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The Australian Government recently released the long-anticipated Token Mapping Consultation Paper (Paper). The Paper provides an overview of the token mapping process in Australia and key concepts in the crypto ecosystem. On top of that, the Paper also:
- describes how the existing financial services framework applies to the crypto ecosystem;
- challenges the existing financial services framework posed by certain elements of the crypto ecosystem;
- alludes to the approaches policy and legislation may likely take based on the process; and
- illustrates what we can expect from the Australian Government in 2023.
This article provides a snippet of the potential legal implications for the crypto ecosystem based on key concepts and terms from the token mapping framework.
Token Mapping Constitutional Paper
Unsurprisingly, the Paper is guided by the need for policy and legislation to protect consumers from the financial risks associated with engaging in the crypto ecosystem. The Paper further identifies the need to protect traditional firms from the financial risks associated with engaging in the system. It also protects from potential financial risks associated with the mainstream adoption of novel products.
The Paper takes a two-pronged approach to the token mapping process.
- a technical and functional approach to describing the crypto ecosystem; and
- a legal approach in mapping the ecosystem against specific parts of the Australian financial services legislative framework.
Consistent with existing Australian financial services legislation, the Paper sets up any potential crypto-specific legislation to be technology-neutral and have a functional approach.
The rationale for such an approach is based on the development of Australia’s existing financial services regulatory framework. Adopting a technology-neutral approach allows regulation to remain fit for purpose despite changes to technology and business models. The equivalent treatment of ‘functionally-equivalent’ products also allows for flexible implementation. This approach differs from that of other jurisdictions, which take a more risk-based or activities-based approach. Depending on future legislation, it also provides an indication of how Australian regulators may regulate and approach crypto assets with regard to the functional perimeter in the existing regulatory framework.
The Paper sets out new key concepts and terminology which will likely guide any legislation precipitated by the token mapping process. Such terminology has been deliberately selected and proposed for broad application and interpretation.
Directly from the Paper, there are three key concepts:
- A crypto network is a distributed computer system capable of hosting crypto tokens. They are the platforms where you can record crypto tokens and smart contracts. Crypto networks primarily store information and process user instructions.
- A crypto token is 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.
- A smart contract is computer code that has been published to a crypto network’s database.
Evidently, the choice of terminology is technology neutral, simple and broad.Continue reading this article below the form
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Token Mapping Framework
The token mapping framework (Framework) takes a functional approach to token mapping. This framework relies on the concepts of tokens, token systems and functions.
You can apply the Framework to ‘crypto assets’ and ‘crypto asset services’. The Framework also assists with assessing any financial services obligations that may arise concerning a crypto token or token system.
Through the Framework and application of existing financial services legislation, the Paper provides a perspective on how you may apply existing financial services laws to crypto projects. Notably, the key question to consider is whether the token system (and not the crypto token) meets the functional elements of a financial product to trigger any potential financial services obligations.
The Paper identifies two categories of crypto products that are problematic for the existing legal and regulatory framework:
- network tokens; and
- public smart contracts.
Notably, these products exist and are part of public crypto networks. This is where we need a fundamentally different approach to legislation and regulation.
Looking Ahead in 2023
The Paper sets out intentions for a multi-stage reform agenda that involves a consultation paper in relation to a licensing and custody framework for crypto asset service providers.
The closing date for submissions in relation to the Paper is 3 March 2023.
We advise that you do not rely on the contents of this article or the Paper as legal advice or any advice.
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The Token Mapping Consultation Paper provides an overview of the token mapping process in Australia. For more information about the Token Mapping Consultation Paper and its implications for your business, our experienced fintech lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
The framework relies on the key concepts of tokens, token systems and functions. Tokens are the physical or digital units or information that have a role in a token system. A token system is a collection of steps involved in performing a function. Finally, a function can be any benefit ensured or facilitated by the token system to the token holder.
This network aims to cover a wide range of data structures and technologies, including well-known public distributed ledger technologies such as public blockchains (e.g. Bitcoin and Ethereum networks).
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