Whereas email once revolutionised society as "communication over internet protocol", Bitcoin is often heralded as the next step in the internet revolution: "money over internet protocol".

Wild West notoriety

Since its inception in 2009, Bitcoin has earned itself a Wild West-like notoriety through rollercoaster price fluctuations between highs of more than $US1,000 a coin and lows of $7 and being the currency of choice for now-defunct drug platform Silk Road. Just last Saturday Japanese police arrested Mark Karpeles, the head of collapsed Bitcoin exchange Mt Gox.

Mt Gox filed for bankruptcy in February, 2014, saying it had lost around 850,000 Bitcoins – worth about $US500 million at the time. A lack of regulatory framework protecting these accounts meant customers never saw their money again.

When the Australian Taxation Office announced last August that Bitcoin was to be treated as an "intangible asset" for tax purposes, the relatively small (but loud) Australian Bitcoin industry cried foul. The nature of Bitcoin as a store of value as well as a method of payment meant each Bitcoin transaction would attract a GST charge twice.

At the time Ronald Tucker, chairman of the Australian Digital Currency Commerce ­Association, said: "The ATO's paper has unfortunately taken the position to treat Bitcoin ­supply transactions the same way as an exchange of a commodity; something that would involve the costly and impractical imposition of GST on every single Bitcoin transaction."

Arbitrage funds experimenting with price fluctuation froze, businesses mining Bitcoin using computational power grew wary and CoinJar, Australia's biggest Bitcoin exchange platform swiftly packed up shop and moved to the UK, where Bitcoin use didn't attract a VAT tax.


"The GST issue really hit the Australian Bitcoin market and several companies were forced to downsize or shut down completely," says CoinJar CEO Asher Tan. "If the definition is changed to a global currency, this would be a positive step to encourage the Bitcoin market to continue innovating. The Australian Bitcoin market will significantly improve."

Government action

But now all this is subject to change after months of lobbying, submissions and hearings.

Senator Sam Dastyari says Australia has a real opportunity to be a world leader in digital currencies. Daniel Munoz

Just after the ATO decision in October, the Upper House's Economics Reference Committee, chaired by Labor Senator Sam Dastyari, kicked off an inquiry to look into the ATO's treatment of Bitcoin, and also to envisage other regulatory frameworks to protect those dabbling in the new space.

Dastyari and Nationals Senator Matthew Canavan hoped to look at how Bitcoin could be regulated to provide safety for consumers, but without stifling an industry before it had even gotten off the ground.

The Inquiry received submissions from all corners of the financial services industry; AUSTRAC, Mastercard, the Australian Federal Police and a swathe of digital-currency start-ups, all voicing opinions on how Bitcoin and the blockchain technology might be regulated.

Most agreed the interpretation of digital currencies as a "commodity" rather than a "currency" misunderstood the premise of the technology and the "double taxing" meant small entrepreneurs were burdened with extra costs.


Asher Tan, CEO and co-founder of Australia's biggest bitcoin exchange CoinJar, moved his company to the UK as a result of the ATO's GST ruling. Paul Jeffers

"We've heard from all over the world – Silicon Valley, Miami, Paris, Hong Kong – everyone is watching to see what Australia will do," Senator Dastyari says.

"It is a brand new and, frankly, very exciting technology – and Australia has a real opportunity to be a world leader. Digital currencies could revolutionise aspects of the payments industry, how we conduct financial transactions, or trade existing fiat currencies."

Hearing from many groups

With the written submissions in, it was time for industry players to lay out case in person. In early March, the Senate Committee heard evidence from organisations including the Australian Digital Currency Commerce Association (the vocal Bitcoin lobby group headed by Ron Tucker), the Australian Bankers Association and the Australian Crime Commission, to name a few.

The security agencies stressed the nature of peer-to-peer transactions meant governing bodies like financial intelligence agency AusTrac were unable to monitor behaviour, due to the lack of a central reporting body.

