‘Token mapping’ to spur tighter Australian cryptoasset regulation

Businesses that provide cryptoassets or related services should consider how the ‘token mapping’ exercise will ultimately impact their operations.

Current regulations around cryptoassets in Australia

Australia’s current regulatory treatment of a cryptoasset depends on the manner in which that asset is classified. If the cryptoasset is considered a financial product, it will be subject to certain obligations and requirements under the Corporations Act 2001 (Cth) and Australian Securities and Investments Commission (ASIC) Act 2001 (Cth) – legislation designed to protect investors. This includes prohibitions on misleading and deceptive conduct or unconscionable conduct, “hawking” or pressure selling, as well as disclosure requirements.

However, if the cryptoasset is not a financial product, then it is considered a consumer product and will be regulated by the Australian Competition and Consumer Commission (ACCC) under Australian consumer law.

The problem with the regulatory scheme is that there has been difficulty in determining when the financial products and services regime applies to certain cryptoassets. This is because the definition of a financial product, which was written prior to the invention and proliferation of cryptoassets, does not provide clarity as to the intended regulatory treatment for the various classes of cryptoassets. As a result of this ambiguity and lack of regulations, ASIC deputy chair Sarah Court reported that losses to crypto scams have dramatically risen by 270% from 2021.

What is token mapping and how it would impact Australian financial services?

In December 2022, treasurer Jim Chalmers announced that the Treasury will be prioritising token mapping, which identifies how cryptoassets and related services – such as digital wallets, stablecoins and central bank digital currencies – will be regulated.

It is almost certain that this process will provide greater certainty to cryptoasset secondary service providers, consumers, and regulators, since a list of the types of cryptoassets will promote consumer protection. In addition, it will help issuers to expand or manage their crypto sales without taking unnecessary risks. Regulators will gain a better understanding of which areas of the industry need monitoring.

A consultation paper is expected to be published before the end of March.

While the market will be more regulated following the token mapping exercise, it is likely that many crypto tokens will not be heavily regulated. For example, collectible crypto tokens such as art, images, music, in-game items, and promotional posters are not financial products and forcing them to be regulated under the financial services regime will be unnecessary. On the other hand, issuers selling stablecoins may find themselves required to follow the financial services regime, because of the fraud and liquidity risks associated with these tokens.

Token mapping will also affect the behaviour of those involved in the cryptoasset industry. Retail banks are expected to benefit significantly if a new regulatory regime is introduced, as banks can expand their offerings with greater confidence. In addition, issuers will have more obligations and consumers will have greater knowledge of the various cryptoassets.

What Australia can learn from other jurisdictions

To assess how token mapping will influence the Australian market, it must be compared with jurisdictions around the world.

Australia’s current regulations are widely considered more liberal than those of countries such as China, Russia and India. In China, the People’s Bank of China banned financial institutions from dealing in cryptocurrencies, crypto exchanges and initial coin offerings (ICOs). That said, China is reported to be incorporating a “digital asset trading platform” to facilitate transactions of intellectual property and non-fungible tokens.

In Canada, the circulation of cryptocurrency is more permissive and bears resemblance to Australia’s regime. The Canadian Securities Administrators and the Investment Industry Regulatory Organisation of Canada impose requirements for crypto trading platforms and dealers to register and how to advertise the products. The Canada Revenue Authority treats crypto as a commodity for tax purposes. In contrast, cryptocurrencies are subject to capital gains tax and taxed as part of ordinary income tax in Australia.

Australian lawmakers can refer to Japan’s regulations in the cryptocurrency sphere as it is one of the most progressive jurisdictions. Japan is the first country to create self-regulatory bodies, such as the Japanese Virtual Currency Exchange Association (JVCEA) and the Japan Security Token Offering Association, to promote regulatory compliance and establish best practices to ensure compliance with regulations.

Japan has recognised the increased use of stablecoins overseas, as well as the prevalence of electronic prepayment instruments and demand to improve transaction monitoring by banks, by passing its “Bill for Partial Amendment to the Act on Payment Services Act for the Purpose of Establishing a Stable and Efficient Funds Settlement System”, which provides mechanisms for responding to global trends.

Japanese legislative infrastructure provides a ‘Green List System’ which enables listing of satisfactory cryptoassets adhering to certain conditions, such as that the asset is handled by at least three registered entities, been handled by at least one registered entity for a minimum of six months, not subject to any additional conditions imposed by the JVCEA for the handling thereof, and that no issue has arisen that would render it inappropriate. Together with required internal assessments from Australia’s token mapping project, similar requirements could promote transparency for consumers and financial institutions which deal with cryptoasset transactions.

Questions to raise for business operations

It is clear that reform is coming in Australia. Businesses need to consider how it might affect them. Some questions they may want to ask themselves include:

• Does your business have a diversity of cryptoassets which could be considered as financial and non-financial products?
• How would the anticipated changes in the cryptocurrency regulations affect your organisation’s revenues streams, disclosure policies or service offerings?
• What types of disclosures are you currently making about crypto assets that you sell and how does it compare with other issuers?
• Are there new types of cryptoassets that you see as requiring classification?
• Would classification be adequate to ensure consumer protection? How should penalties apply to avoid tax evasion and crypto-asset black markets?

Co-written by Dru Chowdhury with further contributions to research by Angie Quan and Andrew Herlinger, of Pinsent Masons.