In the expanding digital economy, tokenisation is set to transform how we interact with assets by creating digital representations of real-world assets on distributed ledgers. This promises to enhance efficiency, transparency and liquidity across various markets. With estimates projecting that tokenisation of real-world assets will reach US$18.9 trillion by 2033, token holders will want to leverage the value latent in those tokens for debt. In response, Lenders will need to understand how to effectively perfect a security interest in these assets under relevant secured transactions law.
Nature of digital tokens: representation, issuance and maintenance
Digital tokens are fungible or non-fungible packets of data that represent a share of an asset (e.g. fractional ownership of real estate) or a set of permissions, rights (e.g. the right to a discount for goods or services on an online platform) or claims (e.g. electronic representation of debt) held by the token bearer.
The process of issuing digital tokens is called ‘tokenisation’. Tokenised real-world assets are, fundamentally, a subset of digital tokens, whereby the asset to which the token bearer partially owns, or can exercise a right over, involves real-world physical assets, traditional financial assets or certain other valuable assets (e.g. money or intellectual property).
Digital tokens are issued and maintained on distributed ledgers or blockchains, which serve as databases that record the history of the information they are designed to store. The key distinguishing features of this technology is its distributed nature, its availability (either public or private depending on use requirements) and its replication across a network of computers, or nodes, located around the world. This framework aims to ensure that the ledger remains accurate and is verified by a decentralised network of individuals.
For more information on digital tokens and the tokenisation process, see our article titled ‘Decoding Tokenisation: An Introduction’.
The role of ‘wallets’ in managing digital tokens
Essentially, wallets function as an interface for users interacting with distributed ledgers or blockchains, enabling access to DeFi applications, metaverses, buying and selling cryptocurrencies, issuing or trading NFTs or acquiring an interest in a DAO.
Each wallet has a public address, derived from a public cryptographic key, which serves as an identifier and a private key, which enables the user to conduct transactions. Users transact, manage and control tokens using these keys that are stored in software 'wallets'. If someone knows your public address, they can send you tokens. The person who possesses the corresponding private key has control over the tokens in that wallet. Some wallets are ‘non-custodial’, in which the user retains complete control of their keys and consequently their digital tokens. Conversely, issuers of ‘custodial’ wallets retain control of the keys and accept instructions to conduct transactions on behalf of the user (e.g. a cryptocurrency exchange).
Taking a security interest in Australia in digital tokens
To lend against digital tokens, a lender will want to secure a first-ranking security interest over such holdings to ensure the best enforcement position and maintain priority in loan repayments. This depends on how digital tokens are characterised under Australian property law and secured transactions law.
Legal nature of digital tokens in Australia
In Re Blockchain Tech Pty Ltd [2024] VSC 690 (Blockchain Tech) the Victorian Supreme Court held that Bitcoin was capable of being property under Australian law, it being a ‘chose in action’.2
This decision was based on Bitcoin satisfying the following criteria for property:3
- an interest in Bitcoin is definable, it being data in the form of a unique digital address and unique public cryptographic key on a public ledger housed on a network of computers;
- an interest in Bitcoin is identifiable by third parties as a result of its unique public cryptographic key shared on a public ledger;
- an interest in Bitcoin has a degree of permanence or stability, it being registered and recorded on a public ledger; and
- an interest in Bitcoin is readily distinguishable from an interest in mere ‘information’ or data, the holder of the public and private cryptographic key being able to complete transactions on a network and being able to exclude third parties from accessing or dealing with the Bitcoin.
The Court’s findings in Blockchain Tech were based on the technical and operational features of Bitcoin. Accordingly, the decision may not be binding or persuasive where digital tokens have different technical or operational characteristics and are unable to satisfy the property criteria summarised above.
