Virtual Currencies and Legal Regulation
Tuesday 26 August 2014 @ 12.22 p.m. | Legal Research | Trade & Commerce
On July 23, 2014, the New York State Department of Financial Services (NYSDFS), the governmental agency that regulates the financial services and insurance industries in New York, released proposed regulations governing the use of virtual currencies in New York State (Proposed Rule). Australia as yet has been reticent to accept any form of virtual currency.
History of Virtual Currency
Virtual currencies and other cryptocurrencies, such as Bitcoin, are financial and technological instruments that incorporate characteristics of money, accounting, networks and remittances into one concept. Bitcoin has been gaining traction as a decentralized, digital currency since it was officially launched in 2009.
Although virtual currencies are not considered “lawful money” in most countries across the world, the number of virtual currency users is growing rapidly beyond the scope of the banking industry. As such, the need to implement regulations to reduce the operational and systemic risks associated with the virtual currency industry and to protect consumers from financial harm is paramount to ensure the survival of a multibillion-dollar system with more than one million users.
New York Proposed Rule
Drawing heavily from New York’s banking industry regulations, the Proposed Rule establishes a strict regulatory regime that will require companies currently operating under the virtual currency model to drastically change their business practices. It includes regulations covering:
- Definition of "virtual currency";
- Licensing requirements to engage in a "virtual currency" business activity;
- Applications and licensing submission processes; and
- A compliance regime for people engaged in a "virtual currency" business activity.
Reaction in Australia
Predictably, in Australia, the Australian Taxation Office (ATO) has been the first government department to release guidance on how to treat virtual currencies and other cryptocurrencies.
The ATO's announcement has said Bitcoin or other digital currency payments will be taxed like a non-cash barter transaction. The announcement dashes the hopes of Australia's digital currency industry and raises fears of the end of Bitcoin's growth in Australia, as businesses move offshore to countries with more favourable laws.
Only about 1000 businesses in Australia currently accept Bitcoin as payment. It is transferred via the internet, and, as such, countries have limited control in how it is moved around the world.
Many local businesses which accept Bitcoin as payment for goods or services had been hoping the internet currency would be treated under tax law as the same as money or foreign exchange. Doing so makes record keeping and taxation requirements significantly easier and it also avoids double taxation as, under the ATO's view, businesses buying digital coins will have to pay GST on the Bitcoin and on the services they offer.
Ron Tucker, the chair of the Australian Digital Currency Commerce Association and a partner at BitTrade, a digital currency trading service has stated:
"The way they've chosen to interpret how it should be applied is unfortunately very stifling for emerging Australian digital currency businesses and the industry as a whole...It's essentially a double GST effect. It is adding 10 per cent tax on the entire supply of the Bitcoin. So if the Bitcoin is worth $500 today, you'll be paying 10 per cent tax on that, as well as the GST on the service or commission fees that the Bitcoin companies may charge."
The ATO's Michael Hardy defended the tax office's guidance on digital currencies:
"It's the law. We don't make it up, we have to look at the existing law that we have...It just doesn't fit the legal definitions [of money or foreign currency], so we can't pretend that it is something what it's not."
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