NOTE: The following article is a replication of the Token Mapping response we provided to Australian Commonwealth Treasury on 15th March 2023.
The full response contains our response as well as the various submissions provided by the community of contributors and can be seen here:
The original Token Mapping Consultation Paper and questions can be seen here: https://treasury.gov.au/consultation/c2023-341659
Contributors
We put this at the end of our submission but we want this up front on this blog so check it out. We would like to acknowledge the following contributors (people and organisation) to this token mapping response
Immutable
Will Remor, Scio Consulting/MakerDAO
London Stock Exchange
Jabran Chaudhry, Adiuvo Legal
Melanie Strong
Laura Sheridan Mouton
Will Gikandi
Darren Gerlach
Ash van der Spuy
Mark Monfort, NotCentralised
Nick Bishop, NotCentralised
Arturo Rodriguez, NotCentralised
Overview
The Director, Crypto Policy Unit - Financial System Division
The Treasury
Langton Crescent, PARKES, ACT 2600
By email only: crypto@treasury.gov.au
Dear Director,
The Australian DeFi Association, a not-for-profit community focused on education and awareness of blockchain technology, is pleased to submit our response to the token mapping consultation. Our submission reflects a mix of thoughts and opinions from our members and community leaders who are actively involved in the development and growth of the DeFi ecosystem in Australia.
As a community, we are passionate about the potential of blockchain technology to disrupt traditional finance (and other industries) and create new opportunities for individuals and businesses. We believe that the development of a clear and effective regulatory framework is crucial to the continued growth and success of decentralised ecosystems and how they are evolving and integrating with traditional methods of commerce.
In our response to the consultation, we provide the thoughts and feedback from our community to these questions and share where the community responses were similar as well as where they differed (including, in particular, in relation to matters such as token classification, consumer protection, and regulatory sandboxes). We believe that our insights and expertise can help inform the development of a regulatory framework that balances the aspirations for technological innovation with the need for investor protection.
We thank the Treasury for the opportunity to provide our input and look forward to continuing to work with the Government and other stakeholders to promote the development of a thriving DeFi and web3 ecosystem in Australia.
Kind regards,
Mark Monfort, President
Australian DeFi Association
Part One - About Australian DeFi Association
The Australian DeFi Association (Aus DeFi) is a non-profit community organisation dedicated to increasing education and awareness of blockchain technology, specifically decentralised finance (DeFi) and web3-based projects. Our mission is to empower the Australian community with the knowledge and tools to participate in the decentralised economy and to promote the adoption and growth of blockchain technology in Australia.
While our name suggests a focus on DeFi, we cover a range of topics related to web3, including non-fungible tokens (NFTs), soulbound tokens, decentralised autonomous organisations (DAOs), and more. We were founded to provide a more grassroots approach to promoting blockchain technology compared to other industry-focused organisations in Australia, and have hosted a variety of events, including general community meetups providing education and updates as well as technical meetups with the likes of StarkWare and Chainalysis.
We are committed to building an inclusive and diverse community that is open to all who want to learn about web3. We have hosted events such as Women in Web3 and Female Leaders in Web3 to promote gender diversity in the industry, as well as an Indigenous NFT event called Canvas to Token. We are also supporting upcoming International Women's Day events around Australia.
Through our monthly meetups and events, we aim to educate and inform the Australian community about the benefits of blockchain technology and how it can be used to explore alternative business models and increase accessibility. We also aim to upskill local businesses and entrepreneurs to meet the needs of a more innovative economy.
As an organisation, we have built a strong following on various social media platforms, including Twitter, LinkedIn, Discord, and Meetup. Our organisation is supported by NotCentralised, a venture studio with the same founders, which builds within the Ethereum ecosystem and advocates for blockchain technology in its work.
Overall, we believe that promoting the adoption of blockchain technology is essential for driving innovation and creating new opportunities for growth and development in Australia. We are committed to being a leading voice in the blockchain industry and to advocating for a regulatory environment that fosters innovation and growth.