As of the date of this article, no other judge of a superior court in Australia has ruled in a trial that a person’s interest in cryptocurrency or digital tokens constitutes property. However, several judges in England and Wales, New Zealand, Canada and the Republic of Singapore have determined that a person’s interest in cryptocurrency is property. A discussion of those cases, however, is beyond the scope of this article.4
Notably, the Court did endorse a speech delivered by Justice Jackman of the Federal Court of Australia in 2024 titled ‘Is Cryptocurrency Property?’ in which his Honour concluded that cryptocurrency is property and that, within Australian law, no impediment exists to treating cryptocurrency as a chose in action.5
Justice Jackman’s speech was endorsed in an interlocutory application before Collier J in Australian Securities and Investments Commission v NGS Crypto Pty Ltd (No 3) [2024] FCA 822, in which the Court held that the definitions of property in the Corporations Act is sufficiently broad to encompass cryptocurrency assets in appropriate circumstances.6
The authors agree with the increasing number of Commonwealth judicial decisions and academic statements that digital tokens, or at the very least certain cryptocurrencies, should be legally categorised as ‘property’.
Security interests under the Personal Property Securities Act
In Australia the Personal Property Securities Act 2009 (Cth) (PPSA) provides a comprehensive statutory framework governing security interests in personal property and sets out rules dealing with their creation, perfection, priority and enforcement.
Section 12(1) of the PPSA defines a security interest as an interest in personal property (both tangible and intangible), provided for by a transaction that, in substance, secures a payment or performance of an obligation. This definition of ‘security interest’ adopts a functional approach by looking to the substance of the transaction as opposed to its form.
‘Personal property’ is defined in section 10 of the PPSA as property (including a licence) other than land or a right, entitlement or authority granted by a law of the Commonwealth, a State or Territory and declared by that law not to be personal property under the PPSA.
Where the technical or operational characteristics of a digital token satisfies the common law definition of property as described in Blockchain Tech, then a security interest in that digital token will be governed by the PPSA (assuming that the territorial reach of the PPSA applies to the digital tokens and the underlying transaction pursuant to the PPSA).
Attachment and perfection for a security interest in digital tokens
Attachment
In order for a security interest to be enforceable against the grantor it must have ‘attached’ to the property secured. Attachment occurs when:
- the grantor has rights in the collateral (legal or equitable proprietary rights in the collateral are sufficient and full ownership is not required) or the power to transfer rights in the collateral to the secured party; and
- either:
- the grantor performs an act granting the security interest, typically by entering into a valid security agreement; or
- the secured party provides value for the security interest, such as a loan or the promise of a loan
Having regard to the above, a lender should ensure that a written security agreement has been documented in respect of the digital tokens.
Perfection generally
Perfection is the method by which secured party’s ensure security interests are effective against third parties. It also operates as a public notice of the existence of a security interest in a specific asset or more generally over all the assets of a grantor.
A secured party can perfect a security interest in personal property by completing one or more of the perfection steps listed in s 21(2) of the PPSA.
The most common perfection method is by registering a security interest on the Personal Property Securities Register (PPSR). Registrations are completed by filing a notice, termed a ‘financing statement’, on the PPSR.
The PPSA also recognises two additional methods of perfection – ‘possession’ (where the personal property can be ‘possessed’) and ‘control’ (where the personal property is ‘controllable property’).
Perfection is not mandatory under the PPSA. However, if a security interest is not perfected, then one or more of the following may apply:
- the security interest vests in the grantor immediately on the grantor entering into voluntary administration, bankruptcy or liquidation;
- a competing secured party may have a higher priority interest in the collateral; and
- third parties may acquire an interest in the collateral free of the secured party’s interest.
Perfection over digital tokens
The PPSA employs a comprehensive classification scheme by separating personal property into a number of collateral classes. It is important to determine how collateral, the subject to of a security interest, is classified under the scheme in order to understand the formalities associated with, among other things, perfection relevant to that collateral, the benefits and distinct rules that may apply to any specific collateral class and how best to accurately capture the collateral when registering a financing statement on the PPSR.
The classification scheme divides personal property into four separate collateral classes, being: (1) goods; (2) financial property; (3) intermediated securities; and (4) intangible property. The PPSA further divides financial property into five sub-classes, including: (1) chattel paper; (2) currency; (3) documents of title; (4) investment instruments; and (5) negotiable instruments.
