Bitcoin – The need to regulate

This month, the Senate Economics References Committee (the “Committee”) released 4 recommendations regarding the regulation of digital currencies.

The recommendations clearly reflect that the Committee was committed to promoting the growth of digital currency within Australia while giving consideration to national security and the protection of consumers.

  1. Tax

In 2014, the Australian Taxation Office released a ruling that digital currencies are not a ‘currency’, but a commodity.  As a consequence, the purchase of a digital currency will attract GST, creating a double taxation system.

The Committee was of the view that this was having a negative impact on the Australian digital marketplace, and made a recommendation that digital currency be treated as money for the purposes of the goods and services tax.

The Committee also considered how income and fringe benefit tax should be applied to digital currency and recommended that further research should be undertaken.

  1. Regulation

Given the nature of digitalized currency it is impossible to regulate the currency itself.  Regulation would have to apply to trading platforms.

The difficulty arises in the definitions provided in legislation.  Digital currency is not a ‘financial product’ for the purposes of the Corporations Act 2001 and therefore trading companies are not required to comply with the laws.  However, once digital currency becomes a payment method for products or services, it becomes a ‘financial product’ and therefore licensing, conduct and disclosure obligations do apply.

The Committee also found that digital currencies fall under the Competition and Consumer Act 2010, affording additional consumer protection.

In the interests of encouraging innovation, the Committee was reluctant to recommend a regulatory approach.  The recommendation therefore was the establishment of a ‘Digital Economy Taskforce’ to further consider relevant opportunities and risks.

In coming to this conclusion they noted that the digital currency industry is moving towards a system of self regulation.  The Committee strongly supported a self regulation model and encouraged consultation with the relevant agencies.

  1. National Security considerations

Many digital currency traders are already attempting to operate within the requirements of the Anti-Money Laundering and Counter-Terrorism legislation (“AML/CTF regime”).  Digital currency is however not covered by this regime as they are not backed by precious metal or bullion.  Traders therefore cannot access the necessary services required to detect money laundering or terrorist financing.

The Committee strongly recommended that digital currencies be bought under the umbrella of the AML/CTF regime.