Responses to Token Mapping Questions
Question 1. What do you think the role of the Government should be in the regulation of the crypto ecosystem?
Across the variety of responses we received, there is a general consensus that the Government should aim to strike a balance between ensuring a proportionate, principles-based regulatory framework and fostering innovation, while also providing clarity and guidelines for the operation of crypto businesses. Some suggest that the Government should focus on regulating behaviour rather than technology, while others argue that the
Government should be adaptive and take a leadership role in harmonising regulations with international partners. Additionally, reducing compliance costs and lowering the cost of remittances are mentioned as important considerations for maximising economic and consumer benefit.
Some of the common themes included
Balancing regulation with innovation: There is a general consensus that the Government should strike a balance between regulation and innovation to avoid stifling the potential of the crypto ecosystem.
Providing clarity and guidelines: The Government should provide clear guidelines and standards for the operation of crypto businesses, including licensing, disclosures, and KYC/AML requirements. Providing clarity and guidance can foster competition and innovation in the crypto ecosystem. A principles based approach is suggested by some respondents.
Reducing compliance costs: Compliance costs can be prohibitively high for small businesses and startups, which can deter new entrants and potentially result in a lack of competition and higher prices for consumers. Therefore, the Government should explore options to reduce compliance costs and encourage new entrants to compete with established players.
International harmonisation: The Government should take a leadership role with international partners to harmonise regulations, reduce costs for consumers, and potentially lower the cost of capital through international liquidity pooling for securities.
Focusing on behaviour rather than technology: Some responses suggest that the Government's role should be to regulate behaviour rather than technology. They argue that the Government should focus on regulating businesses, activities, and behaviours, rather than the software used.
Providing sandboxes: Providing regulatory sandboxes can allow companies to develop new innovations in collaboration with the Government, enabling regulation to evolve in lock-step.
Addressing evolving risks and trends: The Government should monitor the crypto ecosystem to address evolving risks and trends while minimising compliance costs and maximising economic and consumer benefits. Some of these evolving trends include what is happening in the Decentralised Autonomous Organisation (DAO) space and open source communities.
Question 2. What are your views on potential safeguards for consumers and investors?
Across the range of responses we received, there were some common themes to this question and these include the following:
Education: There is a general consensus that education is important in protecting consumers and investors from potential risks and scams in the crypto industry. This includes financial literacy, cybersecurity awareness, and awareness of the potential benefits and risks of crypto investments.
Regulation: There is a range of opinions on the level of regulation needed to protect consumers and investors, with some suggesting a light-touch approach and others advocating for Government oversight and enforcement of rules and regulations. Some suggest that clear laws that are responsive, dynamic and specific on what is allowed and what is not allowed would be beneficial.
Differentiation of investors: Some responses suggest that the term "investors" should be expanded upon further for the purposes of legislative safeguards. There are clear differences between large, sophisticated fund managers and solo retail investors, and different levels of safeguards may be necessary for these groups.
Application of existing laws: Some responses suggest that existing laws and regulations should be applied to the crypto industry, such as financial services and banking licenses for smart contracts that act as financial instruments or bank accounts.
Technology: The technology itself could be used to develop innovative and programmatic solutions that make financial markets more transparent, accessible, and secure.
There were also some differences in these responses covering the level of regulation, who provides education (Government or industry) and how active a role the Government should play in safeguarding consumers.
Overall, the responses suggest that a thoughtful approach is needed to protect consumers and investors in the crypto industry, taking into account the unique nature of this emerging technology and the needs of different types of investors.
Question 3. Scams can be difficult for some consumers to identify.
3.a) Are there solutions (e.g. disclosure, code auditing or other requirements) that could be applied to safeguard consumers that choose to use crypto assets?
There are several common themes that emerge across the responses, including:
Education and consumer awareness: Many of the responses emphasise the importance of educating consumers about the risks and benefits associated with using crypto assets. This includes providing clear and comprehensive information, as well as encouraging consumers to have a foundational understanding of how crypto assets and blockchain technology work.