Below is a table summarising potential categories for certain tokens and certain corresponding perfection requirements under the PPSA. Perfection requirements should be assessed on a case-by-case basis, considering the digital token's current use, potential future use and any underlying real world asset to which the token relates. The matrix provides a summary of potential registrations, but does not represent a definitive or comprehensive list of all possible registration options. Additionally, lenders may find it prudent to register under multiple collateral categories if a digital token serves or will serve several purposes.
1 Network tokens
Category of token
Network tokens7
Token definition
Tokens that are intrinsically connected to and derive their value from the programmatic operations of a blockchain or smart contract protocol. Network tokens often possess inherent utility; they can be utilised for network operations, forming consensus, coordinating protocol upgrades or incentivising network actions.
Examples
Bitcoin’s BTC, Ethereum’s ETH and Solana’s SOL.
Potential PPSA collateral categorisation and description
- Intangible property – general intangible: Operates as a catch-all collateral class, comprising personal property that is not otherwise classified as goods, financial property or an intermediated security.
- Financial property – intermediated security: This collateral class regulates situations where securities and financial assets are held through an intermediary. If the owner of a network token agrees to hold it indirectly through an intermediary (as defined in section 15(2) of the PPSA) and the intermediary classifies the token as a financial instrument or asset (per section 15(7) of the PPSA), the 'intermediated security' class could apply.
- Collateral description: The collateral description in the security agreement should describe the network token held in the public wallet.
Perfection implications
Form of perfection: Perfection by registering a financing statement on the PPSR is available to network tokens.
The avenue of perfection by possession is not available to intangible property and a network token is not a type of intangible property capable of being controlled.
Priority: In applying ss 55(3), 55(4) and 55(5) of the PPSA, the first to register on the PPSR against the grantor will have priority over other secured and unsecured creditors.
2 Security tokens
Category of token
Security tokens
Token definition
A token that is structured like or deemed to be a security which might provide an expectation of profit, voting rights or dividend entitlements. In Australia, this would likely cover tokens that replicate the functions of a ‘financial product’ as defined in the Corporations Act 2001 (Cth).
Examples
Blackrock’s BUIDL (a tokenised fund which invests in cash, U.S. Treasury bills and repurchase agreements) and Etherfuse’s Stablebond (digital assets backed by government debt instruments)
Potential PPSA collateral categorisation and description
- Financial property – investment instrument: An investment instrument includes shares, debentures, derivatives, government bonds, options and financial exchange contracts.
- Financial property – intermediated security: This collateral class regulates situations where securities and financial assets are held through an intermediary. If the owner of a security token agrees to hold it indirectly through an intermediary (as defined in section 15(2) of the PPSA) and the intermediary classifies the token as a financial instrument or asset (per section 15(7) of the PPSA), the 'intermediated security' class could apply.
- Intangible property – general intangible: Operates as a catch-all collateral class, comprising personal property that is not otherwise classified as goods, financial property or an intermediated security.
- Collateral description: The collateral description in the security agreement should describe the security token held in the public wallet.
Perfection implications
Form of perfection:
- Perfection by registering a financing statement on the PPSR against the grantor is available to security tokens.
- If the collateral are shares in a company and they are certificated, a secured party should perfect (where possible) by possession and control by holding the original title certificates and blank transfer forms. This mitigates, in part, the risk of a competing security interest obtaining a priority by securing its interest by possession and / or control.
Priority:
- In applying ss 55(3), 55(4) and 55(5) of the PPSA, the first to register on the PPSR will have priority over other registered secured creditors and unsecured creditors (subject to no secured creditor having perfected by possession or control).
- In applying ss 55(4), 55(5) and 55(6) of the PPSA, the default rule is that if a secured party has a security interest in shares perfected by registration (SP1) and a separate secured party has a security interest in those same shares perfected by possession or control (SP2), priority depends on whether SP1 registered its security interest before SP2 perfected its security interest by possession of the shares. This is the default rule if no other rule applies, including s 57 (see below).
