ATO to monitor Bit-coin growth
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INVESTORS AND BUSINESSES THAT TRADE USING THE DIGITAL CURRENCY BIT-COIN ARE ON NOTICE AS THE AUSTRALIAN TAXATION OFFICE PLANS TO
Bit-coins along with other alternative payment systems and will provide further advice to taxpayers before June 30. "The ATO is working on a holistic understanding of the taxation treatment of Bit-coin to be in a position to provide certainty for the Australian community," he said.
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BITCOIN AND OTHER CRYPTO CURRENCIES
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The ATO has been monitoring developments developments in Bitcoin Bitcoin through through an informal team team led by TPALS with support from Tax Counsel, SB/IT, ITX, SNC, PGI and EST. The team is aware of a number of private ruling requests and compliance activities related to the income tax and GST aspects of bitcoin or bitcoin related activities. However we now need to ensure that we have a complete stocktake of issues on hand.
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It is now evident that that a more more substantial substantial approach approach is required to address the various various issues raised by Bitcoin and other crypto currencies in a timely and more comprehensive comprehensive fashion.
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We will be forming forming a ‘task ‘task force’ to progress progress the ATO’s ATO’s consideration consideration of Bitcoin and related issues. Initially we propose to include the team t eam members already involved from various business lines but we may need to involve more or different staff and you may be requested to provide support to this task force as the work develops. A list of those people involved to date is attached below, however if you have particular arrangements for your business line you would prefer, please let me know.
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We expect to commence with a planning and scoping workshop in the near future and will look at the appropriate use of the consultation hub to have the community involved in our thinking.
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Initially, I’d be grateful grateful for your your support support in providing providing a list of officers officers in your business business line line who may be dealing with: (a) private rulings or similar similar advice matters; or (b) compliance activity in relation to Bitcoin or other crypto currencies. A brief description of the matter under consideration consideratio n in each case would also be appreciated. `0`OOS ADMIN`
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BITCOIN AND OTHER CRYPTO CURRENCIES
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IMPLEMENTATION OF IGT RECOMMENDATION 7.1 (C)
it is a digital equivalent to cash (can be anonymously transferred), there is no central issuing issuing authority that might be used for compliance leverage; and it can be transferred in large volumes across the world almost instantly
Most law enforcement concerns have been about the potential for bitcoin (or similar products) to facilitate criminal transactions including terrorism financing. Revenue concerns are from the taxation aspects of criminal activity through to the use of bitcoin in the cash economy. It should be noted that anonymous transactions and the ability to undertake international transactions are not new risks, but bitcoin seems to represent a potentially convenient new way of exploiting the risks. Moderating Mode rating views about ris k
A review of public information informati on about bitcoin from sources such a as s coindesk.com reveal some of the concerns about bitcoin may be mitigated more easily than first thought. From coindesk.com:
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… a yo at Therefore, it is possible to know that bitcoin address “ABC” has a certain value of bitcoins, it is just not immediately immediatel y possible to associate that address wi with th a natural person or business. The “founder” of Bitcoin, Satoshi Nakamoto (a presumed pseudonym) is estimated to control about US $100m. At the prevailing exchange rate of approximately $US 124.00 this would imply that the founder holds over 800,000 bitcoins of the 11.8 m in circulation. Bitcoins are “mined” through solving computer algorithms, which are designed to maintain the integrity of the bitcoin system. “Satoshi” did not award himself or herself the bitcoins, but had to mine them. The mining transactions are recorded in the bitcoin block chain. As bitcoin has been operating since 2009, but not reall really y attracting widespread public publ ic interest until 2010-11, researchers assume that some of the earliest addresses associated with the bitcoin block chain belong to “Satoshi” and at least one of these has accumulated over 800,000 bitcoins.
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IMPLEMENTATION OF IGT RECOMMENDATION 7.1 (C)
It is not definitively known that the address with over 800,000 bitcoins is that of “Satoshi”. His or her real world identity is also not known. However, it is possible to irrevocably associate a particular bitcoin address with the over 800,000 bitcoins because of the cryptography involved. If the owner of the address with over 800,000 bitcoins was to exchange some of those bitcoins for $US, it is likely that the real-world identity of that individual would be known and could be properly associated with the bitcoin address. `37(2)(b)`INV`
Bitcoin anonymity can be reduced if bitcoin users try to shift out of the bitcoin environment to “physical” currencies or if they leave information that can allow association between their bitcoin address and their actual identity. As there are emerging moves to operate o perate bitcoin bank, presumab presumably ly these banks will need to comply with relevant regulatory rules around anti money laundering and knowing your customer. We should be alert to the challenges of the “pseudo” anonymity, but not alarmed by them. Opportunities
Less commented on is that bitcoin can have attributes programmed into it. There are already extension protocols to create “coloured coins”.`47C`DELIB`
Once again, the emerging desire in the bitcoin community to establish banks and public recognition for bitcoin is likely to be a point of opportunity.
