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2022 | OriginalPaper | Chapter

4. Development of Virtual Currency and ICOs in Australia

Author : Shanuka Senarath

Published in: Law and Practice of Crowdfunding and Peer-to-Peer Lending in Australia, China and Japan

Publisher: Springer Nature Singapore

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Abstract

Chapter 4 examines the development of cryptocurrency in the Australian context with special reference to regulatory response by the Australian legislator to the new developments in the digital-finance world. However, since cryptocurrencies have no national or geographical boundaries, it is essential that our discussion should not only confine to Australia. Hence, we place our discussion in the international context, while focusing more on the regulatory developments in the Australian context. The varying characteristics of crypto currencies, tokens, and Initial Coin Offerings (ICOs) make the legal nature of such very difficult to assess. The Australian Securities and Investment Commission (ASIC) takes a broader approach and seeks into the fact whether a token falls within the definition of a financial product, with the term “security” with primarily referring to shares and debentures in Australia. Jurisdictions elsewhere take various approaches to regulate cryptocurrencies and associated entities. Countries such as China and South Korea have announced outright bans on ICOs. whereas other countries such as United States have issued regulatory warnings. This discussion does not intend to cover all aspects pertaining to cryptocurrencies, yet looks into some resent developments and how the Australian legislator is responding to the ever changing scenario.

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previous chapter Challenges for P2P Lending Business Models and Banks

next chapter Regulatory and Policy Reforms in P2P Lending in Australia

See Matt Vitins, “Crowdfunding and Securities Laws: What the Americans Are Doing and the Case for an Australian Crowdfunding Exemption” (2013) 22(2) Journal of Law, Information and Science 92, 105.

David Meyer, “South Korea Follows China by Banning ICOs”, Fortune, 29 August 2017 <https://finance.yahoo.com/news/south-korea-follows-china-banning-075307361.html>

Aaron Stanley, “SEC Official Offers New Hope for Utility Tokens in Congressional Testimony”, Forbes, 28 April 2018 <https://www.forbes.com/sites/astanley/2018/04/28/sec-official-offers-new-hope-for-utility-tokens-insessionaltestimony/#72e6e9a9fcf9>;

This is intangible in contrast to a Euro bill or a Doller coin.

It is also called digital money, electronic money, electronic currency, or cyber cash.

Digitised transactions that involve the execution of a contractual promise to transfer actual currency between two accounts.

For example, Facebook Credits, Microsoft Points, JPMorgan’s coin, or Amazon Coins.

ATO also identifies things that do belong to the category of digital currency. Accordingly, (i) loyalty points provided by retailers that can only be redeemed for products and services specified by that loyalty scheme (ii) ‘currency’ used in online multiplayer games, that cannot be used outside the game under which the ‘currency’ is made available (iii) ‘digital currency’ with value based on something else or that gives an entitlement or privileges to something else. Australian Tax Office, GST and digital currency, (Web Page, 20 February 2020) <https://www.ato.gov.au/business/gst/in-detail/your-industry/financial-services-and-insurance/gst-and-digital-currency/.>

Financial Action Task Force, ‘Virtual Currencies—Key Definitions and Potential AML/CFT Risks (June 2014)’ 4 <http://www.fatfgafi.org/topics/methodsandtrends/documents/virtual-currency-definitions-amlcft-risk.html>. The objectives of the FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.

Financial Action Task Force, Virtual Currencies—Key Definitions and Potential AML/CFT Risks (June 2014) 5 <http://www.fatfgafi.org/topics/methodsandtrends/documents/virtual-currency-definitions-amlcft-risk.html>

Ibid.

Typically, a regulated digital currency is issued by a central bank or a monetary authority and can be denominated to a sovereign currency. Hence regulated digital currency is subjected to the monetary policy.

See Chris Rose, ‘The evolution of digital currencies: Bitcoin, a cryptocurrency causing a monetary revolution’ (2015) 14(4) International Business & Economics Research Journal 617.

Virtual currencies are sometimes represented in terms of tokens and may be (typically they are) unregulated without a legal tender in contrast to coins or banknotes. See Chris Rose, ‘The evolution of digital currencies: Bitcoin, a cryptocurrency causing a monetary revolution’ (2015) 14(4) International Business & Economics Research Journal 617.

