Cryptocurrencies in Australia

The economic benefits and risks of cryptocurrencies to the broader community, including business and investors

Cryptocurrency is a digital currency secured by cryptography designed to make it nearly impossible to be counterfeited or double-spent. While cryptocurrencies can benefit the broader community, including businesses and investors, this currency faces criticism for various reasons.

Cryptocurrencies are often formally described as intangible property, a means of payment, and a service. Therefore, from a tax perspective, “cryptocurrencies may be covered by the income and capital tax concepts as well as Goods and Services Tax (GST)” (Guglyuvatyy, 2020). Treating cryptocurrency the same as an asset as well as a currency may result in double taxation.

Unlike cash or credit systems, your financial history is kept private, protecting you from the threat of account or identity theft, as your information may be exposed at any time in the transaction chain. Though cryptocurrencies are unregulated by Central Banks, which makes them theoretically immune to government interference or manipulation, their nature allows for their semi-anonymous nature to be suited for illegal activities; “the currency of choice for many drug dealers and extortionists. The criminal activities extend to money laundering or tax evasion, Ponzi schemes and theft” (Kethineni et al., 2019), albeit some cryptocurrencies are more private than others.  Cryptocurrencies are far less liquid than other investments, such as direct equities.

However, they “constitute an emerging alternative asset class, and their inclusion in portfolio allocation benefits stock investors” (Demiralay et al., 2020).  There is also a concern regarding the security of cryptocurrency. For example, “in Bitcoin’s 10-year history, several online exchanges have been the subject of hacking and theft” (Frankenfield, 2021). Cryptocurrency can add a further level of diversification to an investor’s portfolio due to its different asset classes and low correlation; however, “investors should recognise the qualitative and quantitative risks typically associated with an investment in cryptocurrency, such as the high price volatility” (Van Der Merwe, 2021).  High volatility gives an indication of the level of uncertainty associated with that type of asset due to its erratic behavior and instability. Investors should consider this when making their decision.

That being said, cryptocurrencies are designed to make it easier for users to transfer funds directly to one another without involving a third party, as they take place on a peer-to-peer networking structure. This aims to minimize the risk of incorrect transfers, increase accountability, and clarify audit trails. These transfers are also usually completed with minimal fees compared to the higher fees charged by financial institutions.

Cryptocurrencies are technologically structured to “encourage a deflationary attitude and a relatively stable store of value,” similar to how gold supports investors to aid the broader community in hedging against inflation. Given the current economic environment, it is argued that now, more than ever, inflationary hedges are essential. Cryptocurrencies “might play part of this role for the 21st century, as gold did for the 20th century (post GFC)” (Huang, 2020).

Whether the legality of cryptocurrencies should be revised in Australia

Given the criticism that cryptocurrency faces, the risks associated with this digital asset, and “the fact that digital currencies are a relatively new development where current legislation is typically not designed with digital currencies in mind” (Guglyuvatyy, 2020), it is appropriate to revise its legality to ensure that it remains appropriate for Australia’s economy and population.

In 2017, Australia’s government announced that cryptocurrencies were permitted in Australia and subject to Anti-Money Laundering and Counter-Terrorism Financing Act 2006. In 2018, AUSTRAC, Australian Transaction Reports and Analysis Centre, implemented new laws for digital currency exchange, requiring all digital currency exchanges operating in Australia to be registered with AUSTRAC and comply with relevant regulations. This reform aims to “help strengthen public and consumer confidence in the sector and protect their business operations from money laundering and terrorism financing” (Commonwealth of Australia – AUSTRAC, 2018) by requiring such exchanges to identify and verify their users, maintain records, and comply with government reporting obligations. If these exchanges do not comply, they are subject to financial and criminal penalties.

Furthermore, in 2019, the Australian Securities and Investments Commission (ASIC), Australia’s integrated corporate, markets, financial services, and consumer credit regulator, issued updated regulatory requirements for cryptocurrency trading. There is still uncertainty as to ASIC’s role. “There is an argument that ASIC can regulate digital currency as it is considered a ‘financial product’ in 763A of the Corporations Act…however, at this stage, the view is untested” (Duffy et al., 2019). In 2020, Australian regulators unauthorized some cryptocurrencies due to their nature of anonymity.

Additionally, given the “recent revelations that have exposed serious flaws in Australia’s financial industry will undoubtedly affect the way AUSTRAC approaches future compliance enforcement and will likely lead to increased scrutiny and a tightening of regulatory controls across the board” (ComplyAdvantage, 2021).

“Though government has begun to move on digital currency, more is required, and ASIC needs to rise to the regulatory change” (Duffy et al., 2019). It is evident that Australia has been quite progressive and proactive regarding cryptocurrency regulation and is continuing to revise the digital asset’s legality to ensure a clear operational framework for cryptocurrency and the relevant businesses. Given the nature of cryptocurrencies and the level of risk and volatility associated with the asset, the legality must be continuously revised to ensure that investors and the broader economic environment are protected against uncertainty.

