CARF

Treasury has released a consultation paper on Australia’s implementation of the Crypto Asset Reporting Framework and related amendments to the Common Reporting Standard. 

 The paper 'seeks stakeholder views on options for Australia’s approach to implementing the OECD-developed rules for the Crypto Asset Reporting Framework (CARF) and associated amendments to the Common Reporting Standard, or CRS'. 

It comments

 The OECD CARF is a new tax transparency framework which provides an international standard for the automatic exchange of crypto related account information between revenue (tax) authorities. In general terms, crypto assets are a digital representation of value that an entity can transfer, store, or trade electronically – common examples include Bitcoin, investment tokens, and non-fungible tokens. 

The OECD developed the CARF to address the rapid growth of the crypto asset market globally. The CARF is intended to be a global minimum standard in tax information exchange and builds on the existing CRS (outlined below), which enables participating tax authorities to exchange (traditional) financial account information on foreign tax residents, serving as a deterrent on tax evasion. In this regard, the CARF preserves the gains in global tax transparency achieved under the CRS and is a key component of the International Standards for Automatic Exchange of Information in Tax Matters (a multilateral tax framework first endorsed in 2014 and implemented by Australia in 2015). 

In November 2023, Australia joined with 47 jurisdictions signalling an intention to implement the CARF by 2027. As noted in that announcement, the widespread, consistent and timely implementation of the CARF will improve the ability of jurisdictions to enforce tax compliance and clamp down on tax evasion. This will help to protect tax revenues by creating a fairer tax system. As at July 2024, 58 jurisdictions had since signalled their intention to implement the CARF by 2027. 

Implementing the CARF would complement the Government’s efforts to strengthen tax transparency. It would also ensure Australia contributes to the effective global implementation of the CARF and play our role in deterring tax evasion, via the exchange of crypto account information with other countries. ... 

The paper explores the following issues, with specific questions included to guide stakeholder input: • The policy merits of transposing the OECD model into our domestic tax law (compared to a bespoke policy approach). • Potential implementation considerations. • The timeline for implementation that would minimise compliance costs on the community. 

Subject to Government decisions and priorities, future consultation will test exposure draft legislation and specific design issues (such as reporting formats to the ATO). 

Implementing the CARF will also require amendments to the CRS, to ensure the CRS remains up to date. These amendments are consequential in nature and outlined on page 10. 

Introduction 

International tax transparency and exchange of tax information 

The automatic exchange of tax related information between tax authorities is one method to address tax avoidance and ensure that all taxpayers pay the correct amount of tax. This typically involves jurisdictions signing up to a global standard to facilitate the sharing (and receiving) of information on accounts held by non-resident individuals and entities. The global standard ensures that information is exchanged in a standardised format, which assists tax authorities (and complying entities) to collect the information. It also recognises that the effectiveness of international exchange of information regimes are dependent on widespread, standardised adoption by jurisdictions. 

In June 2013, the OECD released a 15-point Action Plan on Base Erosion and Profit Shifting as a roadmap for governments to address profit shifting behaviour – i.e. tax planning strategies that exploit differences in tax rules to avoid paying tax. The Action Plan was endorsed at the G20 Finance Ministers’ meeting in July 2013 and established the OECD/G20 BEPS project. 

The BEPS Action Plan included the Common Reporting Standard (CRS) which recognised that international cooperation and sharing of high-quality information between revenue authorities was vital to ensure compliance with local tax laws. In 2014, the CRS was endorsed by G20 Finance Ministers and Central Bank Governors as an international platform for automatic exchange of tax information between multiple countries. The CRS is the OECD version of the United States’ unilateral information exchange mechanism (FATCA, or the Foreign Account Tax Compliance Act). The CRS has since established a common international standard for the collection, reporting and exchange of financial account information on foreign tax residents. Under the CRS, banks and other financial institutions collect and report financial account information to the ATO who exchange that information with participating foreign tax authorities of those foreign tax residents. In return, Australia (via the ATO) receives financial account information on Australian residents from other countries' tax authorities . Australia passed legislation implementing the CRS in 2016. 

Developing the OECD CARF (outlining the problem) 

In April 2021, the G20 mandated the OECD to develop a framework to provide for the automatic exchange of tax-relevant information on crypto assets. The OECD proceeded to develop a set of ‘Model Rules’ to extend automatic exchange of information frameworks to new intermediaries in the crypto asset sector. In August 2022, the OECD approved the CARF. 

The momentum to establish the CARF was in response to the rapid growth of crypto asset markets across the globe, and the challenges it presents for governments when it comes to tax evasion and tax avoidance. 

This reflects that crypto assets can be transferred and held without interacting with traditional financial intermediaries (such as banks) and without any central (tax) administrator having full visibility on the transactions carried out via crypto intermediaries, investor income derived from crypto assets, or the location of crypto asset holdings (such as assets held in offshore accounts). 

This type of information asymmetry creates opportunities for tax non-compliance and offshore tax evasion, particularly as these transactions and investments are occurring increasingly beyond the remit of established exchange of information frameworks, as compared to more traditional financial products. 

That is, crypto intermediaries can serve to aid asset transfers across borders, and as these platforms become more prominent (and relatively less transparent), there is an incentive for economic activity to shift away from traditional financial platforms to more opaque transaction platforms. This can facilitate the non-disclosure of income, leading to tax evasion. 

The OECD’s response to this policy problem is the CARF – the CARF addresses this gap in tax transparency by providing a new multilateral framework for the reporting of tax information on transactions in crypto assets. 

As with the current CRS, the CARF would ensure crypto related information is reported in a standardised manner, with a view to automatically exchanging information between tax administrators. The CARF is intended to build on the success of the CRS, which has improved international tax transparency via the automatic exchange of financial account information. 

The success of exchange of information frameworks are dependent on co‑ordinated international action, to ensure the information exchanged is broad in scope and coverage. This underpinned the group of jurisdictions, including Australia, signalling an intent to implement the CARF by 2027. 

Crypto assets in Australia 

Since Bitcoin was introduced in 2009, the crypto asset industry in Australia has evolved to mainstream use, and now extends beyond Bitcoin exchanges to include many sophisticated service providers . Cryptocurrencies are the most common form of crypto asset. It is estimated that 20 per cent of Australians currently own a cryptocurrency, and that 82 per cent of Australian crypto owners claimed to make a profit. The average reported cryptocurrency profit in the 2023 calendar year was $9,627 . 

Implementing the OECD CARF in Australia (why is government action needed) 

The OECD CARF reflects that global financial markets are evolving and becoming increasingly digitalised, and that coordinated action is needed to ensure revenue (tax) authorities can retain visibility of income derived from crypto assets. Implementing the CARF into Australia’s domestic legislation would create the legal framework to oblige crypto asset intermediaries to collect and report user and transaction data to the ATO. Exchange of information (between tax administrators) on crypto assets would allow the ATO to access standardised data to identify tax non-compliance and ensure taxpayers are meeting their tax obligations for crypto asset income and assets. Exchange of information under the CARF would only take place with jurisdictions who have appropriate confidentiality and data safeguards . 

The CARF would also ensure Australia continues to be a responsible jurisdiction in relation to combating tax evasion at the international level. Australia, along with many other countries, already shares information through automatic exchange, spontaneous exchange and exchange upon request facilitated through a network of tax treaties and tax information exchange agreements. Similarly, widespread implementation of the CARF would ensure a consistent and coordinated approach to the automatic exchange of information across participating jurisdictions regarding crypto assets. 

Legislative interactions with the Common Reporting Standard 

Reflecting the genesis of the CARF (and the evolving financial landscape), jurisdictions implementing the CARF would also be required to implement legislative amendments to the CRS, to ensure the CRS comprehensively covers transactions beyond the traditional financial sector (for which the CRS was initially developed) such as in the crypto asset market. For example, ensuring that indirect investments in crypto assets (such as through derivatives and investment vehicles) and certain electronic money products and central bank digital currencies are brought into scope of the CRS. 