See Lyndsey Gilpin, ‘10 things you should know about Bitcoin and digital currencies. TechRepublic’ (Web Page) <http://www.techrepublic.com/article/10-things-you-should-know-about-bitcoin-and-digitalcurrencies/>; Omri Marian, ‘A Conceptual Framework for the Regulation of Cryptocurrencies’ (2015-2016) 82 University of Chicago Law Review Dialogue 53.

Australian Taxation Office (2020) Tax treatment of cryptocurrencies (Web Page, 30 Mar 2020) <https://www.ato.gov.au/general/gen/tax-treatment-of crypto-currencies-in-australia%2D%2D-specifically-bitcoin/>.

Reserve Bank of Australia (undated), ‘Cryptocurrencies’ <https://www.rba.gov.au/education/resources/ explainers/pdf/cryptocurrencies.pdf?v= 2021-02-09-13-50-00>.

Viktor Manahov, ‘Cryptocurrency liquidity during extreme price movements: is there a problem with virtual money?’ 2020 21(2) Quantitative Finance 341.

See, Vivian A Maese, Alan W Avery, Benjamin A Naftalis, Stephen P Wink, and Yvette D. Valdez. ‘Cryptocurrency: A primer’ (2016) 133 Banking LJ 468.

European Central Bank defined virtual currency as “a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community.” See European Central Bank, ‘Virtual Currency Schemes 13’ (October 2012) <http://www.ecb.europa.eu/pub/pdf/other/ virtualcurrencysch emes201210en.pdf> Financial Crimes Enforcement Network (FinCEN), a bureau of the US Treasury, defined virtual currency as “a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency. See ‘Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies’ 1 (Web Page) <https://www.fincen.gov/statutes-regs/guidance/pdf/FIN-2013-GOO1.pdf>. In 2014, the European Banking Authority defined virtual currency as “a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a [fiat currency], but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically.” European Banking Authority, EBA Opinion on ‘virtual currencies’ (Web Page) <http://www.eba.europa.eu/documents/10180/657547/EBAOp-2014-08+Opinion+ on+Virtual+Currencies.pdf>. In June 2015, the New York State Department of Financial Service’s Bit License defined virtual currency as “any type of digital unit that is used as a medium of exchange or a form of digitally stored value. Virtual Currency shall be broadly construed to include digital units of exchange that (i) have a centralized repository or administrator; (ii) are decentralized and have no centralized repository or administrator; or (iii) may be created or obtained by computing or manufacturing effort.” Debt Collection by Third-Party Debt Collectors and Debt Buyers Regulation, N.Y. Comp. Codes R. Regs. tit. 23, pt. 1 (available at http://www.dfs.ny.gov/legal/regulations/adoptions/dfsf23t.pdf). 23, § 2 0 0. 2 (p) (2015).

For example, the bitcoin issuance is based on a “mining” algorithm which is run by individuals called “miners” using computers. In exchange for their services, miners are awarded virtual currency units that can be traded. If someone wishes to acquire Bitcoin units without participating in “mining” must purchase the amount of Bitcoins they need.

See ‘Blockchain Info’ (Web Page) <https://blockchain.info/>; Vivian A Maese, Alan W Avery, Benjamin A Naftalis, Stephen P Wink, and Yvette D. Valdez. ‘Cryptocurrency: A primer’ (2016) 133 Banking LJ 468.

The validation process may be conducted by a distributed system for a decentralized virtual currency. See Donald R Lessard and Peter Lorang, ‘Currency changes and management control: resolving the centralization/decentralization dilemma’ In International Accounting and Transnational Decisions (Butterworth-Heinemann, 1983) 474; James Gatto and Elsa S Broeker, Bitcoin and beyond: current and future regulation of virtual currencies (2014) 9(2) Ohio St. Entrepren. Bus. LJ 429.

