In its submission to the ongoing Australian Senate inquiry into digital currency, the Australian Securities and Investment Commission (ASIC) has said that bitcoin and other cryptocurrencies are not financial products.
ASIC, which regulates Australian organisations, financial markets and services, and finance sector professionals, said in its submission that: "It is our view that digital currencies themselves do not fit within the current legal definitions of a 'financial product'."
This means that a person does not need an Australian market licence to operate a digital currency trading platform, or an Australian financial services licence in order to trade in digital currency; hold a digital currency for another person; provide advice in relation to digital currency; and arrange for others to buy and sell digital currency.
ASIC said in its submission that contracts for the sale and purchase of digital currencies are typically settled immediately, and as a result are unlikely to be financial products or derivatives.
"However, if there is a delay between the entry of the agreement to sell and the delivery of the digital currency, the contract may be a derivative and the financial services and financial markets regimes would apply in the normal way," the submission said.
ASIC said it has determined that some facilities developed to enable the use of a digital currency to make payments may be a financial product regulated by the commission.
"Treating digital currencies in a similar manner to national currencies may not result in a significant change to how digital currencies are regulated under the Corporations Act," said ASIC. "Digital currencies will not become financial products under the Corporations Act only by virtue of being treated as 'currency'."
However, it also said that treating bitcoin as currency could mean that some contracts for the purchase and sale of digital currencies could be classed as financial products, if the contracts are not settled immediately -- even though these transactions are typically settled immediately.
If bitcoin and other cryptocurrencies are eventually treated as currency, ASIC said that this could result in exchange contracts being subject to consumer protection obligations in the ASIC Act.
In August, the Australian Taxation Office (ATO) released its guidance on the taxation treatment of bitcoin and other cryptocurrencies to be treated like barter transactions with similar taxation consequences, unless they are doing it for business purposes, or for transactions worth more than AU$10,000, where it would be treated as a product or service and applicable to the Goods and Services Tax (GST).
However, this treatment is likely to result in bitcoin traders being subject to the GST both when buying and selling the digital currency -- a tax hit that some industry stakeholders have said will force some companies operating in the digital currency space offshore.
In November, chairman of the Australian Digital Currency Commerce Association Ronald Tucker told a Senate Committee hearing that the ATO's stance on bitcoin did not make sense.
"It could result in driving the digital currency businesses that [are] emerging in the sector offshore and potentially underground," he said at the time.
Meanwhile, the Australian Attorney-General's Department has said that although it has yet to see evidence of widespread bitcoin use for the purposes of criminal or terrorist activities, regulators need to keep a close eye on the development of the technology.
"The perceived anonymity and security of digital currencies will be exploited and abused to facilitate the laundering of proceeds of crime and the purchase of illicit goods and services," the department said in its submission to the inquiry. "There are also significant concerns around its potential to be used for the financing of terrorism, which poses risks to Australia's national security framework."
The department said that the digital currency could, ultimately, be easier to track than traditional currencies for law enforcement purposes, due to the digital currency's blockchain technology.
"Bitcoin offers users the ability to transact under the concealed identity of their bitcoin address/public key, but all of their transactions are available for full public viewing and therefore for law enforcement scrutiny," it said. "When these transactions were examined and used to construct a pattern of behaviour, analysts in a simulated experiment were able to reveal the identities of approximately 40 percent of bitcoin users."
The Senate Economics References Committee is expected to release its report into the digital currencies inquiry by the first parliament sitting day in March 2015.