Ad vi ce o r Is su e
This is just a brief outline of material to assist our discussion next week.
Michael Hardy Senior Assistant Commissioner
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INTELLIGENCE PRODUCT - ALERT
ENDORSEMENT/VERSION CONTROL `0`OOS ADMIN`
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INTELLIGENCE PRODUCT - ALERT
OBSERVATIONS Bitcoin is a decentralised digital currency that operates on a peer-to-peer basis. OCKO has previously identified Bitcoin as a potential matter of interest since the currency was established in 2009. Other business lines including TPALS and SNC have investigated possible risks relating to the digital currency. Bitcoin has also attracted interest from other agencies such as AUSTRAC and the Australian Crime Commission. Bitcoin has fluctuated in popularity since its inception in 2009 and has had security and legitimacy issues. Its apparent anonymity and use as a medium of exchange for the purchase of drugs and weapons raised questions as to the credibility and reliability of the currency as a genuine means means of exchange. Despite these setbacks, setbacks, the system is still operating and ha has s gradually attracted legitimate legitimate suppliers and retailers to accept the currency as a payment method. Part of the attraction of Bitcoin is in its lack of centralised authority. Since its commencement Bitcoin has risen in prominence and attracted publicity, however has essentially retained a novelty factor rather than being accepted as a mainstream currency. `0`OOS SUM` FN 1`
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http://www.smh.com.au/digital-life/digital-life-news/bitcoin-boom-breakthrough-moment-or-billiondollar-bubble-
20130403-2h68h.html http tp:/ ://w /www ww.th .ther ereg egis iste ter. r.co co.u .uk/2 k/201 013/ 3/03 03/2 /21/ 1/bi bitc tcoi oin n on a ro roll ll in sp spai ain/ n/ ht 3 ibid 4 ://w /www ww.th .ther ereg egis iste ter. r.co co.u .uk/2 k/201 013/ 3/03 03/2 /21/ 1/bi bitc tcoi oin n on a ro roll ll in sp spai ain/ n/ http http:/ 5 http://www.smh.com.au/digital-life/digital-life-news/bitcoin-boom-breakthrough-moment-or-billiondollar-bubble20130403-2h68h.html 6 European Central Bank, ‘Virtual currency schemes’, October 2012 7 http://au.businessinsider.com/cyprus-bitcoin-atm-guy-responds-2013-4 http://au.businessinsider.com/cyprus-bitcoin-atm-guy-responds-2013-4 8 http://www.bbc.co.uk/news/technology-21863593 2
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INTELLIGENCE PRODUCT - ALERT
SIGNIFICANCE From an Australian perspective, evidence evidence suggests that the driver for the use of Bitcoin is not in response to the usability of the method itself but rather a casual factor of the frustration entities are displaying in their interactions with traditional banks and payment institutions. While the cases of its installation continue to be of an isolated nature in Australia and is unlikely to be currently considered a significant threat, the ATO and relevant decision makers should be aware of its current use in Australian business for consideration in compliance activities.
ACTIVITY Bitcoin should be continued to be monitored by OCKO from a strategic level and it is suggested that individual business lines that could be potentially be affected by any rise in prominence of Bitcoin monitor its progress on an operational and tactical level.
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INTELLIGENCE PRODUCT - ALERT
APPENDIX A PPENDIX A – FURT FURTHER HER PUBL ISHING ISHING DETAILS DETAIL S `0`OOS ADMIN`
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PMIPOTENTIAL MATTER OF INTEREST - BITCOIN BOOM: ‘BREAK THROUGH MOMENT' - TPALS INFORMATIO INFORMATION N REPORT 207991
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SIGNIFICANCE
Bitcoins are not real money and not even a type of commodity. It is a global virtual currency floating in cyberspace with no guarantees and only exists because people believe it has monetary value. There are signs of it being perceived as an alternative investment strategy encouraged partly by the current global economic environment of large government fiscal deficits and money printing exercises, which has eroded some world currencies and has created a fear of the unknown consequences and loss of money value. Bitcoins have no serial numbers or any physical characteristics and have no central bank nor is it regulated. Nevertheless, Bitcoin is significantly growing as a potential threat to government government tax revenue and community confidence, as no tax is paid on gains made by Bitcoin trades and purchases as in normal business currency transactions, FOREX and share trades. This is assisted by the virtually untraceable anonymous nature of bitcoin transactions. However, Bitcoin is not recognised as a fiat currency in the world which may render earnings unlikely to be taxable. There is evidence emerging that more businesses including Australian businesses businesses are accepting accepting bitcoins bitcoins as a payment for 12 goods and services and this is increasing the risk of omitted income in BAS and tax t ax returns, as its virtually untraceable and essentially operates like a cash payment, with no paper or transaction trail; and completed with a currency that is not officially recognised in the world.