See for example Donald R Lessard and Peter Lorang, ‘Currency changes and management control: resolving the centralization/decentralization dilemma’ In International Accounting and Transnational Decisions (Butterworth-Heinemann, 1983) 474; Roman.Matkovskyy, ‘Centralized and decentralized bitcoin markets: Euro vs USD vs GBP’ (2019) 71 . The Quarterly Review of Economics and Finance 270; Vitalik Buterin, ‘A next-generation smart contract and decentralized application platform’ (2014) 3(37) Ethereum white paper (online, 20 February 2021) < https://cryptorating.eu/whitepapers/Ethereum/>.

See for example Reuben Grinberg, ‘Bitcoin: An Innovative Alternative Digital Currency’ (2012) 4(1) Hastings Science & Technology Law Journal 159; Vivian A Maese, Alan W Avery, Benjamin A Naftalis, Stephen P Wink and Yvette D. Valdez. ‘Cryptocurrency: A primer’ (2016) 133 Banking LJ 468; Dennis Chu, ‘Broker-Dealers for Virtual Currency: Regulating Cryptocurrency Wallets and Exchanges’ (2018) 118(8) Columbia Law Review 2323.

Thus, Bitcoin is not issued by a central bank or government. Just like the Bitcoin, Virtual currencies are issued by private issuers and may transact among specific virtual communities. Bitcoin generally transacts by one party registering a transaction referred to as a node, in a ledger-type of software called a distributed ledger or blockchain technology. Unlike currencies there is no financial institution which is involved in the transaction.

See Peter Šurda, ‘The Origin, Classification and Utility of Bitcoin’ (May 14, 2014) <https://ssrn.com/abstract=2436823>

Various on Bitcoin Forum ‘Pizza for bitcoins?’ (online, 20 February 2020) <https://bitcointalk.org/index.php?topic=137.0>.

Vivian A Maese, Alan W Avery, Benjamin A Naftalis, Stephen P Wink, and Yvette D. Valdez. ‘Cryptocurrency: A primer’ (2016) 133 Banking LJ 468.

The Tax Institute, Submission 16 to the Senate Economics References Committee (1 December 2014) <http://www.aph.gov.au/DocumentStore.ashx?id=9a5c96c7-e664-4455-9a3c-d0a831fcc07e&subId=302001>

John Detrixhe, ‘Nasdaq Expects to be First Exchange Using Bitcoin Technology’ Bloomberg Business (23 July 2015) <http://www.bloomberg.com/news/articles/2015-07-23/nasdaq-expectsto-be-first-exchange-to-use-bitcoin-technology>

The European Securities and Markets Authority (ESMA) found that the main attraction of digital or virtual currencies is the speed and cost. “The main benefits of VC [virtual currency] based financial assets and asset transfers seem to be speed and cost. From the perspective of the user/investor, the speed of VC based financial asset transactions is higher than traditional financial asset transfers and takes place within a couple of hours at most. The cost of transactions seems to be currently somewhere around a couple of Euro cents. Both speed and cost of transactions vary between different VCs. The benefit of cost and speed equally holds for issuers in terms of listing an asset on an asset exchange. In the case of the NXT asset exchange, a listing currently costs 1000 NXT (currently around 10 Euro) one-off plus transaction costs when sending rewards to investors. Especially for small and medium sized companies this could become an attractive source of funding” See The European Securities and Markets Authority, ‘Call for evidence, Investment using virtual currency or distributed ledger technology’ (online, 22 April 2015) paragraph 34-35 <http://www.esma.europa.eu/system/files/2015-532_call_for_evidence_on_virtual_currency_investment.pdf>. As far as the cost concerns are considered the transaction cost is believed to be around 1% of the total transaction amount. Traditional online payment systems depict a transaction cost of 2%-3% while 8%–9% for remittance without involving bank accounts via money transmitters. It is also notable that schemes are also not subjected to exchange fees typically charged for transactions with third countries, and thus provide for further cost savings. European Banking Authority, ‘EBA Opinion on ‘virtual currencies’ (July 2014) para 46-47 <https://www.eba.europa.eu/documents/10180/657547/EBAOp-2014-08+Opinion+on+Virtual+Currencies.pdf>

