Legal development

Map of the Future Australian Treasurys Token Mapping project

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    Key Takeaways

    •  Treasury’s Token Mapping will identify Australia’s crypto activity and allow regulation of it
    • The exercise will help banks de-risk cryptocurrency platforms and offers
    • Regulated blockchain will make bank compliance and interbank transactions more efficient

    The government’s ‘Token Mapping’ exercise will influence the future of banking and how banks digitise their products and processes. 

    The Token Mapping announcement was made by Treasurer Jim Chalmers on August 22 and since then it has attracted positive and negative reaction, from pioneers who see cryptos as a good alternative to ‘fiat’ currency, and those who know that the technologies underlying crypto will not thrive unless there is regulatory certainty.

    One of the keenest audiences for Treasury’s Token Mapping is the retail banks. The mapping will be the first of its kind in the world, and it’s likely that while the Fintechs and phone-only challenger brands will be considered by Treasury, the greatest weight in the subsequent regulation recommendations will relate to Australia’s banking sector.

    And so it should, because the new crypto rules will have their most profound effect on the workings of retail banking – they will influence the digital future of banking.

    The ‘tokens’ being investigated by Treasury are not all ‘crypto coins’ – they are a variety of usages that sit on a system called the blockchain. This is a distributed digital ledger that can swap-out and swap-in data from approved sources, and is tamper-proof across its own system. 

    The banks observe the crypto world from a risk perspective, on different levels depending on the user-base. Consumer cryptos on trading platforms and ETFs carry risk of failure and fraud, which also reflects the level of consumer ignorance about what they are buying. 

    The consumer crypto market has largely been treated as ‘risk’ by the large banks, with forays into crypto being of a partnered nature.

    De-risking Crypto?

    Token Mapping should result in proper guards rails around crypto products, to an extent that the retail banks will feel less risk-averse about offering them, or enabling access to them for their customers.

    There is also an internal aspect to the blockchain for banks’ processes and risk-management, presenting an opportunity to streamline their AML/CTF regimes as well as being very accurate and up-to-date on ‘Know Your Customer’ requirements.

    Broader Token Mapping issues for retail banks will include the regulatory structure around privacy especially when banks use blockchain-enabled ID Tokens to identify individuals and corporate entities.

    Will ID Tokens give customers a tamper-proof identifier?

    ID Tokens create consumer-rights and privacy concerns, and they present risk for the banks in that there could be consumer push-back in some quarters. But with the support of the government tokens will also be embraced by customers who want a tamper-proof identifier with which to interact with their financial institutions.

    Token Mapping will give a regulatory structure to internal and consumer-facing uses of crypto technologies, but the biggest advantage to retail banks could be in the improved efficiencies promised by the blockchain. This could include how banks access wholesale funds, how they manage the massive market of interbank verification and transfers, and how they report to regulators on matters such as capital adequacy or the weighting of their loan books. 

    Australian retail banks are in the box-seat when it comes to Token Mapping and the regulatory enablement of cryptos. Treasury’s Token Mapping will be the first of its kind in the world and the Australian banks who thrive in the near-future might be those that are ready for the opportunities that arise from the project, both for their own back-office operations and for their millions of customers.

    And because this is the first of its kind, the banks that are ready for what Token Mapping makes possible might find themselves able to pursue global opportunities.

    Hong-Viet Nguyen is a Financial Regulation Partner at Ashurst.

    Author: Hong-Viet Nguyen, Partner.