Overview and recent developments
What is digital currency?
In its 2014 report on virtual currencies, the Financial Action Task
Force (FATF), an inter-governmental body established in 1989 by a Group of
Seven (G-7) Summit in Paris, defined digital currency as:
[A] digital representation of value that can be digitally
traded and functions as (1) a medium of exchange; and/or (2) a unit of account;
and/or (3) a store of value, but does not have legal tender status (i.e., when
tendered to a creditor, is a valid and legal offer of payment) in any
jurisdiction. It is not issued nor guaranteed by any jurisdiction, and fulfils
the above functions only by agreement within the community of users of the
virtual currency. Virtual currency is distinguished from fiat currency (a.k.a.
'real currency', 'real money', or 'national currency'), which is the coin and
paper money of a country that is designated as its legal tender; circulates;
and is customarily used and accepted as a medium of exchange in the issuing
country. It is distinct from e-money, which is a digital representation of fiat
currency used to electronically transfer value denominated in fiat currency.
E-money is a digital transfer mechanism for fiat currency—i.e., it
electronically transfers value that has legal tender status.
The term 'digital currency' can sometimes have a broader meaning, which
also includes e-money.
For the purposes of this report the terms 'digital currency' and 'virtual
currency' can be used interchangeably.
Types of digital currency
Digital currency can be divided into two basic types: convertible and
non-convertible digital currency. Convertible digital currency has an
equivalent value in real (fiat) currency and can be exchanged back-and-forth
for real currency (Bitcoin is an example of convertible currency).
Non-convertible digital currency, on the other hand, cannot be exchanged for
fiat currency and is intended to be specific to a particular virtual domain or
world, such as a massively multiplayer online role-playing game, for example World
of Warcraft Gold is a non-convertible digital currency.
Digital currency can be further categorised into two subtypes:
centralised and non-centralised. All non-convertible digital currencies are
centralised, as they are issued by a single administrating authority.
Convertible digital currencies can be either centralised or decentralised. Decentralised
digital currencies, also known as cryptocurrencies, are distributed,
open-source, math-based, peer-to-peer currencies that have no central
administrating authority and no central monitoring or oversight. Examples of
cryptocurrencies include: Bitcoin, Litecoin and Ripple.
What is Bitcoin?
Launched in 2009, Bitcoin was the first decentralised convertible
digital currency and the first cryptocurrency. Bitcoin was created as an
electronic payment system that would allow two parties to transact directly
with each other over the internet without needing a trusted third party
The 'distributed ledger' (also known as the 'block chain') is used to record
and verify transactions, allowing digital currency to be used as a
decentralised payment system.
A simplified explanation of the process is as follows:
A user, wishing to make a payment, issues payment instructions
that are disseminated across the network of other users. Standard cryptographic
techniques make it possible for users to verify that the transaction is valid—that
the would-be payer owns the currency in question. Special users in the network,
known as 'miners', gather together blocks of transactions and compete to verify
them. In return for this service, miners that successfully verify a block of
transactions receive both an allocation of newly created currency and any transaction
fees offered by parties to the transactions under question.
While Bitcoin is the most prominent digital currency, there are
currently more than five hundred different digital currencies, including Litecoin,
Ripple, Peercoin, Nxt, Dogecoin, Darkcoin, Namecoin, Mastercoin and BitcoinDark.
Most of these alternative digital currencies were inspired by, or explicitly modelled
Digital currency intermediaries
Digital currency users may use intermediaries to manage their holdings
and facilitate transactions. For Bitcoin users, there is a range of
intermediaries which provide services to users.
Current regulatory framework
On 20 August 2014, the Australian Taxation Office (ATO) released a suite
of draft public rulings on the tax treatment of digital currencies. The ATO's
rulings, which were finalised on 17 December 2014, determined that:
Transacting with bitcoins is akin to a barter arrangement,
with similar tax consequences.
The ATO's view is that Bitcoin is neither money nor a foreign
currency, and the supply of bitcoin is not a financial supply for goods and
services tax (GST) purposes. Bitcoin is, however, an asset for capital gains
tax (CGT) purposes.
The ATO's finalised public rulings are as follows:
GSTR 2014/3—Goods and services tax: the GST implications of
transactions involving Bitcoin
TD 2014/25—Income tax: is Bitcoin a 'foreign currency' for the
purposes of Division 775 of the Income Tax Assessment Act 1997?
TD 2014/26—Income tax: is Bitcoin a CGT asset for the purposes of
subsection 108-5(1) of the Income Tax Assessment Act 1997?