Regulation and oversight: Several responses highlight the need for clear regulation and Government oversight to ensure appropriate safeguards are in place for the protection of consumers and financial stability. This includes disclosure requirements, standardised formats for disclosures, and third-party audits of a platform or asset’s code where relevant. Some suggest that for certain parts of the market, this should be mandatory.
Industry self-regulation: Some responses suggest that a level of self-regulation from within the industry can also be effective in safeguarding consumers. This includes the establishment of a self-regulating industry body that collates code auditing and other screening capabilities and the creation of an "allow list" of tokens under specific classifications.
Data analysis, transaction monitoring, and risk assessment: Several responses recommend the use of data analysis, transaction monitoring and risk assessment tools to identify potential issues and provide risk warnings or ratings to digital asset users/investors. This includes private sector ratings agencies or researchers and online "red flag" tools and services.
While there are some common themes across the responses, there are also differences in the proposed solutions to safeguard consumers who choose to use crypto assets. Here are some of the key differences:
Trusted review site vs. self-regulating industry body: One respondent suggests a trusted review site that collates information and provides a comprehensive overview of risks and benefits associated with various cryptocurrencies and blockchain-based products, while another respondent suggests a self-regulating industry body that collates code auditing and other screening capabilities.
Code auditing vs. plain English reproductions: Another respondent suggests that advances in technology, particularly in translating code into plain English, can help reduce smart contract risk, while a different respondent suggests third-party audits of a platform or asset’s code should be encouraged (where relevant).
Allow list vs. disclosure requirements: One respondent recommends an "allow list" of tokens under specific classifications, while another suggests disclosure requirements to ensure consumers are informed about the risks and benefits of using crypto assets.
Government regulation vs. private sector involvement: emphasises the role of the Government in establishing a regulatory landscape that strikes the right balance between ensuring consumer protection and fostering homegrown innovation, while another group suggests private sector ratings agencies or researchers also help with mixed ownership between the Government and private sector, could disseminate risk warnings or ratings to digital asset users/investors.
These differences suggest that there is no one-size-fits-all solution to safeguarding consumers who choose to use crypto assets. Rather, a combination of approaches may be required, depending on the specific needs and circumstances of different stakeholders in the ecosystem. This includes education, regulation, industry self-regulation, and the use of data analysis and risk assessment tools.
3b) What policy or regulatory levers could be used to ensure crypto token exchanges do not offer scam tokens or more broadly, prevent consumers from being exposed to scams involving crypto assets?
Based on the responses, there are several policy and regulatory levers that could be used to ensure that crypto token exchanges do not offer scam tokens and prevent consumers from being exposed to scams involving crypto assets. These include:
Licensing and registration requirements for centralised exchanges, subjecting them to greater scrutiny and accountability.
Mandatory reporting requirements and regular audits for centralised exchanges.
Providing access to on-chain data to regulators to track and prevent scams.
Requiring centralised exchanges to conduct due diligence on crypto assets, ensuring that consumers have all relevant information available to them when making an investment decision.
Requiring that consumers can reasonably rely on the disclosures provided by exchanges and that the exchanges cannot simply remove their liability through broad disclaimers or indemnity provisions in their terms and conditions.
Requiring enhanced due diligence on teams behind a token being listed.
Creating industry-wide standards and best practices for token issuers and exchanges, including in respect of on-chain compliance and integrity systems.
Launching public education and awareness campaigns to inform investors about the risks associated with investing in crypto assets and how to identify scams.
Overall, a combination of these levers could be used to ensure that consumers are protected from scams involving crypto assets while still allowing for innovation in the crypto ecosystem.
Question 4. The concept of ‘exclusive use or control’ of public data is a key distinguishing feature between crypto tokens/crypto networks and other data records.
4a) How do you think the concepts could be used in a general definition of crypto token and crypto network for the purposes of future legislation?
Based on the responses, it seems that the general consensus among the responses is that a definition of crypto tokens and networks for legislative purposes should consider the concepts of exclusive use or control of public data, custody, control, and the layers of a tech stack in a crypto ecosystem.