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ibid Murphy J, ‘Hackers blamed for Bitcoin plunge’, Australian Financial Financial Re Review view, 12 April 2013 9 www.mtgox.com,, accessed 12 April 2013. Mt. Gox, www.mtgox.com 10 Faiola A, ‘Digital currency surges surges to a new mystery high’, Australian Financial Financial Re Review, view, 6 April 2013 11 ibid 12 Murphy J, ‘Hackers blamed for Bitcoin plunge’, Australian Financial Financial Re Review view, 12 April 2013
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PMIPOTENTIAL MATTER OF INTEREST - BITCOIN BOOM: ‘BREAK THROUGH MOMENT' - TPALS INFORMATIO INFORMATION N REPORT 207991
The use of bitcoins allows businesses and individuals to bypass currency exchange fluctuations, fluctuations, GST and transaction fees and is thus an incentive to accept bitcoins. The rapid continued growth of this virtual currency and the increasing acceptance levels being observed worldwide, worldwide, partly helped on the back of perceived global financial instability and distrust for banks and governments; in addition to fear from increased cross border tax bilateral agreements, creates a favourable scenario for Bitcoin to become more mainstream, which would potentially cause significant regulatory headaches to central banks and governments.
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4. Tax Crime and general tax implications in i n relation to Bitcoin The potential Tax Crime and general tax implications in relation to Bitcoin have been previously identified. Broadly these implications relate to: Anonymous transfer of funds by organised crime interests; Profit from exchange gains; Income of exchange dealers; Income on profits from ‘mining’ cryptocurrency; cryptocurrency; and Longer term, potential to support the cash economy.
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APPENDIX A - FURTHER PUBLISHING DETAILS `0`OOS ADMIN`
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BITCOIN GAINS MOMENTUM 3 YEARS ON 197438
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AN UPDATE ON RECENT INTELLI INTELLIGENCE GENCE ON TH THE E BITCOIN VIR VIRTUAL TUAL CURRENCY 211258
ENDORSEMENT/VERSION CONTROL `0`OOS ADMIN`
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AN UPDATE ON RECENT INTELLI INTELLIGENCE GENCE ON TH THE E BITCOIN VIR VIRTUAL TUAL CURRENCY 211258
TABLE OF CONTENTS INTRODUCTION..........................................................................................................................4 CONTEXT ......................................................... ............................ ........................................................... ........................................................... ............................................. ................4 4 COMMENTARY ............................................................. .............................. .............................................................. .............................................................. ............................... 4 `0`OOS COM`
Further Information.......................................................................................................................6 APPENDIX A............................. A ........................................................... ........................................................... ................................................................ ................................... 7 Source evaluation....................................................................................................................7 APPENDIX B............................. B ........................................................... ........................................................... ................................................................ ................................... 8 Further Publishing Details.....................................................................................................8 Keywords List........................................................................................................................8
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AN UPDATE ON RECENT INTELLI INTELLIGENCE GENCE ON TH THE E BITCOIN VIR VIRTUAL TUAL CURRENCY 211258
INTRODUCTION This briefing provides an overview of recent intelligence conducted in relation to the Bitcoin virtual currency. `0`OOS COM`
CONTEXT Serious Non Compliance is monitoring the Bitcoin virtual currency with a view to understanding its implications for the enterprise tax crime risk and ATO compliance more broadly.
COMMENTARY `0`OOS COM`
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AN UPDATE ON RECENT INTELLI INTELLIGENCE GENCE ON TH THE E BITCOIN VIR VIRTUAL TUAL CURRENCY 211258
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2. AUSTRALIAN CRIME COMMISSION - STRATEGIC ASSESSMENT OF THE BITCOIN MARKET IN AUSTRALIA In May 2013 the Australian Crime Commission (ACC) published a strategic assessment of the Bitcoin market in Australia. Australia. Key findings from the assessment assessment (that can b be e published in th this is briefing) include:
– Virtual currencies currencies such as Bitcoi Bitcoin n represent represent an unregulated financial market which which creates opportunities for criminal entities to facilitate illicit activities. – Speculators concerned with profit profit making making are a considerable considerable purchaser of Bitcoins Bitcoins in Australia.
– The five main main reasons reasons Bitcoins are being being purchased in Australia Australia are: Silk Road purchases (illicit drugs)
Speculative investment Payment for services
Gambling A vehicle to allow transfer of money offshore.
