Digital currency

Submission 39

5 December 2014
Dr Kathleen Dermody
Committee Secretary
Senate Economics Committee
PO Box 6100
Parliament House
CANBERRA ACT 2600

SENATE ECONOMICS REFERENCES COMMITTEE - INQUIRY INTO DIGITAL CURRENCY

Dear Dr Dermody,
Thank you for your invitation to make a submission to this inquiry. We appreciate the
opportunity that this inquiry has given to discuss what we believe is one of the most
important technological innovations in recent years.
Given our firms involvement in the digital currency industry, we appreciate that the
Australian Senate is taking the time to familiarise itself with the digital currency technology,
to understand how digital currency is being used in Australia, and to consider the wider
policy implications.
The more consideration that goes into these issues, the more likely Australia is to achieve
the important balance between regulation and innovation.
ABOUT ADROIT LAWYERS
Adroit Lawyers is a boutique technology-focused law firm based in Sydney. We are
Australia's first law firm with a specialist Bitcoin & Digital Currency legal practice, and one of
the first law firms to accept Bitcoin for payment of fees.
In addition to acting for more bitcoin businesses than any other law firm in Australia, our
lawyers have worked with local and international digital currency industry bodies to clarify
the regulatory framework for digital currencies and to assist our clients in growing the global
digital currency industry.
Though we have drawn on our practical experience in this space, our views in this
submission are our own, rather than those of any of our clients.

Digital currency
Submission 39
Submission Senate Economics References Committee Inquiry into Digital Currency

EXECUTIVE SUMMARY
Digital currencies are an intriguing invention that test the existing definitions and
classifications of money, currency, property, commodity and financial product under the
Australian legal framework. For example, digital currencies have the characteristics of
personal property, can be used as money, and can be traded as a commodity.
However, they are not a tangible good, nor are they controlled or administered by any
central authority. They exist through a consensus between users of a network that certain
transactions have occurred and that value has been transferred. The concept of a
decentralised currency which is not issued, administered or controlled by a government
does not easily reconcile with many aspects of our existing legal system. Nonetheless, the
concept is now a reality which is growing rapidly worldwide, and which presents a huge
opportunity for Australia.
The unique nature of digital currencies makes it difficult to apply the current Australian
regulatory framework. This regulatory uncertainty makes it difficult for local and overseas
entrepreneurs who are looking to establish and grow a digital currency business in Australia.
This lack of clarity has also led to a misconception in the general community that bitcoin is
unregulated. This damages the reputation of the digital currency industry as a whole and it
creates an element of mistrust in the community.
A level of regulation is necessary to foster trust from consumers and other market players
and to increase the potential for innovation in the financial services sector. Regulation will
also enhance the benefits that will flow to the broader economy if there is a wider adoption
of bitcoin. The risks associated with consumer protection and money laundering can be
largely mitigated by regulating businesses that interact with consumers.
There is a definite need for the various sections of government to provide guidance on the
regulatory framework that applies to digital currencies in Australia. However, it is crucial that
the guidance is appropriate and well considered.
The key is to achieve a regulatory balance. Regulation needs to mitigate risks without
creating a compliance burden that stifles innovation. In addition to addressing some of the
concerns that have been raised in relation to bitcoin, the government needs to consider the
benefits of a robust digital currency industry in Australia.
HOW BITCOIN IS USED
In a commercial context, Bitcoin offers a new way to do old things. It is a collision of brand
new technology and age-old commercial processes. In practice, bitcoin is a currency. People
are using bitcoin to shop online, buy beers in a pub, make cross-border payments and even
to pay employees. The beauty of bitcoin is the streamlined efficiency of the transfers and the
minimal transaction fees.
Before the blockchain, the transfer of value (both online and offline) necessarily involved a
number of intermediaries, including technology companies and financial services
institutions. The complexities and inefficiencies in these systems led to increased costs and
limited access to services for consumers and businesses around the globe.

