Bitcoin's identity crisis
Alan L Tyree

Bitcoin is usually referred to as a 'crypto-currency', an 'internet currency' or 'digital currency. From its inception, Bitcoin was intended to function as a currency in the sense that it could be used to buy and sell goods and services. The idealists see it as a replacement for state or government issued 'official' currencies.

Bitcoin was a dramatic breakthrough in the quest for a digital currency. The so-called 'digital cash' models which held out promise, unfulfilled, in the 1990's all needed a central entity to control the problem of 'double spending'. In practice, this meant that digital cash would only be issued by banks or bank-like institutions. In fact, digital cash was little more than a bank account, and customers were never persuaded that there was any advantage over existing payment methods.¹

Bitcoin was different. It is not issued by any entity, and the double spending problem is controlled by clever cryptography algorithms that allow a public ledger. The public ledger, the 'blockchain', provides a public record of every bitcoin transaction.²

Bitcoin has characteristics that appeal to many:

• it is and will remain cheap to transfer value;
• it is virtually instantaneous;
• it requires no accounts; indeed, it is very difficult (although not always impossible) to know who 'owns' Bitcoins; and
• it is free from the arbitrary exercise of government or private power.³

Of course, calling Bitcoin a crypto-currency does not make it a currency. Bitcoin is not legal tender in any country. But if it is not a currency, then what is it?

The question has recently received a lot of attention because of a ruling in a California bankruptcy case. Do an Internet search for 'bitcoin intangible property' and you will find a plethora of legal and not-so-legal web pages analysing the very preliminary and interim order in Hashfast v Lowe.⁴

The relevant facts were that the Trustee of Hashfast claimed that 3000 Bitcoins had been fraudulently transferred to Lowe. The Trustee sought an order that the transfer was one of property, not currency as claimed by Lowe.

The distinction might be important. When the transfer took place, the Bitcoins were worth about $300,000. When the matter was before the court, they had appreciated in value to over $1.3 million. if Bitcoin is the equivalent of US dollars, then the Trustee could probably recover only the value at the time of the transfer. If Bitcoin is not the equivalent of US dollars, the it would be open to the court to order the return the increased value.

Most of the web pages make a lot out of the judge's comments during the hearing that Bitcoin is 'intangible property', but the actual order made by the judge is much narrower than that:

The court does not need to decide whether bitcoin are currency or commodities for purposes of the fraudulent transfer provisions of the bankruptcy code. Rather, it is sufficient to determine that, despite defendant’s arguments to the contrary, bitcoin are not United States dollars.

Once the issue is phrased that way, the result is a no-brainer.

The current Australian treatment of bitcoin is discussed below, but first notice that some statutes have special purpose definitions of 'currency', 'money' and 'cash'.

For example, the Anti-money Laundering and Counter-terrorism Financing Act 2006 defines 'e-currency', but the definition only applies if the 'currency' is backed by precious metals, bullion or some other value prescribed by the Rules. Since bitcoin is not backed by any value, it does not fall within the sections of the Act which apply to 'e-currency'.

The Financial Transaction Reports Act 1988 defines 'currency' as:

the coin and paper money of Australia or of a foreign country that:

(a) is designated as legal tender; and

(b) circulates as, and is customarily used and accepted as, a medium of exchange in the country of issue.

The Anti-money Laundering and Counter-terrorism Financing Act 2006 has the same definition for 'physical currency'. In each case, a declaration by Australia or a foreign country that bitcoin was legal tender would probably not suffice to make it 'currency' since it is not 'coin' or 'paper money'.

The Personal Property Securities Act 2009 provides an even more curious example. The Act defines 'currency' as 'currency authorised as a medium of exchange by the law of Australia or of any other country'.

This definition leads to a very peculiar result: if any country, even the smallest and most remote, declares Bitcoin to be authorised as a medium of exchange, then Bitcoin is 'currency' for the purposes of the PPSA. This has real consequences: a holder of 'currency' takes it free of any security interest provided it is taken without actual or constructive knowledge of the security interest: s48.

The most important Australian consideration of the legal status of bitcoin was done, not surprisingly, by the Australian Tax Office. In August 2014 it issued draft rulings which were finalised in December of that year.⁵ Effectively, the ATO found that bitcoin was not 'money', either Australian or foreign, but was a commodity. Transactions with bitcoin were in the nature of barter transactions. The supply of bitcoin is not a financial supply for the GST.

This last conclusion was the worst possible for the development of bitcoin, acquiring and selling bitcoin attracted GST with the consequence that bitcoin transactions were, if the bitcoins were acquired in Australia, taxed twice. Those using bitcoin or other digital currency for investment purposes would be subject to capital gains tax.

The Senate Economics References Committee conducted an enquiry into digital currencies during 2015. The report, 'Digital currency – Game changer or bit player' was published in August 2015.⁶ It provides a valuable overview of the current regulatory oversight of bitcoin and other digital currencies. It made several important recommendations:

• Digital currency should be treated as money for the purposes of the GST (Recommendation 1).;
• the Government should consider establishing a Digital Economy Taskforce for further research and monitoring (Recommendation 3; and
• the statutory review considers applying the AML/CTF regulations to digital currency exchanges (Recommendation 4).

The Committee also recommended a further examination of appropriate tax treatment of digital currencies (Recommendation 2). In general, however, the Committee adopted a 'wait and see' approach to further regulation.

The Government had committed to implementing several of these recommendations. This commitment was reflected in the 2016-1017 Budget. The Budget Overview states:⁷

The Government will encourage the exploration of Blockchain technology, including through a study and pilot testing by the CSIRO’s Data61. We will also introduce changes to the GST to ensure that consumers are no longer double taxed when using digital currencies such as Bitcoin.

The Australian Securities and Investments Commission will also release a consultation paper in the coming weeks on a regulatory sandbox exemption to facilitate the testing of new FinTech products and services.

Treasury has issued a consultation paper for discussion on GST treatment of digital currencies.⁸

In May 2016, the Government responded to the Senate report with a discussion of each of the recommendations of the Committee.⁹ As noted above, it supports the recommendation to exempt digital currency from the GST regime. The Government also agreed with the second and third recommendations listed above.

The US Library of Congress maintains an informative web site describing the regulation of bitcoin in various jurisdictions.¹⁰ The information there should be treated as a starting point since it is not always up to date.¹¹

It will certainly be possible to regulate bitcoin exchanges and other dealings with bitcoin. Some countries have purported to make dealings with bitcoin illegal.¹² While that may prevent widespread use of the digital currency in retail operations, it is unlikely to deter anyone who has some technical savvy. The use of Virtual Private Networks together with various secure browser communication such as the Tor Network may be used to acquire and transfer bitcoins.

We live in interesting times.