- The Bitcoin virtual “currency” has many unique properties that raise novel issues for regulators.
- Most Bitcoin users should fall outside of regulation by AUSTRAC, ASIC and APRA.
- The ATO has issued some guidance on how Bitcoin transactions should be handled for taxation purposes, and is expected to provide further clarification shortly.
Bitcoin and other emerging cryptocurrencies are radically different to traditional payment mechanisms, and as a result, regulators are having a hard time applying existing rules to the novel scenarios being raised.
Bitcoin is the first and most prominent cryptocurrency. These cryptocurrencies offer new methods of making payments online, and have a number of key differences to traditional monetary systems. Key points distinguishing Bitcoin from a traditional currency include that Bitcoin:
- is not issued, endorsed or backed by a government
- is decentralised, and not controlled by any one entity
- is not linked to any precious metal standard, or other item of “real world” value
- relies on cryptographic techniques to verify transactions.
The ease of transacting internationally in Bitcoin, coupled with the pseudonymous nature of transactions, means that Bitcoin has also earned a reputation for use for nefarious purposes. However, such transactions represent a small portion of Bitcoin activity, and essentially raise the same issues that have always been experienced with other less traceable forms of payment, such as physical cash. Large numbers of legitimate traders have begun to accept Bitcoin as an alternative payment option – Virgin Galactic recently took payment from the Winklevoss twins for a trip into space – and the value of Bitcoins in circulation is currently around US$8 billion.
Leaving aside the purposes for which Bitcoin might find itself used, legal systems in Australia and abroad have struggled with the question of how to regulate Bitcoin and other cryptocurrencies. Several countries have attempted to ban or restrict the use of Bitcoins, but the decentralised nature of cryptocurrencies makes these laws hard to enforce.
The Monetary Authority of Singapore recently announced that it will regulate virtual currency intermediaries to address potential money laundering and terrorist financing risks. New regulations will require intermediaries that buy, sell or facilitate the exchange of virtual currencies for real currencies, such as operators of Bitcoin exchanges and Bitcoin ATMs, to verify the identities of their customers and report suspicious transactions.
Several Australian regulatory authorities have the potential to take an interest in Bitcoin, and have done so to varying degrees.
Under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act), certain reporting obligations apply to financial institutions and other persons who provide specific designated services. These reports are provided to the Australian Transaction Reports and Analysis Centre (AUSTRAC).
The AML/CTF Act specifically contemplates e-currencies, but these are defined to only come within the scope of the Act where backed directly or indirectly by precious metal or bullion, which is not the case for Bitcoin. Accordingly, a large number of the obligations under the AML/CTF Act will not apply to Bitcoin.
A 2012 AUSTRAC Report also specifically stated that “digital currencies… such as Bitcoins… are not issued by or under the authority of a government body”, and “Digital currencies that are not backed, either directly or indirectly, by precious metal or bullion are not regulated by the AML/CTF Act.”
Certain transactions, such as a large deposit of Australian dollars into a bank account in return for Bitcoins, may result in notifications to AUSTRAC, but these obligations would arise on the basis of existing reporting requirements around these kinds of transactions irrespective of the involvement of Bitcoin.
The Australian Securities and Investments Commission has offered little public guidance on Bitcoin to date, but has noted on its MoneySmart website that virtual currency exchange platforms are currently not regulated.
Under the Corporations Act 2001 (Cth) (Corporations Act), an entity that carries on a financial services business must hold an Australian Financial Services Licence. It is not clear at this stage whether Bitcoin constitutes a “financial product” that could be the subject of a financial services business. In any case, the majority of Bitcoin users will not be conducting financial services businesses by merely using Bitcoins for standard transactions.
The Australian Prudential Regulation Authority (APRA) is responsible for regulating banks and other authorised deposit-taking institutions (ADIs).
The majority of users are unlikely to fall under the regulatory authority of APRA by merely buying or selling Bitcoins. Should a user begin to hold Bitcoins on behalf of others, or be in the business of taking deposits or offering loans of Bitcoins, then APRA has the potential to become relevant.
The Australian Taxation Office (ATO) has made clear that it will consider transactions made in Bitcoin in much the same manner as it would any other transaction. Paying for goods and services with Bitcoins will not relieve any requirement for the seller to account for GST or include the income in their business tax return.
The ATO is due to release a draft determination on the question of whether Bitcoin is a “foreign currency” for the purposes of Division 775 of the Income Tax Assessment Act 1997 (Cth) (ITAA). If Bitcoin is deemed to be a “foreign currency” for these purposes, then the disposal of Bitcoin is likely to constitute a designated foreign exchange realisation event, triggering special rules regarding how it may be treated for taxation purposes.
The scope of property under the Personal Properties Securities Act 2009 (Cth) is broad. If a party has a significant amount of Bitcoins relative to a particular transaction in question, that party may be able to offer the Bitcoins as a form of collateral capable of registration – assuming the financier is willing to accept it.
As cryptocurrencies rise in prominence and usage they will no doubt continue to draw the attention of regulators across the world. Regulating a system with potentially pseudonymous actors, no controlling body, no central point of failure, and no regard for jurisdictional borders will pose a challenge for legislators and enforcement bodies alike.