Australia is further along the road to balanced crypto regulation than many other countries. This could position the country as a future hotspot for blockchain innovation. CoinIQ’s look at crypto laws in Australia will help you understand the environment crypto companies must operate Down Under.
Australian Crypto Laws Today
The Australian Digital Commerce Association (ADCA) is a non-profit group that promotes the country’s blockchain industry. After receiving criticism from an Australian Senate enquiry, the ADCA developed a self-regulatory code of conduct for all of its members. Independent auditors hired by the ADCA certify that blockchain businesses follow best practices.
Despite the industry’s efforts to regulate itself, Australia’s crypto companies are finding themselves subject to oversight from a number of Australian regulators.
Meet the regulators
Reserve Bank of Australia
The Reserve Bank of Australia (RBC) plays several roles as the country’s central bank. Besides setting monetary policy and maintaining the payments system, the RBC serves as the government’s banker.
RBC Governor Philip Lowe, like many central bankers, has a dim view of bitcoin and other cryptocurrencies as possible replacements for fiat. Lowe said in a late 2017 speech that “the current fascination with these currencies feels more like a speculative mania than it has to do with their use as an efficient and convenient form of electronic payment.”
Given cryptocurrency’s poor record as a form of payment, RBC regulators have taken a wait-and-see approach. Tony Richards, the RBC’s head of payments policy, said in a recent speech that “cryptocurrencies do not appear to raise any major concerns for the Bank given their very low usage in Australia…. Nor do they currently raise any major issues for the Bank’s monetary policy and financial stability mandates.”
Australian Securities and Investments Commission
The Australian Securities and Investments Commission (ASIC) enforces regulations in the financial services, consumer credit, market trading and business sectors.
The Australian Transaction Reports and Analysis Centre, commonly known as AUSTRAC, is the country’s financial intelligence unit. Similar to Canada’s FINTRAC and America’s FinCEN, AUSTRAC leads the Australian government’s fight against money laundering and terrorism financing.
Australian Taxation Office
The Australian Taxation Office (ATO) collects taxes, administers the goods and services tax (GST) and enforces tax laws.
In many ways, the taxes on cryptocurrency are the most easily understood crypto regulations. If you make money, you pay taxes. For the most part, ATO handles cryptocurrencies by treating them as assets.
That did not mean, however, that everyone understood how assets can be taxed. In early 2018, the ATO opened a cryptocurrency consultation seeking public input on crypto-to-crypto exchanges and crypto record keeping. More than 800 responses led the ATO to restructure its website and clarify its policies.
Even with the clarifications, taxation is a complex subject. The following highlights describe some situations where taxes apply to crypto transactions. You should consult an expert to understand your specific tax obligations.
Buying with crypto
In 2017, the ATO exempted cryptocurrencies from general sales taxes (GST). However, the use of cryptocurrency to pay for goods and services does trigger GST.
Mining and other crypto businesses
Companies that trade, exchange or mine cryptocurrency are not taxed under capital gains rules. Instead, the ATO applies trading stock rules to these crypto-based businesses:
“Proceeds from the sale of cryptocurrency held as trading stock in a business are ordinary income, and the cost of acquiring cryptocurrency held as trading stock is deductible.”
Other businesses that use cryptocurrency in their activities must account for the crypto like any other asset. Companies that purchase with cryptocurrency or accept crypto payments will treat the transaction like “any other non-cash consideration under a barter transaction.”
Individuals who run mining rigs on the side may not meet the requirements of a business. In that case, capital gains taxes would apply.
Crypto capital gains
Capital gains taxes may apply whenever an individual disposes of their cryptocurrency. The most common situations in which this may apply include:
- Selling or gifting.
- Trading or exchanging for fiat.
- Trading or exchanging for crypto.
- Converting to fiat currency.
- Paying with crypto.
Should the cryptocurrency be held as a personal asset, capital gains (and losses) may not apply. However, the ATO has specific guidelines that determine the nature of asset ownership.
The ATO has decided that a hard fork does not constitute an income or capital gains event. However, investors must assign a zero value to the new cryptocurrency when calculating future capital gains.
Calculating crypto taxes
All taxes are based on the cryptocurrency’s value at the time of the transaction. This can be an easy calculation when crypto is used to purchase goods or when crypto is traded for Australian dollars. In other cases, however, crypto traders will have to use exchange rates at the time of the transaction to calculate the taxable value.
Crypto tax scams
In March 2018, the ATO warned Australians of a new bitcoin scam. Criminals masquerading as ATO officials were calling people and demanding payment, in bitcoin, for “fake tax debts.”
“So far we have seen over $50,000 paid in Bitcoin to scammers claiming fake ATO tax debts,” said Assistant Commissioner Kath Anderson. “Once the scammers receive payment, it’s virtually impossible to get it back.”
Protecting Australian investors
As in many other countries, the scandal-ridden bull market of 2017-18 saw several scam initial coin offerings (ICOs) as well as ICOs that violated Australian securities laws.
Going after violators
Speaking to the Tyro FinTech Hub in April 2018, ASIC Commissioner John Price said that concerns over scam or incompetent ICOs ”undermine the market integrity of token-based products and services, and can ultimately impact on the attractiveness of the sector and affect its credibility within the broader financial system.”