- Section 57(1) of the PPSA provides that a security interest perfected by control has priority over a competing security interest that is perfected by another means.
3 Company-backed tokens
Category of token
Company-backed tokens8
Token definition
Speculative assets that are intrinsically linked and derive value from an off-chain application, product or service operated by a company or other centralised organisation.
Examples
Tokens issued by exchanges e.g. Gate.io’s GT or KuCoin’s KCS.
Potential PPSA collateral categorisation and description
Intangible property – general intangible: Operates as a catch-all collateral class, comprising personal property that is not otherwise classified as goods, financial property or an intermediated security.
Collateral description: The collateral description in the security agreement should describe the company-backed token held in the public wallet.
Perfection implications
Form of perfection: Perfection by registering a financing statement against the grantor on the PPSR is available to company-backed tokens.
The avenue of perfection by possession is not available to intangible property and a company-backed token is not a type of intangible property capable of being controlled.
Priority: In applying ss 55(3), 55(4) and 55(5) of the PPSA, the first to register on the PPSR time will have priority over other secured and unsecured creditors.
4 Asset-backed tokens
Category of token
Asset-backed tokens
Token definition
Token that represents a claim on, or economic exposure to, an underlying asset. Underlying assets may include real-world assets (e.g. commodities, fiat currency or securities) or digital assets (e.g. cryptocurrencies or liquidity pool interests).
Examples
Stablecoins pegged to a currency or asset (i.e. USDC); derivative token providing synthetic exposure to underlying assets or financial position (i.e. OPYN’s Squeeth); liquidity provider tokens representing claims on pooled assets in a DeFi protocol (i.e. Compound’s C tokens); or deposit receipt tokens representing stacked or escrowed assets.
Potential PPSA collateral categorisation and description
Financial property – intermediated security: This collateral class regulates situations where securities and financial assets are held through an intermediary. If the owner of an asset-backed token agrees to hold it indirectly through an intermediary (as defined in section 15(2) of the PPSA) and the intermediary classifies the token as a financial instrument or asset (per section 15(7) of the PPSA), the 'intermediated security' class could apply.
Intangible property – general intangible: Operates as a catch-all collateral class, comprising personal property that is not otherwise classified as goods, financial property or an intermediated security.
Collateral description: The collateral description in the security agreement should describe the asset-backed token held in the public wallet.
Perfection implications
Form of perfection: Perfection by registering a financing statement against the grantor on the PPSR is available to asset-backed tokens.
The avenue of perfection by possession is not available to intangible property and an asset-backed token is likely not a type of intangible property capable of being controlled.
Priority: In applying ss 55(3), 55(4) and 55(5) of the PPSA, the first to register on the PPSR time will have priority over other secured and unsecured creditors.
5 Arcade tokens
Category of token
Arcade tokens
Token definition
Arcade tokens offer utility within a system and are not intended for investment purposes. They often function as currencies within a digital economy.
Examples
Digital gold in a game, loyalty points within a membership program or redeemable credits for digital products and services.
An example includes Axie Infinity’s AXS.
Potential PPSA collateral categorisation and description
Intangible property – general intangible: Operates as a catch-all collateral class, comprising personal property that is not otherwise classified as goods, financial property or an intermediated security.
Collateral description: The collateral description in the security agreement should describe the collectible token held in the public wallet.
Perfection implications
Form of perfection: Perfection by registering a financing statement against the grantor on the PPSR is available to collectible tokens.
The avenue of perfection by possession is not available to intangible property and a collectible token is not a type of intangible property capable of being controlled.
Priority: In applying ss 55(3), 55(4) and 55(5) of the PPSA, the first to register on the PPSR time will have priority over other secured and unsecured creditors.
6 Collectible tokens
Category of token
Collectible tokens
Token definition
Collectible tokens derive value, utility or significance from representing ownership of a tangible or intangible good.