The responses included the following themes:
The importance of understanding the concept of exclusive use or control of public data in defining crypto tokens and networks for legislative purposes.
The need to consider custody and control when defining crypto tokens and networks for legislative purposes.
The importance of distinguishing the layers of a tech stack in a crypto ecosystem.
The difficulty in applying the concept of intermediaries to the crypto context, and the potential for adverse outcomes if it is broadly applied.
The importance of ongoing consultation with the industry to address the limitations of the current regulatory framework, especially as blockchain technology is evolving.
The use of an exclusive definition that is too narrow and which should consider businesses or multi-parties (aka multisig relationships) too.
4b) What are the benefits and disadvantages of adopting this approach to define crypto tokens and crypto networks?
The common themes across the responses provided include:
Defining crypto tokens and networks in legislation can provide clarity and understanding of the concept.
However, having a definition alone may not be enough to prevent people from losing their assets or having them stolen. It's important for people to educate themselves on the basics of cryptocurrencies to fully grasp the concepts and ensure their own protection.
The current method of defining "crypto asset" in the consultation paper may not be compatible with the current and potential future use of crypto networks, and it differs from the approach taken by other jurisdictions.
The valuable "asset" in any crypto network is the information recorded on the shared ledger, and a "crypto token" should correctly be the "asset" in the ecosystem, irrespective of the token system.
The concept of "exclusive control" may limit the ability to describe certain concepts or functions in a crypto system, such as multi-sig wallets. Additionally, certain terms and conditions of token projects cannot be digitally expressed in a smart contract, as they rely on natural language and interpretation.
Overall, these responses suggest that while defining crypto tokens and networks in legislation can be beneficial, it's important to consider different perspectives and consult with industry experts to ensure that any regulations or definitions accurately reflect the nature and potential of crypto networks and tokens.
5. This paper sets out some reasons for why a bespoke ‘crypto asset’ taxonomy may have minimal regulatory value.
5a) What are additional supporting reasons or alternative views on the value of a bespoke taxonomy?
There were differing responses to this question but some common themes included:
The crypto industry is constantly evolving and new projects and technologies are emerging all the time, which makes it difficult to create a comprehensive and up-to-date bespoke taxonomy for crypto assets.
A functional approach that focuses on the resulting functions, outcomes, and risks associated with different token types may be more appropriate than a precise technical specification-based taxonomy.
The importance of ensuring that regulatory frameworks remain flexible and adaptable to changing market conditions to avoid stifling innovation.
The need for regular engagement between regulators and industry participants to ensure that any regulatory frameworks are effective and do not create unnecessary restrictions or confusion.
The importance of distinguishing between different token types for the purposes of regulation, as different tokens have different functions, users, applications, and behaviours.
The potential benefits of a bespoke taxonomy, such as providing regulatory certainty and making it easier for entrepreneurs to assess compliance across multiple jurisdictions, as well as potential drawbacks, such as the risk of becoming outdated quickly.
Given the differing responses on the value of a bespoke taxonomy for crypto assets, there are several pathways that could be considered:
Conduct further research and consultation: Given the complexity of the issue and the differing opinions, it may be useful for Treasury to conduct further research and consultation with stakeholders to better understand the potential benefits and drawbacks of a bespoke taxonomy for crypto assets.
Explore a hybrid approach: Given that some respondents suggest that a functional approach that focuses on outcomes, risks, and functions associated with different token types may be more appropriate, while others suggest that a bespoke taxonomy may have value, it may be useful to explore a hybrid approach that combines both approaches.
Focus on providing regulatory certainty: Several respondents suggested that a bespoke taxonomy could provide regulatory certainty, making it easier for entrepreneurs to assess compliance across multiple jurisdictions. Thus, one pathway could be to focus on providing more regulatory certainty to support the growth of the crypto industry while ensuring that any regulatory frameworks remain flexible and adaptable to changing market conditions.