Vivian A Maese, Alan W Avery, Benjamin A Naftalis, Stephen P Wink, and Yvette D. Valdez. ‘Cryptocurrency: A primer’ (2016) 133 Banking LJ 468.; Dennis Chu, ‘Broker-Dealers for Virtual Currency: Regulating Cryptocurrency Wallets and Exchanges’ (2018) 118(8) Columbia Law Review 2323; Nathanial Popper, Bitcoin Technology Piques Interest on Wall St, The New York Times, (28 August 2015) <http://www.nytimes.com/2015/08/31/business/dealbooklbitcoin-technologypiques-interest-on-wall-st.html>

Nathanial Popper, Bitcoin Technology Piques Interest on Wall St, The New York Times (28 August 2015) <http://www.nytimes.com/2015/08/31/business/dealbooklbitcoin-technologypiques-interest-on-wall-st.html>; Vivian A Maese, Alan W Avery, Benjamin A Naftalis, Stephen P Wink, and Yvette D. Valdez. ‘Cryptocurrency: A primer’ (2016) 133 Banking LJ 468.

Australian Securities and Investments Commission, ‘Virtual currencies: Bitcoin and other virtual currencies’ (26 August 2014) <https://www.moneysmart.gov.au/investing/investment-warnings/virtual-currencies>

European Banking Authority, ‘EBA Opinion on ‘virtual currencies’ (July 2014) para 46-47<https://www.eba.europa.eu/documents/10180/657,547/EBAOp-2014-08+Opinion+on+Virtual+Currencies.pdf>. Economics References Committee, Digital currency—game changer or bit player (Senate Printing Unit, Canberra, 2015) 18.

Economics References Committee, Digital currency—game changer or bit player (Senate Printing Unit, Canberra, 2015) 23.

Economics References Committee, Digital currency—game changer or bit player (Senate Printing Unit, Canberra, 2015) 18.

For example, the transaction fees for transferring money from Australia to Samoa are around 12 per cent of the transaction value. Economics References Committee, Digital currency—game changer or bit player (Senate Printing Unit, Canberra, 2015) 18.

Jeffrey Chu, Stephen Chan, Saralees Nadarajah, and Joerg Osterrieder, ‘GARCH modelling of cryptocurrencies’ (2017) 10(4) Journal of Risk and Financial Management 17; Katsiampa Paraskevi, ‘Volatility estimation for Bitcoin: A comparison of GARCH models’ (2017) 158 Economics Letters 3.

Tony Klein, Hien Pham Thu and Thomas Walther, ‘Bitcoin is not the New Gold–A comparison of volatility, correlation, and portfolio performance’ (2018) 59 International Review of Financial Analysis 105; Dirk G Baur. Kihoon Hong and Adrian D Lee, ‘Bitcoin: Medium of exchange or speculative assets?’ (2018) 54 Journal of International Financial Markets, Institutions and Money 177. One may also argue that due to high volatility, a cryptocurrency is a less favourable tool to store value or medium of exchange. See Shaen Corbet, Grace McHugh and Andrew Meegan, ‘The influence of central bank monetary policy announcements on cryptocurrency return volatility’ (2014) 14(4) Investment management and financial innovations 60.

Thomas Walther, Tony Klein and Elie Bouri, ‘Exogenous drivers of Bitcoin and Cryptocurrency volatility–A mixed data sampling approach to forecasting’ (2019) 63 Journal of International Financial Markets, Institutions and Money 101,133.

See Xuan Xiao, Zhi-Cheng Wu and Kuo-Chen Chou, ‘A multi-label classifier for predicting the subcellular localization of gram-negative bacterial proteins with both single and multiple sites’ (2011) 6(6) PloS one e20592.

Katsiampa Paraskevi, ‘Volatility estimation for Bitcoin: A comparison of GARCH models’ (2017) 158 Economics Letters 3.

‘Currency Statistics’ (Web Page, 20 February 2021) <https://www.blockchain.com/charts/market-price>.

For example, Microsoft, Apple, Amazon, IBM PayPal and Home Depot. See Viktor Manahov, ‘Cryptocurrency liquidity during extreme price movements: is there a problem with virtual money?’ (2020) 21(2) Quantitative Finance 1.