The OECD identified the need for associated CRS amendments as part of the OECD’s review of the current standards, conducted in parallel to the development of the CARF. 

What is the Crypto Asset Reporting Framework (CARF)? 

The CARF is a new tax transparency framework which provides for the automatic exchange of tax information on transactions in crypto assets, between tax authorities. In the Australian context, it will allow the ATO to exchange information with other participating countries, to the extent the information relates to a person who is a tax resident in that jurisdiction. In turn, the ATO will also receive information on Australian tax residents from those tax authorities. The CARF requires information to be reported in a standardised manner. 

The CARF consists of three distinct components: • CARF Model Rules (and related commentary developed by the OECD) that can be transposed into domestic law to collect information from reporting crypto asset service providers with a relevant nexus to Australia (as the jurisdiction implementing the CARF). The rules focus on the: o scope of crypto assets to be covered; o entities and individuals subject to data collection and reporting requirements; o transactions subject to reporting, as well as the information to be reported in respect of such transactions; and o due diligence procedures to identify crypto asset users and controlling persons and to determine relevant tax jurisdictions for reporting and exchange purposes. • A Multilateral Competent Authority Agreement on Automatic Exchange of Information and related Commentary (or bilateral agreement/arrangement) to allow for the automatic exchange of information between participating jurisdictions); and • An electronic format (XML Schema) to be used by tax administrators for purposes of exchanging the CARF information, as well as by reporting crypto asset service providers to report CARF information to tax administrations (as permitted by domestic law) . The CARF would compel crypto intermediaries – for example, exchange platforms and wallet providers used for storing crypto assets – to report to tax authorities on certain crypto payment transfers, such as disposals (gross proceeds) and acquisitions (market value). Under the OECD model, information reported under the CARF would be subject to de minimis thresholds, specifically: • Values exceeding USD 50,000 or above would require specific customer data. The customer in this instance is identified as a user, and their details are exchanged. • Transaction amounts less than USD 50,000 are still reported, but done so as a ‘platform/merchant’ payment – effectively treated as an aggregate figure (with no specific customer user data). 

Australia’s implementation approach: Options 

The OECD’s CARF provides for a multilateral framework, establishing a common international standard for the exchange of information on transactions in crypto assets. Amendments to Australia’s tax legislation would be required to implement the CARF (along with legislative amendments to existing CRS rules, outlined further below). 

This paper considers two options – under either option, Australia would need to enter into a Multilateral Competent Authority Agreement (MCAA) or a bilateral information exchange agreement to enable the automatic exchange of information between tax authorities. 

The status quo option (no change) is not considered given that crypto use in Australia has become mainstream, and that the CARF is a global minimum standard developed to help deter tax evasion. 

Option 1: adopt the OECD CARF Model 

The OECD CARF Model Rules would be used as the basis for the enabling legislation within Australian law. This would adopt the same defined terms, concepts, due diligence procedures, de minimis thresholds, exclusions, and impose the same obligations on crypto intermediaries (reporting crypto asset service providers), as identified by the OECD. 

This approach would have the benefits of: • receiving information from other jurisdictions who have signed up to the OECD CARF model, assisting with tax compliance and enforcement. • avoiding duplication and deviations from international norms, supporting efficient reporting (by entities) and information exchanges (by tax authorities). • minimising compliance costs on some entities (e.g. if an in-scope entity has nexus with more than one jurisdiction). Similar to how the CRS was implemented in 2016, under this option, Australia would reserve the right to make some adjustments to adapt the OECD model to fit within Australia’s law (noting the above benefits are predicated on consistency with the OECD model). 

Option 2: bespoke approach 

Australia implements a bespoke set of rules. This would have the same policy intent as Option 1, with crypto asset service providers required to collect information on crypto asset transactions they facilitate, and report this data to the ATO to aid with its compliance activities. The information could be exchanged unilaterally with other jurisdictions where the taxpayer is resident, for use by those tax authorities, to ensure assets and income have been appropriately declared for tax purposes. Under a bespoke approach, Australia could more specifically target the reporting obligations to those service providers in the crypto industry whose customers’ information is seen as providing the most useful information to assist the ATO with its compliance activities. This could also include bespoke de minimis thresholds. A bespoke regime could have the same reportable information as captured under the OECD CARF but could offer the flexibility to exclude or add certain fields of information and types of transactions captured. It could also prescribe bespoke timing and frequency of reporting to the ATO. However, under this option many of the benefits of consistent reporting to minimise duplication and enable exchange globally would be lost and likely result in increased compliance costs for affected entities. The ATO may also receive less information compared to the OECD-developed CARF model, as bespoke regimes may not be considered compliant with the OECD standard. 

Who is required to report under the CARF? 

The CARF would apply to Reporting Crypto Asset Service Providers. The OECD defines (Section IV (B)) this term as: • Any individual or entity that, as a business, provides a service effectuating Exchange Transactions for or, on behalf of customers, including by acting as a counterparty, or as an intermediary, to such Exchange Transactions, or by making available a trading platform. 

The term “Exchange Transaction” is further defined to mean any exchange between: • Relevant Crypto-Assets and Fiat Currencies; and • One or more forms of Relevant Crypto-Assets (defined below). 

A Reporting Crypto Asset Service Provider would therefore apply to crypto asset exchanges and wallet providers, brokers, dealers, and automated teller machine providers. These types of entities (and individuals) are in scope given their central role in the crypto asset market in facilitating exchanges between Relevant Crypto-Assets, as well as between Relevant Crypto-Assets and Fiat Currencies. 

Reporting Crypto Asset Service Providers (connection to Australia) 

Under the OECD model, there would be five points of connection establishing a Reporting Crypto Asset Service Provider’s nexus to Australia, thus subjecting them to the CARF rules. These include if the provider is: (i) tax resident in, (ii) both incorporated in, or organised under the laws of, and have legal personality or are subject to tax reporting requirements in, (iii) managed from, (iv) having a regular place of business in, or (v) effectuating Relevant Transactions through a branch based in Australia. 

The OECD’s CARF model includes rules to avoid duplicative reporting where a Reporting Crypto Asset Service Provider may have nexus to more than one jurisdiction. 

Reportable information under the CARF 

The CARF will require reporting crypto asset service providers to report information about in-scope crypto assets and transactions to the ATO. These core definitions are outlined below to assist readers, noting the CARF related commentary has a complete set of defined terms and reporting requirements.

• Crypto-Assets (Section IV (A)) are defined as a digital representation of value that relies on a cryptographically secured distributed ledger or similar technology to validate and secure transactions. This includes assets transferred in a decentralised manner outside the traditional financial sector such as stablecoins, derivatives issued in the form of crypto assets and certain non-fungible tokens (NFTs). Blockchain is an example of distributed ledger technology. 

• Relevant Crypto-Assets refers to all crypto assets that can be used for payment or investment purposes. It excludes crypto assets that pose limited risk to tax compliance (i.e. crypto assets which cannot be used for payment or investment purposes, Central Bank Digital Currencies, and Specified Electronic Money Products). 

• Fiat Currency is the official currency of a jurisdiction, issued by a jurisdiction or by a jurisdiction’s designated Central Bank or monetary authority, as represented by physical banknotes or coins or by money in different digital forms, including bank reserves and Central Bank Digital Currencies. The term also includes commercial bank money and electronic money products. 

• Relevant transactions (Section IV(C)) refer to: - exchanges between relevant crypto assets and fiat currencies; and - exchanges between one or more forms of relevant crypto assets; and Reportable Retail Payment Transaction refers to transfers of relevant crypto assets for payment of goods or services above USD 50,000 (including where an intermediary processes payment on behalf of a merchant accepting crypto assets). 

