Ever since the infamous Silk Road website was investigated and shut down by the US Federal Bureau of Investigation in 2013, and again in 2014, for facilitating the trafficking of illegal narcotics on the “darknet” using Bitcoin, the world of digital currencies has never been the same. Once upon a time Bitcoin was often used as an anonymous way to transfer large amounts of value across international borders – setting the perfect conditions for drug dealing, money laundering and other criminal activities.
By their very nature and design, digital currencies such as Bitcoin were developed to facilitate anonymous, de-centralised financial transactions, and fittingly, even the true identity of Bitcoin’s founder, “Satoshi Nakamoto” remains a mystery. Unlike traditional currencies, digital currencies only exist by means of computer algorithms, and have no backing from any central bank or government authority. Despite the elusive nature of Bitcoin, its value remains high, with each Bitcoin trading today at approximately USD$16,000 (over AUD$21,000). Nevertheless, it is because of Bitcoin’s elusiveness that resulted in the Australian Government’s 2016 Statutory Review of Anti-Money Laundering Counter Terrorism Financing (AML /CTF) Act, Rules and Regulations highlighting the risks associated with the anonymity of transactions and lack of identification and verification protocols associated with digital currency users.
In a bold move to regulate a technology that was ultimately designed to be un-regulated, both Houses of the Australian Federal Parliament, yesterday, passed the Anti-Money Laundering and Counter-Terrorism Financing Amendment Bill 2017 which, in Part 2, deals directly with strengthening the regulatory regime with respect to digital currency exchanges in Australia and reduces the anonymity of digital currency users and transactions.
The Explanatory Memorandum to the bill for the newly passed legislation recognises that digital currencies are “growing in popularity as a method of paying for goods and services and transferring value in the Australian economy”. However, up until now, their use in Australia has largely been outside the scope of the regulated financial system. The new legislation amends the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 and the Financial Transaction Reports Act 1988 and adopts the term “digital currency” to expand the law to include any digital representation that functions as a medium of exchange, which is not issued by a government body, and which is capable of being exchanged for goods and services by the public without any restriction on its use.
Thanks to the amending legislation, the AML/CTF Act now clearly covers convertible digital currencies such as Bitcoin, Ethereum, etc. and requires those who operate an exchange market for such convertible digital currencies to be registered with the Australian Transactions Reports and Analysis Centre (AUSTRAC) and to comply with certain obligations that are in line with the existing AML/CTF requirements imposed on traditional financial transactions, such as Know Your Customer (KYC), client due diligence and associated record-keeping obligations.
Therefore, the new legislation seeks to close the regulatory gap relating to such convertible digital currencies and aims to streamline and simplify Australia’s AML/CTF regime. The new regime will also see the “policing” functions of AUSTRAC expanded; improving its existing powers relating to infringement and registration.
To Bradley Brown, AUSTRAC’s acting deputy CEO of international policy, this must come as a welcome change. Mr Brown recently noted concerns relating to the proliferation of digital currency such as Bitcoin being used to facilitate the safe harbour of illegal drugs and weapons transactions on the “darknet”.[i] A report released by the Australian Criminal Intelligence Commission also said that “virtual currencies are increasingly being used by serious and organised crime groups”[ii], which is extremely alarming given today’s global political climate of heightened public concerns over criminal and terrorist activities.
In an attempt to counter this, the legislation will mean that businesses which trade in digital currencies will be subject to greater oversight, diligence and review by AUSTRAC. This echoes similar rules announced earlier this year by the Japanese Financial Services Agency to regulate the trading of digital currencies in that jurisdiction.[iii]
Interestingly, virtual “points” associated with airline frequent flyer programs, supermarket loyalty schemes and other common loyalty programs are technically digital currencies too. However, these programs fall within the concept of “non-convertible digital currencies” which, unlike Bitcoin, often restrict the members’ use of their accrued “points” to certain flights and selected goods or services. [iv] They are not captured within this new AML/CTF regime. Nevertheless, although airlines, supermarkets and others who offer these non-convertible digital currency programs are not obliged to collect KYC information under the new AML/CTF regime, they often still do so for, presumably, marketing reasons.
In any event, whilst entrepreneurs generally do not welcome increased government regulations, in this case, this new legislation has been embraced by digital currency traders and start-ups alike because, by passing the legislation, Australian law-makers have clearly signalled their intent to give legitimacy to the use of digital currencies in the Australian economy. That said, some start-ups are still worried about the costs associated with implementing KYC procedures for small transactions, resulting in higher barriers to entry for new players.
This new legislation is certainly a ‘game-changer’ with respect to the way the Australian community will view Bitcoin and other digital currencies. This regulatory reform will bring digital currencies more towards mainstream consumer use as to media of exchange. So by requiring convertible digital currency exchanges to be registered with AUSTRAC, to conduct client due diligence, to keep transaction records and to report suspicious matters, the legislation will minimise the risk of misuse of digital currencies for illegal money-laundering and financing of crimes and terror activities. It will also increase regulatory transparency to encourage greater market confidence in the use of innovative peer-to-peer transaction technology.[v]
[i] Eryk Bagshaw, “Don’t pin banks for all “serious crimes” , bankers say”. The Australian, 21 September 2017
[ii] Australian Criminal Intelligence Commission, “Organised Crime in Australia 2017” Report, pages 11 and 12.
[iii] Emiko Terazono, ‘Bitcoin gets official blessing in Japan’, Financial Times, 18 October 2017.
[iv] For example, members of Qantas Frequent Flyer or Virgin Velocity programs can exchange his or her virtual points for flights, services and other household goods. Members of the Flybuys or Woolworths loyalty programs can trade in points they earn from their grocery shopping into fuel discounts. In both cases, there are restrictions on what the accrued points can be converted into.
[v] As reasoned by Justice Minister Michael Keenan in a 2016 counter-terrorism financing summit in Indonesia, “the Government is committed to facilitating innovation and growth in the digital currency sector and considers appropriate anti-money laundering and counter-terrorism financing regulation will aid that development.”