The Australian government announced it will begin work on a “token map” of the cryptocurrency sector. Timely because, according to the Australian Tax Office, more than one million Australians have “interacted” with digital assets since 2018.
And that means a lot of people have made money but, if the normal patterns of frontier investments have held, a lot more have lost money.
“Token mapping” is an approach to describing the characteristics of the different digital tokens – tokens being digital representations of real world items - including the type of digital asset, its underlying code and other defining technological features. The initiative will be used to determine which crypto assets are already subject to financial services law and non-financial products that may need special legislation of their own.
According to the Australian Treasurer Jim Chalmers, “the crypto sector is largely unregulated, and we need to do some work to get the balance right so we can embrace new and innovative technologies while safeguarding consumers”.
Chalmers noted the “token mapping” proposal has not been tried elsewhere in the world but would help delineate where regulation was needed and would be affective.
“The aim will be to identify notable gaps in the regulatory framework, progress work on a licensing framework, review innovative organisational structures, look at custody obligations for third party custodians of crypto assets and provide additional consumer safeguards,” he said.
Meanwhile, the Reserve Bank of Australia is collaborating with the Digital Finance Cooperative Research Centre (DFCRC), which brings together industry, academic and regulatory stakeholders, to investigate “the opportunities arising from the transformation of financial markets through the digitisation of assets that can be traded and exchanged directly and in real-time on digital platforms.”
Key to that project will be to understand where the official and private sectors can play the most constructive role without crowding one another out and, again, what regulation is appropriate.
For example, CBDCs may well have an important role in cross border trade finance or in providing direct monetary benefits to some members of society. However, according to the BIS and many others, the state sector should not take over the financial system nor attempt to provide an extra level of deposit security. In an extreme case, if a central bank were to offer an ordinary deposit account, the danger is in times of financial stress there might be a run on commercial banks as depositors seek the ultimate security of a central bank.
We saw a version of this in the global financial crisis when governments and central banks were forced to institute emergency guarantees on deposits to prevent runs on those banks perceived to be smaller or more risky.
For an easily understood and very readable discussion of the many strands of central bank involvement have a look at the International Monetary Fund article “An IMF economist explains central bank digital currency to his mother.”
The key concerns raised include not just the danger of a run but of privacy – can the state use the CBDC to spy on you? (They could, safeguards are important.) What are the implications for taxation? What if citizens of country X decided they would prefer to hold their deposits with a foreign central bank? Will the involvement of a central bank encourage or stifle innovation?
Those out-there pioneers of DeFi and crypto will lament the intrusion of the official sector into this new world but it is both desirable and inevitable if the innovation and transformation is going to win the trust of not just governments but everyday citizens.
The question is not whether the crypto world should be regulated at all but rather how it should be regulated. How invisible should the hand of the market be? What role should the state play and where can the private sector do a better job with less risk to the taxpayer?