• Reporting requirements (Section II of CARF) specify the general information to be reported with respect to crypto asset users (and controlling persons), including jurisdiction(s) of residence, taxpayer identification number, information on the reporting crypto asset service provider (such as its name, address and any identifying number), and information on the relevant transactions (such as reportable relevant transactions and transfers to external wallet addresses). 

Timing of reportable information under the CARF 

The success of global exchange of information frameworks are dependent on co‑ordinated international action. A collective group of jurisdictions, including Australia, have signalled an intent to implement the OECD’s global tax transparency framework for the reporting and exchange of information with respect to crypto assets by 2027. Once operational, reporting of CARF information by crypto asset intermediaries is proposed to occur on an annual basis relating to data collected over the previous year. 

Subject to a final decision of Government, it is envisaged that CARF reporting requirements would commence from 2026, to ensure the first exchanges between the ATO and other tax authorities could take place by 2027. This timeframe would also be subject to future legislative priorities. 

This timeframe is intended to provide adequate lead time for reporting crypto asset service providers and intermediaries to update their systems. 

It is anticipated the ATO would also undertake public consultation on the CARF reporting format, such as the XML schema. 

Due diligence requirements 

Under the OECD CARF, the reported information must ensure the ATO has a reasonable level of assurance of: • the crypto asset user’s identity, • the possible tax obligations that may arise from trading or accepting crypto assets as payment, where the user is a non-resident for exchange of information purposes with partner jurisdictions. 

Reporting crypto asset service providers would therefore be subject to due diligence procedures which they must apply to identify their users (including controlling persons) and determine the relevant tax jurisdiction and beneficial owners of crypto assets held in certain entities. The due diligence procedures (explained at Section III) may vary depending on whether the customer is an individual or an entity, but in general, would include: • the collection of self-certifications from their customers as to their tax residency and their Tax Identification Numbers (TINs); • Reasonableness checks that those self-certifications reconcile with other information the entity holds to ensure validity (for example checking against documentation obtained in relation to Anti-Money Laundering / Know Your Customer (AML/KYC) purposes); and • Signing off on and submitting the data to the tax authorities. 

Additionally, reporting entities will need to have regard for ‘change of circumstances’ requirements regarding crypto asset users. This imposes obligations on reporting entities to ensure the original ‘self-certification’ remains valid. That is, if a reporting crypto asset provider has reason to know that a self-certification is unreliable, incorrect, or incomplete, the reporting entity is required to undertake procedures to ensure the self-certification is updated. 

In the case of pre-existing users, the CARF Model Rules stipulates that reporting crypto asset service providers must obtain a valid self- certification (and confirm its reasonableness) within 12 months after a jurisdiction introduces the CARF.

Identity

Mellor J in COPA v Wright [2024] EWHC 1198 (Ch) comments 

1. Dr Craig Steven Wright (‘Dr Wright’) claims to be Satoshi Nakamoto i.e. he claims to be the person who adopted that pseudonym, who wrote and published the first version of the Bitcoin White Paper on 31 October 2008, who wrote and released the first version of the Bitcoin Source Code and who created the Bitcoin system. Dr Wright also claims to be a person with a unique intellect, with numerous degrees and PhDs in a wide range of subjects, the unique combination of which led him (so it is said) to devise the Bitcoin system. 

2. Thus, Dr Wright presents himself as an extremely clever person. However, in my judgment, he is not nearly as clever as he thinks he is. In both his written evidence and in days of oral evidence under cross-examination, I am entirely satisfied that Dr Wright lied to the Court extensively and repeatedly. Most of his lies related to the documents he had forged which purported to support his claim. All his lies and forged documents were in support of his biggest lie: his claim to be Satoshi Nakamoto. 

3. Many of Dr Wright’s lies contained a grain of truth (which is sometimes said to be the mark of an accomplished liar), but there were many which did not and were outright lies. As soon as one lie was exposed, Dr Wright resorted to further lies and evasions. The final destination frequently turned out to be either Dr Wright blaming some other (often unidentified) person for his predicament or what can only be described as technobabble delivered by him in the witness box. Although as a person with expertise in IT security, Dr Wright must have thought his forgeries would provide convincing evidence to support his claim to be Satoshi or some other point of detail and would go undetected, the evidence shows, as I explain below and in the Appendix, that most of his forgeries turned out to be clumsy. Indeed, certain of Dr Wright’s responses in cross-examination effectively acknowledged that point: from my recollection at least twice he indicated if he had wanted to forge a document, he would have done a much better job. 

4. If Dr Wright’s evidence was true, he would be a uniquely unfortunate individual, the victim of a very large number of unfortunate coincidences, all of which went against him, and/or the victim of a number of conspiracies against him. 

5. The true position is far simpler. It is, however, far from simple because Dr Wright has lied so much over so many years that, on certain points, it can be difficult to pinpoint what actually happened. Those difficulties do not detract from the fact that there is a very considerable body of evidence against Dr Wright being Satoshi. To the extent that it is said there is evidence supporting his claim, it is at best questionable or of very dubious relevance or entirely circumstantial and at worst, it is fabricated and/or based on documents I am satisfied have been forged on a grand scale by Dr Wright. These fabrications and forgeries were exposed in the evidence which I received during the Trial. For that reason, this Judgment contains considerable technical and other detail which is required to expose the true scale of his mendacious campaign to prove he was/is Satoshi Nakamoto. This detail was set out in the extensive Written Closing Submissions prepared by COPA and the Developers and further points drawn out in their oral closing arguments.

Digital Assets

The UK Law Commission's Digital assets as personal property: Short consultation on draft clauses states 

Digital assets are fundamental to modern society and the contemporary economy. They are used for an expanding variety of purposes — including as valuable things in themselves, as a means of payment, or to represent or be linked to other things or rights — and in growing volumes. 

1.2 In our recent work on digital assets, we considered how principles of private law, specifically personal property law, apply to digital assets. Personal property rights are important for many reasons. They are important in cases of bankruptcy or insolvency, in cases where objects of property rights are interfered with or unlawfully taken, and for the legal rules concerning succession on death. They are also important for the proper characterisation of numerous modern and complex legal relationships, including custody relationships, collateral arrangements and structures involving trusts. Property rights are powerful because, in principle, they are recognised against the whole world, whereas other — personal — rights (such as contractual rights) are recognised only against someone who has assumed a relevant legal duty. 

1.3 We published our final report on digital assets in June 2023. We concluded that certain types of digital assets are capable of being things to which personal property rights can relate, even though they do not easily fit within the traditional categories of personal property, and are better regarded as belonging to a separate category. We recommended legislation to confirm the existence of a “third category” of personal property rights, capable of accommodating certain digital assets including crypto- tokens. ... 

1.5 The draft clauses that accompany these notes implement the recommendation about personal property set out in our June 2023 report. This short, limited consultation exercise is designed to test whether the draft clauses successfully implement the recommendation we made in our report. We also ask about potential impact, and are keen to receive views on costs and benefits, and any potential unintended consequences, in order to inform the Government’s decision on whether to proceed to implementation. We do not ask further questions on the underlying policy, which has already been the subject of consultation. ... 

AIMS OF THE DRAFT BILL 

1.8 The intended effect of the draft Bill is to confirm that crypto-tokens, and potentially other assets such as voluntary carbon credits, are capable of being recognised by the law as property. This will enable courts to determine a number of issues, including, for example, in the following situations. (1) If digital assets are the subject of a legal dispute and there is a danger of their holder dissipating them before that dispute can be resolved, a court can, if these assets are classed as property, order a proprietary freezing injunction over them to prevent this. These remedies exist for things already recognised as property; as yet, it is an open question whether they are available in relation to digital assets. (2) If someone’s digital assets are taken from them or destroyed, the remedies available to them are significantly stronger if those assets are regarded as being their property than if the law does not recognise any property interest in them. Currently, there is a considerable and growing market in such assets and most investors (commercial and private) presume that, when they buy them, they acquire property rights in the same way as they do when they buy, say, a watch or a laptop. As the law currently stands, it is not necessarily the case that they do. 