How the current regulation of cryptocurrencies in Australia could be improved to optimize its potential economic benefits

The primary step for regulating cryptocurrencies is for the governments to determine whether or not they wish to implement active support, tolerance with regulation, or opposition.

Given the rise of cryptocurrency and the risks associated with the financial asset, it is essential to have a regulatory body responsible as well as input from the Commonwealth Government to develop a strategy that deals with digital currency. There is a question surrounding “Commonwealth Government-backed digital currency … and whether it could work effectively” (Duffy et al., 2019). Having one body, such as ASIC (as it is currently classified as a financial product) regulating digital currency can act to mitigate potential harm over the volatile asset. Also, having commercial certainty over the asset will provide investors and the broader community with greater clarity on what is permissible and protect these users.

From the consumer protection perspective, Australia should provide adequate disclosure of risk factors and warnings to help users accurately and appropriately assess the investment. Better disclosure will reduce information asymmetry and inefficiencies, which will also serve to protect users from enhancing the associated benefits.

The benefits discussed previously include a decrease in transaction costs, an increase in transparency, the removal of third-party interference, a decrease in identity theft, etc. With the rise of digital currency, “tolerance with regulation may be the ‘least-worst’ policy for the present,” so improving the regulation within Australia will allow consumers to maximize the benefits of cryptocurrency. 

However, if the Commonwealth Government were to implement active support, there would be a risk of an increase in the cost associated with digital currency, such as transaction fees, as a direct result of the increase in governance and relative operational and compliance resources. If the fees are too low, then maintaining the regulation will not be feasible, and if they are too high, the value and incentive of cryptocurrency decrease.

One of the main benefits of cryptocurrency is that it is unregulated. Although this has some uncertainties for users and the economic environment, it provides investors more flexibility. If the digital currency was to become fully backed by the Government, for example, with the introduction of ‘eAUD,’ the restrictions could outweigh the benefits. That being said, it is important that Australia imposes some rules around business activity to ensure it is legally trading and is in the best interest of its consumers. As such, “a new commercial law that lays out rights and liabilities of cryptocurrency users robustly and transparently” should be implemented” (Huges et al., 2015).

References

Commonwealth of Australia – AUSTRAC. (2018). New Australian laws to regulate cryptocurrency providers. Retrieved from https://www.austrac.gov.au/new-australian-laws-regulate-cryptocurrency-providers

ComplyAdvantage. (2021). Cryptocurrency Regulations in Australia. Crypto Regulations Around the World. Retrieved from https://complyadvantage.com/knowledgebase/crypto-regulations/cryptocurrency-regulations-australia/

Demiralay, S & Bayraci, S. (2020). Should stock investors include cryptocurrencies in their portfolios after all? Evidence from a conditional diversification benefits measure. International Journal of Finance & Economics. 1 – 17. Retrieve from  https://doi.org/10.1002/ijfe.2116

Duffy, M & Latimer, P. Deconstructing digital currency and its risks: Why ASIC must rise to the regulatory challenge. Federal Law Review. 47(1). Retrieved from https://search-informit-org.ezproxy-f.deakin.edu.au/doi/epdf/10.3316/agispt.20190618012544

Frankenfield, J. (2021). Cryptocurrency. Investopedia. Retrieved from https://www.investopedia.com/terms/c/cryptocurrency.asp

Guglyuvatyy, E. (2020). Regulating a new phenomenon: examining the legal nature and taxation of cryptocurrencies in Australia and Singapore. Australian Tax Forum. 35(3). 351 – 367. https://eds.b.ebscohost.com/eds/pdfviewer/pdfviewer?vid=5&sid=4607eb44-13ab-4761-af6a-af69eb30e572%40pdc-v-sessmgr02

Huang, R. (2020). Bitcoin vs. Inflation. Forbes. Retrieved from https://www.forbes.com/sites/billybambrough/2021/04/02/jpmorgan-reveals-big-bitcoin-price-prediction-as-bitcoin-and-crypto-market-surges-toward-2-trillion/?sh=5e55fdfb2801

Hughes, S & Middlebrook, S. (2015). Advancing a Framework for Regulating Cryptocurrency Payments Intermediaries. Yale Journal of Regulation. 32(2) 494 – 559. Retrieved from https://eds.b.ebscohost.com/eds/pdfviewer/pdfviewer?vid=27&sid=e2bbb930-ead0-4b82-9385-b78a17332991%40pdc-v-sessmgr02

Kethineni, S & Cao, Y. (2019). The Rise in Popularity of Cryptocurrency and Associated Criminal Activity. International Criminal Justice Review. 30(3) 325 – 344. Retrieved from https://journals-sagepub-com.ezproxy-b.deakin.edu.au/doi/pdf/10.1177/1057567719827051

Van Der Merwe, A. (2021). A Taxonomy of Cryptocurrencies and Other Digital Assets. Review of Business. Vol 41(1) 30 – 43. Retrieved from https://eds.b.ebscohost.com/eds/pdfviewer/pdfviewer?vid=13&sid=123092c2-5144-4c67-b47c-d135614137f1%40sessionmgr103