The Tax Institute, Submission 16 to the Senate Economics References Committee (1 December 2014) <http://www.aph.gov.au/DocumentStore.ashx?id=9a5c96c7-e664-4455-9a3c-d0a831fcc07e&subId=302001>

Due to their virtual nature, cryptocurrencies do not maintain a central repository. Hence data could be wiped out by a computer crash, provided, no backup copy of the holdings.

See Nicholas Weaver, ‘Risks of cryptocurrencies’ (2018) 61(6) Communications of the ACM 20.

See for example Dennis B Desmond, David Lacey and Paul Salmon, Evaluating cryptocurrency laundering as a complex socio-technical system: A systematic literature review’ (2019) 22(3) Journal of Money Laundering Control 480.

See James Martin, ‘Lost on the Silk Road: Online drug distribution and the ‘cryptomarket” (2014) 14(3) Criminology & Criminal Justice 351.

Liberty reserve is a centralised convertible digital currency system being used to facilitate US $6 billion worth of illicit online activity.

Financial Action Task Force, Virtual Currencies—Key Definitions and Potential AML/CFT Risks (June 2014) 10 <http://www.fatfgafi.org/topics/methodsandtrends/documents/virtual-currency-definitions-amlcft-risk.html>

Maria Demertzis and Guntram B Wolff, ‘The economic potential and risks of crypto assets: is a regulatory framework needed?. (No. 2018/14. Bruegel Policy Contribution, 2018). Also see Hun Oh Jeong and Kevin Nguyen, ‘The growing role of cryptocurrency: what does it mean for central banks and governments (2018) 25(1) International Telecommunications Policy Review 33.

Economics References Committee, Digital currency—game changer or bit player (Senate Printing Unit, Canberra, 2015) 21.

Ibid.

Satoshi Nakamoto, ‘Bitcoin: A peer-to peer electronic cash system’, https://bitcoin.org/bitcoin.pdf (accessed 30 April 2015) 259.

Robleh Ali, John Barrdear, Roger Clews and James Southgate, ‘The economics of digital currencies’, (2014) Q3 Bank of England Quarterly Bulletin 54(3) 277.

Robleh Ali, John Barrdear, Roger Clews and James Southgate, ‘The economics of digital currencies’, (2014) Q3 Bank of England Quarterly Bulletin 54(3) 266.

The key problem is that the payee needs to make sure that one of the transferors did not spend the coin previously. A common solution is to introduce a trusted central authority, called a mint, that may verify every transaction for double spending. Accordingly, after each transaction, the coin must be returned to the mint to issue a new coin, and thus coins issued directly from the mint guaranteed as genuine coins that has not been spent before. However, the challenge with this solution is that the entire structure may depend on the entity operating the mint. See Nakamoto, Satoshi. Bitcoin: A peer-to-peer electronic cash system. Manubot, 2019.

Reserve Bank of Australia (undated), ‘Cryptocurrencies’ <https://www.rba.gov.au/education/resources/explainers/pdf/cryptocurrencies.pdf?v= 2021-02-09-13-50-00>. See also The Tax Institute, Submission 16 to the Senate Economics References Committee (1 December 2014) <http://www.aph.gov.au/DocumentStore.ashx?id=9a5c96c7-e664-4455-9a3c-d0a831fcc07e&subId=302001>

See Satoshi. Nakamoto, ‘Bitcoin: A Peer-to Peer Electronic Cash System’ (2008) <https://bitcoin.Org/bitcoin.pdf>.

The total number of unique Blockchain.com wallets created.

The total USD value of trading volume on major bitcoin exchanges. See ‘Bitcoin Charts’ Blockchain.info (Web Page, 20 February 2021) <https://blockchain.info/charts/>

‘Crypto-Currency Market Capitalizations’ (Web page, 20 February 2021) <http://coinmarketcap.com>.

Robleh Ali, John Barrdear, Roger Clews and James Southgate, ‘The economics of digital currencies’, (2014) Q3 Bank of England Quarterly Bulletin 54(3) 266.

Stephanie Lo and J Christina Wang, ‘Bitcoin as money?’ Federal reserve bank Boston currency policy perspectives No 14 – 4 <https://bitcoinwallets.com/bitcoin-as-money.pdf>. Also see Sean Greenwalt, ‘Bitcoin: The Conflicting Currency’ (2016) 4(1) Lincoln Memorial University Law Review 81.