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Bitcoin is not not an e-currency for the purposes of AML/CTF AML/CTF Act Act and there are currently no – regulatory requirements for Bitcoin dealers in Australia - any person can commence requirements business as a Bitcoin exchange provider. – Lack of of Austrac reporting requirements for the Bitcoin market could could facilitates facilitates money money laundering launderin g and transfer of money offshore by organised crime groups, bypassing AMLCTF controls.
– The financial financial crisis in Europe, Europe, in particular particular the Cyprus bank bank deposit deposit tax is contributing to the substantial price increase increase of Bitcoin. This is likely because curre currencies ncies such as Bitcoin are perceived as not being controlled by any government – something attractive to organised crime. Gox Bitcoin exchange (the world’s world’s largest) largest) have been carried carried out with – Attacks on the Mt Gox the intention of destabilising the Bitcoin price.
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Money Laundering – Counter Terrorism Financing Act
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AN UPDATE ON RECENT INTELLI INTELLIGENCE GENCE ON TH THE E BITCOIN VIR VIRTUAL TUAL CURRENCY 211258
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unlikely that that the Bitcoin Bitcoin will ever represent represent a full-scale full-scale challenge to – While it seems unlikely regular money, it points to a rise of virtual currencies and changing definition definition of ecurrency that policy makers need to be aware of.
The assessment also includes information on: `0`OOS COM`
FURTHER INFORMATION For further information or to obtain a copy of the products referred to in this briefing contact Stephen Hoult, SNC Strategic Intelligence, x36565.
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AN UPDATE ON RECENT INTELLI INTELLIGENCE GENCE ON TH THE E BITCOIN VIR VIRTUAL TUAL CURRENCY 211258
APPENDIX A Source evaluation `0`OOS ADMIN`
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AN UPDATE ON RECENT INTELLI INTELLIGENCE GENCE ON TH THE E BITCOIN VIR VIRTUAL TUAL CURRENCY 211258
APPENDIX B Further Publishing De Details tails `0`OOS ADMIN`
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POTENTIAL MATTER OF INTEREST
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The Tax office needs to be vigilant with the increasing popularity of virtual currency to be prepared for it being implemented in business transactions in Australia. There are risks to correct reporting and record keeping.
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Dutch food delivery site takes bitcoins, Herald Sun online, 6 November 2013,
http://www.heraldsun.com.au/business/breaking-news/dutch-food-delivery-website-takes-bitcoins/story-fni0xqe41226754123624 4 Virgin Galactic to accept bitcoin for space flights, Amanda flights, Amanda Holpuch, The Guardian, 23 Nov 2013, http://www.theguardian.com/technology/2013/nov/22/virgin-galactic-bitcoin-space-flights-payment
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SIGNIFICANCE Why is this matter significant? Test? ? Does it pass the MI Significance Test
POTENTIAL MATTER OF INTEREST
This is an indication that bitcoin is increasingly becoming of concern to overseas economies. The ATO needs to be vigilant with the increasing popularity of virtual currency to be prepared for it being implemented in business transactions in Australia. There are risks to correct reporting and record keeping.
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POTENTIAL MATTER OF INTEREST
`0`OOS SUM` FN 1
It is of interest that a multi-national company company is prepared to accept payment by bitcoin. The Tax office needs to be vigilant with the increasing popularity of virtual currency to be prepared for it being implemented in business transactions in Australia. There are risks to correct reporting and record keeping.
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POTENTIAL MATTER OF INTEREST
`0`OOS SUM` FN 5 AND 6 ` links as per footnotes`
SIGNIFICANCE
Why is this matter significant?
Bitcoin is becoming more accessible to a wider variety of people who may choose to use it in the place of traditional currency. This could make it more difficult for governments to regulate transactions using Bitcoin, meaning people may find it easier to hide income and avoid paying tax.
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John Southurst, Get Paid in Bitcoin With BitPay’s New Payroll API, published 14 January 2014, accessed 17 January 2014. 2014.
www.coindesk.com, 6
of Your Paycheck in Bitcoin? Here’s How…’ from Michael Krieger, ‘Want to Receive www.LibertyBlitzkrieg.com, accessedPart 16 January 2014.
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Why is this matter significant?
POTENTIAL MATTER OF INTEREST
concern to overseas economies.
Test? ? Does it pass the MI Significance Test
The ATOneeds to be vigilant with the increasing popularity of virtual currency to be prepared for it being implemented in business transactions in Australia. There are risks to correct reporting and record keeping.