1.9 The common law has answered some questions in relation to some kinds of digital assets, but the result is, inevitably, both piecemeal and vulnerable to different judicial approaches in the future. The draft Bill would definitively lay to rest any lingering doubt about the existence of a third category of property accommodating the unique nature of digital assets, setting the future direction of the law in favour of commercial certainty and confidence. 

1.10 Members of the judiciary themselves suggested to the Law Commission that the recommended legislation would be a useful tool in developing the law in this area. ...

Legal background 

2.1 “Property” can be divided into real property (interests in land) and personal property (interests in other things). The law of England and Wales traditionally recognised two distinct categories of personal property rights: rights relating to “things in possession” (tangible things), and rights relating to “things in action” (legal rights or claims enforceable by action). A 19th century case, Colonial Bank v Whinney, is often used as authority for the proposition that these two categories of personal property are exhaustive so that anything that is an object of personal property rights must fall within one of these two. 

2.2 Court decisions over the last ten years show that the common law of England and Wales has moved toward the recognition of a “third” category of things to which personal property rights can relate but which do not fall easily within either of the two traditionally recognised categories. Initially, this development was in response to emergent forms of intangible things such as milk quotas;5 more recently, it has been in response to crypto-tokens. 

2.3 A strong majority of our consultees agreed that either a third category of things to which personal property rights can relate has already developed in England and Wales at common law, or that, to the extent it has not, one should be recognised as existing. Some consultees, including senior and specialist judges, said to us that the explicit recognition of such a category would confirm the existing law, facilitate the law’s future development and lay to rest any lingering doubt about the existence of such a category. 

2.4 In this chapter, we briefly explain the legal background to, and reasons for, our recommendation. In the next chapter, we introduce the draft Bill and explain what it does – and what it does not do. 

Property 

2.5 Colloquially, the term “property” is used interchangeably to describe both a thing, and a claim or entitlement to that thing. However, in a stricter legal sense, the term describes a relationship between a person and a thing, and not the thing itself. For example, in the phrase “that phone is my property”, the object (the thing) is the mobile phone. The property rights are the rights that a person has in relation to that mobile phone. 

2.6 Even in legal writing such as academic papers, cases and statutes, the term property is sometimes used in its broader, more colloquial sense or as a shorthand term, and we also use it in this way from time to time. However, the draft Bill refers to an “object of property rights”. 

Third category / third thing 

2.7 In our report, and in this paper, we use the term “third category” to describe a category of thing distinct from both things in possession and things in action. In adopting this terminology, we acknowledge the argument that other distinct categories of things to which personal property rights can relate might already exist at law (including patents and statutorily created intellectual property rights). We adopt the term “third category” as shorthand: in part, as a direct reference to Lord Justice Fry’s influential judgment in Colonial Bank v Whinney and the longstanding practice among lawyers and judges of referring to the things in possession/things in action dichotomy; and in part as a convenient and readily understandable term, which almost all consultees were comfortable with. We deliberately do not, however, use the term in the draft legislation. 

THINGS IN ACTION AND THINGS IN POSSESSION 

2.8 By way of background, it may be helpful to expand briefly on the two categories of personal property traditionally recognised by the law of England and Wales: (1) Things in possession are, broadly, any object that the law considers capable of possession. This category includes assets which are tangible, moveable and visible, such as a bag of gold.  Possession of a thing gives its possessor a property right which is enforceable against the world.  Rights in things in possession can be asserted by use and enjoyment as well as by the exclusion of others from them.  Things in possession exist regardless of whether anyone lays claim to them, and regardless of whether any legal system recognises or is available to enforce such claims. (2) Things in action are, traditionally, any personal property that can only be claimed or enforced through legal action or proceedings. Common examples of things in action are debts, rights to sue for breach of contract, and shares in a company. Things in action have no independent form and exist only insofar as they are recognised by a legal system. This means that the presence of a thing in action in the world is dependent on there being both a party against whom the thing in action (the right) can be enforced and a legal system willing to recognise and enforce that right. The category of things in action is sometimes given a much broader meaning as a residual class of personal property — that is, it is sometimes regarded as encompassing any personal property that is not a thing in possession. 

2.9 Things in possession and things in action are susceptible to different types of legal treatment. 

2.10 In the 1885 case of Colonial Bank v Whinney, Lord Justice Fry said:  All personal things are either in possession or in action. The law knows no tertium quid [third thing] between the two. 

2.11 Although this statement has largely been taken as reflecting the correct position in law, it is almost certainly no longer correct (to the extent that it ever was). As Professor Fox and Professor Gullifer observed in their joint response to our call for evidence: The reasoning in [Colonial Bank v Whinney] turned on the interpretation of the bankruptcy statutes then in force. It has been taken out of context and used as authority for a proposition that it [was] not meant to support. 

Digital assets as things in possession or things in action 

2.12 Digital assets do not sit easily in either of the traditionally recognised categories of things in possession or things in action (at least in the narrow sense). They are not tangible things in the normal sense, meaning that courts are likely to feel unable to find that they are things in possession.  Nor are they claimable or enforceable only by legal action or proceedings. Crypto-tokens would continue to exist even if the law were to fail to recognise them as objects of personal property rights and even were a law to prohibit their existence.18 Their useful characteristics and the ability of people to use, enjoy and interact with them (and exclude others from them) would also continue to exist: the functionality of the crypto-token system would remain unaffected. They therefore function more like objects in themselves. 

2.13 Some digital assets, such as crypto-tokens, might represent, record, or be linked to other things (including legal rights – that is, things in action) which are external to that particular crypto-token and/or crypto-token system. In our work, however, we concluded that the better view is that a crypto-token is a thing in itself to which personal property rights can relate, regardless of whether it is also linked to another thing. Specifically in respect of crypto-tokens, almost all consultees agreed that crypto-tokens cannot be conceived of as merely rights or claims in themselves and that they can be used and enjoyed independently of whether any rights or claims in relation to them are enforceable by action. Further, the use or enjoyment of a thing in action is dependent entirely on the enforceability of the right or claim of which it is constituted. That is not true of crypto-tokens, for example. This is the crucial distinction that needs to be made for proprietary classification purposes.  

2.14 Crypto-tokens and certain other digital assets can be used and enjoyed independently of whether any rights or claims exist in relation to them. Moreover, any property rights in relation to them can be asserted by use and enjoyment of the thing and by the exclusion of others from it. This is one of the fundamental underlying innovations of crypto-tokens, because it is all achieved through software where this was not previously possible. 

2.15 It is this quality of digital assets, as things independent of the rights that relate to them, that makes them susceptible to involuntary alienation. This is relevant to a proprietary classification because it helps to distinguish between the legally relevant characteristics of different things. A debt, for example, as a thing in action, cannot be alienated from a person without a legal process (usually one which requires that person’s consent). A crypto-token, on the other hand, as a thing in possession like a car or a watch, can as a matter of fact be alienated from a person without a legal process and without their consent. 

2.16 So, despite the longstanding existence of two categories, the courts have consistently concluded that certain things (often digital assets) are capable of being objects of personal property rights, even where the thing in question does not neatly fit within either of the traditionally recognised categories of thing to which personal property rights can relate. The courts have done so, either expressly or impliedly, in respect of milk quotas,  European Union carbon emission allowances (“EUAs”),  export quotas,  waste management licences,  and a wide variety of crypto-tokens, including non-fungible tokens (NFTs). 

