8Sep 2020

A Review of Australian Crypto Laws

by Tim Johnston

Australia is yet to regulate digital currencies other than for money laundering and counter-terrorism purposes. Other than operating digital currency exchanges, Australia does not have specific laws or a specific framework that regulates crypto assets. Australia is relying on applying old laws to fit around crypto assets, rather than developing new laws specifically tailored to this new technology.

A decision in March this year, Commissioner of the Australian Federal Police v Bigatton [2020] NSWSC 245, considered the legal status of Bitcoin and crypto assets in Australia.

The case considered the question of whether the defendant’s dealings with the proceeds of the BitConnect Lending Program amounted to dealing in the proceeds of crime.

The BitConnect Lending Program was an investment vehicle that allowed investors to profit from a BitConnect trading bot and volatility software. According to Wikipedia, BitConnect was a ponzi scheme that promised 1% daily compounded interest. The BitConnect Lending Program was closed down in January 2018 and investors incurred substantial losses. The Bigatton case noted some of the investors lost in excess of $10,000.

It was alleged that the defendant, Mr Bigatton, was the Australian National Promoter of BitConnect, a virtual currency or cryptocurrency business. It was alleged that the defendant converted amounts he received from his role as National Promoter of the BitConnect Lending Program to make mortgage payments of over $576,000 and purchase a motor vehicle.

The defendant denied being the Promoter of the BitConnect Lending Program. The defendant also alleged the bitcoin or any cryptocurrency is not money.

The summary of the Bigatton case examined the question of what is Bitcoin?

On generally accepted principles of what is money, we could conclude that a digital currency is money.  It is a medium of exchange and can be used as a method of payment.  However, section 8(1) of the (Cth) Currency Act 1965 (Currency Act) states that the monetary unit, or unit of currency, of Australia is the dollar. Section 9(1), so far as it is relevant, requires every transaction, dealing, matter or thing relating to money or involving the payment of, or a liability to pay, money to be made, executed, entered into or done according to the currency of Australia, unless the currency of some other country is used. Section 11(1) requires that every payment, unless made according to the currency of some other country (of which Bitcoin is not), be made according to the currency of Australia.”

Digital currencies such as bitcoin on the other hand are generally treated as property and not currency. This is spelt out in more detail in the Guidance Note from the Australian Taxation Office ‘Tax treatment of crypto-currencies in Australia – specifically bitcoin.’

The Australian Tax Office

The Australian Tax Office considered the status of bitcoin and crypto assets in a 2014 Tax Determination. 

The Commission for Taxation noted the following:

It has been argued that bitcoin satisfies the ordinary meaning of money because on a functional approach it satisfies three essential elements for money because it serves as (1) a medium of exchange, (2) a unit of account, and (3) a store of value. In addition, it is argued that there is widespread usage and acceptance of bitcoin in the community as a means of discharging debts and making other payments, and accordingly bitcoin’s increasing acceptance has now reached the point that it qualifies as ‘money’. This later point is very much a question of fact and degree. The evidence available to the Commissioner informs the view that the current levels of use and acceptance of bitcoin within the community is far short of what may be regarded as sufficient or necessary to satisfy the test in Moss, nor is it a generally accepted medium of exchange as per Travelex. Accordingly, bitcoin does not satisfy the ordinary meaning of money.

The meaning of ‘the currency of Australia’ (or ‘Australian currency’) under the Currency Act is the monetary unit established by that Act as the requisite unit of account, and means of discharging monetary obligations, for all transactions and payments that are not made according to the currency of another country. Conversely, ‘the currency of some country other than Australia’ – the only other species of ‘currency’ according to which transactions and payments can proceed under the Currency Act – must be any monetary unit recognised by another country’s laws for the same purposes. Therefore, the critical character of the Currency Act’s concept of ‘currency’ is State recognition and adoption of a monetary unit under law. This approach under the Currency Act reflects the position taken in Mann on the Legal Aspects of Money, namely that money ‘must exist within some form of legal framework, because it reflects an exercise of sovereignty by the State in question’.

