September 2018 | James Freidman

“There is something special about Bitcoin that makes it inherently resistant to government control. It is built on code. It lives in the cloud. It is globalized and detached from the nation-state, has no own institutional owner, operates peer to peer, and its transactions are inherently pseudonymous. It cannot be regulated in the same way as the stock market, government currency markets, insurance, or other financial sectors.”

– Jeffery Tucker (American economist and writer). 

Introduction

Bitcoin was introduced in 2008 and has sent shock-waves through financial, legal and government sectors. Today Bitcoin’s market capitalisation stands at USD$125 billion.

Bitcoin is a long way from being a standard form of currency exchange. It is crucial for governments and consumers alike to be aware of its potential as a new medium of currency exchange and the inherent security risks associated with it.

Key Concepts

Bitcoin is a ‘convertible digital currency and the first cryptocurrency’.[1] It was described as ‘an electronic payment system that allows two parties to transact directly with each other over the internet without needing a trusted third party intermediary.’[2]*

The exchange of cryptocurrency is facilitated by the ‘blockchain’ which is a digitized, public ledger of all cryptocurrency transactions, ‘allowing digital currency to be used as a decentralised payment system.’[3]

The process

A simple explanation of the process used is:  

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.[4]

Part-regulation by the Australian government – Taxation, Corporations Act 2001 & ASIC/ACCC and AUSTRAK

Taxation

On 20 August 2014, the Australian Tax Office (ATO) announced ‘[b]itcoin is neither money nor a foreign currency, and the supply of bitcoin is not a financial supply for goods and services (GST) purposes. Bitcoin is, however, an asset for capital gains tax (CGT) purposes.”

Individuals who use bitcoin for personal use and in amounts under AUD $10,000 will have no CGT obligations.

Bitcoin is not a financial supply for goods and services so individuals will be charged GST when they buy and sell digital currency.

 ASIC/ACCC and the Corporations Act 2001

The Australian Securities and Investment Commission’s view is that digital currency does not fall within the legal definition of a ‘financial product’ under the Corporations Act 2001. This means that a person is not providing financial services when they operate a digital currency trading platform provide advice on digital currencies or arranging for others to buy or sell digital currencies’.[5]

The more general consumer protection provisions of the Corporations Act 2001 will continue to apply to transactions involving digital currency.

 AUSTRAC

The Australian Transaction Reports and Analysis Centre (AUSTRAC) provides some protection to people dealing in digital currencies by their ability 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 digital currencies; and
  • threshold transaction reports (TTRs) for cash deposits/withdrawals of AUD 10,000 or more involving the bank accounts of digital currency exchange providers.[6]

Risk #1 – Exchange platforms are unregulated

Digital currency exchange platforms are unregulated and so if something goes wrong, individuals will have little in the way of legal/statutory recourse. For example, as recently as February of this year over 1,200 people complained to consumer watchdog ASIC over alleged cryptocurrency scams.[7]

Risk #2 – Values fluctuate

The crypto-currency boom has been described as a ‘bubble’ and investment in it is, by its very nature, highly speculative. Bitcoin is not regulated by a central authority such as the Reserve Bank of Australia and prices at any time are dependent on popularity – prices can fluctuate in value by up to 10% each day.  

Risk #3 – Links with illegal activity

The anonymous nature of crypto-currencies makes them attractive to criminals who use them for money laundering and other illegal activities.[8]

Harris Freidman Lawyers advises caution with respect to all cryptocurrencies and for individuals to obtain specialist legal/accounting advice before entering into any transactions/utilising cryptocurrencies.     

[1] Satoshi Nakamoto, ‘Bitcoin: A peer-to-peer electronic cash system’, https://bitcoin.org/bitcoin.pdf (accessed 30 April 2015).

[2] Satoshi Nakamoto, ‘Bitcoin: A peer-to-peer electronic cash system’, https://bitcoin.org/bitcoin.pdf (accessed 30 April 2015).

* It is important to note that whilst Bitcoin is the most popular cryptocurrency there exist more than five-hundred cryptocurrencies such as ‘Ethereum’ and ‘Ripple’.

[3] Robleh Ali, John Barrdear, Roger Clews and James Southgate, ‘The economics of digital currencies’, Quarterly Bulletin, Q3 2014, Bank of England, vol.54, no.3, p. 277. http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q302.pdf (accessed 3rd September 2018).

[4]  Robleh Ali, John Barrdear, Roger Clews and James Southgate, ‘Innovations in payment technologies and the emergence of digital currencies’, Quarterly Bulletin, Q3 2014, Bank of England, vol.54, no.3, p. 266. http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q301.pdf (accessed 30 April 2015).

[5] http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Digital_currency/Report  Accessed 3rd September 2018.

[6] http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Digital_currency/Report  Accessed 3rd September 2018.

[7] http://www.abc.net.au/news/2018-02-19/more-than-1200-people-complain-to-accc-about-bitcoin-scams/9462240 Accessed 3rd September 2018.

[8] Bitcoin was used most predominantly (before its large-scale adoption in 2017 on the ‘deep web’ – an encrypted part of the web that is not discoverable by standard search engines and is, naturally, a hub for illegal activity.

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