The Digital Finance Cooperative Research Centre (DFCRC) has released a groundbreaking report examining the economic case for digital finance, in conjunction with the Digital Economy Council of Australia (DECA) (Report). Amongst its findings, the Report identifies a $24 billion per year economic opportunity for:
- Better markets ($10 billion per year)
- Better payments ($8 billion per year)
- Better assets ($6 billion per year)
Key drivers for these opportunities for growth include reduced costs, capital efficiency and increased market participation. At the core is “structural improvement in financial infrastructure”. This involves far more than incremental technology enhancements. To that end, the Report draws from deeply innovative decentralised finance and tokenisation case studies in several of its observations and recommendations, and the underlying methodology spans technical, economic, legal, regulatory and policy considerations.
In this alert, we focus on key opportunities and legal considerations. Specifically, we summarise how “better” markets, payments and assets have been defined, as well as the key legal and regulatory factors that may help catalyse the next phase of digital finance transformation in Australia. We also provide a synopsis of the key policies identified in the Report to accelerate tokenisation.
This synopsis is just a small part of a monumental Report. Please let us know if you would like to discuss any aspect of digital transformation in finance.
What are “better” markets, payments and assets?
The Report summarises the opportunities for digital finance in three key areas:
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Concept
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Headline opportunities
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Specific opportunities
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Asset classes positively impacted*
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BETTER MARKETSEnhancing market infrastructure and trading efficiency |
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Atomic settlement and improved post-trade processes
Access and liquidity
On-chain trading mechanisms such as automated market makers
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Detailed findings: Section 4 of the Report |
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BETTER PAYMENTSModernising domestic and cross-border payments |
Improve how value moves domestically and across borders |
Tokenised money: CBDCs, stablecoins and deposit tokens
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Detailed findings: Section 5 of the Report |
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BETTER ASSETSImproving the functionality of real-world assets |
Enhanced functionality |
Tokenisation
Assets with lower levels of transparency, such as corporate bonds and private equity
Assets locked up as collateral
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Detailed findings: Section 6 of the Report |
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* In order of estimated improvement. |
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What are the legal and regulatory issues and pathways?
The Report analyses four pillars of digital finance regulation:
View from the ground
The Report articulates several important legal and regulatory considerations.
From our own experience, many of the issues identified are navigable. For example, it is possible to achieve the commercial objectives of a project (say, a tokenised instrument or new digital asset market infrastructure) by adopting a structured approach to addressing legal, regulatory and internal requirements, finding pathways to certainty that already exist, working collaboratively with regulators to forge new models and norms, and creatively addressing perceived barriers.
However, this requires resource and appetite for both effort and risk, particularly for early movers. It is also true that a clearer articulation of principles and expectations would aid market certainty, provide greater confidence, encourage ecosystem development (including services such as on-chain analytics, market surveillance, accounting and audit) and ultimately support a more efficient regulatory environment and a more consistent application of the law across the digital finance arena. In this respect, pilots and sandboxes can only go so far.
The Report provides several recommendations, which we summarise below.
The practical question for industry participants is whether to wait for the perfect moment, to press on with what’s currently available and move ahead of the pack, or to be closely involved in forging new standards and pathways. We expect the answer will be different for each.
Policies to accelerate tokenisation
The Report outlines four key themes and several potential policies to accelerate tokenisation in Australia to support the potential gains identified as part of the research.
These are summarised as follows:
Next steps
The Report provides valuable insight in relation to the areas covered by this synopsis, and many more. For example, there are excellent case studies throughout in relation to corporate bonds and other forms of debt, money market funds, OTC derivatives, public equities, repurchase agreements (repos), real estate, FX, carbon and more.
As the ripple effects of the Report cascade, we would be pleased to discuss any of the legal and regulatory issues relevant to tokenisation and digital finance with you.
Please contact us, anytime.