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SIGNIFICANCE
PMI - JPMORGAN APPLIES FOR BITCOIN STYLE PATENT
The announcement from a major well recognised international financial institution to roll-out an anonymous electronic payment system that will allow people to pay for things and store funds in an e-wallet over the internet, without divulging their personal details, appears to be in response to capitalising on a rapidly growing trend by consumers embracing anonymous internet systems to pay for goods online and as part of holding cash in ewallets for instant transactions and to protect personal details from identity fraud when transacting t ransacting online. There are a number of possible reasons why this trend is occurring as it has many perceived advantages for consumers to use anonymous electronic systems. With more anonymous and harder to trace electronic payment systems being developed with increase security of personal client details and tracing, there may be risks in the cash economy associated with: concealmen concealmentt of wealth; concealmen concealmentt of income;
hard to trace offshore transfers of funds;
ability to determine income by internet sellers ability to determine determine accurate income by virtual businesses that who have a home base in Australia etc
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TAX CRIME PMI 13 - LITECOIN CRYPTO CURRENCY - A VARIATION ON BITCOIN 212270 212270
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SIGNIFICANCE
The potential tax crime and general tax implications previously previously identified in relation to Bitcoin apply also to Litecoin. Broadly these implications relate to:
Anonymous transfer of funds by organised crime interests; Profit from exchange gains; Income of exchange dealers; Income on profits from ‘mining’ cryptocurrency; and Longer term, potential to support the cash economy.
These implications are of course contingent on Litecoin gaining trust in specific communities (organised crime, currency dealers, investors, crypto currency miners) or the general community more broadly. As a lower cost and and more accessible accessible partner to the Bitcoin, Litecoin has the potential to increase acceptance of both currencies. In this way Litecoin’s Litecoin’s emergence emergence potentially represents an increase generally in the previously identified threat from highly anonymous cryptocurrencies. The main impediment to Litecoin use by organised criminal interests, speculators and exchange dealers currently will be removed once it is listed for trading with the Mt. Gox Bitcoin exchange (and the many smaller exchanges which will no doubt follow).
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http://litecoin. litecoin.info/A info/About bout Lite Litecoin coin,, accessed 13 June 2013. Source: http:// On 24 April 2013 Mt. Gox issued a statement that they had planned to list Litecoin in the following two weeks but this had been delayed due to the denial of service attacks the exchange had been subject to. It is understood Mt Gox still has plans to list Litecoin in the near future. Source: 5
6 https://m https:/ /mtgox. tgox.com/ com/pdf/ pdf/2 20130 304 424
ddos ddo sonsta state teme ment and faq. fa q.pdf pdf 12 June 2013. Source: htt http:/ p:///lit lite ecoi coin. n.inf info/ o/C Com ompa paris rison betwe be twee ent n Lit Lite ecoi coin n and, accessed Bitcoi Bit coin n , accessed 13 June 2013.
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In relation to taxpayers seeking to profit from Litecoin mining, the lower computer hardware requirements for Litecoin make this activity more accessible and potentially more widespread compared to Bitcoins. Bitcoins. Identifying and taxing the profits on Litecoin and Bitcoin mining will remain problematic. From a cash economy perspective, Litecoin represent a viable threat for the ATOfor they would(and haveBitcoin) to gainto acceptance as a practical currency, acceptable to a wide range of merchants willing to receive it in exchange for their goods or services. In this regard Litecoin, with its greater accessibilit accessibility, y, lower value, and quicker transaction confirmation times, probably represents an increased cash economy threat relative to Bitcoin.
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MI - BITCOIN AND CHINA'S IMPACT
viable Bitcoin could be as an alternative currency. Economists are speculating that China is looking to exert more financial influence on a global scale. China now controls a large portion of the Bitcoin market and if Bitcoin emerges as a sustainable part of the global economy and undermines the US dollar’s status as the world’s reserve currency, China could view this as an opportunity to grab power and influence. So why have the Chinese flocked to uptake the Bitcoin currency? Some of the reasons being put forward by economists are: 1. A highly regulated currency regime makes it difficult to get wealth out of the country. Bitcoin makes the move of monies overseas relatively easy. As Bihang, Bihang, another Chinese currency exchange, states “in 200 milliseconds you can move Bitcoin data to the US for almost no cost”. 2. BTC China, which only trades in Chinese Yuan, currently offers no-fee trading. 3. Because the property market in China is capped and controlled and the stock market isn’t doing too well, wealthy Chinese using Bitcoin for speculation purposes. Bitcoinare is an alternative to hedge bets to increase profits. SIGNIFICANCE
The Chinese rush into the Bitcoin market has quadrupled the currency’s value in less than a month and China now controls a large portion of the Bitcoin market. The significant increase in the value of the Bitcoin also takes it just that bit closer to global mainstream acceptance. If this happens then China will be able to exert more influence on global economies. Previous analyses of Bitcoin have identified significant risks to taxation if it does become an accepted global currency, and ongoing monitoring of Bitcoin’s progression has been recommended. However the implications of China having a major influence on the Bitcoin begs further questions: What are the implications if Bitcoin moves from just allowing ease of international trade to becoming a mainstream investment/speculation platform? If the Yuan improves and becomes more viable for speculation will this wipe-out Bitcoin? If the Yuan fails does the reliance on on Bitcoin increase, pushing it further to become the global reserve currency instead of the US$?