Adroit Lawyers

Digital currency
Submission 39
Submission Senate Economics References Committee Inquiry into Digital Currency

The Bitcoin network is a new payment system that doesnt involves banks as intermediaries.
The technology has the potential to be an instant, secure and cost-effective payment
system.
Bitcoin in the global market
The adoption of Bitcoin has seen a steady and steep increase. One report estimated that the
first four months of 2014 saw a 92% rise in the global daily total Bitcoin transactions. Over
76,000 merchants accept bitcoin as payment, including Dell, Expedia, Overstock.com, Tiger
Direct and Virgin Galactic.
The growth of the digital currency industry is part of the boom in Financial Technology
(FinTech) innovation. Global investment in FinTech hit $3 billion in 2013, and this figure is
expected to reach $8 billion by 2018. Nearly 40 per cent of these investments were made to
companies that are developing innovative payment products.
Venture Capital investment in the global digital currency industry is now over $330 million,
an impressive amount, considering the relative nascence of the technology, the considerable
uncertainty about the regulatory environment and the limited access to banking services.
These global and local investments will increase the adoption of bitcoin in the Australian
community. Smart Australian regulation will help seize the opportunity this innovation
presents and establish Australia as a hub for digital currency services.
Australian Digital Currency Industry
We support the views expressed in the joint submission by the Bitcoin Foundation and the
Bitcoin Association of Australia, that Australia has the potential to become a global hub of
digital currency innovation. We had the privilege of assisting in the preparation of the
submission.
The submission stated that, in addition to a world-leading financial services industry,
Australia has a number of key market attributes that make our country the perfect location
for the growth of a robust digital currency industry.
Australias ranking at #1 in the G20 countries for e-Trade Readiness, is largely due to our
nations affordable internet access, high smartphone penetration, high use of electronic
payment and well-developed regulatory framework.
Bitcoins facilitation of low cost cross-border payments can play a key role in Australia
leveraging this market environment. With the roll out of the National Broadband Network
and the introduction of bitcoin as a payment option, an online shop in Cobar NSW can
service a global market.
Australia is also #4 in the world for non-cash payments. The Australian Clearing and
Payments Association reported that the use of cash for payments in 2013 was as low as 47%,
with internet and smart-phone payments making up 90% of all remote payments in 2013.

Adroit Lawyers

Digital currency
Submission 39
Submission Senate Economics References Committee Inquiry into Digital Currency

This wide-spread adoption of mobile payment solutions makes Australia an ideal market in
which to develop and grow a digital currency industry.
In our experience, there is significant interest in Australia from large international digital
currency companies. In addition to the attractive market factors discussed above, Australias
centralised regulatory framework makes it an attractive jurisdiction for companies that are
looking to establish a regional base.
Bitcoin 2.0
Although the specific focus of this inquiry is on digital currency, Adroit Lawyers asks the
Committee to be aware of the non-currency uses for the Bitcoin technology.
Leading thinkers and digital currency analysts are now talking of the potential impact of
Bitcoin 2.0. This new wave of innovation in the digital currency industry is focused on
understanding how the blockchain protocol, and other similar decentralised protocols, can
be used for non-currency purposes.
There is a growing realisation that the use of the Blockchain concept for other business
processes and uses may at least as important as Bitcoin itself.
The blockchain not only facilitates instant and secure peer-to-peer transfer of money, it also
allows for the digitisation of legal and beneficial rights to both tangible and intangible
property, and the creation of self-executing smart contracts.
The ability to digitise property and money and to transform them into a digital token is the
equivalent of the containerisation in the shipping industry.
The simple invention of transporting goods in a metal box introduced intermodalism to the
shipping industry. Once goods could be moved seamlessly and efficiently, delivery times
shortened, loading and unloading costs dropped, and bigger loads could be carried.
Containerisation also resulted in fewer thefts, decreased union bargaining power, increased
productivity and reduced labour costs.
A recent study by Lunds Universitet found that containerisation resulted in a 320% increase
in bilateral trade in the first five years and 790% increase over the next 20 years.
Bitcoin has the potential to unleash a similar economic transformation. Not only does bitcoin
technology allow easier and quicker trade of property and money, it introduces a
revolutionary level of efficiency and security in this transfer process.
Given the myriad potential uses and benefits, it would be both impractical and inappropriate
to regulate all use of Bitcoin technology in the same manner. An effective regulatory
framework in Australia will need to clearly delineate between the various commercial uses
of the same technology.
The focus of the regulatory framework should be on regulating the commercial conduct or
businesses use, and not the underlying technology.

