Bitcoin, arguably the most well-known form of cryptocurrency, first entered the market as an exchange medium in 2009, with a popularity surge in 2017 and 2018, as Bitcoin defied expectations surrounding valuation.
2021 marked a new milestone in the acceptance and evolution of cryptocurrency as countries across the globe gradually started to accept them. Cryptocurrency’s unparalleled growth and usage as an exchange medium for goods and services led governmental oversight institutions across the globe to legislate how it is procuring and disposing.
What is cryptocurrency?
At the technical level, cryptocurrency is a collection of binary data designed to work as a medium of exchange, wherein a computerised database, which is called a ledger, stores individual coin-ownership records protected by strong cryptography to control the creation of additional coins and to verify the transfer of coin ownership.
Blockchain is the technology that validates cryptocurrency: a continuously growing list of records, called blocks, are linked and secured, with each block typically containing a hash pointer that links to a previous block, a timestamp, and transaction data. By design, blockchains are inherently resistant to data modification.
Cryptocurrency regulation globally
Most developed economies and some developing economies have regulated cryptocurrency, and the evolving landscape will likely lead to other countries joining the league soon.
Some of the jurisdictions that have established a regulatory framework for cryptocurrency include Australia, Canada, the EU, Germany, Japan, Malta, Mexico, Singapore, South Korea, and the United States.
In late 2019, the United Kingdom Jurisdiction Taskforce of the Lawtech Delivery Panel first officially recognised crypto assets as property, but as yet they do not have a specific framework to govern them and nor are they considered legal tender.
In late October 2021, Stephenson Law, announced that it would become the first UK law firm to sell advice using cryptocurrency tokens, in the form of three auctioned crypto-art tokens representing legal service. In a blog post on the firm’s website, the Stephenson Law team characterised the launch initiative as “a move of solidarity with the clients who have trusted us to guide them into the exciting and emerging field of NFTs. As the saying goes, if you want to talk the talk, you better walk the walk. So, we decided to get walking.”
NFT stands for a non-fungible token is a form of cryptographic asset that is unique to itself and allows users to verify its authenticity. Each is a unique token on the blockchain. In the Stephenson Law example above, each NFT would be exchangeable for a specific amount of legal advice. However, the largest audience for NFTs, in general, has been digital art. NFTs’ scarcity creates value for itself and hence, it requires measures to safeguard.
A recent blog post describing how one can safely use digital assets like NFTs, Concentric, a global security management company, reported that the underlying technologies are secure, “they do not prevent someone from tokenising something that is not theirs. Fortunately, there are legal protections you have access to. Standard copyright law may apply to NFTs. If, for example, you believe your digital art was being appropriated, you could file a takedown notice against the platform selling and creators of these NFTs using the Digital Millennium Copyright Act (DCMA).”
Cryptocurrency regulation in Australia
Australia has taken a forward-thinking approach to cryptocurrency, which the country has heavily regulated since 2017. The Australian Transaction Reports and Analysis Centre (AUSTRAC), in particular, has adopted new anti-money laundering and counter-terrorism funding (AML/CTF) rules to keep digital currency exchange (DCE) providers in check.
Some of these rules include requirements that:
- DCEs that operate in Australia must register with AUSTRAC
- DCEs must establish and maintain AML/CTF programs to help identify and mitigate the risk of money laundering and terrorist financing
- DCEs must identify and verify customer identities, in addition to monitoring their transactions
- DCEs must notify authorities of suspicious activities or matters, threshold transactions, and instructions on international fund transfers
- DCEs must keep records of all of the above points
Chainalysis’s 2021 Geography of Cryptocurrency Report states that Australia is ranked 38th globally in cryptocurrency adoption. One of the report’s key insights indicated that global cryptocurrency adoption has grown by more than 2300% since Q3 2019 and more than 881% in the past year. The continuing growth and popularity make it imperative that the laws that govern cryptocurrency are implemented with the intricacies involved with potential misuse at top of mind.
Even some Australian law firms, which have traditionally been loath to forge ahead with new technologies, have begun to accept payment via cryptocurrency. For example, Piper Alderman became the first major Australian law firm to accept bitcoin payments, expanding in October 2019 to accept other major digital currencies as well, including stablecoins. In April 2021, the firm became the first in Australia to execute a blockchain-based payment guarantee in the country.
While announcing the news to The Australian Business Review, Michael Bacina, a partner at Piper Alderman’s digital law practice, stated, “the transformative nature of distributed ledger technology is only just beginning and I’m thrilled to be a small part of helping to modernise and improve legal practice.”
In October 2021, a Senate inquiry through the Select Committee on Australia as a Technology and Financial Centre recommended changes to taxation laws, licensing, and regulatory regimes to encourage digital and crypto-asset businesses to set up in Australia.
In his analysis of the committee report from Senate inquiry, Nick Abrahams, the global co-leader of Norton Rose Fulbright’s digital transformation practice said, “the report didn't deal in enough detail with the issue of how do we regulate digital assets … And, so, what the report did was to really kick the can down the road with that and said [it] is going to be a token mapping exercise."
The committee found that Australia’s current cryptocurrency regulation is inadequate and additionally recommended that the country implement tax discounts and a new licensing regime. If passed into law, experts say these changes may result in Australia becoming a digital innovation hub.
There has been an upsurge of financial technologies (FinTech) recently including mobile money, digital wallets, digital currencies. FinTech potentially serves as a substitute to the traditional banking system (requiring transactors to hold a bank account). Digital currencies have a great potential to serve as the payment system for the unbanked or individuals/businesses in remote and marginalised areas.
An October Bloomberg article reported that JPMorgan's analysts found that the recent rally of Bitcoin was driven mainly by the perception that it was a better inflation hedge than gold. Investors around the world are worried about rising rates, they said, reviving interest in inflation hedges, including Bitcoin.
Conventional transactional fees using the banking system can impose costs ranging from a small percentage (1%–3% for credit card purchases) up to 20% of transferred amounts.
The transactional fees associated with cryptocurrency often are less than 1%. Different cryptocurrency exchanges have designed their fee schedules to encourage recurrent trading in bulky transaction amounts. The fee often reduces with an increase in amount and trade frequency.
There are talks to further reduce the transaction fees. In a submission to Senate inquiry, Afterpay (an Australian financial technology company) said that “merchants stand to benefit considerably from the cryptocurrency model, as card network fees are entirely removed from the equation and the customer/payer bears the transaction costs.”
Interwoven future to obtain global acceptance
Despite their complexities, cryptocurrency and blockchain will be interwoven amid the future of online currency and transactions, given the surge in their global acceptance. Investors globally are hinged towards investing in cryptocurrency given the perception that it is a better inflation hedge than other assets. Cryptocurrency, in some form or another, is here to stay, and advances to its technology are inevitable. This natural evolution gives rise to the need to reframe policies and laws, supported by more manpower in Australia to safeguard end consumers from potential risk.
Disclaimer: The views and opinions expressed in this article do not necessarily reflect the official policy or position of Novum Learning or Legal Practice Intelligence (LPI). While every attempt has been made to ensure that the information in this article has been obtained from reliable sources, neither Novum Learning or LPI are responsible for any errors or omissions, or for the results obtained from the use of this information, as the content published here is for information purposes only. The article does not constitute a comprehensive or complete statement of the matters discussed or the law relating thereto, and does not constitute professional and/or financial advice.