Digital currencies (such as Bitcoin and its newly-developed offshoot Bitcoin Cash) represent a large and growing pool of value, with a total market capitalisation well in excess of AUD $100 billion. However, as is often the case with new and emerging technologies, these "currencies" have so far remained largely unregulated in Australia, falling outside the scope of legislation designed before they entered widespread use.
Despite growing calls for regulation in recent years, including recommendations arising from a 2016 statutory review of Australia's anti-money laundering and counter-terrorism financing (AML/CTF) regime, the road to regulation has been relatively slow. However, the Commonwealth Government has recently taken the first step towards closing this regulatory gap by introducing the Anti-Money Laundering and Counter-Terrorism Financing Amendment Bill 2017 (AML/CTF Bill) into parliament.
The AML/CTF Bill is designed to implement a range of reforms recommended by the 2016 statutory review, including a move to bring digital currencies within the AML/CTF regime.
Digital currencies, which typically function on a "peer-to-peer" basis without the need to move through established financial institutions, are often regarded as providing a greater degree of anonymity as compared to transactions using traditional currencies. While this may represent part of the appeal for privacy-conscious users, it also gives rise to concerns regarding the use of digital currencies for illicit purposes.
The Commonwealth Government's new proposal to regulate digital currencies forms part of a global trend, following on the heels of similar regulatory reform in Japan which will bring digital currency exchanges under the jurisdiction of the Japan Financial Services Agency from 1 October 2017. More recently, China has taken a more restrictive approach to digital currencies, with its central bank announcing a ban on "Initial Coin Offerings" (under which companies raise funds by issuing their own digital currencies) as of 4 September 2017.
The AML/CTF Bill is intended to bring digital currency exchange operators (who provide platforms where users can exchange digital currencies for traditional currencies and vice versa) within the AML/CTF regime and under the oversight of Australia's financial intelligence agency, AUSTRAC.
Should the AML/CTF Bill become law, operators of digital currency exchanges would be required to:
- register with AUSTRAC;
- comply with customer identification and due diligence obligations (including "Know Your Customer" checks);
- keep appropriate records; and
- report large or suspicious transactions to AUSTRAC.
Effect on industry
Operators of digital currency exchanges will need to be aware of their obligations under the proposed rules, as failure to comply can carry significant penalties. These obligations largely mirror those of reporting entities under the existing AML/CTF legislation, which include banks and other financial institutions as well as providers of a range of other "designated services" in the financial sector.
Many digital currency exchanges in Australia already require customers to provide some form of identification in order to use their services (partly in anticipation of proposed changes such as these). However, should the AML/CTF Bill become law, exchange operators would need to ensure that their procedures for collecting, verifying, recording and reporting information comply with strict legal requirements.
Exchange operators would also be required to comply with the Privacy Act 1988 (Cth) in collecting information for AML/CTF purposes.
The AML/CTF Bill proposes to bring digital currency exchanges within Australia's AML/CTF regime and under the regulatory oversight of AUSTRAC.
If passed, the Bill will have a significant impact on providers of digital currency services, and operators of digital currency exchanges in particular should ensure they are prepared to comply with registration, due diligence, record-keeping and reporting obligations.
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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.