TD 2014/27—Income tax: is Bitcoin trading stock for the purposes
of subsection 70-10(1) of the Income Tax Assessment Act 1997?
TD 2014/28—Fringe benefits tax: is the provision of Bitcoin by an
employer to an employee in respect of their employment a fringe benefit for the
purposes of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986?
A summary of the taxation implication of the ATO's rulings on digital
currencies is as follows:
Capital gains tax (CGT)—Those using digital currency for
investment or business purposes may be subject to CGT when they dispose of digital
currency, in the same way they would be for the disposal of shares or similar
CGT assets; individuals who make personal use of digital currency (for example
using digital currency to purchase items to buy a coffee) and where the cost of
the Bitcoin was less than AUD$10,000, will have no CGT obligations.
Goods and Services Tax (GST)—Individuals will be charged GST when
they buy digital currency, as with any other property. Businesses will charge
GST when they supply digital currency and be charged GST when they buy digital
Income Tax—Businesses providing an exchange service, buying and
selling digital currency, or mining Bitcoin, will pay income tax on the profits.
Businesses paid in Bitcoin will include the amount, valued in Australian
currency, in assessable business income. Those trading digital currencies for
profit, will also be required to include the profits as part of their
Fringe Benefits Tax (FBT)—remuneration paid in digital currency
will be subject to FBT where the employee has a valid salary sacrifice
arrangement, otherwise the usual salary and wage PAYG rules will apply.
Taxation white paper process
On 30 March 2015, the Hon Joe Hockey MP, Treasurer, released a tax
discussion paper to inform the government's tax options Green Paper, due to be
released in the second half of 2015, with the White Paper to be released in
2016 following further consultation.
The tax discussion paper commented on challenges arising from the potential
for digital currencies to increase the ability of companies to relocate profits
to minimise their tax. The discussion paper noted:
...financial markets are increasingly globally integrated, and
the international flow of capital has become less restricted and more mobile.
Technology has also allowed new business models to evolve that have
substantially changed the way businesses and consumers interact. New ways of
transacting, including crypto-currencies such as bitcoin, were not contemplated
when the current tax system was designed.
The ATO's ruling, that digital currency is a commodity rather than a
currency, is similar to the tax guidance provided by relevant authorities in
other countries such as Canada and Singapore.
Alternatively, other jurisdictions such as the United Kingdom and most recently
Spain, have released guidance advising that digital currency is exempt from
value added tax (VAT) under Article 135(1)(d) of the European Union (EU) VAT
The EU is waiting on a ruling from the EU Court of Justice on the correct
interpretation of the relevant EU VAT directive. Sweden's tax authorities
have challenged a previous Swedish decision that digital currency should be VAT
Financial regulation and consumer
Reserve Bank of Australia
The Reserve Bank of Australia (RBA) is the principal regulator of the
payments system, and administers the Payment Systems (Regulation) Act 1998
(PSRA). The RBA's general regulatory approach under the PSRA relies principally
on 'industry- or market-driven solutions', intervening only when necessary on
the grounds of its 'responsibility for efficiency and competition in the
payments system and controlling systemic risk'. The RBA considers digital
currencies are currently in limited use and do not yet raise any significant
concerns with respect to competition, efficiency or risk to the financial
system; and are not currently regulated by the RBA or subject to regulatory
In April 2015, the RBA informed the committee that it would be assessing
whether the current regulatory framework could accommodate alternative mediums
of exchange such as digital currencies.
ASIC and ACCC
The Australian Securities and Investments Commission's (ASIC) view is
that digital currencies themselves do not fall within the legal definition of
'financial product' under the Corporations Act 2001 (Corporations Act)
or the Australian Securities and Investments Commission Act 2001
(ASIC Act). This means that 'a person is not providing financial services when they
operate a digital currency trading platform, provide advice on digital
currencies or arrange for others to buy and sell digital currencies'. However,
some facilitates associated with digital currencies may fit within the
definition as financial products.
ASIC has issued advice to consumers on its MoneySmart webpage outlining
some of the of the risks of digital currencies:
Virtual currencies have less safeguards—The exchange
platforms on which you buy and sell virtual currencies are generally not
regulated, which means that if the platform fails or is hacked, you are not
protected and have no statutory recourse. Virtual currency failures in the past
have made investors lose significant amounts of real money. Some countries are
moving towards regulating virtual currencies, however virtual currencies are
not recognised as legal tender.
Values fluctuate—The value of a virtual currency can
fluctuate wildly. The value is largely based on its popularity at a given time
which will be influenced by factors such as the number of people using the
currency and the ease with which it can be traded or used.
