The Treasurer has announced his approach to establishing a regulatory framework for crypto assets to protect consumers and keep up with technological developments.

The starting point is Treasury’s consultation paper on ‘token mapping’.

Token mapping is the process of identifying the key activities and functions of products in the crypto ecosystem and mapping them against existing regulatory frameworks.

The ATO has previously determined that for tax purposes, crypto assets are not a form of money.

The ATO says that crypto assets are a digital representation of value that you can transfer, store, or trade electronically.

The Treasury Consultation Paper explains that crypto assets are not excluded or ‘carved out’ from Australia’s financial services regulatory framework. Any product (including a crypto asset) will be a financial product if it meets the financial function test or meets one of the specific definitions of financial product – regardless of its technological underpinnings.

Mapping products against the functional perimeter shows that:
(a) some products have clear financial functions (e.g. crypto asset services offering crypto
derivative products, or crypto assets ‘backed’ by existing financial products); and
(b) some products have clear non-financial functions (e.g. crypto tokens used for document
provenance, digital identity, general record keeping, data storage, and crypto assets used
in event ticketing).

However, there are some elements of the crypto ecosystem that may not fit the existing
regulatory models.

The term ‘crypto network’ is used in the paper to refer to the various types of systems used to create and host crypto tokens. It has a similar but broader meaning than ‘distributed ledger technology’.

The consultation paper observes that:

“Crypto networks are used by governments, businesses, non-profits, and individuals across sectors such as computer gaming, media and communications, logistics, gambling, marketing, and traditional finance. Similarly, ‘crypto assets’ are not a homogenous asset class. They involve a vast range of different token types representing a wide variety of things, including communications, items in computer games, club memberships, bets, and legal entitlements to real-world assets, goods, and services…

There are three key risks that need to be considered:
(i) potential financial losses to consumers from engaging in the crypto ecosystem;
(ii) potential financial risk to traditional firms engaging with the crypto ecosystem; and
(iii) potential financial risk from the mainstream adoption of novel products that may turn out to be riskier than their traditional counterparts.”

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