In today’s connected society, digital currency and encryption are becoming more mainstream.
Both are becoming more regulated globally, due to the potential for use in illegal activities.
What is digital currency?
Digital currency (also referred to as online or virtual currency) is an electronic form of money. It is largely unregulated, and is usually issued and controlled by its developers, not by national financial bodies such as central banks.
Digital currency has some of the same qualities as traditional money. Subject to acceptance by vendors, it can be used to buy a new vacuum cleaner online or be converted into another currency.
But digital currencies also allow for:
- Greater anonymity,
- Instantaneous transactions, and
- Borderless transfer of ownership.
These factors are often exploited by criminals.
Unlike banks, many digital currency platforms do not require identity verification to open an account.
Cryptocurrency and blockchain technology
Cryptocurrency is a type of digital currency created through blockchain technology. A cryptocurrency unit is a digital token created from code using an encrypted string of data blocks. Cryptocurrencies can be bought or sold through digital currency exchange platforms.
Cryptocurrencies do not have any intrinsic value. Their value is determined by what people are willing to pay for them.
Bitcoin is the most well known cryptocurreny in circulation. It is a decentralised global payment system, not backed to any asset or linked to any organisation (such as the Reserve Bank of Australia). Bitcoin miners can use software to validate transactions in the Bitcoin process, earning new Bitcoins.
It is quick and relatively easy to get Bitcoin online. Bitcoin is increasingly used by criminals to launder proceeds of crime, and ransomware payments are demanded to be paid in Bitcoin as this presents challenges to law enforcement in tracing the payments.
Regulating digital currency
The Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) Act 2006 does not directly regulate or limit the use of digital currencies, however it places strict reporting and registration obligations on digital currency exchange service providers.
Digital currency exchanges are required to:
- Register with the Australian Transaction Reports and Analysis Centre (AUSTRAC),
- Implement compliance programs aimed at verifying the identity of their customers, and
- Report suspicious matters and transactions.
These regulations make it harder for people to anonymously transfer digital currencies. This reduces the opportunity for money laundering and criminal activity to occur, and increases the capacity of authorities to maintain some degree of monitoring of this space.
What is encryption?
Encryption is a form of electronic protection that converts data, such as text messages, into a form that cannot be read by another person or program.
An algorithm ensures that only the intended receiver can convert messages back into readable text. The “cryptographic key” to the algorithm, which is contained in the intended receiver’s device, is required to view messages in their original decrypted form.
End-to-end encryption refers to encryption security used by services such as WhatsApp. These services only allow the sender and recipient to view a message. Third parties, including the service provider, aren’t allowed to decrypt messages.
Encryption is a vital and commonly used mechanism for safeguarding online privacy and protecting digital data. However, people can exploit encryption to enable crimes such as organised crime, child abuse and terrorism.
Encryption laws in Australia include the Telecommunications and Other Legislation Amendment (Assistance and Access) Act 2018, also known as the Assistance and Access Act, which impacts on a range of commonwealth legislation.
The Act empowers law enforcement and national security agencies to request or compel assistance from communications providers, forcing companies to grant access to encrypted messages.
Review our Submissions to the Telecommunications and Other Legislation Amendment (Assistance and Access Bill) 2018.
Review our Submissions to the Inquiry into the impact of new and emerging information and communications technology on Australian law enforcement agencies.