Long-awaited cryptocurrency regulation is on the way after Treasury last week opened consultation on its proposed method of categorising the myriad of different crypto assets to fit existing financial services frameworks.
This ‘token mapping exercise’ involves matching the different types of crypto assets with existing regulation in order to bring about the licensing and custodial obligations which Treasury said will be “the logical next step”.
Following the collapse of cryptocurrency exchange FTX, which had flow-on effects for local investors and businesses, the need for cryptocurrency reform has become more apparent.
Assistant Treasurer Stephen Jones told ABC News Breakfast last week that the exercise was necessary because “you can’t regulate what you don’t understand”.
“[We are] ensuring we have a conversation with the Australian people about which of the cryptocurrencies – the tokens, if you like – that we are going to drag inside the financial services regulation system,” he said.
“[Other tokens] might be endlessly fascinating and useful, but they aren’t about financial services and we’ll leave those alone.”
In its discussion paper about token mapping, Treasury said the exercise is the best way to fold crypto assets into existing regulation.
“Other jurisdictions exhaustively list regulated products and may be guided by risk-based or activities-based approaches in updating those lists to include novel financial products,” Treasury notes, adding that Australia, by contrast, uses a ‘functional’ definition of financial services.
Exactly how crypto assets fit into this functional model is the purpose of Treasury’s token mapping exercise.
Already it has identified problems like how trustless crypto assets lack the “promises, intermediaries, and agents” around which our financial system is built, and as such may be “fundamentally incompatible with the existing financial services regulatory framework”.
Other issues put to the public concern wrapped tokens, how to classify the different functions of smart contracts, and ways of tackling scams in the crypto ecosystem.
Jonathon Miller, local managing director of cryptocurrency exchange Kraken, said he’s glad to see the government’s consultative approach to regulation but wants to see it move faster.
“Our concern is that we're getting further and further behind the rest of the world when it comes to developing a regulatory regime, and the uncertainty this brings does come with a cost,” he said.
Miller mentioned that the European Union has publicised its draft regulation while the UK’s financial regulator has a regime in place already. He would have liked to see Australia “faster off the blocks”.
“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,” Miller said.
“Crypto is a global industry, far more than most. The quicker we can harmonise global regulatory certainty, the better.”
Consultation on the token mapping discussion paper is open until Friday, 3 March.