25 Dec 2017
The lack of formal recognition and regulation of bitcoin in Australia has created serious problems for many, including traders, and the relationship between multiple digital currency exchanges and banks has been difficult.
However, towards the end of year there has been a massive shift in the state of play – namely the introduction of the Anti-Money Laundering and Counter-Terrorism Financing Amendment Bill 2017, also known as the ‘Bitcoin Bill’, which passed the Australian parliament on 7 December.
What is it all about?
Basically, digital currency exchanges are set to be regulated under Australia’s anti-money laundering and counter-terrorism financing (AML/CTF) regime.
Amongst other changes, the Bill amends existing legislation to give Australia’s financial intelligence agency AUSTRAC the power to monitor and regulate digital currency exchanges via a new centralised register.
The legislation is intended to follow guidance from the Financial Action Task Force in on applying risk-based approaches to digital currencies to address the potential for money laundering and terrorism financing.
A key recommendation of the FATF’s guidance is focussing on digital currency exchanges as the key point at which digital currencies interact with the regulated financial system.
Under the legislation, digital currencies will effectively be treated in the same way as money in traditional financial institutions for AML/CTF purposes.
AUSTRAC will create a new Digital Currency Exchange Register which all businesses exchanging digital currencies for money will be required to apply to enrol in.
If accepted, digital currency exchanges will have to adopt and maintain AML/CTF programs similar to traditional financial institutions, including verifying customer identity, suspicious transaction reporting and keeping records of transactions and associated customer identities for seven years.
Harsh penalties including up to AU$2 million in fines or seven years’ jail will be imposed for failures to comply with the new regulations.
This is only the latest in a number of recent efforts by Australian authorities to manage the impact of digital currencies.
According to EY’s FinTech Australia Census, digital currencies and exchanges made up about 4% of fintech businesses in Australia in 2017.
Other uses of blockchain for fintech also play an increasingly significant role in Australia’s finance industry. For example, on the same day as the AML/CTF legislative amendments passed in parliament, the Australian Stock Exchange announced its plans to move to a blockchain-based distributed ledger system to track transactions, settlements and company ownership.
In general the approach of Australian authorities has been to try to integrate digital currencies under existing regulatory frameworks whilst still encouraging financial innovation.
In September the Australian Securities and Investments Commission (ASIC) released a guide to Initial Coin Offerings for investors, and in November the Australian Taxation Office released a guide on the treatment of digital currencies under tax laws.
Another move which was especially welcomed by the digital currencies community was the removal of Goods and Services Tax on purchases of digital currencies.
The government itself has invested millions in Power Ledger, the first Australian company to hold an ICO. Legislation currently exists in draft form to create a fintech “regulatory sandbox” which would allow fintech startups to experiment without facing the full regulatory burden of the rest of the sector.
Reactions to the new AML/CTF regulations amongst the digital currency community have been largely positive. Community representatives and peak bodies, particularly the Australian Digital Commerce Association (ADCA), played a major role in helping to shape the legislation see it as an important step towards integrating digital currencies into the mainstream and establishing them as a legitimate part of the finance industry.
“This is a reform that ADCA has been calling for. We have been delighted to work with the Attorney-General’s Department and AUSTRAC on a sensible regime to provide business certainty and confidence to consumers,” says Leigh Travers, ADCA’s Deputy Chair. ADCA voluntarily incorporated AML/CTF measures into its Code of Conduct released in 2016, and initially lobbied for a self-regulatory model to be co-enforced by ADCA and AUSTRAC.
A big part of why the digital currencies community has been so welcoming of the new regulatory arrangements is that it is expected to improve the often difficult relationship between digital currency exchanges and the banks.
During the industry consultation process, multiple digital currency exchanges claimed to have experienced problems working with Australian banks due to perceptions of risk associated with their businesses, including being denied services or having accounts shut down.
“The issue of access to banking services is key to the growth of a local digital currency industry. Blanket classification of all bitcoin businesses and users as “high risk” customers is both inappropriate and disproportionate,” said the Bitcoin Foundation of Australia in a submission.
“Refusing access to banking for cryptocurrency businesses and users will not prevent illicit use of the technology. It is counterproductive, as it only serves to limit the operation of legitimate actors.
[We] ask the Australian banking institutions to adopt a case-by-case approach to assess the risk profile of bitcoin users and bitcoin businesses.”
The extension of AML/CTF regulations to cover digital currency operators is likely to significantly shift perceptions of risk associated with those businesses.
Making the transition from a total lack of regulation to regulation on a level with traditional financial institutions is likely to be difficult for some businesses, however, particularly those with fewer resources or less experience implementing AML/CTF programs.
This is likely to hand a competitive advantage to the larger players, and make it more difficult for start-ups to break into the market.
“The regulations don’t discriminate between the larger and smaller institutions. The larger players have more resources and can hire experienced full-time compliance officers, but smaller businesses can’t afford that,” says Scott Williamson, CEO of biometric identity verification solutions company PRIMEiD, which works with both traditional and digital currency clients.
“The industry response we’re working on is to develop a template for cryptocurrency exchanges to follow. Most of the founders in this space come from tech backgrounds and don’t have experience with financial compliance.
Buying these types of compliance services often isn’t cheap, but the reality is that this is the cost of doing business.”
Businesses dealing with smaller transactions are also unfairly disadvantaged, argues Daniel Alexiuc, CEO of digital payments company Living Room of Satoshi.
Alexiuc says that the new measures imposes unreasonable restrictions on companies such as his which enable customers to use bitcoin for low value payments.
This, he argues, creates a barrier to entry at the lower end of the market and may make widespread consumer adoption less likely.
“The legislation will have the effect of requiring KYC procedures of our customers for even very small transactions, like paying your phone bill or buying a Banh Mi for lunch,” Mr Alexiuc said in a submission to the industry consultation process.
“The legislation will impact our current business and stifle future innovation in the area of small payments, since many of our customers will feel KYC is unwarranted and too much of a hassle for small amounts.”
How well Australia’s existing regulations designed for traditional currencies can be transplanted onto digital currencies, and how effectively they guard against the new avenues for money laundering and terrorism financing methods created by digital currencies remains to be seen.
What is clear is that when it comes to dealing with risks associated with financial innovation, Australian authorities are determined not to be caught on the back foot.Elise Thomas
Melbourne-based Elise Thomas has a background in international affairs and a strong interest in financial crime, data and technology issues.
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