2.17 In the recent case of AA v Persons Unknown, the High Court of England and Wales said that “[cryptocurrencies] are neither [things] in possession nor are they [things] in action”.  Nonetheless, in that case, the court held that cryptocurrencies were a form of property.  Mr Justice Bryan said that it would be “fallacious” to proceed on the basis that the law of England and Wales recognises no form of property other than things in possession and things in action. He explicitly recognised the difficulty in the classification of crypto-tokens (which, on their face are things which are neither things in action nor things in possession). He held that a crypto-token could be an object of personal property rights even if it was not a thing in action in the narrow sense. 

2.18 The Court of Appeal has said that “a cryptoasset such as bitcoin is property” under the law of England and Wales. This is also affirmed, or necessarily implicit, in at least 23 other cases decided at first instance, although most were decided in connection with interim relief. 

2.19 Since the judgment in AA v Persons Unknown was handed down in 2019, courts in at least 14 of those 23 cases, including the Court of Appeal,31 have cited that judgment in support of the proposition that the digital asset in question is a thing which is capable of being an object of personal property rights. 

2.20 Taken together, the case law demonstrates that the courts of England and Wales now recognise crypto-tokens as distinct things which are capable of being objects of personal property rights. Further, through the consistent application of AA v Persons Unknown (as opposed to any contrary approach), courts have deliberately proceeded in a manner that carves out a third common law-based category of thing to which personal property rights can relate. 

2.21 Courts in other jurisdictions have reached the same (or a similar) conclusion. Courts across the common law world, including in Australia, Canada, Hong Kong, New Zealand, Singapore, and the United States, now consistently proceed on the basis that crypto-tokens are capable of being objects of personal property rights and are therefore susceptible to the various consequences that follow.  This includes recognition that crypto-tokens can be subject to an interlocutory proprietary injunction, are capable of being held on trust and fall within certain broad statutory definitions of “property”. 

2.22 Examples of this can also be seen in some civil law-based systems, including Japan, Liechtenstein, and Switzerland. 

2.23 Our conclusions are also consistent with international law reform developments, including those that are intended to be applicable in civil law jurisdictions. The UNIDROIT Working Group recently published a set of international principles,  which set out a proprietary framework applicable to digital assets.  The UNIDROIT Working Group Principles apply to “electronic records”, of which digital assets are a sub-set.  In effect, the Principles apply proprietary concepts to a category of things distinct from things in possession and things in action. 

OUR RECOMMENDATION: STATUTORY CONFIRMATION OF A “THIRD THING” 

2.24 We have therefore concluded that a thing is not, and should not be, deprived of legal status as an object of personal property rights merely by reason of the fact that it is neither a thing in action nor a thing in possession. We recommended the explicit recognition, in statute, of a third category of personal property, to encourage a more nuanced consideration of new, emergent things. A distinct, third category will better allow the law to focus on attributes or characteristics of the things in question, without being fettered by analysis or principles applicable to other traditional objects of personal property rights. As discussed below, we consider that such things include, but are not necessarily limited to, crypto-tokens such as bitcoin. 

2.25 Although it may not change the common law position,  we conclude that such a statutory confirmation will provide greater legal certainty and will allow the law to develop from a strong and clear conceptual foundation. A statutory confirmation will alleviate any lingering judicial concern surrounding Colonial Bank v Whinney or any concern that recognising a third category is not an appropriate development for the common law to make.  The exact parameters which describe a third category thing, and the legal treatment afforded to such things, will be matters for common law. There are centuries of case law considering the factors that make a thing an appropriate object of personal property rights, which the courts can continue to apply in this context so that the third category does not become inappropriately broad. We consider this to be the most effective and least interventionist recommendation that we can make to facilitate the law’s development on this point. 

2.26 A statutory confirmation will explicitly recognise the reality that in the modern world there exist things that are neither purely intangible rights nor conventionally tangible objects, and that the law is capable of treating those things as objects of personal property rights. This in turn will allow the law of England and Wales to discuss crypto- token systems (and other systems that might manifest third category things) more directly in terms of powers and incentives/incentive mechanisms of participants, rather than in terms of claims/rights, corresponding duties and obligations.  It also means that the category of things in action can remain usefully distinct and descriptively accurate. 

2.27 A statutory confirmation will reduce the time spent by the courts on questions of categorisation of objects of personal property rights, and instead allow them to focus on the substantive issues before them. It gives explicit effect to: [the] powerful case for reconsidering the dichotomy between [things] in possession and [things] in action and recognising a third category of intangible property ... in a way that would take account of recent technological developments. 

2.28 A statutory confirmation is likely to help protect new and emergent forms of property from intermediation imposed by the application of ill-fitting private law principles, such as the concept that such things are things in action. A statutory confirmation is also likely to help protect emergent forms of property from regulation which might mandate intermediation or reduce a person’s ability to self-custody their own asset; that is, to hold it directly rather than through an intermediary such as a wallet provider. 

2.29 A statutory confirmation will provide a strong signal to market participants that the law of England and Wales will continue to protect personal property rights, even in new and emergent forms of property. It will also re-emphasise the fundamental difference between third category things that can be “owned”, and other existing types of software, the rights to which are generally governed by a mixture of statute (for example, intellectual property rights) and contract (for example, licences granted by Microsoft), without clear principles of “ownership”. Crypto-tokens, for example, are so fundamentally different to other types of software or digital assets that this distinction alone is worth codifying in statute. Doing so will facilitate and encourage innovation based on the underlying principle that certain digital things can now be “owned”.

Cogito

In Epic Trust Limited v Ruscoe [2024] NZHC 21 Palmer J states 

 [1] My judgment of 6 September 2023 outlines a summary of the context of these proceedings: [1] Cryptopia Ltd (Cryptopia) is a company that ran a cryptocurrency exchange. In January 2019, there was a serious hack of Cryptopia’s cryptocurrency and the loss of some $30 million of its cryptocurrency holdings. In May 2019, the shareholders of Cryptopia appointed Mr David Ruscoe and Mr Malcolm Moore as liquidators of the company under s 241(2)(a) of the Companies Act 1993. Mr Ruscoe and Mr Moore are chartered accountants, partners in the firm Grant Thornton New Zealand Ltd, and licenced insolvency practitioners. The liquidation involves complex arrangements regarding around 370 functioning cryptocurrencies owned by some 960,000 holders of accounts with positive balances in around 180 countries. 

[2] On 8 April 2020, the High Court determined that each type of cryptocurrency is intangible property held by Cryptopia as trustee for the benefit of all the account holders of that currency. Cryptopia itself is a beneficiary of some of those trusts. The High Court’s judgment sets out a more detailed account of the factual background of the liquidation. 

The liquidators of Cryptopia have applied for directions about distribution of the cryptocurrency assets. On 13 November 2023, Epic Trust Ltd (Epic Trust) sought to make submissions on the application. Epic Trust is owned by Mr Victor Cattermole. As explained in my judgment of 15 November 2023, Epic Trust had not filed and served a notice of appearance, an application to be joined, or a notice of opposition to the application for directions. I declined to hear Epic Trust at that hearing. I noted the evidence provided to date raised doubts about whether Epic Trust really had an interest in the proceedings. 

[3] On 14 November 2023, Epic Trust filed and served an application to be joined as a respondent and a notice of opposition to the application for directions with supporting affidavits. I heard the application to be joined, which was opposed by the liquidators, on 11 December 2023. ... 

