Reuben Bramanathan is associate counsel at Coinbase and Lecturer of Digital Currency Regulation at the University of Nicosia. He was involved with a number of submissions to the Australian Senate inquiry. Here, he explains the importance of the Senate Economics References Committee Report on Digital Currencies and what it means for bitcoin.
The release of the Senate Economics References Committee Report on Digital Currencies marks the start of the next phase for bitcoin in Australia.
The 74-page report, which is the result of 10 months of hearings, submissions and research by the committee, will serve as the roadmap for regulation of bitcoin and other digital currencies in Australia.
It is the first comprehensive analysis of digital currencies in the context of the Australian legal and financial system, and it indicates the government is focused on the huge potential impact of cryptocurrencies.
Top five things you need to know about the report
- It is a committee report, which contains a number of recommendations, but it has not been adopted by the government, and there are no changes to laws or regulations yet.
- There is a clear statement of intent to fix the Goods and Services Tax (GST) problem for bitcoin, but the process it will take some time.
- Exchanging bitcoin for fiat or other digital currencies does not require any license in Australia, and nor does holding bitcoin on behalf of others. However, providing payment processing or remittance services using digital currency may require an Australian Financial Services Licence.
- Anti-money laundering and counter-terrorism financing (AML/CTF) laws currently do not apply to digital currencies, but this is likely to change as part of an ongoing review of AML/CTF laws.
- Overall, the report recommends a ‘wait-and-see’ approach, notes the importance of balanced regulation and encourages self-regulation in the meantime.
Taxation of bitcoin in Australia
By far the most important aspect of the report is the committee’s recommendation that the GST law should be changed to include digital currencies within the definitions of ‘money’ and ‘financial supply’. This would mean that GST would not apply to bitcoin exchange transactions, and it would only apply once when bitcoin is used to pay for goods or services.
However, this type of change to the GST law would need to be approved by each state, in addition to being legislated by the Federal Parliament. This is a lengthy and political process, and bitcoin is not currently a high priority for federal or state governments. One beacon of hope is the ongoing review of the federal tax system, which may result in broader changes to the GST, and the recommended bitcoin changes could be pushed through together with those changes.
However, this means Australian bitcoin businesses are stuck with the current double-GST problem for the immediate future.
Another unresolved problem is Fringe Benefits Tax, which applies to an employer who pays their employees in bitcoin. This remains a problem for bitcoin startups and their employees who want to avoid the friction of multiple bitcoin/AUD conversions. Addressing this issue needs to be a priority to promote growth of the bitcoin ecosystem in Australia.
Licensing requirements
Australia’s corporate and securities regulator, ASIC, has issued a clear statement that bitcoin is not considered a financial product, which means that no licence is required to exchange bitcoin, or hold bitcoin on behalf of others. The report supports this view and recommends that further research should be undertaken before any changes are made in this area.
However, the areas of payments processing and remittance are less clear. A business operating a payments or remittance service involving bitcoin could be regulated as a ‘non-cash payment facility’, which requires an Australian Financial Services License, or needs to rely on a low-value exemption.
The report endorses industry self-regulation, to develop best practice guidelines and standards for digital currency businesses in Australia. It will be important that these are developed in consultation with the entire industry to provide appropriate guidelines for the different types of business models.
AML and KYC requirements
Currently, bitcoin is not subject to AML/CTF laws in Australia, including know-your-customer (KYC) checks and transaction monitoring and reporting.
The report recommends that the ongoing review of Australia’s AML/CTF laws should consider whether to broaden the laws to include activities involving bitcoin and other digital currencies. The most likely outcome is that, consistent with the approach from around the world (most recently announced in the UK and Singapore) the AML/CTF laws will be expanded to digital currency exchanges.
Although KYC checks are not required at this stage, the report also notes a problem for bitcoin startups which want to voluntarily conduct KYC (for example to prevent fraud and to help strengthen their banking relationships) – they cannot access the Document Verification Service and have to rely on other sources for KYC.
The report notes the difficulty Australian bitcoin businesses are experiencing in establishing and maintaining banking relationships, but, apart from bringing bitcoin businesses under the AML/CTF laws, does not make any real recommendations about how this problem could be addressed.
Overall good news for bitcoin in Australia
The report is a strong endorsement of the potential of digital currency in Australia. Although the GST issue remains a problem, many bitcoin businesses have already adopted business models which do not attract GST.
Importantly, there is no risk of a BitLicense-type regulation in Australia anytime soon.
With a generally tech- and mobile-savvy population and a strong banking system, Australia is becoming an attractive target market for global bitcoin businesses.
The views expressed in this article are Reuben Bramanathan’s, they do not necessarily represent those of the companies he works for.
Sydney image via Shutterstock