As with many novel emergent technologies, how existing law applies to new technology is always a matter of concern for individuals and institutions looking to get in on the latest development. As with most emergent technologies in common law jurisdictions the principle of “Everything which is not forbidden is allowed” - sometimes referred to as the Lotus principle in International law, Ram Doctrine in the UK or Dillion’s rule in the U.S., this generally holds when approaching new developments, as case law slowly builds up around it before it is later formalised in legislation. Thus, unlikely in some civil law jurisdictions, most emergent technologies so long as they are not criminal in nature are legal upon their creation.
As Bitcoin and other cryptocurrencies embody both a payments network which users build and submit transactions to which settles ownership changes into a ledger block through a mechanism of decentralised mining, it is also a potential money which at scale at as a medium of exchange, store or value and unit of account, as well as being a generalised informational ledger for the storage and retrieval of arbitrary data. All together this means that Bitcoin and related cryptocurrencies will increasingly likely draw on the existing body of case law for previous disputes in payments networks such as MasterCard and VISA, issues with money tracing as part of KYC/AML obligations, non-compliance with proceeds of crime legislation, as any of the applicable case law on computer misuse and database fraud and manipulation as they relate to denial of service attacks, ownership of data and records, and record falsification. As cases have been few and far between and courts have been slow, the law has yet to deal with the many aspects of how Bitcoin and other cryptocurrencies work and what they can do
In most jurisdictions Bitcoin and other cryptocurrencies have only really begun to interface with the legal regimes around the world, where it is generally regarded merely as a capital asset and is generally subject capital gains taxes of the jurisdiction, though sometimes sales taxes are also substituted or added on top of that. Beyond this there has been some uptake from legislators around the world for legislating amended counterterrorism financing laws, though very little clear legislation exists outside of these areas, and most legal aspects of Bitcoin and other cryptocurrencies are covered by pre-existing legislation.
How Bitcoin is addressed in Australian law currently
Bitcoin and other cryptocurrencies are covered under a number of different aspects of the law, each of which is discussed below. Bitcoin and others have been most stringently covered by the law with respect to its potential use in money laundering activity and terrorist financing, which has given it the most attention under the legal regimes which cover this. Beyond this, Bitcoin and other crypto-assets such as token ICOs are also subject to consumer protection law and securities fraud legislation, in addition to existing tax law, business and contract law and legal tender laws.
Exchanges, KYC and AML
Bitcoin and other cryptocurrencies was declared subject to the Anti-Money Laundering and Counter-Terrorism Financing Act of 2006 (AML/CTF 2006) as of an amendment to the law made in 2017, which has implication for users and exchanges operating in Australia.
Exchanges in Australia from then on are formally regulated by the Australian Transaction Reports and Analysis Centre (AUSTRAC) as per Part 6A of the AML/CTF 2006 rules. This meant that any entity involved in the buying and selling of digital currency must be registered with AUSTRAC and they must:
- Register themselves as exchanges
- Implement identification and verification of users
- Maintain compliant records
- Comply with existing AML/CTF obligations
Non-compliance with these requirements leaves cryptocurrency exchanges wide open to criminal charges of fines. The purpose of enforcing compliance of exchanges is to continue to intercept and disrupt money laundering, tax evasion and terrorist financing through the new avenues of cryptocurrency. In addition to this, exchanges are also required to report any suspicious activity to AUSTRAC for further analysis.
Consumer protection law
Another set of laws which also applies to cryptocurrency exchanges operating in Australia is that they are also required to hold an Australian Financial Services (ASF) license as the sale of crypto assets such as Bitcoin or other tokens are regarded as financial products. As such consumers are expected to be provided with applicable information such as free structures and guidelines.
As Bitcoin is treated as an asset it is important to be aware that Bitcoin is subject to Capital Gains Tax (CGT) just as if it were any other piece of property one purchases and disposes of. It has previously been the case that investors and users were also expected to pay Goods and Services Tax (GST) but this has since been revised. As of 2015, the Australian Tax Office took the view that “Bitcoin is neither money nor a foreign currency, and the supply of bitcoin is not a financial supply for goods and services tax (GST) purposes. Bitcoin is, however, an asset for capital gains tax (CGT) purposes.” This view has also held for similar cryptocurrency assets which have evolved over the years. Read our entire cryptocurrency tax guide for Australians here.
Currently, Bitcoin does not enjoy the status of legal tender in Australia. Legal tender in Australia is currently only defined as the Australian dollar. Presently, legal tender in Australia is defined in two acts of parliament, Reserve Bank Act 1959 and the Currency Act 1965. As buying and selling goods and services with Bitcoin is viewed as a barter transaction currently, it is unclear what the legality of Bitcoins creation was, as S.44(1) of the Reserve Bank Act 1959 prohibits private and state government currencies. Owing from the decentralised Proof-of-Work based mining of the currency, it is unclear if Bitcoins creation is in contravention of this law and laws around the world like it, or if miners themselves are guilty of private currency issuance.
Bitcoin’s predicate scripting system and a number of other cryptocurrency projects also implement automated contracting systems, allowing coins to be released so long as the terms of the digital contract are fulfilled. As these are implemented in minimalistic scripting languages, room for nuance in terms conditions and conditions is fairly limited and liable to miscarriage unless parties can act in good faith. Attempts to formalise electronic contracts into human readable documents have been made, most notably by financial cryptographer Ian Grigg in 1996 who penned the concept of the “Ricardian Contract” whereby electronic implementations of a contract generate a reflective, human readable document containing all the necessary stipulations should the need for dispute resolution through the court system arise. While such ideas have been slowly taken up by the cryptocurrency space, recent developments in enterprise grade blockchain solutions have generated renewed interest.
As per the Electronic Transmissions Act of 1999, smart contracts have already been provided with a rich legal framework to enable electronic contracting to occur in the same form and fashion as paper based contracting methods. Under the ETA it should thus hold that any breach of contract running atop of a cryptocurrency network should be resolvable in a court of law so long as it was a lawful contract to begin with.