Adroit Lawyers

Digital currency
Submission 39
Submission Senate Economics References Committee Inquiry into Digital Currency

THE TAXATION TREATMENT OF BITCOIN

Adroit Lawyers supports a practical approach to taxation that reflects the commercial use of
bitcoin as money.
We have undertaken detailed analysis of the current tax law, and we believe that the better
interpretation of the current definitions of money and foreign currency in the tax law include
Bitcoin. Our analysis can be found at: http://www.adroitlawyers.com.au/defining-digitalbitcoin-treated-money-gst-act/
This view is consistent with the almost unanimous position of Australian tax experts,
including Chartered Accountants Australia and New Zealand, CPA Australia, The Tax
Institute, and Taxpayers Australia.
This view has been presented to the Australian Taxation Office as part of the consultation
process leading to, and responding to, the ATO guidance which was released on 20 August
2014. The ATO did not agree with this view.
When determining whether Bitcoin meets the definition of money, the focus is not on
defining Bitcoin itself; but rather, accurately characterising its use and purpose in commerce
and in the wider community. Applying general law concepts, the fact that bitcoin is widely
used as money and are broadly accepted as payment gives bitcoin the character of money.
A key differentiator (which is often misunderstood) between Bitcoin and other forms of noncash payment, such as frequent flyer points or other loyalty reward points, is that bitcoin is
accepted without reference to the character or the credit of the person who offers the
bitcoin, or the legal relationship between the parties to the transaction.
For example, a frequent flyer point is only accepted as payment because the person using
the points has an account with the issuer of those points (e.g. Qantas). The acceptance of
the frequent flyer point is contingent on the contractual relationship between the owner of
the point and the issuer or owner of the points program. The point is not accepted in its
own right like cash or bitcoin is accepted. The condition of membership of a centrally
administered scheme also limits the ability of a frequent flyer point to be generally
accepted. Subject to limited exceptions, account holders are unable to transfer frequent
flyer points to any other member. They can only be spent by redemption for goods or
services from the issuer.
In contrast, bitcoin is capable of being generally accepted. Just as cash can be accepted
electronically by anybody with a bank account, bitcoin can be accepted electronically by
anybody with a Bitcoin wallet. There is no cost to create a Bitcoin wallet and it can be done
by anyone with internet access in a matter of minutes.
Bitcoin also shares the characteristic of negotiability with cash. This means that when an
amount of bitcoin is transferred, control and possession of that amount of bitcoin transfers
completely. Bitcoin is accepted without reference to the character or credit of the person
providing the bitcoin, and as such, is truly negotiable.

Adroit Lawyers

Digital currency
Submission 39
Submission Senate Economics References Committee Inquiry into Digital Currency

As the statistics show, bitcoin is being generally accepted as a medium of exchange for
goods and services. Bitcoin is being used as money.
There is also an anomaly in the drafting of the GST Act whereby the definition of financial
supply does not automatically including the definition of money. For this reason, any
legislative clarification should confirm that Bitcoin meets the definition of both money and
foreign currency. For further detail on this point we refer to and endorse the submission
by The Tax Institute, dated 1 December 2014.
It is the position of Adroit Lawyers that Bitcoin should be considered money within the
ordinary meaning of money. Nonetheless, we urge the Committee to consider
recommending immediate legislative change to clarify that Bitcoin meets the definition of
money and foreign currency under all taxation laws.
DIGITAL CURRENCY AS A FINANCIAL PRODUCT
The Australian Securities and Investments Commission (ASIC) has not released any public
guidance on whether digital currencies are considered to be a financial product under the
Australian Financial Services Licensing regime. However, there have been various indications
that ASIC is leaning towards viewing bitcoin as a commodity and not a financial product.
This has created a significant level of uncertainty in the digital currency industry about how
such businesses may be regulated. It appears that some businesses may not need an
Australian Financial Services Licence (AFSL), while others may be operating in a manner
that requires them to hold a licence (e.g. non-cash payment facility).
Whilst this is not an entirely undesirable outcome, the lack of clarity does make it difficult for
businesses to navigate the regulatory environment. This has had the knock-on effect of
increasing compliance costs and discouraging investment in local digital currency businesses.
It is also unclear whether the Australian government intends to define digital currency as a
financial product in the future.
The difficulty with defining digital currency as a financial product is already apparent with
the development of Bitcoin 2.0 projects. For example, some crypto-assets or cryptosecurities could already potentially fall within the definitions of derivative or security
under the Corporations Act.
This decentralised nature of these products does challenge some of the fundamental
concepts that govern the AFSL regime. Identification of the exact role that each person,
entity, or jurisdiction plays in the business process can be very difficult.
Myriad questions are raised, including: who operates a decentralised financial market; is the
blockchain a derivative trade repository; who operates a non-hosted wallet; and is holding
a multi-sig key the equivalent of operating a custodial and depository service?
If a bitcoin company was required to have an AFSL, it is important that any regulatory
framework for digital currency is appropriate and practical. From an AFSL perspective, this