Emphasise engagement between regulators and industry participants: Several respondents suggested that ongoing engagement between regulators and industry participants is essential to ensure that any regulatory frameworks remain effective and do not create unnecessary restrictions or confusion. Thus, one pathway could be to emphasise ongoing engagement and collaboration between regulators and industry participants to ensure that any regulatory frameworks reflect the needs of the industry and are effective in achieving their goals.
Develop education initiatives for developers: Several respondents suggested that initiatives aimed at providing blockchain and token developers with a better understanding of the existing legal landscape could be useful. Thus, one pathway could be to develop education initiatives for developers to help them avoid inadvertent violations of the law and ensure that any regulatory frameworks are effective and understood by industry participants.
5b) What are your views on the creation of a standalone regulatory framework that relies on a bespoke taxonomy?
Overall, the responses suggest that any regulatory framework for digital assets should balance regulatory compliance with promoting innovation, provide clarity and certainty, be harmonised with international frameworks where possible, and clearly classify digital assets.
Responses can be grouped into the following categories:
Balancing regulation with promoting innovation: Several respondents argue that any regulatory framework for digital assets should strike a balance between ensuring regulatory compliance and promoting innovation. They contend that overly burdensome regulation could stifle the growth of the industry.
Clarity and certainty: Respondents stress the importance of clarity and certainty in any regulatory framework. They argue that a clear and predictable regulatory environment would be beneficial for businesses operating in the digital assets industry.
Harmonisation with international frameworks: Some respondents suggest that any regulatory framework should be harmonised with international frameworks to reduce friction for Australian businesses operating in a multi-jurisdictional environment.
Classification of digital assets: There is some disagreement among respondents on how digital assets should be classified and regarding how NFTs should be treated. Some argue that NFTs should be explicitly excluded from regulation if they have non-financial functions, while others suggest that exemptions from relevant regulatory requirements should be confirmed for NFTs with incidental financial elements.
5c) In the absence of a bespoke taxonomy, what are your views on how to provide regulatory certainty to individuals and businesses using crypto networks and crypto assets in a non‑financial manner?
Overall, while there are some differences in the suggested approaches, all of the responses emphasise the importance of providing regulatory certainty to individuals and businesses using crypto networks and crypto assets in a non-financial manner.
Common themes across these responses are:
The importance of providing clear guidance and practical education to users to help them make informed decisions and avoid scams and risky investments.
The need for ongoing engagement and coordination between the public and private sectors to ensure regulatory certainty and minimise inefficiencies in the use of blockchain technology.
Some mention the need for more dialog with ASIC as a way we could move towards better certainty.
The suggestion that specific regulation should be implemented for clearly defined parts of the crypto ecosystem, such as exchanges and stablecoins, to provide further regulatory certainty.
Question 6. Some intermediated crypto assets are ‘backed’ by existing items, goods, or assets. These crypto assets can be broadly described as ‘wrapped’ real-world assets.
6a) Are reforms necessary to ensure a wrapped real-world asset gets the same regulatory treatment as that of the asset backing it? Why? What reforms are needed?
Based on the responses to this question, there were some common themes which include:
Education: There is a consensus among the respondents that education is important in ensuring that individuals and businesses understand the technology and potential risks associated with wrapped real-world assets.
Need for legal clarity: The respondents recognise that legal clarity is necessary to ensure that new technological methods of expressing existing property rights can be effectively enforced.
Treatment of tokenised versions: There are different views on whether tokenised versions should be treated the same as the asset backing it or not. Some respondents believe that tokenised versions should be treated differently than the asset backing it while others believe that tokenised versions should be treated the same as the asset backing it.
Innovation: Some respondents suggest that the current treatment of tokens as securities is prohibitive for innovation. There is a call for regulatory frameworks that encourage innovation in the space.
6b) Are reforms necessary to ensure issuers of wrapped real-world assets can meet their obligations to redeem the relevant crypto tokens for the underlying good, product, or asset?
The common themes across the responses were as follows:
The need for education and understanding of the technology and potential pitfalls.