What will be the impact of these scenarios on the Australian Tax Crime environment, environmen t, including: – Non declaration by Australian taxpayers of very significant short term capital gains fuelled by Chinese
influence on the value of Bitcoin;
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– Potential for the concealment of proceeds of crime (and the ability to accumulate further wealth by the increase in value of Bitcoin); and `37(2)(b)`INV`
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POTENTIAL MATTER OF INTEREST - SUPER INVESTED IN LITECOIN 215675
`0`OOS SUM` FN 5 AND 6`
In conclusion, self-managed super funds are required to put forward an investment strategy to the Australian Tax Office upon registration as an SMSF, which is reviewed annually. annually. SIGNIFICANCE
The Tax Practitioners & Lodgment Strategy business line is responsible for managing the cash economy risk. Any new research and observations found in the environment needs to be monitored and where relevant, necessary mitigation strategies implemented. Issues for consideration include: Litecoin super investment might exist on a small scale, but its does challenge traditional traditional concepts of what constitutes a form of investment and currency accepted by regulators; and
Bitcoin and Litecoin may be accepted as currency but is not always traceable and could be used to hide taxable income
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Australian Financial Review 24 June 2013: http://www.afr.com/p/technology/ato http://www.afr.com/p/te chnology/ato targe targets ts bitcoi n users oawpzLQ oawpzLQHD HDz2 z2vEU vEUWtvYLT WtvYLTWI WI 6 GAO Virtual Economies and Currencies Additional IRS Guidance Could Reduce Tax Compliance Risks May 2013 htt p://www .gao.gov/assets/66 .gao.gov/assets/660/6 0/654 54620 620.pdf .pdf
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BITCOIN RECENT EVENTS - STRATEGIC OUTLOOK
Regulatory reform of Bitcoin Since March 2013 numerous countries have reviewed the regulation of Bitcoin, largely in response to money laundering concerns. There has also been a desire for regulation from some members of the Bitcoin community who are developing businesses based on Bitcoin. Some notable examples of this reform are documented below below.. `0`OOS SUM` FN 4-7`
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room/nr/html/201 0130 3031 318. 8.html html,, Sources: http://fincen.gov/news http://fincen.gov/news room/nr/html/2 http://www.fincen.gov/statutes http://www.fincen.gov/statutes regs/ regs/guidance/ guidance/html/FI html/FINN-20 2013 13-G -G00 001. 1.html html,, accessed 21 October, 2013. 5 Sources: http://www.reuters.com/article/2013/10/11/idUS397843744220131011, http://www.reuters.com/article/2013/10/11/idUS397843744220131011, http://www.huffingtonpos t.com/2 t.com/201 013/ 3/05 05/1 /17/ 7/bitcoin-operatorbitcoin-operator-accounts-seiz accounts-seized ed n 32 3293 9393 937. 7.html html,, http://techcrunch.com/2013/08/23/feds-seize-another-2-1-million-from-mt-gox-adding-up-to-5million/,, accessed 22 October, 2013. million/ 6 Source: http://info.datauthority.org/wordpress/blog/2013/10/05/the-announcement/ 7
Source: http://www.finextra.com/News/FullStory.aspx?newsitemid=25184 , accessed 22 October, 2013.
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BITCOIN RECENT EVENTS - STRATEGIC OUTLOOK
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Source: Bitcoin London Conference, as reported at http://techcrunch.com/2013/07/02/regulationmeans-the-bitcoin-gold-rush-will-not-happen-in-the-us-say-experts/ , accessed 21 October, 2013. 9 http://www.coindesk.com/germanyrmany-offic offic ialial-recognisesrecognises-bitcoi bitcoi n-a n-as-private s-private-mone -money/ y/,, Source: http://www.coindesk.com/ge accessed 22 October, 2013, 10 Source: http://www.coindesk.com/german-government-relieves-capital-gains-tax-on-bitcoinpositions/,, accessed 22 October, 2013. positions/ 11 https://www.mtgox. www.mtgox.com/pr com/press ess re relea lease se 201 0130 3053 530. 0.html html,, accessed 21 October, 2013. Source: https:// 12
http://www.forbes.com/sites/andygreenberg/2013/05/30/not-so-anonymous-bitcoin-exchangemt-gox-tightens-identity-requirement/
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SIGNIFICANCE
BITCOIN RECENT EVENTS - STRATEGIC OUTLOOK
The tax and tax crime implications of Bitcoin (and other crypto currencies) have been documented previously13. Broadly these implications, which are complicated by the anonymity inherent in the design of Bitcoin, relate to: Profit from exchange gains; Income of exchange dealers; Income on profits from ‘mining’ cryptocurrency; Longer term, potential to support the cash economy; and Money laundering and anonymous transfer of funds by organised crime interests.