Examples
Digital analogue or representation of a work of art or a literary work; a collectible or merchandise, like a ticket stub from a concert; membership in a club or community; or an asset in a game or metaverse, like a digital asset or plot of metaverse land.
Examples include:
- NFT Avatars (e.g. Reddit’s Collectible Avatars);
- Bar Lulu (The Rocks, Sydney) NFT Membership; and
- Tomorrowland NFT (which granted early access to music festival tickets).
Potential PPSA collateral categorisation and description
Intangible property – general intangible: Operates as a catch-all collateral class, comprising personal property that is not otherwise classified as goods, financial property or an intermediated security.
Collateral description: The collateral description in the security agreement should describe the collectible token held in the public wallet.
Perfection implications
Form of perfection: Perfection by registering a financing statement against the grantor on the PPSR is available to collectible tokens.
The avenue of perfection by possession is not available to intangible property and a collectible token is not a type of intangible property capable of being controlled.
Priority: In applying ss 55(3), 55(4) and 55(5) of the PPSA, the first to register on the PPSR time will have priority over other secured and unsecured creditors.
7 Memecoins
Category of token
Memecoins
Token definition
Memecoins are tokens that lack intrinsic utility or value. They are often associated with internet memes or community-driven movements and are not fundamentally connected to any network, company or application.
Examples
PEPE, SHIB and DOGE.
Potential PPSA collateral categorisation and description
Intangible property – general intangible: Operates as a catch-all collateral class, comprising personal property that is not otherwise classified as goods, financial property or an intermediated security.
Collateral description: The collateral description in the security agreement should describe the memecoin held in the public wallet.
Perfect implications
Form of perfection: Perfection by registering a financing statement against the grantor on the PPSR is available to memecoins.
The avenue of perfection by possession is not available to intangible property and a memecoin is not a type of intangible property capable of being controlled.
Key considerations when taking security in Australia over digital tokens
Controlling the digital tokens
A key consideration for lenders when taking security is ensuring that the collateral remains available as a source of repayment if the borrower defaults. Lenders need confidence that the borrower will not dispose of the collateral, making it unavailable on enforcement. Without this assurance, the security holds little, if any, value.
Considering that some distributed ledgers and blockchains do not record personal details during a transaction unless elected by the parties, and anyone with access to the private key can authorise the transfer of the digital tokens to a different public key address, lenders face certain challenges. In such cases, lenders need to investigate the transfer, identify the new digital token holder and navigate the PPSA provisions and potentially other jurisdictions’ secured transaction laws to establish priority. Third-party taking free rules may also hinder a lender’s priority claim in such circumstances.
One alternative is for the borrower to transfer the digital tokens to a public key controlled by the lender or an agent, trustee or custodian. This allows the lender to manage the digital tokens without requiring further borrower permission or action. However, this alternative may be unattractive to a borrower needing access and use of the digital tokens for its business. In such circumstances, comprehensive account and withdrawal terms would need to be documented.
Market volatility and protection against it
The high volatility of some digital tokens makes their value as collateral uncertain. A significant drop in digital token value decreases collateral value, altering the loan-to-value ratio and exposing lenders to under-recovery risk in case of default. This is a particular concern when digital tokens constitute a large part of the collateral.
Cryptocurrency backed loans and lending platforms mitigate this risk, in part, by over-collateralising loans and documenting margin calls if digital token value falls below a threshold. Some platforms employ smart contracts that issue margin calls, send default notices and complete enforcement steps automatically once collateral thresholds have been met and cure periods expire.
Enforcement of security interests in Australia over digital tokens
The PPSA does not adequately account for how digital tokens function as collateral for secured lending, how they are held and transacted on distributed ledgers or blockchains and the fact that such transactions may be irreversible. This creates uncertainty for lenders about accessing digital tokens efficiently in an acceleration and enforcement scenario.
Lenders in Australia are best protected if they register the security interest against the grantor on the PPSR, control the digital tokens, over-collateralise the loan and document margin call provisions as summarised above. However, these protections, when combined, might not be commercially tenable from a borrower’s perspective.