However, it should be noted that some facilitates associated with digital currencies may fit within the definition as financial products. Satoshi Nakamoto, ‘Bitcoin: A peer-to peer electronic cash system’ <https://bitcoin.org/bitcoin.pdf>

Australian Competition and Consumer Commission, ‘Consumers’ (Web Page, February 20) <http://www.accc.gov.au/consumers>

ASIC (2021) ‘Initial coin offerings and crypto-assets’ (web page March 30, 2021) <https://asic.gov.au/regulatory-resources/digital-transformation/initial-coin-offerings-and-crypto-assets/#fig-1>

Christian Fisch, “Initial Coin Offerings (ICOs) to Finance New Ventures: An Exploratory Study” (2019) 34(1) Journal of Business Venturing 1.

Saman Adhami et al., “Why Do Businesses Go Crypto? An Empirical Analysis of Initial Coin Offerings” (2018) 100 Journal of Economics and Business 64, 69.

See Dirk Zetzsche et al., “The ICO Gold Rush: It’s a Scam, It’s a Bubble, It’s a Super Challenge for Regulators” (2019) 63(2) Harvard International Law Journal 267.

Tokens must not be puzzled with cryptocurrencies since the tokens are rather modifications of cryptocurrencies. Tokens, in contrast to stocks, are not capable of providing ownership of a company. However, tokens do provide interest in a product or service created by the company. Investors have the option of benefitting from the company’s products or services or retain their tokens expecting an appreciation of the tokens’ value. A token has multi-functional purposes. White a token is a digital asset that may be capable of storing value. Tokens may grant memberships, voting rights, virtual items in a video game, flight rewards etc. in contrast, A coin is a transfer of value and typically on its own blockchain technology. Tokens are typically hosted on another platform’s blockchain and switches to their own chains at a later stage.,

Its noteworthy that Facebook, in January 2017, the largest social media network in the world, including, Facebook Messenger, Instagram, and WhatsApp has taken step to prohibiting ads that promote financial products and services on their servicers. In mid-2018 Google decided to ban crypto-related ads, and anything concerning ICOs, crypto wallets, and virtual currency trading advice.

See for example Philipp Hacker and Chris Thomale, “Crypto-Securities Regulation: ICOs, Token Sales and Cryptocurrencies Under EU Financial Law” (2018) 15 European Company and Financial Law Review 645;

Philipp Hacker and Chris Thomale, “Crypto-Securities Regulation: ICOs, Token Sales and Cryptocurrencies Under EU Financial Law” (2018) 15 European Company and Financial Law Review 645.

Rohr, Jonathan, and Aaron Wright. “Blockchain-based token sales, initial coin offerings, and the democratization of public capital markets.” Hastings LJ 70 (2018): 463.

See FINMA, “FINMA Publishes ICO Guidelines” (16 February 2018) <https://www.finma.ch/en/news/2018/02/20180216-mm-ico-wegleitung>; Satoshi Nakamoto, “Bitcoin: A Peer-to-Peer Electronic Cash System” (Bitcoin, 31 October 2008) <https://bitcoin.org/bitcoin.pdf>

The non-investment model is focused on reward and donation-based crowdfunding. Project backers support a non-profit organization that resonates with them and do not expect any financial benefits in return. Investment based crowdfunding implies p2p lending and equity crowdfunding that generates financial returns.

However, under the Corporations Act 2001, if the tokens fit the definition of a financial product white papers are required to meet disclosure standards.

The Treasury, ‘Initial Coin Offerings: Issues Paper’ (January 2019) <https://treasury.gov.au/consultation/c2019-t353604>.

In contrast, in a share issue or a security issue issuing entity is required to provide disclosure documents in line with national regulations,

Philipp Hacker and Chris Thomale, “Crypto-Securities Regulation: ICOs, Token Sales and Cryptocurrencies Under EU Financial Law” (2018) 15 European Company and Financial Law Review 645.