 [8] Mr Henry, for Epic Trust, submits: 

(a) Epic Trust is an undisputed owner of Cryptopia cryptocurrencies as a purchaser for value from a group of beneficiaries, specifically and namely Mr Joshua Stevenson. The agreements are under an arbitral rule. Epic Trust is appointed as agent until settlement and there is a right of subrogation to Mr Stevenson’s claims in the liquidation. Accordingly, Epic Trust has a right to appear and be named in the proceeding and to make applications, be bound by the Court’s decision, and to appeal. 

(b) The proceeding is not a liquidation proceeding but a trustee seeking orders for distribution of trusts. The trustees must disclose to beneficiaries the assets held in the trusts under s 51 of the Trusts Act 2019, for the beneficiaries to formulate their claims. None of the beneficiaries are represented before the Court. 

(c) The beneficiaries’ agreement with Cryptopia was fundamentally breached by Cryptopia whenever it stopped operating the trading platform, entitling a beneficiary to cancel the agreement under s 37(1)(c) of the Contract and Commercial Law Act 2017 (CCLA) and Epic Trust to claim relief under s 48(b). So Cryptopia’s terms and conditions with the beneficiaries, including the prohibition against assignment, are no longer valid. Otherwise, the dispute resolution clause would also be valid, contrary to the liquidators’ proposed application. 

(d) Epic Trust denies its acquisition of beneficial interests for the COG digital coins in Mr Cattermole’s metaverse is a scam. Those agreements are for the beneficiaries to assess and to decide whether to accept or reject. Mr Cattermole’s conviction in 2002 was not a minor crime and does not provide any proper basis for assuming he is involved in digital currencies in any similar way now. Epic Trust is not trying to be irresponsible in any way. xx 

[9] Mr Barker, for the liquidators, submits: (a) Epic Trust LLC is a one-euro Montenegrin company. There is no evidence on which Mr Henry can properly rely to say that Epic Trust has a relevant interest. It is not an account holder according to Cryptopia’s and the liquidators’ records. There is a genuine dispute as to whether Mr Stevenson has a claim. Even if he does, the purported assignment of his claim to Epic Trust is not valid. An agent has no ability to bring proceedings in its own name. The terms and conditions of the agreement between cryptocurrency owners and Cryptopia prohibit assignment and there is no evidence of cancellation. It is not obvious that term should be implicitly disapplied just because the exchange is no longer effective. If it were disapplied, the management of accountholder claims and verification would be even more complicated, which is not a cost that should be borne by the general body of account holders. 

(b) In the liquidators’ verification process, if an account holder is unable to recall the email address they used, there are seven to eight other indicators that can be used to satisfy the liquidators they are the account holder. An approximation of the balance of the holding is one of them. So, providing the balance to a claimant, which is the point of Epic Trust’s wish to be joined, could compromise the identification process. 

(c) It is not necessary for Epic Trust to be joined for the liquidators’ application to be determined. No one is named to represent the account holders because all issues could be spoken to by: counsel for the liquidators; Mr Watts KC as counsel assisting the Court regarding the interests of account holders; and Ms Cooper KC as counsel assisting the Court regarding the interests of creditors. All account holders were served with the application and leave was reserved for them to appear or apply to vary or rescind any orders made. 

(d) The Court should be reluctant to entertain any application from Epic Trust because Mr Cattermole is its shareholder. He has been held in contempt by the High Court on 7 July 2021 for improperly obtaining and retaining confidential information about Cryptopia including the email addresses of account holders. He appears to have breached the Court order in relation to the non-use of that information. The liquidators are concerned the offer to purchase account holders’ cryptocurrencies may have been misleading and deceptive. Furthering Epic Trust’s business venture is not a direct and direct interest in the relief sought by the liquidators. ... 

[19] Similarly, I do not need to decide on the validity of the purported sale and purchase agreement between Epic Trust and Mr Stevenson. Clause 6(a) expresses that agreement to be subject to the “laws of the Principality of Cogito ... to the exclusion of all other jurisdictions.” Cogito is a metaverse created by Mr Cattermole. It is not a foreign jurisdiction and its “law” is not foreign law recognised by this Court. Its “constitution” of April 2023 provides ultimate decision-making power to Mr Cattermole as Crown Prince of Cogito. There is no evidence of Cogito’s “laws”, including its “laws” of assignment of interests, even if this Court were to recognise the agreement as governed by those “laws”, which I do not.

The 'Principality of Cogito' is one of those internet-based pseudo states, unrecognised by any substantive nation and with laws - as indicated by Palmer J - that are unrecognised and do not supersede conventional law.  

Its website indicates

Cogito is revolutionary. A principality that breaks traditional borders and is open to e-residents from every country in the world. All human beings can apply, no age restrictions and no country restrictions. Our vision is that e-residents would support each other, to provide freedom of trade, interest-free finance, simple and low tax rates, education, and the ability to start investing. As an e-resident, we would encourage you to establish companies and asset protection trusts in the Principality of Cogito to protect your hard earned wealth. 

Principality of Cogito allows you to: 

build-wealth 

Build Wealth - The Principality of Cogito brings our global market together in the Cogito Metaverse, and in doing so breaks down boundaries and minimises local government control of finances. As a Cogito e-resident, you build wealth in a way that traditional banks and investment companies can not provide. You will eventually have access to a growing market of fractional investments, enabling small to large investments with a higher level of security and transparency. This will give you the ability to build wealth in a new way. 

flexibility 

Financial Flexibility - Cogito is the natural evolution to global digital currency where everyone is treated as equals. Cogito protects you from the financial limitations your government may place on citizens by not being influenced by exchange rates, by being taxed fairly, and by having an open and transparent global marketplace. 

security 

Security & Privacy - The Cogito Metaverse is built with the type of cutting edge security that you would expect from any financial institution around the world. In addition to this, the design of the Cogito Metaverse means that someone from outside the Cogito Metaverse cannot hack in and steal Cog and remove them from the Metaverse. This ensures there is a digital trail for any one attempting fraudulent behaviour.

The site explains 

In the context of the metaverse, the Principality of Cogito represents a virtual jurisdiction or digital realm within the broader Metaverse. It is a self-governing entity with its own set of rules and regulations. The principality operates under a constitution that serves as a fundamental framework for governance, protecting the rights and liberties of its citizens and ensuring that any attempts by potential tyrants to undermine those rights are exposed and prevented well in advance.

The Constitution indicates

The Head of State is the Prince, whose role is both as figurehead representing the Principality and over-arching protector of governance to ensure that any attempt by would-be tyrants to subvert or abuse the rights to Citizens is exposed and thwarted long before they achieve their objective. ... 

The succession to the Throne, opened by death or abdication, takes place by the direct and legitimate issue of the reigning Prince, by order of primogeniture with priority given to males within the same degree of kinship. In the absence of direct legitimate issue, the succession passes to the brothers and sisters of the reigning Prince and their direct legitimate descendants, by order of primogeniture with priority given to males within the same degree of kinship. If the heir, who would have acceded by virtue of the preceding paragraphs, is deceased or has renounced the Throne before the succession became open, the succession passes to his own direct legitimate descendants, by order of primogeniture with priority given to males within the same degree of kinship. If the application of the preceding paragraphs does not fill the vacancy of the Throne, the succession passes to an heir appointed by the Crown Council. The Throne can only pass to a person holding Cogito Citizenship on the day the succession opens. The Prince can exercise his sovereign powers if he has reached adulthood, fixed at the age of eighteen. During the Prince’s minority or in case the Prince is temporarily unable to exercise his functions, the Chairman of the Crown Council or some other member of the Crown Council elected by the Crown Council shall exercise the powers of the Prince.

There is no reference to corgis or baubles. Article 143-146 of the Constitution state 

The Prince is entitled to a personal remuneration calculated as one fortieth (2.5%) of the gross Transaction Tax charged as provided by law enacted as provided in the Property and Finance section of this Constitution. 

The Prince’s personal remuneration may not be changed except by an amendment to the Constitution. 