AusTrac CEO John Schmidt has said visibility is limited, but Bitcoin's limited use in Australia puts it down the list of potential threats.

Notably, the Reserve Bank of Australia put in its two cents, saying it isn't overly concerned the digital currency will pose a huge risk to competition of the financial system on the whole. It still remains the realm of tech startups wanting to experiment with new technology.


But in encouragement to the fledgling industry, the RBA's head of payment policy Anthony Richards said digital currencies represent an interesting development in the broader payments and financial system landscape. "The concept of a decentralised ledger is an innovation with potentially broad applications for a modern economy," he said.

It is understood the Senate committee has found that further investigation will be needed before Bitcoin can be fully regulated by the likes of the RBA and the Australian Securities and Investments Commission, something that Big Four banks have indicated will be required before they consider offering customers the possibility of banking their Bitcoins.

Other committee recommendations are understood to include the need to further investigate how Bitcoin is treated for income tax and FBT purposes; the creation of a digital economy taskforce to conduct greater examination of how Bitcoin is being used and its related risks for regulation purposes; and also a move to insist that anti-money laundering and counter-terrorism financing regulations are applied to Bitcoin exchanges.

Cautious banks

Australian banks have been watching Bitcoin innovation closely and have been dabbling in the possibilities: Westpac recently acquired a stake in US based exchange Coinbase, while Commonwealth Bank of Australia, Australia and New Zealand Banking Group and Westpac are all experimenting with a sister blockchain technology, Ripple.

Overseas, Citigroup has been researching ways to move money from country to country more effectively, and has developed its own blockchain structure and cryptocurrency (imaginatively dubbed CitiCoin). Barclays has signed a Proof of Concept agreement with Swedish-based Bitcoin exchange, Safello, to explore benefits from the blockchain. And investment bank Goldman Sachs has sunk a reported $US40 million in Bitcoin company Circle, hedging its bets on the future of Fintech.

There are no Bitcoin legislation blueprints, but a number of different regulatory models have emerged. In June, the New York State Department of Financial Services released final BitLicence rules for digital currency firms, requiring them to apply for a license then comply with rules on consumer protection, anti money laundering and cyber security among other things. In July, the European Union ruled against a value-added taxation for Bitcoin trading.

However, until now, the unregulated nature of Bitcoin has kept mainstream financial institutions wary. Bitcoin's history steeped in Silk Road drug transactions and the possibility to finance terrorist organisations, have kept it on the fringes of mainstream adoption. Indeed, like cash, it is difficult to track once it's left traditional mainstream pathways.


Strict regulations

In Australia, strict "Know Your Customer" programs require financial institutions to have optics on their customer's habits and understand their financial activities, allowing authorities to better identify money laundering and terrorism activities.

As Bitcoin performs peer-to-peer transactions, it bypasses banks, allowing regulators limited visibility on the movement of Bitcoins, only the buy and sell point when fiat currency is swapped into the Bitcoin universe. This is known as on-ramp, off-ramp visibility and it has made it difficult to build a regulatory framework.

The Senate Committee looked closely at this issue and in this week's recommendations have acknowledged Bitcoin plays a very similar role in the criminal economy as cash. Once someone withdraws $3,000 from an account it could just as easily end up in the pockets of heroin suppliers, as in those of a used car salesperson.

Businesses like Bit Trade have made moves to implement KYC-type monitoring as they have more visibility on on-ramp and off-ramp behaviour.

"This is something that we're quite proud of," says Tan. "We have a thorough KYC process using our identity portal, a project we have been working on for the past few months.

"It's a win-win situation if regulators and the Bitcoin industry worked in tandem to develop fair policies that encourage innovation, while protecting consumers."

If implemented, this week's recommendation to alter the definition of "money" to include digital currencies could potentially firm up the ground for banks to begin experimenting more in this space, without contravening existing regulations or be seen to facilitate illegal activities.

Many Australian start-ups hope so, given they've developed their own blockchain and Bitcoin products that could help the banks integrate towards more efficient "money over internet protocol".