Bergesen, Øystein and Lucas Mikael Palm, ‘An exploratory study of initial coin offerings: A better understanding of the ICO market and its fraudulent and unregulated nature’ (Masters thesis, Universitetet i Agder. 2018); Dirk Siegel et al., “ICOs – The New IPOs? How to Fund Innovation in the Crypto Age” (Monitor Deloitte, 2017) <https://www2.deloitte.com/content/dam/Deloitte/de/Documents/Innovation/ICOs-the-new-IPOs.pdf>

Such as an interest in a managed investment scheme or a security.

ASIC (2021) ‘Initial coin offerings and crypto-assets’ (web page March 30, 2021) <https://asic.gov.au/regulatory-resources/digital-transformation/initial-coin-offerings-and-crypto-assets/#fig-1>

In the Australian context misleading or deceptive conduct amounts to a serious breach of law. Australian law forbids misleading or deceptive conduct in wider array of circumstances, including in trade or commerce, pertaining to financial services, and in relation to a financial product. Hence the same Australian laws and regulations that forbid misleading or deceptive conduct may also apply even to ICOs or crypto traded offshore. ASIC (2021) ‘Initial coin offerings and crypto-assets. If a particular ICOs is not for a financial product, the same prohibitions against misleading or deceptive conduct apply under the Australian Consumer Law. For ICOs that are financial products, the ASIC Act and the Corporations Act include prohibitions against misleading or deceptive conduct. ASIC (2021) ‘Initial coin offerings and crypto-assets’ (web page March 30, 2021) <https://asic.gov.au/regulatory-resources/digital-transformation/initial-coin-offerings-and-crypto-assets/#fig-1>

But, at times, may have voting rights or similar rights.

Also see RG 133 Funds management and custodial services: Holding assets <https://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-133-funds-management-and-custodial-services-holding-assets/>

If an ICO is formed in order to fund a company the rights attached to the crypto-asset issued by the ICO may fall within the category ‘security’.

See RG 1 AFS Licensing Kit: Part 1 – Applying for and varying an AFS licence <https://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-1-afs-licensing-kit-part-1-applying-for-and-varying-an-afs-licence/>

A derivative is a product that derives its value from ‘something else’ which is commonly referred to as the ‘underlying instrument’ or the ‘reference asset’. See Section 761D of the Corporations Act provides.

ASIC (2021) ‘Initial coin offerings and crypto-assets’ (web page March 30, 2021) <https://asic.gov.au/regulatory-resources/digital-transformation/initial-coin-offerings-and-crypto-assets/#fig-1>

A non-cash payment (NCP) facility is defined as an ‘arrangement through which a person makes payments, or causes payments to be made, other than by the physical delivery of currency.’ By the ASIC. A non-cash payment facility can be a financial product and may require an AFS license. Also, an intermediary that arranges for the issue of an non-cash payment facility may need an AFS license.

ASIC (2021) ‘Initial coin offerings and crypto-assets’ (web page March 30, 2021) <https://asic.gov.au/regulatory-resources/digital-transformation/initial-coin-offerings-and-crypto-assets/#fig-1>

ASIC (2021) ‘Initial coin offerings and crypto-assets’ (web page March 30, 2021) https://asic.gov.au/regulatory-resources/digital-transformation/initial-coin-offerings-and-crypto-assets/#fig-1. Also see The Treasury, ‘Initial Coin Offerings: Issues Paper’ (January 2019) <https://treasury.gov.au/consultation/c2019-t353604>

Australian Tax Office, ‘Taxation Determination’ (TD 2014/25 -Income tax: is bitcoin a ‘foreign currency’ for the purposes of Division 775 of the Income Tax Assessment Act 1997) <https://www.ato.gov.au/law/view/document?docid=TXD%2FTD201425%2FNAT%2FATO%2F00001>

100

101

The Tax Institute, Submission 16 to the Senate Economics References Committee (1 December 2014) 4 <http://www.aph.gov.au/DocumentStore.ashx?id=9a5c96c7-e664-4455-9a3c-d0a831fcc07e&subId=302001>