The importance of sufficient safeguards, such as the involvement of legacy financial institutions, use of crypto tax software and on-chain data, and sharing of code audits.
The need for disclosures and audits to confirm that issuers can meet their obligations.
The potential for applying real-world obligations as is if relevant.
Question 7. It can be difficult to identify the arrangements that constitute an intermediated token system.
7a) Should crypto asset service providers be required to ensure their users are able to access information that allows them to identify arrangements underpinning crypto tokens? How might this be achieved?
Some common themes across these responses include:
the need for transparency and clear information to be provided to users of crypto asset service providers, particularly centralised exchanges. This includes access to information about the arrangements underpinning crypto tokens, risk management policies, and the use of proof of reserve systems or allow lists to provide transparency and trust in the ecosystem.
the responsibility of crypto asset service providers to protect their users and ensure they are aware of the risks associated with their investments.
7b) What are some other initiatives that crypto asset service providers could take to promote good consumer outcomes?
Across the responses received, we saw the following common themes:
Emphasis on consumer education: Various responses highlight the importance of educating consumers about cryptocurrencies, DeFi exchanges, and potential scams or malicious activities in the crypto space. By offering guidance and resources, service providers can help users make informed decisions and avoid pitfalls.
Focus on transparency: The responses also emphasise the importance of transparency in promoting good consumer outcomes. This includes making token unlock schedules clear and embedded in smart contracts, auditing smart contracts, and providing links to on-chain metrics that can help investors assess the progress of a token.
Advocacy for consumer protection measures: The responses also suggest that crypto asset service providers should take steps to protect consumers, such as utilising systems that promote transparency and minimum standards. This can help build trust and increase consumer confidence in the crypto space.
Question 8. In addition to the functional perimeter, the Corporations Act lists specific products that are financial products. The inclusion of specific financial products is intended to both: (i) provide guidance on the functional perimeter; (ii) add products that do not fall within the general financial functions.
8a) Are there any kinds of intermediated crypto assets that ought to be specifically defined as financial products? Why?
Based on the responses provided, the majority agree that existing laws that govern centralised exchanges are sufficient to regulate the industry.
8b) Are there any kinds of crypto asset services that ought to be specifically defined as financial products? Why?
One response to this question focused on services offered by centralised exchanges. This response highlights the trade-off between ease of use and loss of control over assets. This suggests that there may be a need for regulation to ensure that users are adequately protected when using centralised exchanges.
Question 9. Some regulatory frameworks in other jurisdictions have placed restrictions on the issuance of intermediated crypto assets to specific public crypto networks. What (if any) are appropriate measures for assessing the suitability of a specific public crypto network to host wrapped real world assets?
Responses from our collective highlighted the following measures:
High uptime and no known flaws in the code.
A community to check if information is correct.
Source data availability.
Code audits from reputable audit firms.
Robust security protocol that can withstand hacking attempts and other security breaches.
Scalability to handle large volumes of transactions efficiently.
Interoperability with other networks and protocols.
Regulatory compliance with relevant frameworks.
Transparent and decentralised governance structure that is accountable to its users.
These measures are important to ensure that the public crypto network is suitable and secure for hosting wrapped real world assets. As the space evolves, it is important to continually learn and watch for changes in the technology to ensure that the measures are up to date and relevant.
Question 10. Intermediated crypto assets involve crypto tokens linked to intangible property or other arrangements. Should there be limits, restrictions or frictions on the investment by consumers in relation to any arrangements not covered already by the financial services framework? Why?
We had a variety of responses to this question.
Some felt that existing regulations and laws are already in place for intermediated crypto assets, such as on and off-ramp exchanges and individuals or entities' bank accounts, to protect investors.
Others believe that investors should have knowledge of these regulations and laws to protect themselves, as there is no way to recall funds if they make a mistake, such as sending it to the wrong location.
Another group highlights that digital assets or arrangements not covered by the financial services framework should not be restricted for consumer investment. They also go on to mention that retail investors are already allowed to engage in risky activities in financial markets, such as equity and forex trading, even without having knowledge of the intrinsic value of the assets in question.