The closure of the Silk Road site had the potential to significantly affect the value of Bitcoin and its position as a trusted medium of exchange. A failure of confidence confidence in Bitcoin Bitcoin would have threatened its ongoing ongoing viability, potentially negating the tax and tax crime implications previously identified. It is seen as a measure of Bitcoin’s strength and growing broader acceptance that the Silk Road closure hasn’t caused users and speculators of Bitcoin to abandon abandon it. This event and its its aftermath only serve to strengthen Bitcoin’s reputation and ongoing viability. Strategic Strate gic Outlook Moves to regulate Bitcoin, particularly the approach being reported in the UK and Europe, represent a positive from a taxation regulator’s perspective. The potential of Bitcoin and other crypto currencies to interrupt mainstream finance business models, particularly in relation to internationall currency transfers, has been recognised. internationa recognised. Bitcoin entrepreneurs entrepreneu rs are seeking to capitalise on this potential and this requires some level of regulation and legitimacy. The move by the Mt. Gox exchange to identify account holde holders rs is one example of increasing regulation which is likely to minimise those elements of the Bitcoin Bitcoin threat whi which ch stem from its anonymity. anonymity. It also `37(2)(b)`INV`
Analysing the strategic outlook for for Bitcoin and other other crypto currencies currencies however reveals a counterpoint to this creeping regulation and legitimisation legitimisatio n of Bitcoin which needs to be considered.
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BITCOIN RECENT EVENTS - STRATEGIC OUTLOOK
Some in the Bitcoin community see its development development as a competition between ambitious Bitcoin entrepreneurs seeking legitimacy, and libertarians who want to develop new protocols that make Bitcoin more anonymous and more distinguished from mainstream finance. If Bitcoin rises in prominence to become a legitimate part of mainstream finance, the needs of its libertarian supporters may no longer be met. met. There are currently currently around 30 competing competing crypto currencies which have relatively little scale or support, and the above scenario could serve as a trigger for one of those currencies to fill the void created by the legitimisation of Bitcoin. Developed with the benefit of the Bitcoin experience, a new crypto currency could provide its users with even greater anonymity and less vulnerabilities vulnerabili ties than Bitcoin. Another hypothesis hypothesis would see those Bitcoin exchanges exchanges seeking seeking legitimacy competing competing with those seeking to protect the anonymity of their clients. Increasing regulation regulation of the point point at which Bitcoin Bitcoin currency meets mainstream finance, could see Bitcoin exchanges emerging in secrecy havens and other jurisdictions supportive of the Bitcoin libertarian ideal. Currently, the value of Bitcoin, the number of users, and its limited circulation and acceptance acceptance means that the t he threat of Bitcoin is minimal and would barely register in terms of the ATO’s existing risks. However the threat from Bitcoin (and other crypto currencies) relates more to its potential as it grows in value, circulation, legitimacy and community support. For this reason SNC Intelligence will continue to monitor and report on developments developme nts in relation to Bitcoin and crypto currencies generally.
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BITCOIN RECENT EVENTS - STRATEGIC OUTLOOK
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Why is this matter significant?
Cryptocurrencies like Bitcoin have previously been thought Cryptocurrencies to be a way to avoid government regulation including taxation, much like cash transactions have. Providing users with an option to directly pay their tax using Bitcoin highlights the continual expansion in use of this digital currency and is indicative of substantial changes underway in the broader economy. Ongoing monitoring of shifts in the Bitcoin environment environment is particularly important important at this time, as the ATO is forming a taskforce to progress the consideration of Bitcoin, to ensure that a holistic ATO approach and view can be formed.
