Today, the Australian Government Treasury opened a month-long consultation on token mapping. Once it has completed the token mapping process, it hopes to proceed with crypto licensing and custody legislation in the first half of this year. The Australian approach is significantly different compared to other jurisdictions, it makes a lot of sense and is quite thoughtful.

For example, typical token classifications include stablecoins, security tokens, and utility tokens and a more granular taxonomy within them. But that is not the path Australia has taken.

He believes that the way Australia regulates financial activities differs from countries that exhaustively list types of financial products. Instead, it focuses on features. Therefore, existing Australian regulations already cover some cryptographic activities. However, its financial legislation is based on the concepts of ‘promises, intermediaries and agents’. And many cryptographic activities don’t fit neatly into those parameters.

Token taxonomy proposed by Australia

Therefore, it suggests a high-level taxonomy that contemplates two classes of systems:

1. Intermediate token systems:
   (i) crypto asset services
   (ii) intermediated crypto assets
2. Public token systems:
   (i) network tokens
   (ii) public smart contracts (including some crypto assets created with smart contract tokens).

Our quick reading of the document led us to believe that tokenized securities are out of scope because they are financial products that fall within existing regulations.

Intermediate token systems

The brokered token system currently covers a large proportion of cryptocurrency activity. This type of system will have a link to the real world, and the crypto network, token, or smart contracts are likely to be just one facet of a financial product.

Examples of intermediated services they include (centralized) borrowing and lending, fiat phasing on/off, (centralized) crypto token trading, fund management, mining/staking as a service, gambling, and custody.

A brokered crypto asset it covers a wide range of tokenized assets, such as licences, intellectual property, rewards, tokenized non-financial assets, and fiat currency. The document talks about ‘real world assets involved’, which includes stablecoins.

Public token systems

Public token systems are for transactions where the parties do not know or trust each other. Public smart contracts provide an economic function without the need for a middleman.

So most cryptocurrencies are 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 doesn’t.

However, if there is any level of permissions involved in a smart contract, that would involve an intermediary and would therefore fall under intermediated token systems.

In addition to smart contract-based cryptocurrencies, the document divides the types of smart public contracts in

• interoperability mechanisms, such as wrapped ether
• economic mechanisms: DeFi, such as automated market makers, e.g. uniswap
• coordination mechanisms, such as decentralized autonomous organizations (DAOs) for joint investments. Although in many cases, it may be necessary to audit the smart contract code to determine if a group of people is in control.

While public smart contracts can eliminate counterparty risks, they introduce various other risks, such as bugs, potential weak economic models, compliance risks, and unknown risks due to the early 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 Digital Finance CRC (DFRCC) to explore potential use cases, including tokenization.