Ahead of her presentation at Environmental Asset Tokenisation: The Legal Implications on Friday, 28 March 2025, Katrina Donaghy explores how tokenising environmental assets enhances transparency and liquidity while navigating governance challenges and evolving regulations for sustainable management.
1. Can you explain the concept of tokenomics and why it's a crucial first step when considering the tokenisation of environmental assets? How does it help define the structure and functionality of these tokens?
Tokenomics can be explained as the design, issuance and management of digital tokens within a specific ecosystem. The crucial first step when considering the tokenisation of environmental assets is to understand that tokenisation does not exist in isolation from the technology environment that makes the token ecosystem available to real-world users.
When structuring the tokenisation of environmental assets, there is a need to understand the challenges to be addressed as a direct contribution of the way environmental assets are represented today in the Web2.0 ecosystem: paper, proprietary databases, information asymmetry, privileged information, illiquidity, lack of transparency and price discoverability.
Armed with such knowledge, the technology environment applies digitisation or tokenisation of real-world assets such as environmental assets to unlock innovation and investment by:
The next crucial step is token design, supply and issuance mechanisms and incentive structures.
2. In your experience, how do different environmental assets—like water rights or water quality credits—pose unique challenges when tokenising, especially in terms of governance and compliance?
First, water for extraction (water rights) and water for discharge (water quality) are two very different concepts with two different regulatory institutional instruments.
For example, a water right is the right to interfere with a water source to extract a volume of fresh water whether that be from ground water, surface water or piped water. On the other hand, water quality is the right to pollute a water source through discharging a volume of degraded fresh water whether that be into groundwater, surface water, a wetland, a reef etc.
From our point of view, the terms of governance and compliance rules are similar.
However, the key difference between the two environmental assets is that water rights are scarce – you need to be granted a right from the State when water supply is available if you can prove that it is for agriculture, livestock, fibre, aquaculture, indigenous or environment (and mining) purposes – in Australia, for most Water Plans, water rights or a share in the water supply are fully allocated. Further, water markets are not voluntary. They are highly, highly regulated and are restricted to who can participate.
Water quality credits are traded in voluntary environmental markets in Australia e.g., Eco-Markets for the trading of reef credits. If we consider the now stalled “Right to Repair Nature” Bill, this Bill was to establish the regulatory frameworks and governance instruments for the voluntary biodiversity market which aimed to empower individuals and businesses to play a direct role in financing nature-positive outcomes.
A stark difference to carbon markets which come under the remit of the Clean Energy Regulator.
From our perspective, there are no unique challenges. We structure the tokenisation of the asset to embed the rules as to how these assets are to interact with institutional instruments, authorities, ownership, balances, metadata and physical assets such as meters and offtakes.
There will be slight nuances between the two assets, but the overall goal of tokenisation is to bring transparency, accountability, market integrity and “compliance by design” features to these important environmental marketplaces to the benefit of market participants, regulators, communities and the public in general.
3. Given that not all environmental assets are considered financial products, what are the legal and regulatory implications when tokenising assets like water rights, and how does that differ from tokenising carbon credits?
Good question! By default, carbon credits are determined as a “financial product”, so it is clear from a regulatory perspective on its compliance and reporting obligations. That is, the regulation stipulates quite clearly that “Mums and Dads” are excluded from participating in carbon markets.
Water rights, on the other hand, are ruled under the Corporations Act by default “not a financial product” unless they have attributes that transform them into securities such as managed funds or securities traded on futures markets.
Approximately 8% of water traded in the Murray Darling Basin water markets are financial products due to the participation of natural capital investment companies such as Duxton, Kilter Rural, Argle and Riparian Capital. These financial companies bundle up water rights into managed funds whereby their clients can directly participate in water markets without owning the water rights. They are permitted to do so as each hold an Australian Financial Services Licence. Canadian Superannuation Funds are the largest holds of water rights in Australia accessed through such managed funds. The irony here though is that these bundled water rights which are now financial products, are leased to irrigators and farmers for extraction for agriculture, livestock, fibre, aquaculture, indigenous or environment.
For the average water right holder i.e., irrigators and farmers, their water rights are not a financial product as water allocations are issued by licensed water operators regulated by State Government Departments such as the Queensland Department of Local Government, Water and Volunteers. In Australia, fresh water assets are owned by the Crown and regulated under the Commonwealth Water Act 2000. From our perspective, we call fresh water extracted for agriculture, livestock, fibre, aquaculture, indigenous or environment as “retail water”.
Irrigators and farmers trade their excess water allocations (temporary water) or their water entitlements (permanent water) on water exchanges such as Rural Co, Water Exchange, or Waterfind. None of these water exchanges are required to hold an Australian Financial Services License.
When water is traded, the seller does make a financial gain but again, water is not a financial product in this scenario. As you can see, water is complex!
Now, to add to this complexity, by tokenising water rights, its determination under the Corporations Act starts to get blurry. The reason why is that ASIC has released its Info sheet 225 on Digital Assets for comments from the Australian blockchain and cryptocurrency industry.
By tokenising or digitising water assets, does this mean fresh water is now a security?
We are actively participating in this discussion and aim to highlight the problematic nature that environmental assets, when tokenised, may need to be ruled as an exception under the proposed regulatory reforms currently underway pertaining to digital assets here in Australia.
4. What are some potential use cases for tokenising environmental assets that go beyond carbon credits, and how do these examples influence the way we think about asset tokenisation in environmental sectors?
In short, tokenisation of environmental assets that go beyond carbon credits will shift our perspective on the way nature is financed paving the way for a holistic approach to environmental impact due to:
I don’t consider the concept of “potential uses cases” anymore as the technology is now proven and globally regulation is moving towards accounting for nature in financial markets.
Environmental assets that can benefit through tokenomics exist today with some examples being biodiversity, nutrients, soil health, circular economy, renewable energy, and forest conservation to name a few.
5. With the complexity surrounding environmental asset tokenisation, how can stakeholders ensure that the governance structures for these tokens align with both legal frameworks and sustainable practices in the long term?
As discussed in Q3, from the point of view of how we navigate the legal frameworks, we are very clear that through our token economics approach to water rights, our utilisation of tokenisation whether it be in the form of fungible, non-fungible or semi-fungible (water can be all three!) is from the lens of authority and underlying ownership.
We understand our platform for the trading of water (both temporary and permanent) must comply to the Commonwealth Water Act, the respective State Water Acts and the new Water Amendment (Restoring our Rivers) Act 2023.
For the longer term, from our perspective, ASIC will need to engage with both Commonwealth and State Agencies responsible for governing environmental assets that are not financial products, as the digitisation of these assets increases to ensure that innovation is not derailed so to speak due technology companies like ourselves do not inadvertently come to the attention of AUSTRAC and we are required to hold a Australian Financial Services License.
At the end of the day, current Web2.0 operators of these environmental marketplaces (except for carbon markets) are not required to hold AFSLs. A balanced playing field must prevail!
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Through Katrina's early years as a sociologist through to her interest in entrepreneurialism, she has extensive experience in public policy and early stage commercialisation. For more than 20 years, Katrina has worked in both public and not for profit sectors with a specific focus on business development, project delivery and revenue diversification with the view to building resilient and sustainable organisations. |