Your money could be stolen—Just as your real wallet can be
stolen by a thief, the contents of your digital wallet can be stolen by a
computer hacker. Your digital wallet has a public key and a private key, like a
password or a PIN number. However, virtual currency systems allow users to
remain anonymous and there is no central data bank. If hackers steal your
digital currency you have little hope of getting it back. You also have no
protection against unauthorised or incorrect debits from your digital wallet.
Popular with criminals—The anonymous nature of virtual
currencies makes them attractive to criminals who use them for money laundering
and other illegal activities.
In summary, ASIC advised that 'if you decide to trade or use virtual
currencies you are taking on a lot of risk with no recourse if things go wrong'.
On 26 November 2014, the Parliamentary Joint Committee on Corporations
and Financial Services tabled a report on the oversight of ASIC. During the
course of the inquiry, ASIC informed the committee of its approach to digital
Virtual currencies such as Bitcoins are a developing area
globally. ASIC monitors new developments in the marketplace and, accordingly,
ASIC is considering whether and how the legislation it administers, such as the
Corporations Act, applies to virtual currencies.
ASIC's view is that Bitcoins themselves (and other virtual
currencies) are not financial products and are not regulated under the
legislation we administer. Unlike Australian dollars or other traditional
currencies, Bitcoins are not issued by a central bank and do not give the
Bitcoin holder any right to make payments in this form.
ASIC is consulting with other Australian regulators that are
also giving consideration to the regulation of virtual currencies. This
includes both financial regulators and law enforcement agencies that are
examining the use of Bitcoin in criminal activities. Additionally, the
regulation of Bitcoins is being considered by regulators and policy makers
The Parliamentary Joint Committee on Corporations and Financial Services
noted that it will continue to monitor the development of digital currencies.
While ASIC does not consider digital currencies to be currency or money
for the purposes of the Corporations Act or the ASIC Act, the general consumer
protection provisions of the Competition and Consumer Act 2010 apply to
digital currencies, rather than the equivalent provisions in the ASIC Act. The Competition
and Consumer Act 2010 is administered by the Australian Competition and
Consumer Commission (ACCC). The ACCC's SCAMwatch and consumer information
webpages do not include any specific warnings about digital currencies.
Financial System Inquiry
On 20 December 2013, the Hon Joe Hockey MP, Treasurer, announced the
final terms of reference for the government's Financial System Inquiry (FSI)
and the appointment of four members of the inquiry panel to be chaired by Mr David Murray AO.
The purpose of the FSI was to examine how Australia's financial system could be
'positioned to best meet Australia's evolving needs and support Australia's
On 7 December 2014, the final report of the FSI was released and the Treasury
is currently conducting a consultation process on the FSI recommendations.
The FSI report noted that national currencies are currently the only
instruments widely used to fulfil the economic functions of money—that is, as a
store of value, a medium of exchange and a unit of account. The FSI found that:
Digital currencies are not currently widely used as a unit of
account in Australia and as such may not be regarded as 'money'. However, their
use in payment systems could expand in the future. It will be important that
payments system regulation is able to accommodate them, as well as other
potential payment instruments that are not yet conceived. Current legislation
should be reviewed to ensure payment services using alternative mediums of
exchange can be regulated—from consumer, stability, competition, efficiency and
AML [anti-money laundering] perspectives—if a public interest case arises.
In August 2014, the UK government announced it was considering
regulation of digital currencies. In November 2014, it published a call for
information and the outcome of this consultation process was released in March
2015. In relation to consumer protection the UK government announced its
intention to work with the digital currency industry and the British Standards
Institution to develop voluntary standards for consumer protection. In its
view, this approach would address potential risks to consumers without imposing
a disproportionate regulatory burden on the digital currency industry.
The Canadian Senate's Standing Committee on Banking Trade and Commerce conducted
an inquiry into digital currency and tabled its report on 19 June 2015. It investigated
how digital currency should be treated, including whether it should be
regulated. It recommended that the Canadian government should exercise a
regulatory 'light touch' in order to create an environment that fosters
innovation and minimises the risks of stifling new technologies.
Both the Singapore and Canadian governments have published advice for
consumers, similar to ASIC's MoneySmart webpage, warning consumers of the risks
associated with digital currency.
