serves as a significant profit centre for the stablecoin issuer.

What is the legal difference between a technical peg & a contractual redemption right?

A technical peg refers to the design or mechanism intended to maintain a stablecoin’s value, whereas a contractual redemption right is the legally enforceable promise required by ASIC. This right, documented in the T&Cs, obligates the issuer to redeem the token for fiat currency at par value.

What are the penalties for failing to disclose reserve information?

Failing to comply with monthly disclosure obligations or providing misleading information can result in severe civil and criminal penalties. Under proposed legislation, these penalties can include up to five years of imprisonment for responsible officers.

What types of assets are permitted in a stablecoin reserve?

Permitted reserve assets are limited to high-quality liquid assets, which primarily include cash held in an account with an Australian Authorised Deposit-taking Institution (ADI). Short-term, high-quality government securities may also be included in the reserve.