GOVERNMENT ANNOUNCEMENT
In a joint media statement on 22 August 2022, The Hon Stephen Jones MP, Assistant Treasurer, Minister for Financial Services and The Hon Dr Andrew Leigh MP, Assistant Minister for Competition, Charities and Treasury confirmed that the Government is to commence consultation on a framework for the regulation of crypto assets.
As many jurisdictions grapple with the evolving technology and its implications this announcement indicates a step towards much needed regulation spanning various legal areas including tax, business and corporate, consumer, intellectual property and finance.
The Government’s suggested first step in the process will be token mapping with a consultation paper to be released soon. The token mapping process was suggested as an reform option for the regulation of digital assets by the Senate in the Final Report by the Select Committee on Australia as a Technology and Financial Centre released in October 2021.
The Senate Report acknowledged three token types recognised by the OECD, being Payment Tokens, Security Tokens, and Utility Tokens. We expect the token mapping will address these as well as the recently popular non-fungible tokens (NFTs). In summary these tokens are:
Payment tokens: tokens which can be used as a medium as exchange. Bitcoin is the most commonly known payment token.
Utility Tokens: these forms of tokens provide holders which access to blockchain based products or services. For example…
Security Tokens: the blockchain version of stocks and shares.
NFTs: digital representations of unique things for example a collectable in a game.
It is likely that the mapping will go further and address other tokens such as stablecoins (coins whose value is reference to another asset such as a fiat currency), governance tokens (tokens that represent voting power), reward tokens (such as a loyalty program) and DeFi tokens (a token that transfers value).
WHAT IS THE TOKEN MAPPING INTENDED TO ACHIEVE?
Crypto assets are becoming more popular and visible to the Australian community. From sports sponsorships to a seeming increase in the uptake by Australians of NFTs and cryptocurrencies the implications of crypto assets on the Australian economy are significant.
The purpose of token mapping is to identify the different types of “tokens” to provide a base level understanding upon which to build a regulatory framework. The need for regulation in this space comes from the many uncertainties surrounding crypto assets in Australia. For example:
What is the appropriate tax treatment of crypto assets and can ordinary principles apply? Is it appropriate that the tax treatment differs between token types or should this mapping instead focus on transaction types – and thus requiring a transaction mapping exercise?
When will a token be a financial product and subject to the Australian financial services licensing regime?
Should there be minimum requirements imposed on parties that provide custodial services for crypto assets?
How should digital asset exchanges in Australia be regulated?
Do the Anti-Money Laundering and Counter-Terrorism Financing regulations appropriately apply to this space?
Are crypto consumers protected against unfair contract terms with crypto businesses or from the release of their private information?
How can the crypto marketplace regulated to prevent unfair practices?
Will decentralised autonomous organisations (DAOs) be recognised as a separate legal entity?
DAOs
The Senate Report Recommendation 4 included:
The committee recommends that the Australian Government establish a new Decentralised Autonomous Organisation company structure.
Interestingly the Media Release states that the Government will work to “review innovative organisation structures”. Whilst no further details are provided in the press release, we expect this refers to DAOs meaning decentralised autonomous organisations.
DAOs in essence are blockchains answer to company structures with an emphasis of course being place on community decision making, transparency and decentralised power.
To expand, DAOs are blockchain based cooperative or management structures conducted online (both on and off chain) with their core role being to automate all required agreements (via smart contracts) to coordinate a group of individuals to effectively run an organisation.
The decentralised nature of DAOs is two-fold, first in that they are built on a public blockchain and second, as they rely on certain decentralized governance mechanisms which enable the decision-making process to be based on the collective agreement of its members. Decision making generally occurs via voting of the members rather than the board of directors as many traditional company structures operate.
There are obvious challenges in developing a DAO. The ability to appropriately include into code what is intended by parties requires a deep understanding of how such agreements, akin to partnership agreements, operate and how particular results can be achieved. When preparing partnership agreements, shareholders’ agreements, unitholders’ agreements or the like for our client’s consultation is required to understand the intended result and then careful drafting to ensure that is met. For DAOs this process remains the same, with the added step that the provisions then need to be appropriately drafted. Those considering DAOs should seek legal advice on these issues.
There are additional challenges in developing a DAO structure to operate a business in Australia. At present, Australian law (such as the Corporations Act 2001 (Cth)) does not recognise DAOs as holding their own distinct legal personality. It is arguable that DAOs may constitute partnerships for Australian legal purposes. A 'partnership' is defined in the Partnership Act 1959 (Vic) as follows:
Partnership is the relation which subsists between persons carrying on a business in common with a view of profit and includes an incorporated limited partnership within the meaning of Part 5.
This definition would not of course cover all DAOs as many may not intend to carry on a business and may not intend to make a profit. However, where satisfying that definition a partnership may be subject to section 115 of the Corporations Act (which does not recognise it as a separate legal entity but does impose certain restrictions). Clearly the provisions are complex and their application uncertain. This does not mean that DAOs can operate outside of the law but in the absence of a solid framework as to DAO governance this is a complex area for Australians. Professional advice should be sought as to not only the structuring of DAOs but the related tax, commercial and governance issues.
WHAT’S NEXT?
Blockchain and its applications are a continuing area of development which are challenging traditional laws, business structures and transactions. It is expected that the Government’s token mapping exercise as well as the Board of Taxation’s review into the tax treatment of crypto assets will lead to further (and much needed) guidance and regulation in the coming months and years.
Taxpayers and advisors should keep attention to this evolving space. Sladen Legal regularly provides updates on blockchain, technology and cryptocurrency. To subscribe to this mailing list click this link.
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For more information on cryptocurrency and taxation or structuring using blockchain based organisations, please contact:
Laura Spencer
Senior Associate
M 0436 436 718 | T +61 3 9611 0110
E: lspencer@sladen.com.au
Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E: nbrydges@sladen.com.au
Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327 | T +61 3 9611 0105
E: dsmedley@sladen.com.au
