What a difference a day (or 7 years) makes.
In 2007 Jed McCaleb, an American entrepreneur, registered the Mtgox.com web domain to trade a popular type of game card in Tokyo. In 2010 McCaleb repurposed the site with the simple idea of providing a single place to connect buyers and sellers of bitcoin. By 2014 Mt. Gox was one of the largest bitcoin exchanges in the world, facilitating tens of thousands of transactions a day. Later that same year, it was gone.
Mt. Gox folded after hackers stole almost half a billion dollars in crypto-currencies, driving the company to bankruptcy. The collapse resonated through the crypto-currency underground as questions were raised around exchange security, not least because the Mt. Gox hack had been reportedly perpetrated for years without detection, with millions skimmed from the company since 2011.
Whilst the Mt. Gox collapse raised concern for users, it did not spark action from law makers. In 2014 the Australian Tax Office designated bitcoin as an intangible asset subject to GST. This drove many bitcoin start-ups from Australia and pushed concern about exchanges to back of mind for regulators.
But, as the number of digital currencies has increased and awareness of their use in both criminal activity and terrorism financing has grown, the Australian Government has recognised the importance of regulating digital exchanges.
It is on this backdrop that the Justice Minister Michael Keenen acted last week, unveiling draft amendments to the Anti-Money Laundering and Counter-Terrorism Financing Act. These changes would bring digital currencies under the remit of the Government’s financial intelligence and regulatory agency, AUSTRAC.
In effect the changes would hold digital currency exchanges to the same reporting standards as banks and enforce many of the same regulations that bind established banking competitors.
Bringing digital currency out from the underground will take time and the Government will need to move quickly, maintaining close contact with regulators internationally. The difficulty of keeping pace with technology is compounded by the challenge of defining this ever changing medium of exchange.
Regulators will need to engage in a broader discussion about the role of digital currencies in the financial system if they are to go down the path to legitimising their use. The difficulty with this discussion is it is much easier to point to what a digital currency is not rather than what it is. For example, currencies such as bitcoin are not fiat money as they are not legal tender; nor are they a money substitute (or token money) because they are not redeemable for any more fundamental unit than itself.
‘Commodity money’ is a description often used for digital currency, along with a comparison to silver and gold. But this is really just a euphemistic label for everything that is not money – all things against which money prices are paid. The ‘commodity money’ label also doesn’t explain why the Government would regulate crypto-exchanges in the same manner as banks that exchange fiat money.
The taxonomy of crypto-currencies is a broad debate, but not one that need be concluded before regulations are brought upon digital exchanges. The growing number of digital currencies and innovative ways of using them presents increasing financial risks.
If Australia is to prove its credentials as the fintech hub of Asia, the Government must address these risks without placing undue burden on the innovators driving digital disruption.