amor sexton, digital currency lawyer, adroit lawyers - let’s get the story straight about bitcoin

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REGULATION FOR INNOVATION PREPARING AUSTRALIA FOR THE FINTECH BOOM CryptoCon, Sydney – 24 July 2014

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SUMMARY

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1.  Why bitcoin?

2.  Why Australia?

3.  What is the current regulatory framework in Australia?

4.  Can regulation and innovation co-exist?


WHY BITCOIN?

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BITCOIN BUSINESSES

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Commercial ventures using bitcoin

•  Bitcoin miners •  Exchanges •  ATMs •  Wallets •  Payment Processors •  Financial Services •  Services & products for bitcoin businesses


EXAMPLES OF BITCOIN USE

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Paying for services •  Pay Mel B, former Spice Girl. •  Pay your lawyer or other consultant. •  Pay for space travel on Virgin Galactic. •  Pay for your university fees.

Paying for goods •  Buy a Lamborghini or Tesla car. •  Pay for a coffee or buy a beer in Sydney. •  Buy flights or book a hotel through Expedia. •  Buy sheets on Overstock.com. •  Buy a computer on Dell.

Global Micropayments •  Send money to relatives (e.g. in the Philippines) and avoid 9% remittance fees.

•  Trade with businesses in other jurisdictions for small transactions without attracting hefty bank fees.

•  Donate to charities across the globe and avoid 10% processing fees. •  Local Australian businesses can attract customers from around the

world as the currency exchange fee can be as low as 1%.


BITCOIN FACILITATES E-TRADE

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Case Study: Coins for Tech

•  Online electronics store. •  Exports and delivers consumer electronics. •  Customers from all parts of the world including South Africa, Malta, Thailand, Israel,

Canada, Pakistan, Taiwan, Turkey, Australia, New Zealand, United States, the majority of Europe & many more!

•  Some areas had high rates of credit card fraud. •  Accepting payment in bitcoin allowed Coins for Tech to securely transact with

customer in these areas. •  Accepting payment in bitcoin also reduced the cost of transacting across

jurisdictions.


BITCOIN FACILITATES FINANCIAL INCLUSION

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Case Study: Philippines

•  Credit card penetration is less than 5%. •  Less than 30% of Filipinos have a bank account. •  10 million Filipinos live overseas. •  In 2010 Filipino expats sent $21.3 billion back into the PI. •  Average fees for these transactions was 9%. •  To use bitcoin, all that is needed is a mobile phone. •  70% mobile phone penetration. •  Bitcoin is now able to be used in over 12,000 locations. •  Over 22 different pay-out options are available to consumers.


BITCOIN FOR OFF-LINE CONSUMERS

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•  Speed & efficiency of visa-paywave type technology. •  Safer as a push technology. •  Indelible record of transactions. •  Can be stored in multiple places to reduce risk of misplacing bitcoins. •  Transactions fees are lower than credit card fees. Good for customers as no need to

pass on the surcharge. •  Merchants have the option to accept all in bitcoin, or part in bitcoin and part in cash. •  Tourists don’t need to pay in the local currency – saves on currency exchange fees

and hassle.


WHY AUSTRALIA?

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MARKET CAP $8.1 BILLION USD

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BITCOIN ADOPTION RATES

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•  60,000 online retailers globally already accept Bitcoin. •  Expedia and Dell have joined the likes of Overstock, Square and Zynga in accepting

bitcoins. •  Overstock.com reports that is has made $1.6 million USD of sales in bitcoin. Cheap

Air reports bitcoin sales worth $1.8 million USD. •  Ebay has added a ‘virtual currency’ category to its US and UK sites. •  Growth from 40 businesses to 250 businesses in Australia between January to June

2014. •  SMH reports that 2% of Australians have used bitcoin in last 12 mths – over 400,000

Australians.


GROWING THE LOCAL ECONOMY

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Australia ranked #1 in the G20 for e-Trade Readiness

•  Affordable internet access. •  Well-developed regulatory framework for commerce. •  High usage of electronic payment. •  High smart phone penetration.

Support for innovation

•  The FSI interim report highlighted the support for innovation in the financial services sector.

•  Together with the development of the NPP, the growth of digital currency as a payment option is one of the most important changes to the Australian payments landscape.

•  Digital currency businesses can work with traditional players in the banking and financial services sector.


GROWING A DIGITAL CURRENCY INDUSTRY

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THE BITCOIN MATRIX

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Source: CoinDesk


THE FINTECH BOOM

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•  Global investment in Financial Technology innovation hit $3 billion in 2013. •  This is expected to reach $8 billion by 2018. •  Nearly 40% of this investment was made in innovative payment products. •  First quarter of 2014 saw the biggest influx of FinTech investment with $1.7 billion

invested globally. •  The report estimates that banking and securities institutions will spend $485 billion

on information technology in 2014. •  Traditional regional hubs of financial services are seeking to capitalise on the

incredible potential for growth in the FinTech industry: New York v London. •  How can Australia become a regional hub of FinTech innovation?


BITCOIN INVESTMENT GLOBALLY

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•  Over $300 million USD invested into bitcoin ventures in the past 18 months.