Reform
United States Uniform Commercial Code Reform
The PPSA takes as its starting point the personal property securities model first implemented in the United States and then adopted by Canada and New Zealand.
Having regard to the prominence of digital assets, the Uniform Law Commission (ULC) and the American Law Institute (ALI) formed the Emerging Technologies Committee (ETC) in 2019 to review the United States Uniform Commercial Code (UCC) and what amendments may be required to better accommodate emerging technology, including distributed ledger technology, digital tokens and electronic money.
Initial drafts of the amendments were produced by the ETC in July 2021 and discussed by the ALI Members Consultative Group (MCG) in October 2021. In January 2022, ALI approved Council Draft No. 1. The MCG met and discussed the latest draft in April 2022 and approved the changes in May 2022. The ULC approved the changes at its annual meeting in July 2022, the amendments, some of which relate to Article 9 (being the UCC article governing secured transactions), are offered for uniform enactment to each of the US state legislatures.
For more discussion on these amendments see our article titled ‘Time for reform: Can Australia bring secured transaction law into the digital age?’.
Australian reform
Australian legislators should consider amending the PPSA to better support the use of digital tokens as collateral for secured lending. In doing so, they should aim, where possible, to:
- ensure that lenders and borrowers can determine, with reasonable certainty, the scope of their rights and others’ rights concerning digital tokens the subject of a security interest;
- establish clear and predictable priority rules, allowing lenders to ascertain the priority of their rights in digital tokens the subject of a security interest;
- provide clear and comprehensive provisions that facilitate the efficient enforcement of lender rights and obligations in relation to digital tokens;
- consider the effect that security arrangements will have on third parties, including other secured and unsecured creditors, purchasers and third-party transferees, having regard to the at times decentralised and immutable nature of distributed ledgers and blockchains; and
- with the cross-border nature of digital tokens, the sections should be drafted with a view to achieving some harmonisation with jurisdictions who adopt a similar personal property securities model.
What next?
As we continue to explore the potential of tokenisation, it is clear that distributed ledger technology and digital tokens hold promise for transforming the way we interact with real world assets in the digital economy. However, widespread adoption will require careful navigation through a web of legal considerations arising from the novel characteristics of the technology. In future briefings, we will explore in greater detail these specific legal and regulatory considerations, and how the frameworks may respond to tokenised versions of traditional regulated assets.
Footnotes
- https://ripple.com/reports/approaching-tokenization-at-the-tipping-point.pdf
- Re Blockchain Tech Pty Ltd [2024] VSC 690, [383 and 389].
- Re Blockchain Tech Pty Ltd [2024] VSC 690, [386 - 388].
- For example, Ruscoe v Cryptopia Ltd (in liq) [2020] NZHC 725; AA v Persons Unknown [2020] 4 WLR 35; Shair.com Global Services Ltd v Arnold 2018 BCSC 1512; Copytrack Pty Ltd v Wall 2018 BCSC 1709; B2C2 Ltd; Quoine Pte Ltd [2019] SGCH(I) 3; Bybit Fintech Limited v Ho Kai Xin [2023] SGHC 199.
- Justice Jackman, ‘Is Cryptocurrency Property?’ (Speech, Commercial Law Association, 21 June 2024).
- Australian Securities and Investments Commission v NGS Crypto Pty Ltd (No 3) [2024] FCA 822, [51].
- Also referred to as ‘protocol tokens’ or ‘app tokens’.
- Also referred to as ‘startup tokens’ or ‘app tokens’.
- The difference between a 'network token' and a 'company-backed token' lies in their value sources. Network tokens primarily derive their value from a blockchain or a smart contract protocol, whereas company-backed tokens primarily gain their value from off-chain systems or sources that cannot operate autonomously (i.e. centralised systems that require human intervention and control).
- Also referred to as ‘utility tokens’, ‘loyalty tokens’ or ‘points’.
