Bitcoin operates entirely as a peer-to-peer industry, where the participants interact directly with each other to create and exchange bitcoin.
The value of Bitcoin is not derived from a physical commodity nor does a government or central bank ascribe a value to it; instead, the value of Bitcoin is what a buyer and seller agree that it is worth when it is exchanged between them or when it is used to pay for a good or service.
How is Bitcoin created and stored?
Bitcoin can be obtained by mining i.e. the creation of Bitcoin, or by purchasing Bitcoin using a legal tender.
‘Mining’ is the process used to create new Bitcoin. Mining is performed by a special group of users on the Bitcoin network known as miners. The miners solve mathematical algorithms and each solution also adds a new block to the blockchain and unlocks additional bitcoins.
Approximately every ten minutes a new block is created and added to the blockchain through the Mining process. This block verifies and records any new Bitcoin transactions. The creation of the new block means that the Bitcoin network has then confirmed those transactions.
Bitcoin is stored on a public ledger called the blockchain in what is known as a ‘Bitcoin Wallet’, a type of software where Bitcoins are stored. A Bitcoin Wallet acts in much the same way as a bank account – you can deposit, store and transfer Bitcoin from the Bitcoin Wallet.
How is Bitcoin used?
Bitcoin can be used to pay for online purchases; every transaction is recorded on the Blockchain which is a public ledger, this means that each time Bitcoin changes hands from one user to another this is recorded where it can be viewed by anyone and this prevents users from selling bitcoin they don’t have.
The Blockchain records the transaction history and ownership of every single bitcoin.
Bitcoin is also known as a ‘convertible digital currency’, which means that it can be easily and readily exchanged for legal tender. Much of the growth of value in Bitcoin is attributed not to its ability to be used for digital purchases but in its value as an investment, with the price of Bitcoin surging in the past 12 months.
How is Bitcoin Regulated?
At this stage, Bitcoin is not considered a financial product for the purposes of the Corporations Act 2001. ASIC considers that Bitcoin does not meet the definition in section 763A of the Corporations Act 2001 as it is not:
- a facility through which a person makes a financial investment;
- does not have the features of a facility used to managed financial risk; and
- is not a facility through which a non-cash payment is made.
ASIC has concluded that bitcoin is not a financial product and therefore you do not need an AFSL to act as a Bitcoin adviser, buyer or seller.
Does the AML/CTF regime apply?
Not at the moment.
At present, the definitions in the AML/CTF Act are not broad enough to encompass Bitcoin.
However, rising global concern about Bitcoin’s potential to be used for unscrupulous dealings and the difficulty in identifying the individuals or companies involved in any Bitcoin Transaction has meant there has been worldwide discussion regarding the most effective method of regulating Bitcoin.
The Australian government recently conducted industry consultation around proposed new AML/CTF guidelines for digital currencies, including Bitcoin. The result of this consultation is the Anti-Money Laundering and Counter-Terrorism Financing Amendment Bill 2017 (“Bill”), which was introduced to Parliament on 17 August 2017.
Broadly, the Bill proposes the following updates to the current AML/CTF Act (“the Act”):
- The definition of ‘e-currency’ will be removed from the legislation and replaced with a ‘digital currency’ definition, which will capture cryptocurrencies such as Bitcoin;
- AUSTRAC will maintain a Digital Currency Exchange Register;
- Providers of registrable digital currency exchanges must be registered with AUSTRAC, and will not be able to provide such services if they are not a registered provider;
- AUSTRAC may impose conditions on the registration of a person on the Digital Currency Exchange Register. These conditions may include the value of the digital currency or money exchanged, the volume of digital currency exchanged, or the kinds of digital currencies exchanged; and
- AUSTRAC will have powers to suspend and cancel such a registration on the Digital Currency Exchange Register.
The Bill has undergone its first reading in parliament and must now be debated, voted on and pass through both houses before becoming Australian Law.
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