The debate around Bitcoin and how it should be regulated in Australia is heating up as the Canberra tries to get its head around the impact of digital currency technology on the Australian economy.
Bitcoin – a decentralised digital currency or ‘crypto-currency’ in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds – has long moved from a niche tool for libertarians to ‘stick it to the man’ to a legitimate payment option considered by financial giants like PayPal and Amazon.
But while our lawmakers deliberate on how to treat Bitcoin, promising local start-ups in the crypto-currency space, like CoinJar, are moving offshore.
For CoinJar founder Asher Tan the Australian Tax Office’s decision in August to not treat Bitcoin and other crypto-currencies as money was just the latest example of why innovation in the local “FinTech” sector has been hard to come by.
“I don’t think FinTech companies can be globally competitive remaining in Australia,” Tan says definitively.
CoinJar, which offers users a Bitcoin wallet and is aiming to become a major player in the worldwide digital finance space, moved this week to the UK in a move that will strategically position the company centrally in Europe and also exempt it from the 10 per cent GST placed on all Bitcoin transactions in Australia.
In contrast, the UK government treats bitcoin as ‘private money’, meaning owners are not liable for capital gains tax or VAT, and its approach has been widely lauded as being progressive and forward-looking.
It’s this progressive thinking that has made UK the desired destination for Tan.
“I think there’s a very supportive and very considered effort by the UK government to position themselves as a world leader in FinTech. Australia is just not as welcoming,” Mr Tan says.
Fostering a viable local FinTech industry, and the place of the likes of Bitcoin in that space is the latest industry disruption the Australian government is trying to come to grips with.
While the positives of Bitcoin’s potential are clear to advocates – anonymity, payment freedom, low fees – less clear is how to best regulate digital currencies and protect both consumers and other stakeholders like governments, from threats like money laundering and economic terrorism.
The challenge is to engineer a solution that’s secure but doesn’t fundamentally diminish the features that make Bitcoin great.
Keep up or give up?
A senate hearing last week headed by the Senate Standing Committee on Economics heard from experts both from Australia and internationally, with speakers calling for Australia to keep up with global trends.
“The lack of regulatory framework or regulatory oversight is one of the key drivers for lack of investment in this space,” managing director of ABA Technology Christopher Guzowski told the committee.
According to Guzowski, the industry needs resources to finance very smart, expensive people in Australia to stay and innovate locally.
When it comes to retaining the necessary talent, we just aren’t attractive enough and that sentiment is also echoed by Andrew Sommer, a partner at commercial law firm Clayton Utz.
Speaking to committee, Sommer called on the federal government to treat Bitcoin as a currency and to begin a process of regulation.
“The take up rate of Bitcoin can be slowed by the domestic tax treatment, particularly in the GST/VAT space, where GST or VAT is imposed on the acquisition of bitcoins as part of a trading transaction,” Sommer said.
“It makes it much more difficult and much less economically viable for me to take my Australian dollars and go and convert them into Bitcoin if one eleventh of that transaction is going to be lost in GST at the point that I do that. And for consumers that one eleventh cost is a real cost. And that’s the consequence of treating Bitcoin like a commodity rather than as a currency.”
Labor senator and committee chair Senator Sam Dastyari is an unabashed Bitcoin fan, and recently told the AFR that while this year’s ATO decision was significant it was instead Australia’s banks who were responsible for holding Bitcoin back, describing them as “acting like a bunch of ostriches” with their heads in the sand.
Australia’s banks – the most profitable in the world – have been closing the accounts of Bitcoin-related businesses over the last couple of years saying they’re too risky.
Senator Dastyari says however, that digital currencies are the future and the banking sector “has a tendency to try and pretend that change isn’t coming down the pipeline, in a bid to protect what is their own market position.”
The Commonwealth Bank shut down Coinjar’s accounts last year, leaving the start-up with hundreds of thousands of dollars in frozen assets and potentially scaring Australian users away from Bitcoin, while NAB closed accounts of all Bitcoin-related customers in May this year.
The banks provided a submission to the senate committee through the Australian Bankers’ Association, which represents 24 member banks in Australia, including NAB and CBA, highlighting Bitcoin risks for both consumers and government without highlighting any of the digital currency’s benefits.
It also doesn’t trust the digital currency industry to regulate itself – a position prompted by highly publicised security issues like last year’s infamous Silk Road FBI bust and Bitcoin exchange Mt Gox’s collapse which cost investors about $US480 million.
“The ABA does not support a self-regulation model for providers of digital currencies or participants in the digital currency industry,” the association said in its submission, arguing for an “appropriate consumer and investor protection regime focussing on conduct and disclosure standards applicable to issuers of digital currencies.”
But try telling that to Ron Tucker, chairman of industry lobby group the Australian Digital Currency Association (ADCCA), who told Business Spectator his organisation is already working on a voluntary association model set to launch next year.
Tucker said Bitcoin-centred businesses will have the ability to apply for certification from ADCCA, which will include a set of background checks on the directors of businesses, as well as an audited anti-money laundering system. Businesses would also have to acquire professional indemnity insurance and answer to a digital financial services ombudsman.
A final requirement would see a regulation in which members would be forced to identify themselves to law enforcement in certain situations.
“With Bitcoin you can trace every transaction from A to Z and see every movement in a way that’s never been possible before,” Mr Tucker says.
Though it might be hard to swallow for some of Bitcoin’s earliest adopters, the digital currency will inevitably need some form of consumer protection for it to be fully embraced by the mainstream. For the moment, the risk of cowboys running wild, and big collapses as was seen with Mt Gox, is still too real.
Despite the reticence of the banks Tucker is optimistic, saying that he left the senate chamber last week feeling positive.
“To try and put Bitcoin into a pre-existing regulatory structure would be counterproductive and would disadvantage Australia in the global FinTech marketplace … the technology behind Bitcoin means it is safe, secure, transparent and accountable. A transaction cannot be hidden, nor is anonymous,” Mr Tucker said.
“This is a key moment for Bitcoin both in Australia and the world.”
Bitcoin or bust
Sunday’s release of the Murray report, which is expected to recommend sweeping institutional changes for the financial services industry and is set to be the biggest overhaul of Australia’s banking and superannuation since the Wallis inquiry almost two decades ago, will force Australia’s banks to re-think the way they’ve traditionally gone about their business.
And that includes thinking about Bitcoin.
The hard truth for banks and governments is that disruption is happening whether they like it or not, and businesses and their customers will simply go elsewhere, whether that be within Australia or to somewhere like the UK, if their needs aren’t being met.
Innovate or bust – it’s the message being heard across industries and across verticals, and heeding it may just give Australia a fighting chance at being a desired destination for Bitcoin, rather than somewhere worth fleeing.
The senate committee is scheduled to report its findings in March 2015.\