Question 11. Some jurisdictions have implemented regulatory frameworks that address the marketing and promotion of products within the crypto ecosystem (including network tokens and public smart contracts). Would a similar solution be suitable for Australia? If so, how might this be implemented?
Our responses highlighted some commonalities including the importance of striking a balance between protecting consumers and fostering innovation within the industry. Additionally, the responses also recognise the challenge of regulating an industry that is constantly evolving, and the need to consider the effectiveness of existing legislation before drafting new legislation. Finally, our responses acknowledge the importance of protecting consumers from scams and exploitation, while also fostering innovation within the industry.
Question 12. Smart contracts are commonly developed as ‘free open source software’. They are often published and republished by entities other than their original authors.
12a) What are the regulatory and policy levers available to encourage the development of smart contracts that comply with existing regulatory frameworks?
Despite proposing different approaches, there are some common threads in these responses.
Firstly, all the responses acknowledge the need for smart contracts to comply with existing regulatory frameworks. They recognise that regulations such as the Austrac AML/CTF Act, ATO Income Tax Act, and the Goods and Services Act, provide sufficient oversight and guidance for the crypto system.
Secondly, there is a shared concern about stifling innovation through overregulation. All the responses indicate that further regulation either may not be necessary or should be implemented with caution to avoid harming the competitiveness of the crypto system in the global market.
Finally, there is a focus on protecting retail investors. The responses propose different methods of doing so, such as ensuring compliance with existing regulatory requirements, creating an "allow list" of tokens and facilitating user education.
12b) What are the regulatory and policy levers available to ensure smart contract applications comply with existing regulatory frameworks?
Overall, these responses demonstrate a range of perspectives and ideas for addressing the question of regulatory and policy levers for ensuring compliance with existing regulatory frameworks in smart contract applications. All the responses recognise the importance of ensuring compliance with existing regulatory frameworks. However, they differ in their approaches to achieving this goal.
One response suggests that the current regulations are sufficient, and adding more regulation could stifle innovation.
Another suggests a collaborative effort between the Government and industry stakeholders to establish clear guidelines and standards for smart contract development, third-party auditing or certification programs, and incentives for compliance.
Another emphasises the importance of auditing smart contracts to ensure compliance.
Despite these differences, all the responses agree that it is important to ensure compliance with existing regulatory frameworks, and that a coordinated effort between industry stakeholders and Government could help achieve this goal.
Question 13. Some smart contract applications assist users to connect to smart contracts that implement a pawnbroker style of collateralised lending (i.e. only recourse in the event of default is the collateral).
13a) What are the key risk differences between smart contract and conventional pawn broker lending?
The responses suggest that the key risk differences between smart-contract and conventional pawn-broker lending are:
Trust: Conventional pawn-broker lending requires trust in the lending service to hold the collateral over the period of time specified in the agreement, whereas smart-contract based DeFi lending uses self-custody escrow type mechanisms that cannot be corrupted by human error.
Immutability and transparency of the smart-contract system, which reduces the risk of fraud or manipulation by the lender.
The ability to automate the entire loan process, which reduces the time and cost associated with traditional loan applications.
Fungibility of cryptocurrency collateral, which allows for greater price discovery but also leads to potential contagion risk if large lending positions are closed out simultaneously.
Overall, it seems that smart-contract lending offers significant advantages over conventional pawn-broker lending, particularly in terms of transparency, automation, and risk reduction. However, there are still some unique risks associated with lending in the cryptocurrency space, particularly around the volatile and rapidly changing value of collateral.
13b) Is there quantifiable data on the consumer outcomes in conventional pawn broker lending compared with user outcomes for analogous services provided through smart contract applications?
A common thread across the responses is the acknowledgement that there is some quantifiable data available to compare consumer outcomes in conventional pawn-broker lending and smart contract applications. However, there is also recognition that the data may not be directly comparable due to differences in the nature of the lending products.
