10 Oct Report on Key Policy Reforms to Support Tokenisation of Real World Assets in Australia

Sydney, 10 October 2024

At Federal Parliament today we launched of our joint report “Key Policy Reforms to Support Tokenisation of Real World Assets in Australia”, a collaboration between Digital Finance CRC, Digital Economy Council of Australia (DECA), and Ripple. We had productive discussions with Senator Andrew Bragg, Dr Andrew Charlton MP, ASIC, Treasury, and others.

Here are the key messages (more details in the report)

Tokenisation of Real-World Assets is a major economic opportunity for Australia:

• First, there is a productivity uplift opportunity for the Australian economy:
  • Digital real-world assets involve a subtle change in how the asset is represented but with major downstream impacts on how those assets can be traded and used – allowing them to be exchanged in a more efficient and low risk manner.
  • $12 bil in annual gains in existing markets, and a multiple of that in making new digital asset markets for assets that are currently not widely traded.
• Second, there is a large innovation uplift
  • There are things you can do with digital assets that can’t be done (or are difficult) with traditional assets.
  • Like fractionalising the assets to solve issues in the housing market, increasing liquidity by making the untraded tradable (e.g., making private markets accessible), applications of AMMs to cut the costs of trading, increasing access (due to the elimination of counterparty risk).
  • They can also enhance competition – central registries are gatekeepers, distributed ledgers open the doors to competition.
• Third, there is our position in the global economy
  • Globally, across all asset classes we estimate there is a >$2 tril p.a. opportunity just from the efficiencies we have been able to quantify so far.
  • Intense competition between countries to get their slices of this global pie. Financial services that were traditionally localised will become more globally integrated making that competition a much larger threat.
  • We risk missing out as other countries are advancing quickly → parts of financial services value chain could shift overseas.

These opportunities and economic impacts are not purely hypothetical – they are based on findings from the Australian CBDC pilot in 2023 (run by DFCRC and RBA, with collaboration with ASIC and Treasury) in which we evaluate around 140 real-world (industry driven) use cases of digital finance and quantified the areas of biggest economic gains.

Running some of those tokenisation use cases as “real money” pilots (rather than merely simulations) also revealed the real-world regulatory roadblocks stopping RWA tokenisation in Australia.

The three key policy recommendations we brought to Parliament today are all squarely focused at removing those identified roadblocks → they are the next important steps in the policy agenda:

• First – roadblocks in digital token representation of real-world assets
  • There are many ways to tokenise an asset. Take equities for example –
    • A company could choose their official record of shareholders be recorded by tokens in a distributed ledger rather than a spreadsheet.
    • Or you could have a custodian hold shares on the traditional registry and issue 1:1 backed (redeemable) tokens.
    • Or you could have a pooled asset arrangement.
    • … and others
  • When you apply these various approaches to token structuring across the different asset classes, you quickly end up with many permutations and combinations → We need a comprehensive taxonomy of those RWA tokens, then lines mapping them to Corporations Act or other relevant legislation.
  • What this will achieve:
    • Identify legislative blocks, e.g., bearer securities being prohibited
    • Identify gaps and areas of ambiguity to clarify
    • Identify undesirable legal classification transformations, e.g., equity becomes managed investment scheme or derivative

• Second – roadblocks in Financial Market Infrastructure (FMI) licenses.

• (i) A new license is needed to match the reality of digital asset trading and settlement

• • Structural mismatch – traditionally trading is separate from clearing and settlement (C&S) and it is in C&S that there is a lot of systemic risk build up in the form of aggregation of counterparty risk, hence rigorous licensing and capital requirements.
  • In contrast, the most efficient digital asset markets combine the trading and settlement functions into a single inseparable function, and there is no clearing, hence no build-up of counterparty risk.
  • Other jurisdictions have recognised this structural mismatch between current licensing and the reality of digital asset markets and corrected it via a new license for Digital asset markets and settlement.

• (ii) New Digital Asset Markets Sandbox

• • Needed to develop the new license type and provide relief in the interim while the license is being developed, i.e., the new sandbox would be part of a two-step approach to getting to a new fit-for-purpose license.
  • Has the benefit of being quick to implement (should be able to implement within ASIC’s existing powers, with policy support from Government and collaboration with RBA) to avoid losing international competitiveness, and buy time for the legislative process of licensing reform.
  • Other jurisdictions have great examples of well thought through sandboxes for Australia to take guidance from. Examples are in our report.

Summary

• Tokenisaton of RWA is a big economic opportunity for Australia
• Government’s strategic plan for payments put Australia at the forefront of digital finance innovation via the CBDC pilot → now we need act on the learnings – i.e. regulatory workstreams dedicated to enabling regulations for RWA tokenisation, and legislative reforms.
• These policy recommendations could be implemented immediately and then added to a new strategic plan for Digital Finance – a roadmap of policies to capitalise on the economic opportunities

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