102

GSTR 2014/3 - Goods and services tax: the GST implications of transactions involving bitcoin, ruled that; (i) A transfer of bitcoin from one entity to another is a ‘supply’ for GST purposes. The exclusion from the definition of supply for supplies of money does not apply to bitcoin because bitcoin is not ‘money’ for the purposes of the GST Act. (ii) The supply of bitcoin is not a ‘financial supply’ under Section 40-5 of the GST Act. Further, it is not an input taxed supply under paragraph 9-30(2)(b). (iii) A supply of bitcoin is a taxable supply under Section 9-5 if the other requirements in Section 9-5 are met, and the supply of bitcoin is not GST-free under Division 38. A supply of bitcoin in exchange for goods or services will be treated as a barter transaction. (iv) Bitcoin is not goods and cannot be the subject of a taxable importation under paragraph 13-5(1)(a). However, an offshore supply of bitcoin can be a taxable supply under the ‘reverse charge’ rules in Division 84. (v) An acquisition of bitcoin will not give rise to input tax credits under Division 66, which allows input tax credits for certain acquisitions of second-hand goods. (vi) A supply of bitcoin is not a supply of a voucher under Division 100. Australian Tax Office, ‘Goods and Services Tax’ (GSTR 2014/3 - Goods and services tax: the GST implications of transactions involving bitcoin <https://www.ato.gov.au/law/view/document?docid=GST/GSTR20143/NAT/ATO/00001&PiT=20141217000001>.

103

Australian Taxation Office (2020) Tax treatment of cryptocurrencies (Web Page, 30 Mar 2020) <https://www.ato.gov.au/general/gen/tax-treatment-ofcrypto-currencies-in-australia%2D%2D-specifically-bitcoin/>.

104

If a particular digital wallet contains different types of cryptocurrencies, each cryptocurrency will be treated as a separate CGT asset.

105

Including the disposal of one cryptocurrency for another cryptocurrency.

106

Essentially a currency established by government regulation or law.

107

ATO identifies cryptocurrency trading businesses, cryptocurrency mining businesses and cryptocurrency exchange businesses (including ATMs) as examples of businesses that involve cryptocurrency. This essentially means similar businesses with cryptocurrency may also be treated as cryptocurrency trading businesses (Author). It is also noteworthy how the ATO differentiate a cryptocurrency business from someone acquiring and disposing of cryptocurrency not for the purpose of business. Accordingly, if a particular person or an institute (i) carry on activities for commercial reasons and in a commercially viable way (ii) undertake activities in a business-like manner (iii) prepare accounting records and market a business name or product (iv) intend to make a profit or genuinely believe of making a profit in future.

108

However, under the Australian tax regulations this is the same process of accounting for any other non-cash consideration under a barter transaction. See also Australian Tax Office, ‘Income tax: barter and countertrade transactions’ (IT 2668, 13 February 1992) <https://www.ato.gov.au/law/view/document?docid=ITR/IT2668/NAT/ATO/00001&PiT=99991231235958>.

109

In the absence of a valid salary sacrifice agreement, say for example if the employee who has already received salary asks the employer to pay salary in cryptocurrency, the employee is considered to have derived their normal salary or wages and the employer may need to meet their pay as you go (PAYG) obligations on the Australian dollar value of the cryptocurrency it pays to the employee.

110

Australian Tax Office, ‘Cryptocurrency used in business’ (30 March 2020) <https://www.ato.gov.au/general/gen/tax-treatment-of-crypto-currencies-in-australia%2D%2D-specificallyitcoin/?anchor=Cryptocurrencyusedinbusiness#Cryptocurrencyusedinbusiness>

111

Economics References Committee, Digital currency—game changer or bit player (Senate Printing Unit, Canberra, 2015) 8.

112

Economics References Committee, Digital currency—game changer or bit player (Senate Printing Unit, Canberra, 2015) 17.

113

Ibid.

114

Economics References Committee, ‘Digital currency—game changer or bit player’ (Senate Printing Unit, Canberra, 2015) 7.

Title: Development of Virtual Currency and ICOs in Australia
Author: Shanuka Senarath
Publisher: Springer Nature Singapore
Book: Law and Practice of Crowdfunding and Peer-to-Peer Lending in Australia, China and Japan
Print ISBN: 978-981-19-3833-7

Electronic ISBN: 978-981-19-3834-4

Copyright Year: 2022
DOI: https://doi.org/10.1007/978-981-19-3834-4_4

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