Today the Australian government Treasury opened a one month consultation on token mapping. Once it has completed the token mapping process, it expects to proceed to crypto licensing and custody legislation in the first half of this year. The Australian approach is significantly different compared to other jurisdictions, makes a lot of sense, and is rather thoughtful.
For example, typical token classifications include stablecoins, security tokens and utility tokens and a more granular taxonomy within those. But that’s not the path that Australia has taken.
It believes the way Australia regulates financial activities differs from countries that exhaustively list types of financial products. Instead, it focuses on functions. Hence, existing Australian regulations already cover some crypto activities. However, its financial legislation is based on the concepts of ‘promises, intermediaries, and agents’. And many crypto activities don’t fit neatly into those parameters.
Australia’s proposed token taxonomy
Hence it suggests a high level taxonomy that envisages two classes of systems:
- Intermediated token systems:
(i) crypto asset services
(ii) intermediated crypto assets
- Public token systems:
(i) network tokens
(ii) public smart contracts (including some crypto assets created using smart contract tokens).
Our quick read of the document led us to believe that tokenized securities are out of scope because they are financial products that fall within existing regulations.
Intermediated token systems
The intermediated token system currently covers a large proportion of cryptocurrency activity. This kind of system will have a real world link, and the crypto network, token or smart contracts are likely just one facet of a financial product.
Examples of intermediated services include (centralized) lending and borrowing, fiat on/off ramping, (centralized) crypto token trading, fund management, mining/staking-as-a-service, gambling, and custody.
An intermediated crypto asset covers a wide array of tokenized assets such as licenses, intellectual property, rewards, tokenized non financial assets and fiat currency. The document talks about ‘wrapped real world assets’, which includes stablecoins.
Public token systems
Public token systems are for transactions where parties don’t know or trust each other. Public smart contracts provide an economic function without the need for an intermediary.
So most cryptocurrencies are either network tokens for a layer 1 blockchain or based on a public smart contract. People often refer to the latter as a utility token, but Australia does not.
However, if there is any level of permissions involved in a smart contract, that would involve an intermediary and hence falls under the intermediated token systems.
Apart from smart contract based cryptocurrencies, the paper divides the types of public smart contracts into
- interoperability mechanisms – such as wrapped ether
- economic mechanisms – DeFi such as automated market makers eg. Uniswap
- coordination mechanisms – such as decentralized autonomous organizations (DAOs) for pooled investments. Although in many cases, the smart contract code might need to be audited to determine whether a group of people have control.
While public smart contracts can remove counterparty risks, they introduce several other risks, such as bugs, possible weak economic models, compliance risks and unknown risks because of the nascent stage of the technology.
The consultation is open for a month.
Meanwhile, Australia is in the process of exploring a central bank digital currency (CBDC). It has partnered with the Digital Finance CRC (DFCRC) to explore potential use cases, including tokenization.