As noted above, various countries are assessing the impact of Bitcoin and addressing taxation and regulatory treatment. As Bitcoin raises questions about consumer protection, fraud, anti-money laundering, counter-terrorism legislation and trade in illicit goods, it is likely that government policies will evolve to regulate cryptocurrency trades more broadly. But how might that be achieved?
Bitcoin.org contemplates the possibility of regulating Bitcoin in terms of the purposes for which it is used, in the same way as fiat currency,11 but regulation in practice would need to overcome some challenging obstacles arising chiefly from the pseudonymity and irreversibility of Bitcoin transactions and the locations of the primary exchanges. How are exchanges to be regulated if they are based offshore? How are transactions to be regulated when both the buyer and seller are pseudonymous? How are fraudulent transactions to be invalidated when every transaction is irreversible?
There are various sources of government power under which Bitcoin might be regulated in Australia. Those concerning currency and the internet include sub-ss 51 (v), (xii), (xiii), and (xvi) of the Commonwealth of Australia Constitution Act 1900 (Cth), the Reserve Bank Act 1959 (Cth), the Currency Act 1965 (Cth) and the Corporations Act 2001 (Cth).
As all financial transactions in Australia must be made in Australian currency or the currency of another country, it is unlikely that Bitcoin or any other virtual currency would be considered valid currency or legal tender.12 It might be possible, using the above powers, to seek to regulate Bitcoin as a ‘token’ for the purposes of the Currency Act and follow China’s lead in prohibiting trade in them by financial institutions.13 However, this would not prevent individual users from continuing to trade, nor would it provide consumer protection. There has also been some debate as to whether intangible property would constitute a ‘token’. It has also been argued that Bitcoin is a ‘financial product’ for the purposes of the Corporations Act, used to make ‘non-cash payments’ as described in s 763D, so that service providers such as exchange operators are performing a regulated financial service and therefore are required by the Act to hold an Australian Financial Services licence.14 In both cases, there may be significant enforcement challenges if, as is likely to be the case currently, institutions or trading platforms involved are located offshore.
It may be possible to impose regulation on banks that hold accounts belonging to the exchanges or to users. However, with the advent of Bitcoin ‘vending machines’ allowing people to buy Bitcoin without making an online transfer from a bank account15 and the frequency with which new exchanges and virtual currencies appear, such regulations are likely to be of limited effectiveness. If considered to be a payment system, Bitcoin may fall under the jurisdiction of the Reserve Bank, but without the co-operation of the Bitcoin community, any controls would be difficult – if not impossible – to enforce.
Regulating through tax laws has been a common starting point for those countries addressing Bitcoin regulation, capturing businesses trading in Bitcoin rather than anonymous users or offshore exchanges. However, the current inconsistency between national regimes—such as between those terming Bitcoin an ‘asset’, a ‘commodity’ or ‘private money’—may result in confusion and competition problems, causing businesses to move offshore where rules might be clearer or less onerous.
Despite this, and despite the determination of cryptocurrency to bypass banks and other financial ‘middlemen’, banks may be part of the solution. In December 2013, JPMorgan Chase applied for a patent for a new online payment scheme that would allow users to make payments anonymously with currency stored on their computer memories and with a common log to be used for verifying transactions, as is currently used by Bitcoin.16 If large international banks were to run similar online payment systems, it is arguable that users may receive some of the benefits of Bitcoin – the speed, the convenience, and the anonymity - as well as the stability and protection provided by transacting through a large regulated institution. However, the key libertarian element of Bitcoin – a lack of fee or charge for its use or exchange - is unlikely to be present in bank-run cryptocurrencies.