Cryptocurrency Regulation In Australia: Pains And Gains

Cryptocurrency regulation in Australia - positive news for ICO rules but tax legislation is crippling

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We start this analysis with an unusual positive: cryptocurrency regulation in Australia is moving in the right direction, and the latest legislative developments regarding cryptocurrencies should be welcomed by the general public as a step in the right direction.

Offering protection to crypto consumers and investors, and providing legal certainty to blockchain-related businesses – without extinguishing the fire of blockchain innovation and adoption – is an incredibly hard thing to do, and the Australian authorities seem to be very active and willing to achieve this balance.

The Land of Plenty may not be the biggest player in the game, but it sure is a significant one. Let us take a look at Australia’s regulative approach to ICOs, cryptocurrency exchanges, and tax treatment of cryptocurrencies.

ICO regulation

The Australian Securities and Investments Commission (ASIC) is ahead of the game when it comes to cryptocurrency regulation in Australia. Set up under the 2001 ASIC Act, the Commission’s principal job is to enforce and give effect to the Corporations Act, as well as maintain, facilitate, improve, monitor and regulate the performance of the Australian financial markets and the entities in it.

In September 2017, the ASIC published an information sheet (INFO 225) that gives guidance regarding the potential application of the Corporations Act to entities considering crowdfunding through an ICO.

According to the ASIC, the laws applicable to crypto-assets or ICOs depend on whether the crypto-asset or ICO is a financial product. The general definition of a financial product under the Corporations Act is “a facility through which, or through the acquisition of which, a person does one or more of the following: (a)  makes a financial investment, (b)  manages financial risk, and (c)  makes non-cash payments.”

Therefore, ICOs and crypto-assets that are considered to be financial products are subject to the Corporations Act and under the jurisdiction of the ASIC, while ICOs and crypto-assets that are not financial products are regulated under Australian Consumer Law.

That being said, the ASIC has clearly stated on numerous occasions that it does not consider bitcoin, ether or other similar cryptocurrencies as financial products. Furthermore, the ASIC maintains that the legal status of ICOs and crypto-assets depends on the structure, operation, and the rights attached to the tokens offered in the ICO, and that merely describing the tokens issued as “utility tokens/digital currency” does not mean they’re not financial products.

In the information sheet guidelines, the ASIC categorizes different types of ICOs into four categories: managed investment scheme (MIS), shares, derivatives, and non-cash payments. This categorization is important because different types of ICOs may trigger particular licensing and disclosure requirements under the Corporations Act.

ICOs set up as a Managed Investment Scheme

Managed investment schemes are defined in Section 9 of the Corporations Act. In short, any arrangement constitutes an MSI if: (i) people contribute money or assets to obtain an interest in the scheme, (ii) the contributions are used in a common enterprise to produce financial benefits or interests in property, and (iii) the contributors do not have day-to-day control over the operation but, at times, may have voting rights or similar rights.

As you can see, the ASIC uses something very similar to the SEC’s Howey test in order to determine if a particular arrangement constitutes an MSI. Furthermore, as the SEC does with the Howey Test, the ASIC will interpret the rights attached to the tokens broadly, and merely “framing the entitlements received by contributors as a receipt for a purchased service” won’t be sufficient to circumvent the law.

If (after a careful case-by-case consideration by the ASIC) an ICO is classified as an MSI, a range of product disclosure, licensing and registration obligations are triggered under the Corporations Act.

ICO’s set up as an “offer of shares”

Shares are a collection of rights (ownership, voting, right to future profits through dividends) relating to a company. If the tokens issued during the ICO have these or similar rights attached to them (as generally promised in ICO’s “white paper”), they will be regarded as shares by the ASIC. If this is the case, the issuer of the tokens is required by law to prepare a prospectus with all the information that consumers need in order to make an informed investment decision (as in the case of IPOs).

ICO’s offering derivatives

For the purpose of the information sheet guidelines, the ASIC defines derivatives as financial products that derive their value from an underlying instrument or reference asset. The underlying instrument may include shares, share price index, a pair of currencies (including cryptocurrencies), or a commodity. Common examples of derivatives are options and futures.

According to the ASIC, all ICOs that offer derivatives are subject to the Corporations Act, which means they must obtain an Australian financial services (AFS) license in order to conduct a financial services business.

Crypto businesses offering NCPs

As defined in the information sheet, “a non-cash payment (NCP) facility is an arrangement through which a person makes payments, or causes payments to be made, other than by physical delivery of currency.”

In 2014, the ASIC made a submission to the Australian Senate regarding an inquiry into digital currencies in which it explains that facilities that “involve the digital currency holder transferring the digital currency to an intermediary (the service provider), who then exchanges it for monetary value and completes the payment to the merchant” qualify as NCP-providing facilities and, as such, they’re required to obtain an AFS license.

What about cryptocurrency exchanges?

In line with global regulatory trends, on April 3, 2018, AUSTRAC (Australia’s government financial intelligence agency) published regulatory guidelines urging all digital currency exchanges (DCE) to register with the authorities before May 14, 2018.

DCEs that list financial products on their trading platforms are considered to be operating as “financial markets” and they’re required to obtain an Australian market license (unless covered by an exemption). Furthermore, according to the latest regulatory guidelines, DCEs must comply with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 — meaning that they’ll have to identify users, collect transactional data, and report any suspicious activity that involves cash amounts over $10,000.

Tax treatment of cryptocurrency related activities

If, after reading the article up to this point, you entertained a fairly positive image of the Australian cryptocurrency legislation, it’s time we ruin that. This may sting a little.

On June 29, 2018, the Australian Tax Office (ATO) published a paper named “Tax treatment of cryptocurrencies in Australia” in which it laid out the following:

A CGT (Capital Gains Tax) event occurs when you dispose of your cryptocurrency. A disposal can occur when you:

  • sell or gift cryptocurrency
  • trade or exchange cryptocurrency (including the disposal of one
  • cryptocurrency for another cryptocurrency)
  • convert cryptocurrency to a fiat currency like Australian dollars, or
  • use cryptocurrency to obtain goods or services.
Put simply, this means that every transaction you make (including crypto-to-crypto e.g. Bitcoin-to-Ether), and every time you make a gain, the event must be recorded as it constitutes a CGT event.

Furthermore, the ATO doesn’t care if your crypto portfolio appreciates 1000% over time as CGT only applied when you liquidate (dispose of) your cryptocurrency.

As you can imagine, this process of recording every single transaction in order to file your taxes will be a nightmare for everyone, especially for active day or swing traders. The ATO is treating all cryptocurrencies that are not categorized as financial products as property, and every transaction with them is taxed as such.

If there’s anything positive in all of this, it’s the fact that coins that are acquired and held for more than 12 months trigger a 50% CGT discount. Also, it’s important to note that only profit (with costs and losses deducted) is subject to CGT.

Cryptocurrency Regulation In Australia: Conclusion

As things stand at the moment, Australia has the most comprehensive cryptocurrency tax regime in the world, and only time will tell if this strategy proves to be efficient and, most importantly, positive for the whole cryptocurrency ecosystem.

Understandably, there has been some serious backlash regarding Australia’s tax regime in the active crypto community and, hopefully, the tax authorities will listen to the complaints and change their approach to better suit the reality of the Australian crypto markets.

As for everything else, the Australian ICO and DCE legislation is in line with the general direction cryptocurrency regulation is headed all around the globe and, the reactions from both the crypto community and the legal experts have been very positive and optimistic thus far.

The author is not currently invested in digital assets.

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