Adroit Lawyers

Digital currency
Submission 39
Submission Senate Economics References Committee Inquiry into Digital Currency

means that the licensing requirements should be tailored to meet the unique characteristics
of the digital currency industry. For example:

in a digital currency exchange it may be more important for a Responsible Manager

to have skills and experience in information technology systems and information
security infrastructure than the financial market;
liquidity requirements for digital currency custodial and depository services could be
quantified in that digital currency, and not fiat currency; or
a non-cash payment facility that settles the digital currency transaction immediately
could be allowed to increase their limit under the class order exemption.

Up to now, regulation and governance has always been a matter of managing human
conduct.
The Crypto-Economy Working Group submission (which we also had the pleasure of assisting
to prepare) outlined the innovative strengths of the associated technology. A strong feature
is how digital currency technology has the inherent ability to be both self-governing and selfregulating.
Other submissions, such as the one from Chris Mountford, explain how the multi-signature
feature in bitcoin can deliver an increased level of protection for consumers. This is possible
through the ability for bitcoin to provide risk assessment services and transaction
authorisation protocols, and the fact that bitcoin is a push based technology.
Given the unique characteristics of this technology, and the challenges that it presents to the
current regulatory framework, Adroit Lawyers supports the basic concept of self-regulation
for the digital currency industry. However, the ultimate regulatory framework needs to
achieve a balance between mitigating risks to consumers and the wider market, and keeping
the barriers to entry low enough to encourage innovation and growth in the digital currency
industry.
This balance will only be achieved through ongoing consultation and collaboration between
the industry, the government and regulatory bodies including ASIC.
ANTI MONEY LAUNDERING AND COUNTER-TERRORISM FINANCING
Given the potential for misuse of Bitcoin by some individuals, it would be a desirable
outcome for bitcoin businesses who are operating in a similar manner to a remittance
service to be included as a designated service under the AML/CTF Act.
To achieve this outcome, there is scope for a third definition of e-money to be added to the
act, such as a definition for cryptocurrency. Alternatively, the e-currency definition could
be decoupled from bullion or precious metals.
It is important that any definition of digital currency considers the technical similarities
between bitcoin and other digital tokens, and ensures that non-currency tokens are not
inadvertently captured under any definition of e-money.

Adroit Lawyers

Digital currency
Submission 39
Submission Senate Economics References Committee Inquiry into Digital Currency

RECOMMENDATIONS
In conclusion, Adroit Lawyers would like to make the following recommendations to the
Committee.
1. That the Australian Securities and Investments Commission releases a discussion
paper that addresses the key questions that exist about the relationship between
digital currencies, digital tokens and the Australian Financial Services Licensing
Regime.
2. That the definitions of money and foreign currency in section 195-1 of A New Tax
System (Goods and Services Tax) Act 1999 and foreign currency in section 995-1 of
the Income Tax Assessment Act 1997 be amended to specifically include bitcoin.
3. That bitcoin be included in the definition of e-money the Anti-Money Laundering and
Counter-Terrorism Financing Act.
4. That the Australian Government considers a Compliance Grant scheme similar to the
one discussed in the joint submission by the Bitcoin Foundation and the Bitcoin
Association of Australia.
Please let us know if you require further information on any of the points discussed in this
submission.
Regards,

Amor Sexton

Mark Toohey

Reuben Bramanathan

Digital Currency Practice Team

Adroit Lawyers

Adroit Lawyers