(Kitco News) -
The Australian Treasury has released their ‘token mapping’ consultation paper on Feb. 3 which classifies cryptocurrencies and other digital assets into the key categories that will guide the government’s regulatory approach going forward.
In August 2022, Australia announced their intention to map the various tokens available in the country to help identify how crypto assets and related services might be regulated. Treasury investigated the characteristics of all digital assets used in the country in order to classify them based on their asset type, underlying code, and other defining technological and functional features.
The consultation paper released today is the culmination of that process and takes “a technical approach in describing the crypto ecosystem and a legal approach in mapping the ecosystem against specific portions of the financial services regulatory framework.”
The Treasury makes clear that they have continued to adhere to the ‘looks like a duck, walks like a duck’ principle for classification which they have referenced through all the discussions on crypto regulation.
“Crypto assets are not excluded or ‘carved out’ from Australia’s financial services regulatory framework,” they wrote. “Any product (including a crypto asset) will be a financial product if it falls within the function perimeter or meets one of the specific definitions of financial product – regardless of its technological underpinnings.”
The paper divides digital assets into three main categories:
Crypto networks – Defined as “a distributed computer system capable of hosting crypto tokens,” these are the “platforms on which crypto tokens and ‘smart contracts’ are recorded.”
Crypto tokens – Defined as “a unit of digital information that can be ‘exclusively used or controlled’ by a person – despite that person not controlling the host hardware where that token is recorded.”
Smart contracts – Defined as “computer code that has been published to a crypto network’s database” and that can be “guaranteed to run in a predefined and deterministic manner without risk of intervention.”
The paper defines Australia’s “functional perimeter” as “any ‘facility’ through which, or through the acquisition of which, a person does one or more of: (a) makes a financial investment; (b) manages financial risk; and (c) makes non-cash payments (together, the ‘general financial functions’).”
It then applies a token mapping framework based on three key concepts: tokens, token systems and functions, which “can be used to consider the various products within the crypto ecosystem” and to assess them against the functional perimeter.
Based on this framework, the authors outline two token systems, each containing two asset types:
Intermediated token systems, which “typically involve a promise or arrangement for functions to be performed by intermediaries or agents.” These contain:
Crypto asset services – This is a token system that “accepts crypto tokens as part of performing a function under a legal agreement or other arrangement” and includes lending and borrowing, fiat on/off ramping, crypto token trading, funds management, mining/staking-as-a-service, gambling, and custody.
Intermediated crypto assets – This is a crypto asset where “the link between the crypto token and the token system is created by legal agreement or other arrangement” and includes rights or licenses for event access or subscriptions, intellectual property, reward programs, consumer goods and services, fiat money, non-financial assets, government bond coupons, and units in a member-directed venture capital fund.
Public token systems, which “do not involve a promise that an intermediary or agent will perform a function in the future” but instead involve functions being ensured by a crypto network directly. These contain:
Network tokens – These are “essential components of any public crypto network.” They are created by the network itself to reward specific network participants who contribute to ensuring all participants agree to the same database. These include BTC, and LTC, and “are not designed to host the types of smart contracts considered in this paper.”
Public smart contracts – These are smart contracts on a public crypto network that "can be fully intermediated and permissioned (e.g. usable only by authorized customers of a business), or fully intermediated but partly permissionless (e.g. a stablecoin that is freely transferable but that can be frozen but its issuer).”
The paper concludes by asking for feedback from the public which it will collect until March 3, 2023. The feedback will be used to inform the framework for the custody and licensing of digital assets, which will be released in mid-2023.
“It's excellent to see the Treasury team continue with its consultative approach to the development of a crypto licensing regime in Australia,” said Jonathon Miller, Managing Director for Australia at cryptocurrency exchange Kraken. “The ideal outcome is that we see the development of a crypto-specific regime in Australia - else we risk pushing square pegs into round holes of existing financial services regulation."
The government continues to favor fitting crypto into the existing financial framework, however. Stephen Jones, Australia’s Financial Services Minister, reinforced his earlier statements about regulating cryptocurrencies as financial products in an interview with the Sydney Morning Herald published on Jan. 23.
“I don’t want to pre-judge the outcomes of the consultation process we are about to embark on,” Jones said. “But I start from the position that if it looks like a duck, walks like a duck and sounds like a duck, then it should be treated like one.”
Jones noted that bitcoin appeared to be “attempting to replicate or replace traditional forms of currency” and acknowledged that this did not necessarily make it a financial product. “Other coins or other tokens are being essentially used as a store of value for investment and speculation,” he said, which means there’s a “good argument that they should be treated like a financial product.”
Jones said the government is focused on crypto assets that act like financial products but remain unregulated, and that the November collapse of cryptocurrency exchange FTX “puts beyond doubt” the need for crypto regulation in the country.
On Dec. 14,Jones announced that the government was going to make crypto regulation a priority in 2023. Along with the goal of establishing a crypto regulation framework, the government also plans to “update and strengthen Australia’s payment system; strengthen its financial market infrastructure; and establish a regulatory framework for Buy Now Pay Later,” the report said.
Jones said the previous government “sat on its hands” when it came to keeping pace with changes in the market, especially as it relates to new digital products and services, and this would be a key goal of Prime Minister Albanese’s government moving forward.
In September 2022, the country created a crypto-monitoring task force as part of its efforts to reign in the unregulated crypto sector, and a draft bill was introduced by Liberal Party Senator Andrew Bragg that is designed to clamp down on the use of digital asset exchanges, stablecoins, and China’s central bank digital currency, the e-Yuan.
