There are fears communities will soon lose faith in the Aboriginal flag if restrictions on its use are not quickly resolved.
A Senate committee has rejected calls for the Commonwealth to compulsorily acquire the copyright to the Aboriginal flag.
But Labor members have called on the government to commandeer the license for wearing and displaying the flag if negotiations are not finalised by January 26.
Next year is the 50th anniversary of the Aboriginal flag and Labor senator Malarndirri McCarthy said the milestone could be one of celebration or commemoration.
Senator McCarthy is concerned Aboriginal people are already starting to abandon the flag.
"I don't think the flag itself will disappear, but what will disappear is the incredible passion, hope, belief, faith in what the flag stands for," she told ABC radio on Wednesday.
"Aboriginal people don't want to be held to ransom for the use of something that has been a symbol of pride and activism over decades."
The committee does not want to impinge on the rights of Indigenous artist Harold Thomas, who designed the flag in 1971.
But they are concerned about WAM Clothing, a non-Indigenous company which owns the licensing rights.
The federal government is locked in long-running negotiations with Mr Thomas about the future of the flag.
Labor wants it to swoop on the licence if those talks reach a stalemate.
The committee has recommended an independent Aboriginal body take custody of the flag to uphold its dignity and maintain its integrity.