Advances in modern technology mean the world is rapidly moving away from the era of a cash-based society. With an increase in global connectivity and greater focus on transacting business and making purchases via the internet, digital currency has become a simple and easy solution for many businesses and individuals.
Along with such a fluid payment medium, however, comes an increased risk of crime, particularly in the areas of money-laundering, funding terrorism and theft of funds from bank accounts.
Internationally, lawmakers and legislators have acknowledged the emerging opportunities and threats of digital currency, and have sought to impose regulations to deal with them.
We consider what Australia’s response has been, and how this has differed from other countries.
What is digital currency and how does it work?
As identified in the Attorney-General’s Department’s submission to the Senate Economics References Committee Inquiry into Digital Currencies in December 2014, there is no hard and fast definition of digital currency. The difficulties defining the concept arise from the rapid pace of technological advancement.
Broadly, the key umbrella terms relating to digital currency are as follows:
• Convertible currencies – as the name suggests, these can be transferred back into “real world” value and exchanged for cash or another type of generally accepted financial medium.
• Non-convertible currencies – these are created and exist wholly within an online forum such as a game or digital store and cannot be converted into another medium. All non-convertible currencies are centralised.
• Centralised currencies – released, overseen and implemented by a central administrator who holds complete power over the currency, including its value and terms and conditions of its use.
• Non-centralised currencies – effectively, unsupervised and uncontrolled digital currencies which have no central power or administrative base.
Key threats of digital currency as perceived by Australia
Australia has identified concerns about the potential for money laundering through digital currency, such as Bitcoin. According to the Australian Transaction Reports and Analysis Centre (AUSTRAC) in its 2011 Money Laundering in Australia and Terrorism Financing in Australia 2014 reports, digital currency is particularly attractive to criminals because of:
• Rapid technology developments
• Dynamic changes to the industry
• The promise of anonymity
• The potential for abuse of sending currency to or from a country with a weak anti-money laundering or cyber crime legal regime.
Australia’s Regulatory Response
The submission notes that Australia’s current digital currency regulatory regime under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) only encompasses those currencies which are backed by either precious metals or bullion – that is, clear-cut convertible currencies.
The difficulty with this approach is that the vast majority of digital currency is not backed by precious metals or bullion.
However, a loophole in the definitions of digital currency means that most digital transactions will at some point need to become convertible currencies to have any real value in the current global system.
This means that all large-scale (and therefore potentially concerning) transactions must at some point involve the transfer of “real” money into digital currency or vice versa – and this transfer of actual funds brings such transactions under the purview of Australia’s traditional banking and regulatory regime.
Nonetheless, relying on this current gap in technology is an unsatisfactory solution for Australia, which will need to play legal catch-up as digital currencies evolve.
The international regulatory response
By contrast, the United States’ response has been to release clarifying guidelines regarding the application of the Bank Secrecy Act in relation to digital currencies.
This has made it clear that people who administer or exchange (as opposed to simply “spend”) in digital currencies are potentially liable to the full range of offences under American anti-money laundering and counter-terrorism financing legislation. Individual states such as New York have also proposed specific regulatory frameworks in relation to popular crypto-currencies such as Bitcoin.
More emphatically, Canada has enacted legislation which treats all digital currencies as “money services businesses” (MSBs) under its anti-money laundering/counter-terrorism financing legal framework.
• All dealers in digital currencies must comply with recording and reporting rules imposed on “real” financial dealers.
• MSBs must register with the government-administered FinTRAC and subsequently complete an appropriate legislative compliance program.
• Traditional banks are restrained from dealing with MSBs which are not registered appropriately.
• The legislation applies both to businesses existing within Canada and those directing services at people and companies located in Canada.
The position in Europe and the UK is slightly less clear. Although there have been numerous directives canvassed by the EU in relation to the use of digital currency, as well as some consideration provided by the European Central Bank as to what constitutes digital currency, no formal legislation has been enacted yet.
In the UK, consideration has been given as to the regulation of digital currencies, but despite these discussions having taken place some years ago, there does not appear to have been any formalisation of regulation to July 2017.
Like many aspects of modern technology, digital currencies are growing quickly in popularity. Although Australia (and many other countries) has taken some steps to recognise the risks of digital currency and impose appropriate regulations, further action will be required to keep up as currencies continue to evolve.
Nyman Gibson Miralis provides expert advice and representation in all aspects of digital currency law.
Contact us if you require assistance.