•  $200 million USD invested in 2014 alone.

•  Hundreds of millions of dollars worth of venture capital investment earmarked for further investment.

•  Over $20 million has already been invested in Australia.

•  A new $30 million fund was announced in Australia.


CURRENT REGULATORY FRAMEWORK

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RECENT GLOBAL DEVELOPMENTS

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•  California changes laws to declare bitcoin as ‘legal money’. •  Switzerland’s Federal Council recommends no application of VAT to supply of

bitcoin. •  The UK Revenue Commission considered the supply of bitcoin to be VAT exempt. •  Canada changes its AML/CTF equivalent to extend its cover to bitcoins. •  European Banking Authority – cautions banks from dealing in bitcoins themselves

until the currencies are regulated, but allows banks to continue relationships with bitcoin businesses. Supports regulation at industry level.

•  Italian legislators meet with the bitcoin industry to consider regulatory approach. •  New York proposes a state-based BitLicense. •  Isle of Man says AML/CTF rules will apply, but not prudential regulation. •  Sweden has asked the ECJ to rule on VAT for bitcoin to fiat exchanges.


CURRENT AUSTRALIAN FRAMEWORK

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Issues Status Taxation •  Is bitcoin money for the GST Act?

•  Is the supply of bitcoin a financial supply? •  Is bitcoin a foreign currency for the Income Tax Act? •  Is bitcoin ‘property’ and a CGT Asset?

Unclear

Consumer Protection

•  Is bitcoin a financial product? •  What bitcoin businesses need an AFSL? •  What Consumer Law protections apply? •  What prudential regulation applies?

Unclear

Anti-Money Laundering

•  Bitcoin is not a designated service under the AML/CTF Act. •  AUSTRAC has no oversight of bitcoin businesses. •  Bitcoin businesses have no mandatory KYC requirements.

Clear, but undesirable

General Law •  Is bitcoin ‘money’ under the general law meaning? •  Is bitcoin ‘currency’ under the general law meaning? •  Is bitcoin ‘property’? •  How can you enforce your rights over a bitcoin against third parties?

Unclear


REGULATION FOR INNOVATION

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FSI INTERIM REPORT

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“Whether new entrants should be brought within a regulatory perimeter depends on the nature and scale of the risk they present and who bears the risk. Government needs to strike a balance that allows the benefits of innovation to flow through the financial system, while maintaining stability

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Technological innovation has the potential to improve financial system efficiency. It is a powerful force for competition, driving the development of products that better meet consumer needs and improve access. Firms can harness technologies to improve risk management and other internal processes. Although innovation has many benefits, it may also bring risks. Government must manage these risk, while enabling the benefits of innovation to flow through the system.”


APPROPRIATE & PROPORTIONATE

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Regulation is needed to increase confidence in bitcoin:

•  Increase consumer confidence and encourage relationships with other stakeholders. •  Encourage innovation as new businesses know what is expected of them.

Focus on the business, not just the use of bitcoin technology: •  Does the business process expose consumers to risk? E.g. Instant exchange v

depository service. •  What is the AML/CTF risk profile for the business? E.g. Bitcoin exchange v merchant

services platform. Identify the real risks (not just the ones that make the news headlines)

•  Understand what created those risks – technological flaws or bad corporate governance?

•  Harness technology to mitigate the risks - Anonymous wallet holders v full transparent blockchain.


PRACTICAL

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Cohesive language

•  All areas of government need to agree on common definitions of digital currency. Encourage voluntary compliance

•  Until tax authorities learn how to utilise the blockchain for auditing purposes, largely reliant on voluntary reporting.

Administration costs

•  Regulatory approach needs to be able to be enforced. •  Practical regulatory approach encourages voluntary compliance and reduces

administration and enforcement costs. Compliance costs

•  Added compliance costs can defeat the benefits of using bitcoin, remove the benefits for SMEs and stifle innovation.


SOME EXAMPLES

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Japan

•  Industry self-regulatory body, backed by the government. Isle of Man

•  Regulation to focus on AML, but not prudential regulation. United Kingdom

•  Using bitcoin to pay for goods or services is VAT exempt. •  Project Innovate launched by the Financial Conduct Authority.

New York’s BitLicense

•  Extra-territorial reach. •  Liquidity requirements and limitation on what a business can do with customer’s bitcoin. •  Customer complaint & dispute resolution procedures. •  AML Compliance & Cyber Security Program.


A POSSIBLE PATH FORWARD

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Appropriate & proportionate regulation:

•  Industry self-regulation. •  AFSL requirements that are product-focused. •  Class order relief for new and low-risk entrants.

Practical approach to regulation:

•  Bitcoin treated as money and as a currency. •  Focus on regulating the on-ramps and the off-ramps. •  Encourage voluntary compliance through education and practical approach to tax.

Commercialisation incentives: •  Research & Development grant – quarterly. •  Compliance grant – quarterly. •  Changing tax and AFSL laws to make it affordable to have ESOPs for start-ups.

amor sexton, digital currency lawyer, adroit lawyers - let’s get the story straight about bitcoin

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