ASIC uses a combination of legal action and education to protect Australian investors and help crypto projects raise money the right way. Most recently, in September 2018, ASIC stopped a crypto project from issuing its Product Disclosure Statement. The distribution of deceptive marketing materials, a failure to register and not holding an Australian financial services license were all reasons for ASIC to stop the project in its tracks.
“It is the legal substance of your offer – not what it is called – that matters,” Commissioner John Price said. “You should not simply assume that using an ICO structure allows you to ignore key protections there for the investing public…”
Warning the public
In May 2018, ASIC updated its information sheet on ICOs and cryptocurrency. The publication explains when an ICO could be regulated as a financial product, shares, derivatives or non-cash payment facilities.
The information sheet also explains how crypto trading platforms could cross the line to become a regulated financial market. In general, listing tokens that qualify as a financial product will turn the trading platform into a financial market.
ASIC also warned financial services companies that the creation of financial products that reference tokens, such as exchange-traded funds, would come under extensive and extended scrutiny.
Finally, ASIC updated its MoneySmart website to guide retail investors considering crypto purchases. The new site warned that “not all ICOs are cryptocurrencies. Some are high-risk investments in start-up blockchain projects that may be nothing more than an idea. Some have turned out to be scams.”
Combating crime and terrorism
In April 2018, AUSTRAC implemented new laws that require Australian crypto exchanges to comply with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006. These anti-money-laundering (AML) and counter-terrorism financing (CTF) regulations require businesses to collect their customers’ identity information and monitor their customers’ financial transactions. Exchanges must now report any suspicious activity or large transactions to AUSTRAC.
The regulator’s CEO, Nicole Rose, explained the rationale behind the new requirements. “It’s recognised that this reform will help protect [exchanges’] business operations from money laundering and terrorism financing, while regulation will also help strengthen public and consumer confidence in the sector.”
The exchanges had until mid-May to register with AUSTRAC. To help these companies’ transition into regulated status, the agency produced an AML/CTF guide for digital currency exchange services. The guide explains how to conduct an AML/CTF risk assessment as well as the kinds of procedures crypto exchanges need to put in place. This includes collecting and verifying know-your-customer (KYC) information.
Fostering Crypto in Australia
Australia is not known as a blockchain hotbed, but there is a concerted effort underway across the Australian government to help the country’s blockchain and DLT industry. The Treasury Ministry appointed a FinTech Advisory Group which includes leading members of the Australian blockchain industry.
Australia’s regulators have also developed programs to support innovative crypto companies and help established players use the new technology. This support led to a pioneering announcement in August 2018 when the World Bank tapped the Commonwealth Bank of Australia to issue a bond entirely through a blockchain-based system.
Supporting blockchain innovation
The ASIC Innovation Hub helps fintech startups, including blockchain projects, navigate the regulatory process. Officials provide informal guidance on how regulations might apply to a token-based project. ASIC will even grant startups a waiver that exempts the project from financial services regulations for up to 12 months. This regulatory sandbox makes it much easier to test new financial products and services without the cost and effort of regulatory compliance.
Advancing blockchain technology
Standards Australia is a non-profit organization charged with the responsibility to coordinates standards-setting in Australia. In 2016, the organization proposed the establishment of a blockchain-focused committee within the International Organization for Standardization (ISO). Meeting twice a year, the Australian-led committee hopes to create standards for blockchain interoperability, governance and other issues.
The Commonwealth Scientific and Industrial Research Organization (CSIRO) is Australia’s premier scientific research group. Through its Data 61 program, the CSIRO has funded several blockchain-based research projects. The Red Belly Blockchain project, for example, developed techniques to increase transaction rates and make cryptocurrencies more resilient in the face of double-spending attacks.
The Australian government is also considering how it can adopt distributed ledger technologies. Blockchain advocates inside and outside the government focus on DLT’s potential to make government operations more transparent, secure and efficient.
For example, the Digital Transformation Agency (DTA) has set aside AUD $700,000 “to investigate the use of blockchain for government services.” The money will fund studies of technology readiness and a possible pilot project in 2019.
Taking the Australian dollar digital
The RBC has taken a close look at what distributed ledger technology (DLT) could mean for Australia’s national currency. “A convincing case for issuing Australian dollars on the blockchain for use with limited private systems has not yet been made,” is how Philip Lowe described the RBC’s conclusion in a late 2017 speech.
Having said that, the RBC is discussing DLT topics with Australia’s fintech startups along with the country’s financial establishment. The conversations help Australia’s central bankers understand the risks, benefits and technological issues presented by DLT integration in the financial system.
Tony Richards touched on this in the speech mentioned earlier. Distributed ledger technology, he speculated, could form the basis for a new payments settlement system for banks and businesses. “At the moment, it does not appear that a strong case has emerged for us to provide this new form of central bank money,” Richards said, “but we have an open mind.”
Compared to other countries, Australia is much further along in the process of integrating its crypto industry into the mainstream economic system. Australia’s proactively balanced approach to its growing crypto industry places an understandable priority on protecting the public and investors. Nevertheless, the Australian government has taken the steps needed to foster homegrown blockchain innovation.