The government’s role in regulating the crypto ecosystem should involve dynamic enforcement through ASIC, ensuring future-proofing by cautiously addressing current infrastructure and smart contract methodologies, addressing tax leakage and money supply issues, considering the need for critical digital infrastructure and national security, and examining the legal status of DAOs and AOs in relation to the Responsible Machine Problem. This multifaceted approach aims to create a balanced and adaptable regulatory framework that addresses the unique challenges and opportunities presented by the rapidly evolving crypto landscape.

Smart-contract-based collateralised lending differs from conventional pawn-broker lending in terms of asset possession, control, and regulatory frameworks. Perfection of security interests over crypto-assets under the Personal Property Securities Act 2009 (Cth) (PPSA) is limited to registration, while possession and control are less clear due to the unique characteristics of crypto-assets. Consequently, these discrepancies impair meaningful secured lending of crypto-assets in Australia, creating challenges for funding and investment in the industry.

Addressing these issues requires legislative amendments to accommodate the technological complexities of crypto-assets in the context of secured lending arrangements and the PPSA. Amendments should aim to align the practical aspects of possession and control with the legal framework, ensuring regulatory certainty in the enforceability of security interests. Collaboration with relevant governmental departments and industry stakeholders is crucial for developing comprehensive solutions that foster growth in the Australian crypto-asset industry.

This response broadly supports Treasury’s preference for a functional approach over a bespoke crypto-asset taxonomy. The functional approach is deemed more appropriate, flexible, and rigorous, while a taxonomic approach may encourage regulatory arbitrage and potentially fail to address consumer protection objectives. Furthermore, a taxonomic approach might only cater to simplistic ‘Generation One’ crypto-assets and require constant updates to accommodate technological advancements in the field.