Digital assets are assets that are made of code.
They do not exist in the physical and (for now) they are not tangible. Digital assets are exponentially increasing in volume and complexity, with the digital economy predicted to account for 30% of value in the global economy by 2030. Although they only exist in cyberspace, digital assets are recognised by the law as real, and a large majority are already considered financial products because of what they do (not what you call them!).
Over the past year, the Australian Government has been preparing for a “token mapping” exercise to bring some order to the complexity of the current market in blockchain-based digital assets. The original plan was announced under the former Liberal government last December; last week, the new Treasurer announced
As the first step in a reform agenda, Treasury will prioritise ‘token mapping’ work in 2022, which will help identify how crypto assets and related services should be regulated. This hasn’t been done anywhere else in the world, so it will make Australia leaders in this work… The previous government dabbled in crypto asset regulation but prematurely jumped straight to options without first understanding what was being regulated. The Albanese Government is taking a more serious approach to work out what is in the ecosystem and what risks need to be looked at first
The desire to take stock of what is out there, to bring the 10,000+ (and daily growing) tokens into some classification scheme is understandable. But before embarking on such an exercise, it is important to consider what we can expect from such an exercise and how to get it right.
At first blush, a mapping exercise seems a good candidate for solving the “issue” of regulatory uncertainty, but it is a bit like trying to capture a cloud. Attempts to create static categories of digital assets with corresponding static legal responsibility is a fool’s errand.
With the possible exceptions of central bank digital currencies (and bitcoin), the prevailing clustering of digital assets into the categories of stablecoin, non-fungible token (‘NFT’), utility token, security token and payment token (just to name a few) is often no more than a marketing exercise loosely tethered to technical functionality.
The key thing to look at when understanding your legal position in respect of digital assets is what can the token do and who is responsible for it; that is, what rights and obligations sit in the belly of the token, and who (or, in a world of code-run autonomous platforms, “what”) has control of the token?
This brings us to the nub of the issue: when it comes to digital assets, the answers to these questions change (often rapidly) and can be obscured from legal oversight and audit in novel ways. Ways that our current regulatory approach of licensing entities (and prosecuting entities for non-compliance) has not been designed for.
The current Australian project of token mapping is to be welcomed, if done properly:
(i) as a quick and largely heuristic exercise that;
(ii) takes account of all the relevant data points (technical function, economic function, legal function);
(iii) remains flexible in the face of asset hybridity and dynamism; and
(iv) is grounded in the deeper jurisprudential problems that frame the issues.
Otherwise, it is likely to create more confusion than clarification.