Cryptocurrency has been revolutionising the world since its inception in 2009. Bitcoin is currently the most well-known form of cryptocurrency and has a current market capitalisation of approximately US$973.6 billion. Given its popularity and the potential to disrupt many industries, including the legal industry, it's important to be able to understand exactly what cryptocurrency is, how it is treated in Australia and the implications for business.
What is cryptocurrency?
Cryptocurrency, colloquially known as 'crypto', is a digital term used to describe a digital currency platform where transactions are verified and recorded using an encrypted technique known as cryptography. In most cases, this is accomplished via a decentralised system, although some are still controlled via a centralised authority. This system, where transactions are verified and records are maintained, is a digital ledger technology, with the most common one being Blockchain.
Well-known examples of cryptocurrencies include Bitcoin (BTC) and Ethereum (ETH).
Bitcoin has a current market capitalisation of approximately US$973.6 billion and its current market value has varied between US$29,000 and US$65,000 per coin in the last six months. While Bitcoin may be one of the most well-known cryptocurrencies in the market, it is most certainly not the only one. Currently, there are over 4,000 different types of cryptocurrencies, which are otherwise referred to as 'Altcoins' (alternative cryptocurrency coins that are not Bitcoin).
Given the expansion of cryptocurrencies and the excitement they bring by their ever-growing value, the important question is do we truly understand what cryptocurrencies are?
Why is cryptocurrency becoming more and more popular?
The popularity behind this digital ledger technology lies in its decentralisation which manages and records the transactions of cryptocurrency and as such, has become an appealing and secure way for one party to deal directly with another, without an intermediary such as the bank, a central authority or government. This means that transactions are authenticated and recorded amongst a series of copies within the same digital ledger, such as the Blockchain.
In the alternative, where an intermediary such as a bank is required, transactions are conducted through a central system where your money is transferred over a course of time, and you trust that the transaction on the other end is in fact that which you authorised initially. This arguably removes the element of 'trust' due to the presence of an intermediary. Where crypto is becoming increasingly popular is due to it being peer-to-peer reviewed transactions before reaching the other end.
The popularity of crypto stems from its ability to transact without an intermediary. Where the majority of crypto effectively removes a centralised system from managing the supply of money, it also removes your money from being subject to inflation as flat currencies (such as the dollar, pound, yen, etc) are.
Further, an extremely appealing factor of crypto is its mechanics which are entrenched in the concept of 'cryptography', which is where cryptocurrency derives its name from. Cryptography or cryptology is a study of techniques that allows secure communication, making it virtually impossible to counterfeit or double-spend the currency.
Given its increasing prevalence and secure network, many experts are led to believe that cryptocurrencies and its related technologies will disrupt many industries, namely those of finance and law. The evolution of cryptocurrencies could potentially affect various areas of the law such as Commercial, Taxation and even Family Law.
In a series of articles, we will explore the impacts of cryptocurrency on commercial and family law matters and what you need to be aware of. Our commercial and family lawyers are well versed in crptocurrency, and the potential implications for your business and/or family law matters, and as such, can provide expert legal advice on your obligations and rights. You can get in touch with us here.
Types of cryptocurrencies
Generally speaking, crypto can be classified into two separate categories:
- Coins – Some cryptocurrencies do not have a purpose other than to serve as a decentralised digital currency platform, known as 'Coins'. Crypto Coins exist as a unit value on their own independent ledger, and include Bitcoin (BTC) and Altcoins.
- Tokens – Others provide real-world applications such as legal contracts, decentralised financial products, and enterprise solutions where authorisation and records of actions or transactions are required, known as 'Tokens'. A renowned example of crypto tokens is Ethereum (ETH) and the token created using the Ethereum platform is referred to as an ERC20 token.
With its applicability to today's growing technology, crypto provides investors with world-changing projects to support, making it seen as the currency of the future. Around the world, we can see the replacement of flat currency to crypto; where it has become largely accepted as a form of currency to buy something as mundane as a coffee and something more significant, such as real property.
Cryptocurrency in Australia
As a result of cryptocurrencies not being regulated by a central system, countries and their respective legal systems have struggled to define crypto and its application, and ultimately its regulation, in their relevant jurisdiction.
In Australia, crypto became subject to the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, which was further amended in 2017. This legislation now regulates service providers of cryptocurrencies, which was brought into effect to minimise the risk of money laundering, terrorism financing and cybercrime through digital currency exchange (DCE).
Although it is not illegal to trade, it is subject to a series of requirements in order to identify, mitigate and manage the currencies from a series of laundering and terrorism acts.
The Australian Tax Office (ATO) views cryptocurrency (particularly, Bitcoin) as neither an Australian nor a Foreign currency. Instead, the ATO deems cryptocurrency a property or asset and therefore is subject to capital gains tax (CGT).
Due to its categorisation as a property, cryptocurrencies may have a significant impact in matters concerning commercial, family, and taxation law, namely where commercially, there are impacts on:
- the rights and obligations of corporate and private owners of cryptocurrency;
- contractual issues/obligations arising from legal contracts;
- ownership of cryptocurrency;
- insuring cryptocurrency;
- fraud; and
- cryptocurrency theft.
Understanding your obligations and rights regarding crytocurrency
Whether you are new to trading or have been a long-time investor in cryptocurrency, it is always important to understand the implications this new form of digital currency has on various aspects of life, especially when it comes to legal matters.
If you would like a better understanding of cryptocurrency or if you have queries in relation to its impact on commercial matters or other legal matters you are currently involved in, our experienced Sydney Commercial Lawyers can provide tailored advice on what your obligations and rights are.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.