Another common thread is the importance of factors such as interest rates, repayment terms, default rates, and consumer protection in assessing consumer outcomes for both types of lending. It is suggested that these factors could be used to compare the outcomes of smart contract applications and conventional pawn-broker lending.
Finally, there is a recognition that the data available may not be completely useful for comparison at this time, as DeFi loans are often over-collateralised on-chain and are not creating credit in the same way as traditional finance. However, it is noted that as DeFi continues to expand and evolve, this may change in the future.
Question 14. Some smart contract applications assist users to connect to automated market makers (AMM).
14a) What are the key differences in risk between using an AMM and using the services of a crypto asset exchange?
Based on the responses provided, the key differences in risk between using an AMM and using the services of a crypto asset exchange can be summarised as follows:
Centralised crypto asset exchanges have operational risks, such as the potential for the business to go bankrupt, mismanagement or fraud by the exchange, while decentralised exchanges have smart contract vulnerabilities such as poorly written code or built-in back doors and admin keys that could be exploited or used against individuals interacting with such code.
Both types of exchanges have risks related to sending crypto to the wrong address resulting in a permanent loss of assets.
Centralised exchanges adhere to the AML/CTF Act, so when on- and off-ramping, the data is captured, while decentralised exchanges rely on on-chain data.
AMMs expose users to liquidity dynamics driven by supply and demand of token buyers/sellers and liquidity providers, while centralised exchanges are able to be more dynamic during the provision of liquidity.
Liquidity for centralised exchanges is typically provided by one or more centralised market makers, while AMMs have a permissionless environment where liquidity can be provided by market participants in exchange for a portion of trading fees collected.
Centralised exchanges have counterparty risk, as customers trust them with deposited assets, while with AMMs, the same risk lies in the potential for underlying smart contracts containing errors in the code to be exploited by a malicious actor and the assets drained from that particular liquidity pool.
14b) Is there quantifiable data on consumer outcomes in trading on conventional crypto asset exchanges compared with user outcomes in trading on AMMs?
Based on the responses, it seems that quantifiable data on consumer outcomes is more readily available for AMMs than conventional crypto asset exchanges. This is because AMMs operate on public blockchains like Ethereum and information about transactions and outcomes of smart contract applications can be accessed through blockchain explorers like Etherscan. Financial reports from conventional crypto asset exchanges only show assets, liabilities, and equity, and the data is not as extensive.
Another response suggests directing the question to high-quality, on-chain data providers like Chainalysis, Dune Analytics, or Arkham Intelligence.
A further response highlights that price action is a common data point for both centralised exchanges and AMMs, which can be accessed through platforms like Tradingview. However, due to the open-source nature of AMMs, data from any transaction can be pulled permissionlessly into any new data aggregator or analytics platform, allowing users to get customised information that they wouldn't normally get from a centralised exchange.
Conclusion
The Australian DeFi Association, a not-for-profit community organisation focused on blockchain technology education and awareness, submits the above response to the token mapping consultation. The community members' various opinions on the topics discussed in the consultation reflect a desire to ensure consumer protection while continuing to encourage innovation in the digital asset space.
The submissions received indicate the need for flexibility in regulatory frameworks that focus on the underlying functions, outcomes, and risks associated with different token types. Instead of attempting to create a comprehensive taxonomy, the community suggests a more nuanced approach to regulation that adapts to changing market conditions and ensures that regulation is focused on protecting investors and promoting market integrity.
Respondents to the consultation agree that financial services regulation should not treat digital assets differently just because they operate on different technology. They urge the Government to work collaboratively with industry participants to develop regulation that strikes a balance between consumer protection and innovation. Members are committed to ongoing conversations with the Government to share their views proactively and to ensure that regulatory frameworks for digital assets are developed with due consideration for the unique features of the technology.
In conclusion, the responses to the Token Mapping Consultation highlight the importance of striking a balance between consumer protection and innovation and developing regulatory frameworks that support the growth of the digital asset space. Aus Defi looks forward to continued collaboration with the Government to help shape regulatory frameworks that promote the growth of the digital asset space and support innovation.
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