The category of Household Expenses shall include the Prince’s expenses incurred in the lawful discharge of his duties as representative of the Principality. 

The Prince’s Household Expenses shall be assessed and provided for in the National Budget adopted by the Executive Council as provided in the Property and Finance section of this Constitution

And if you want an AI as a citizen, the Principality ... 

is able to handle everything at once by recognising two classes of Citizen: Natural Person Citizens and AI Citizens. In the early stages, the Executive Ministers will be carefully selected AI Citizens with a built-in safeguard to allow Natural Person Citizens to take control away from AI Citizens if the latter appears to be running amok. 

What is an AI Citizen? 

The Prince selects a leading figure in public life whose advice the Prince believes could be valuable to the Commune of the Principality or who has demonstrated leadership and integrity in governance and would be both ethical and competent as a Minister of a particular regional commune or a particular portfolio. He also selects other personalities that he believes will provide a useful contrarian view to add some necessary diversity and cultural balance to avoid the risk of “herding” Citizens into a cultural prison. The Prince then “interviews” that personality using the latest and greatest AI tool available at the time to assess the responses and the accepts or rejects that personality as an AI Citizen. The Prince’s “interviews” with AI Citizens are available for review by Natural Person Citizens. AI Citizens are treated as adult Natural Person Citizens for all the purposes of this Constitution. Everything in this Constitution applies to all Citizens except for the safeguard regulations for voting and referendum

Payments

The Commonwealth's A Strategic Plan for Australia’s payments system: Building a modern and resilient payments system in June this year offers a 'Vision for the payments system': 

A modern, world class and efficient payments system that is safe, trusted and accessible, and enables greater competition, innovation and productivity across the economy. 

Principles to guide the future direction of the payments system: Trustworthiness, Accessibility, Innovation, and Efficiency

Key priorities and supporting initiatives: 

1) Promoting a safe and resilient system • Reducing the prevalence of scams and fraud • Strengthening defences against cyber attacks • Supervising systematically important payment systems 

2) Updating the payments regulatory framework • Implementing changes to the Payment Systems (Regulation) Act 1998 (PSRA) • Establishing a new payments licensing framework • Promoting competition by facilitating transparent access to payment systems • Enabling greater collaboration between payment system regulators • Reducing small business transaction costs 

3) Modernising payments infrastructure • Phasing out cheques • Upgrading systems • Maintaining access to cash 

4) Uplifting competition, productivity and innovation across the economy • Aligning payments system objectives and the Consumer Data Right (CDR) framework • Supporting the broader use of Digital ID • Uplifting digital and technological skills • Building public trust and confidence and supporting adoption of artificial intelligence (AI) 

5) Australia as a leader in the global payments landscape • Creating a regulatory environment that attracts and enables innovation • Facilitating cross border payments • Exploring the policy rationale for a Central Bank Digital Currency (CBDC) in Australia

The Plan notes 

The Australian payments system is increasingly digitised due to consumer preferences for frictionless transactions and evolving technology. Card based payments make up about 75 per cent of non cash retail payments, with 25 per cent of that volume coming via mobile wallets. ... 

As the Australian payments system continues to evolve and consumers’ needs change, there has been a shift away from traditional payment methods. There has been an almost 90 per cent decline in cheque volumes in the last 10 years, with cheques now comprising only 0.2 per cent of non cash retail payments in Australia. Cash use has also reduced significantly, with the share of retail payments made in cash falling from 27 per cent in 2019 to 17 per cent in 2022. However, cash in circulation is rising, indicating Australians’ demand for cash for the purposes of storing value, potentially for uncertain circumstances, remains high. ... 

The Government intends to enable greater choice for Australians in the way they transact for goods and services. The Government will focus on removing legislative and other barriers that entrench payment by cheques as well as phasing out government cheque usage by the end of 2028, with the eventual wind down of the cheques system in Australia by no later than 2030. This will be subject to further consultation with industry and stakeholders to determine the feasibility of this end date and an appropriate transition plan. 

There has been a rapid decline in the use of cheques in the past 10 years, which now comprise only 0.2 per cent of non cash payments in Australia. This has been driven by growing availability of card and electronic payments and consumer preferences for more efficient and low cost digital payments. This consumer led migration is consistent with the global trend towards digitisation, with some countries successfully managing the complete closure of their cheque systems. 

As cheque use declines, the per transaction cost of supporting the cheque system will continue to increase. Banks and financial institutions are taking steps to withdraw from the cheque system, such as ceasing issuance of cheque books for new customers. At the same time, many merchants are ceasing to accept cheques as a means of payment. 

Although cheques represent a narrow segment of our payments system today, they continue to be issued in relatively large numbers by some corporates and Government entities. They also continue to be used by certain cohorts of the population, particularly older Australians and those living in regional or rural areas or with limited digital proficiency or connectivity. Some types of businesses also rely more heavily on cheques (for example, charities and other not for profit organisations who take a large proportion of donations through cheques from their donors). As an advanced economy with well developed digital insfrastructure, Australia is well placed for an eventual withdrawal from the cheque system. Many stakeholders have indicated a strong desire to end the cheque system, with habit and legislative barriers being the most cited reasons for its continued use. However, with the increased adoption of faster, safer, and more seamless technology, there are now strong and readily accessible payment alternatives to cheques. These alternatives will also help deliver greater financial inclusion outcomes such as more clear and targeted customer communication and real time access to information to assist those cohorts of the community that are more susceptible to vulnerability. Transitioning away from cheques will help achieve greater efficiency, productivity and security in Australia’s payments system. It will remove barriers that entrench specific payment methods and promote payment neutrality, giving Australians greater choice in choosing how they pay. 

However, the Government is committed to ensuring that all Australians are supported in a transition away from cheque use. As banks and financial institutions continue to reduce cheque related services and parts of the economy cease accepting cheques as a way to pay, it is important to ensure that the transition is appropriately managed. The Government has a role to play in managing the transition away from the cheques system, coordinating a whole of economy approach in a manner that provides appropriate support, and minimises adverse impacts to consumers and businesses. 

In the short term, the Government will consult with industry and stakeholders to identify challenges, develop solutions and supports for affected users, and implement the changes required to ultimately close the cheques system. This would involve staged reforms, rather than a single change at the end of the proposed period. To this end, four main workstreams have been identified for ensuring a smooth transition away from the cheques system.

• The Government will work to reduce Commonwealth usage of cheques by working with agencies and departments with high cheque usage to develop a transition plan away from reliance on cheques. This includes identifying products, such as health services or tax payments, that will need viable and alternative forms of payment with the same level of reach and convenience as cheques. 

• The Government will support industry in promoting the use, and removing barriers to adoption of, alternatives to cheque products, especially for institutional and commercial uses of cheques that cannot be serviced through existing digital channels. Industry’s development of education and outreach programs to assist cohorts that are greater users of cheques will also be required. 

• The Government will explore changes to Commonwealth legislation that entrench the use and acceptance of cheques with a view to amending legislation. The Government aims to ensure that legislation mandating cheque use will become payment neutral in the future. As part of this process, the Government will consider the ongoing role of the Cheques Act 1986. 

• The Government will also work with state and territory counterparts to encourage a coordinated approach to transitioning away from the cheques system. This includes encouraging state and territory governments to amend legislation that mandates the usage of cheques in certain industries such as gaming and insurance. ...

Cash is an important payment method for certain groups in Australia and plays a vital role in their inclusion in the wider economy. Cash is still widely accepted as a means of payment by merchants, used as a store of value, and provides resilience to the payments system during outages where digital forms of money cannot be used. 

