08 September 2015

Senate Digital Currencies Report

Last month's Senate Economics References Committee report Digital Currency—game changer or bit player examines "how best to define digital currency within the regulatory frameworks in order to support innovation and the needs of the growing Australian digital currency industry".

The Committee was asked
(a) how to develop an effective regulatory system for digital currency that: (i) ascertains the most appropriate definition of digital currencies under Australian tax law, (ii) promotes competition and growth of the digital currency industry, (iii) ensures ongoing stability in the financial services industry, (iv) secures protection of consumers and businesses against illegal activity, (v) incorporates digital currencies into Australia's national security framework, and (vi) ensures the financial stability of the industry; 
(b) the potential impact of digital currency technology on the Australian economy, including the: (i) payments sector, (ii) retail sector, and (iii) banking sector; 
(c) how Australia can take advantage of digital currency technology to establish itself as a market leader in this field; and 
(d) any other related matters. 
The report comprises six chapters -
 chapter 2—provides an overview of digital currencies and recent developments both in Australia and overseas; 
chapter 3—discusses some of the potential risks and benefits of digital currencies; 
chapter 4—examines the tax treatment of digital currencies; 
chapter 5—looks at how digital currencies fit within the financial and payments system regulatory frameworks; and 
chapter 6—considers whether digital currencies should be brought within the anti-money laundering and counter terrorism regime. 
In Chapter 5 the report states -
The committee acknowledges the need for a clear regulatory approach for both consumers and the digital currency industry. The committee considered concerns raised by submitters about the negative effect overregulation would have at this early stage in the development of the industry. In this respect, the central concern was any regulatory framework should balance the need to mitigate risks facing consumers and the broader financial system, while still encouraging innovation and growth in the industry by keeping the barriers to entry low. As the digital currency industry is still in its early stages, the committee supports a 'wait-and-see' approach to government regulation. The committee believes that the relevant government agencies should closely monitor the development of the digital currency industry in Australia, and conduct further research to determine the actual risks and opportunities presented by different types of digital currency businesses, for example Bitcoin exchanges and ATMs, or payment facilities. The committee supports ADCCA's continued development of industry best practices based on the standards set for financial services and payments services. This self-regulation model should be developed in consultation with government agencies, as well relevant stakeholders in the banking, finance and payments sectors. The committee considers that this will ensure that businesses are prepared for regulatory oversight in the future, as the industry expands and grows. 
The Committee's comment in relation to Chapter 6 is -
In order to help manage relationships with banking services and be prepared for future regulation, some digital currency businesses have tried to mirror the obligations that are required by designated services under the AML/CTF regime, such as implementing know your customer programs. However, the AML/CTF Act currently does not cover digital currencies that are not backed by precious metal or bullion. Consequently, digital currency businesses are not able to access the Document Verification Service which would better facilitate identity checking to meet AML/CTF requirements. Furthermore, they currently stand outside this robust regulatory regime designed to detect and deter money laundering and terrorism financing. 
The committee strongly supports applying AML/CTF regulation to digital currency exchanges, noting that similar steps have been taken in Canada, the UK and Singapore. The committee notes that the Attorney-General's Department is currently conducting a statutory review of the AML/CTF Act which is examining whether digital currency businesses should be brought under the AML/CTF regime, and if so which businesses should be included. 
 Overall the Committee's recommendations are anodyne -
R1 The committee is of the view that digital currency should be treated as money for the purposes of the goods and services tax. As such, the committee recommends that the government consults with the states and territories to consider amending the definition of money in the A New Tax System (Goods and Services Tax) Act 1999 and including digital currency in the definition of financial supply in A New Tax System (Goods and Services Tax) Regulations 1999
R2 The committee recommends that further examination of appropriate tax treatment of digital currencies should be included in the taxation white paper process, with particular regard to income tax and fringe benefits tax. 
R3 The committee recommends that the Australian government consider establishing a Digital Economy Taskforce to gather further information on the uses, opportunities and risks associated with digital currencies. This will enable regulators, such as the Reserve Bank of Australia and ASIC, to monitor and determine if and when it may be appropriate to regulate certain digital currency businesses. In the meantime, the committee supports ADCCA's continued development of a self-regulation model, in consultation with government agencies. 
R4 The committee recommends that the statutory review considers applying AML/CTF regulations to digital currency exchanges.