Digital currencies, such as Bitcoin, are not currently covered under section
5 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006
(AML/CTF Act). The Act, however, recognises e-currency, which is defined as
e-currency means an internet-based,
electronic means of exchange that is:
- known as any of the following:
a name specified in the AML/CTF
backed either directly or
precious metal; or
a thing of a kind prescribed by
the AML/CTF Rules; and
not issued by or under the
authority of a government body;
and includes anything that, under
the regulations, is taken to be
e-currency for the purposes of this Act.
The AML/CTF Act currently only covers a very small proportion of the
digital currencies. It does not cover digital currencies, such as Bitcoin, that
are not backed by precious metal or bullion. While subsection 5(b)(iii) enables
the regulation of digital currencies backed either directly or indirectly by 'a
thing of a kind prescribed by the AML/CTF Rules', no such rules have been
issued to date.
Australia's current AML/CTF regime allows for limited regulatory
oversight of convertible digital currencies. Because digital currencies such as
Bitcoin are not yet widely used and accepted, they are yet to form a 'closed loop'
economy, and whenever they are exchanged for fiat currencies, or vice versa
('on ramps' and 'off ramps'), the transactions will generally intersect with
banking or remittance services which are regulated under the AML/CTF regime.
For example, Australian Transaction Reports and Analysis Centre (AUSTRAC),
Australia's AML/CTF regulator, is able to monitor and track reportable
transactions such as:
reports of international funds transfer instructions (IFTIs)
between Australian accounts and foreign accounts for the purchase/sale of
threshold transaction reports (TTRs) for cash
deposits/withdrawals of AUD10,000 or more involving the bank accounts of
digital currency exchange providers; and
suspicious matter reports (SMRs) submitted where reporting
entities consider financial activity involving a digital currency exchange to
Statutory Review of the Anti-Money
Laundering and Counter-Terrorism Financing Act 2006
In December 2013, the Australian government commenced a statutory review
of the operation of the Anti-Money Laundering and Counter-Terrorism
Financing Act 2006 (AML/CTF Act)—the review is required under section 251
of the AML/CTF Act.
The Attorney-General's Department stated:
The use and ongoing
expansion of digital currencies is an area of continuing policy interest to the
Attorney-General's Department. A number of options to address the money
laundering and terrorism financing issues created by the emergence of digital
currency systems are being considered in the context of the statutory review of
the AML/CTF Act.
Parliamentary Joint Committee on
The Parliamentary Joint Committee on Law Enforcement is currently
conducting an inquiry into financial related crime and received evidence from
law enforcement agencies in relation to Bitcoin and financial crime. 
The inquiry was referred on 5 March 2014 and is expected to report late in
In March 2015, the UK government flagged its intention to apply
anti-money laundering regulation to digital currency exchanges, and committed
to a full consultation on the proposed regulatory approach in the next
Parliament in response to the findings of its consultation process.
On 19 June 2014, the Canadian AML/CTF legislation, the Proceeds of
Crime (Money Laundering) and Terrorist Financing Act, was amended to bring money
service businesses (MSB) dealing in digital currencies under Canada's AML/CTF
regime. Once new regulations are drafted and come into force, they will cover
digital currency exchanges, but not individuals or businesses that use digital
currencies for buying and selling goods and services.
In its report on digital currency, the Canadian Senate's Standing Committee
on Banking Trade and Commerce recommended that the Canadian government should
require digital currency exchanges, excluding businesses that solely provide
wallet services, to meet the same requirements as money service businesses
under Canada's AML/CTF laws. The report recommended that digital currency
exchanges should be defined as 'any business that allows customers to convert
state-issued currency to digital currency and digital currencies to
state-issued currency or other digital currencies'.
On 13 March 2014, the Money Authority of Singapore (MAS) announced that
it would regulate digital currency intermediaries that buy, sell or facilitate
the exchange of digital currencies for fiat currencies under its AML/CTF
Financial Action Task Force
The Financial Action Task Force (FATF) is an independent
intergovernmental body that develops and promotes policies to protect the
global financial system against money laundering and terrorism financing. FATF
released a report on digital currencies in June 2014, establishing a common
definitional vocabulary and suggesting a conceptual framework for understanding
and addressing the AML/CTF risks associated with digital currencies.
On 1 July 2014, Mr Roger Wilkins AO, former Secretary of the Attorney
General's Department, assumed the Presidency of the FATF. Mr Wilkins has
indicated that during his term he intends to examine the money laundering and
terrorism financing risks associated with digital currencies and, consider
whether further policy measures are necessary.
Countries are considering the regulatory challenges presented by the
emergence of new forms of digital currencies. Australia is no exception and in
the following chapters the committee will explore some of these challenges and
how best to address them.
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