The Commissioner considers that when defining ‘foreign currency’ as ‘a currency other than Australian currency’ in section 995-1, Parliament intended to use the term ‘currency’ in the same sense that ‘currency’ is used in the Currency Act – namely, a currency legally recognised and adopted under the laws of a country as the monetary unit and means of discharging monetary obligations for all transactions and payments in that country. Consistent with the Currency Act, this concept of currency is in turn divided into two types for the purposes of the ITAA 1997:

1. Australian currency, and

2. Every currency that is recognised and adopted by the laws of any other sovereign State as the monetary unit and means of discharging monetary obligations for all transactions and payments in the respective sovereign state (that is, foreign currency).

As bitcoin is not a monetary unit recognised and adopted by the laws of any other sovereign State as the means for discharging monetary obligations for all transactions and payments in a sovereign State, it is not ‘foreign currency’ for the purposes of Division 775 of the ITAA 1997.

A taxpayer that receives bitcoin as payment for goods or services they provide as part of their business, or uses bitcoin to make purchases for their business, is required to include the arm’s length Australian dollar value of their bitcoin transactions in calculating their assessable income

We note that there is evidence that some of these comments are outdated. While admittedly on a small scale, one example is Switzerland’s tech friendly hub Zug, home to hedge funds, crypto firms and commodity traders, which will start allowing citizens to pay taxes in Bitcoin and Ether. Perhaps this, and other developments, will help Bitcoin’s recognition as a means to discharge monetary obligations.

Anti-Money Laundering

One area where the law is clear in Australia is the operation of digital currency exchanges.

Under the AML/CTF Act, digital currencies involve the converting of Australian or foreign currency in Australia to a digital currency or a digital currency into Australian dollars or a foreign currency in Australia. Section 5 specifically defines a digital currency to mean “(a) a digital representation of value that:

  1. functions as a medium of exchange, a store of economic value, or a unit of account; and

  2. is not issued by or under the authority of a government body; and

  3. is interchangeable with money (including through the crediting of an account) and may be used as consideration for the supply of goods or services; and

  4. is generally available to members of the public without any restriction on use as consideration……”

In short, if a person operates a digital currency exchange, they must enrol with Australian Transaction Reports and Analysis Centre (AUSTRAC).

A number of Australian exchanges have recently delisted privacy coins due to “pressure from external forces.” We believe it is not unreasonable to believe these external forces are due to the AML/CTF issues associated with privacy coins.

Our View at Apollo

At Apollo, we believe the current legal situation is adequate, but in time, crypto assets will require their own defined regulation. In our opinion the current legal situation in Australia is working relatively well. Most cases involving crypto assets are covered. One cannot unlawfully sell financial products disguised as crypto assets. One cannot operate a digital currency exchange without registering with AUSTRAC. One cannot raise money for an ICO or crypto project without adhering to the laws relevant to raising capital. The tax situation is clear – every instance of trading crypto assets is a taxable event, much like trading multiple foreign currencies.

However, we think that crypto assets will inevitably require clear and dedicated regulation. A legal sandbox might be a smart way for regulators and market participants to experiment and determine the best way to regulate crypto assets. We don’t suggest this needs to happen immediately. Indeed it may be wise to wait until the use and design of crypto assets evolves and matures. The crypto asset space is evolving so quickly it would be difficult to introduce regulation now and continuously update it. Perhaps it makes more sense to wait until the pace of technological advancements has slowed.

Tim Johnston

Tim is the Managing Director at Apollo Crypto. He has substantial expertise in both traditional financial services and technology investing. In financial investing, he worked at DMP Asset Management, a boutique Australian Equities Fund Manager, and was part of the investment team that managed a $33 billion super fund. On the technology side, Tim has worked as a venture capital Associate at Dominet Venture Partners and has been active in crypto markets for over four years. Tim is a CFA charterholder.