The use of cash as a method of payment has declined substantially in the last decade and this trend accelerated during the COVID 19 pandemic. According to the Reserve Bank’s Consumer Payments Survey, 13 per cent of payments were made using cash in 2022 whereas, in 2019, this share was 27 per cent. At the same time, financial institutions are reducing the number of branches and ATMs they operate across the country. APRA reports that over the 5 years to June 2022, bank branches have declined by 30 per cent in major cities, and 29 per cent in regional and remote areas. The number of ATMs in Australia have declined by approximately 25 per cent since the peak in 2016. 

The Government understands the important role cash still plays in our payments system and supports Australians having continued access to cash. The Government will work with the relevant agencies across the public sector and with industry to ensure that Australia has a sustainable cash distribution network that maintains adequate access to cash. Currently, Australians have good access to cash services with an estimated 95 per cent of the population living within around 5km of a cash access point as of June 2022. However, there are some communities in Australia that are facing a reduction in cash services more acutely, particularly those in regional and remote areas. These Australians typically have to travel further to access cash and are particularly vulnerable to the removal of cash access points, bank branches and cash distribution facilities. The declining transactional use of cash has led to a per unit increase in costs in distributing cash across the country. Australia’s two largest Cash in Transit (CIT) service providers, Armaguard and Prosegur, have responded to these financial pressures in recent years by downsizing or closing some facilities and reducing the frequency of CIT services. 

More recently Armaguard and Prosegur have applied for ACCC authorisation to merge their cash distribution and management, device monitoring and maintenance and ATM businesses to help create a more efficient and financially sustainable business. Merger authorisation includes both a competition assessment and public benefits assessment. The ACCC is expected to make a decision by 14 June 2023. The applicants have submitted that the merging of the businesses could help operations by achieving synergies. These synergies will better enable continued provision of CIT services across Australia in an environment where both providers reported incurring heavy financial losses due to declining demand. 

Regardless of the decision made by the ACCC on this application, the Government will closely monitor developments regarding access to cash for Australians, in close consultation with relevant regulators. This is to ensure that as cash reliance declines and the the CIT industry undergoes transition, the market can operate both efficiently and fairly, that the potential for disruptions that could impact cash access are identified early and minimised, and that Australians continue to have access to cash. 

The RBA is working to reduce impediments to improved efficiencies in cash distribution operations. This includes introducing transparent and standard contractual arrangements for the distribution of banknotes by the RBA as well as the establishment of a banknote distribution industry forum to facilitate more timely changes to make the distribution of cash more effective, efficient, resilient and sustainable. The Government notes the Senate Standing Committees on Rural and Regional Affairs and Transport Inquiry into Bank Closures in Regional Australia, in particular its investigation of the effect bank closures and the removal of face to face cash services are having on cash access. The Senate inquiry will report by 1 December 2023. 

The Government notes industry’s role in supporting the Bank@Post network which provides access to banking services through Australia Post outlets, including in 1,800 locations in rural and remote areas. The use of this network is supporting communities at a time of transition towards greater use of electronic payments, but may not fully address issues around access to cash for all Australians. 

The Government also notes work being done overseas to maintain access to cash and ensure infrastructure supporting cash access and availability is effective, sustainable and resilient. Initiatives in the UK include widespread adoption of cash at point of sale without a purchase, ensuring cash facilities are available in all communities and that there is broad coverage of free to use ATMs. ...

The Plan articulates the Regulatory Framework

The regulatory framework for Australia’s payments system is determined by the Government, regulators, and key industry bodies. .. 

The Government 

The Government designs and, through the Parliament, implements laws that determine the regulatory architecture for the payments system. Besides its rule making function, the Government is uniquely positioned to provide high level strategic direction for the payments system due to its role in setting system wide policy. 

The Government has a role in setting the overarching direction for the payments system by influencing the focus of agencies and regulators. A clear overarching direction from Government is critical for the payments system as the range of activities undertaken by businesses in the payments system cuts across the remit of several regulators. This feature of the payments system necessitates policy and regulatory responses to be coordinated and aligned. 

Regulators 

The Reserve Bank of Australia (RBA) and the Payments System Board (PSB) 

The RBA is the primary payments system regulator, covering the wholesale, retail and commercial payments systems. The RBA’s payments system policy is determined by the PSB, which sits within the RBA. 

The RBA’s regulatory powers are set out under the Payment Systems (Regulation) Act 1998 (PSRA), Payment Systems and Netting Act 1998, and Cheques Act 1986. In determining the RBA’s payments system policy, the PSB must exercise its responsibility in a way that best contributes to: • controlling risk in the financial system; • promoting the efficiency of the payments system; and • promoting competition in the market for payment services, consistent with the overall stability of the financial system. 

The responsibilities of the PSB are broad, covering both the high value wholesale payments system and retail and commercial systems, which have high transaction volumes but are of lower value. 

The Payment Systems (Regulation) Act 1998 (PSRA) is the primary regulatory framework governing payment systems. It authorises the RBA to impose regulatory requirements on participants in designated payment systems where it is in the public interest to do so. Intervention and regulatory action is generally preceded by industry consultations to explore non regulatory solutions first. Regulation is developed by the RBA closely with industry and relevant parties. 

Australian Prudential Regulation Authority (APRA) 

APRA is responsible for prudential regulation, including the licensing of Authorised Deposit taking Institutions (ADIs). APRA, alongside the RBA, also has the power to authorise the provision of Purchased Payment Facilities (PPFs), which are facilities that store funds for the purpose of making payments. 

Specifically, APRA supervises providers of PPFs that have payment obligations of over $10 million (with deposit like features), which are redeemable in the Australian currency and are ‘widely available’ (more than 50 users). The provision of PPFs is treated as ‘banking business’ and providers are regulated as a special class of ADI. 

Australian Securities and Investments Commission (ASIC) 

ASIC’s role in regulating the payments system includes licensing financial service providers and overseeing the ePayments Code to ensure consumer protection for electronic payments. ASIC licenses entities that deal in a financial product. Most relevantly for payment service providers, ‘non cash payment’ facilities are a defined type of financial product under the Corporations Act 2001. 

A person makes a non cash payment if they make payments, or cause payments to be made, other than through the physical delivery of Australian or foreign currency in the form of notes or coins. ASIC updates the contents of the ePayments Code and undertakes targeted compliance. The currently voluntary Code provides important consumer protections in relation to electronic payments, including ATM, eftpos, credit and debit card transactions, online payments, and internet and mobile banking. The Code provides key consumer safeguards and sets out the circumstances in which a financial institution will be liable to reimburse customers who lose money to an ‘unauthorised transaction’. 

Australian Transaction Reports and Analysis Centre (AUSTRAC) 

AUSTRAC has a role as a payments regulator under Australia’s Anti Money Laundering and Counter Terrorism Financing (AML/CTF) Act 2006. AUSTRAC regulates ‘designated financial services’ under the AML/CTF Act and imposes reporting requirements on entities in the financial system that provide those services. Designated financial services required to register with AUSTRAC include remittance services, digital currency token services, and the issuance of stored value cards that have stored value above a certain threshold. 

Australian Competition and Consumer Commission (ACCC) 

The ACCC has a wide remit on competition, consumer, and merger matters – as dictated by the Competition and Consumer Act 2010. In the payments system, the ACCC generally uses its powers to investigate potentially anti competitive behaviour, while also playing a role in assessing and authorising mergers (as seen with the eftpos, BPAY and NPPA merger in 2021). 

The ACCC is also progressing the Digital Platform Services Inquiry report which is being delivered in bi annual interim reports until 2025. The 5th Interim Report released in November 2022 made recommendations to address consumer and competition issues, including recommending a new competition framework for designated digital platforms to be subject to service specific codes. Treasury consulted on these recommendations and the government is considering their response to the report. The next interim report is due to be submitted to the Treasurer in September 2023 and will consider potential competition and consumer issues and benefits from the expanding ecosystem of digital platform providers in Australia.