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TABLE OF CONTENTS EXECUTIVE SUMMARY ...................................................... .......................... ......................................................... ....................................................... .......................... 4 INTRODUCTION..........................................................................................................................6 CONTEXT ......................................................... ............................ ........................................................... ........................................................... ............................................. ................6 6 Background ........................................................... ............................. ........................................................... .................................................................. ..................................... 6 ATO Position on `0`OOS` and Bitcoin .......................................................... ............................ .......................................................... ............................ 7 `0`OOS`
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Bitcoin ........................................................... ............................. ........................................................... ........................................................... ........................................... .............7 7 COMMENTARY ............................................................. .............................. .............................................................. .............................................................. ............................... 8 `0`OOS`
Bitcoin....................................................................................................................................15 Regulation of Bitcoin ....................................................... ......................... ........................................................... .................................................... ....................... 15 Bitcoin exchanges...............................................................................................................16 Money laundering and funds transfer opportunities............................................................16 Technical vulnerabilities of Bitcoin ....................................................... ........................... ......................................................... ............................... ..17 17 Further information and reading in relation to Bitcoin ......................................................... ............................ ............................. 18 CONCLUSIONS.........................................................................................................................18 APPENDICES .......................................................... ............................ ........................................................... .................................................................. ..................................... 20 APPENDIX A - Supporting Documents ........................................................... ............................. .................................................... ...................... 20 APPENDIX B – Source Evaluation ............................................................. .............................. .......................................................... ........................... 21 APPENDIX C – Further Publishing Details ........................................................... .............................. .............................................. ................. 22 Keywords List......................................................................................................................22
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EXECUTIVE SUMMARY OBSERVATION
The ACC’s multi-agency workshop on `0`OOS` and Bitcoin was useful in providing an enhanced understanding of how the use of this technology is evolving and the methods other agencies are employing in responding to it. By serving as a forum to share information and strategy the workshop also establishes a platform for further cross-agency cooperation as the nature of this threat continues to evolve. SIGNIFICANCE
Participation by the ATO in the workshop directly contributed to an enhanced understanding of the tax crime and general compliance implications arising from the use of this technology, and this briefing is intended to capture and share this information. A number of the law enforcement agencies represented at the workshop are experienced in policing criminal offences enabled by darknets and Bitcoin, and it was evident that their success depended to a high degree on an awareness of this technology and its vulnerabilities, in combination with the use of appropriate established and developing treatment strategies. A challenge for the ATO will be in applying the experience of other agencies to tax crime and general compliance risks, determining how the risks might manifest, and how they can best be treated in the context of our available treatment strategies. `0`OOS`
The use of `0`OOS` Bitcoin technology is presently a niche practice by those with largely, though not necessarily, illicit intent. Perhaps one of the major threats to the ATO is the potential for `0`OOS and Bitcoin to become mainstream tools, and this briefing identifies ` numerous trends that could support such a hypothesis. Attendance at the workshop also identified, or enhanced our understanding of, numerous implications for tax crime and general compliance, including: – `0`OOS`
– – Use of Bitcoin to support money laundering and the transfer of funds between Australia and secrecy havens; Bitcoin as a virtual secrecy haven for online businesses; and – `0`OOS` `0`OOS` – `0`OOS`
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RECOMMENDATIONS
– The ATO recognise the potential threat from `0`OOS` and Bitcoin technology gaining widespread or mainstream use and the implications this may have for the tax crime and general tax compliance risks. – This briefing be widely circulated to ATO Risk Owners and Risk Managers in order to raise awareness of these threats and ensure the ATO is prepared for them as they evolve.
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– SNC continue to collaborate with ICT and other BSLs in order to better understand and quantify the threat presented by `0`OOS and Bitcoin, and support future opportunities to collaborate with external agencies to `respond to these threats.
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INTRODUCTION The combination of `0`OOS` and virtual currencies like Bitcoin is facilitating a growing level of online illicit commerce, fraud and other serious crime. `0`OOS ADMIN`, `0`OOS`
CONTEXT This briefing is intended to summarise the information and strategy shared at the workshop, identify tax crime or general tax compliance implications relating to `0`OOS` Bitcoin, and make recommendations for further assessment of these issues where appropriate. The workshop was an initial step in raising the collective level of understanding of the represented agencies in relation to `0`OOS` and Bitcoin. Further cooperation is anticipated in order to close intelligence gaps and identify new strategies as these threats continue to evolve.
BACKGROUND `0`OOS`
Bitcoin is a relatively anonymous virtual currency. While it has legitimate uses it has also emerged as the default currency for online illicit market places hosted within darknets. These market places deal in commodities such as illicit drugs, weapons, and stolen identities, and host forums which provide instruction on how to commit fraud and other crimes. `0`OOS COM`, `0`OOS ADMIN`
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ATO POSITION ON `0`OOS`
BITCOIN
Throughout the course of the workshop and in discussions with other representatives there were numerous opportunities to share and discuss the ATO’s current thinking with regard to the `0`OOS`
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Bitcoin. A brief summary of this position is presented below.
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Bitcoin The ATO presently has Bitcoin (BTC) and similar currencies like the Canadian Mintchip2 on a watching brief. From a cash economy perspective the total circulation of BTC in worldwide circulation is just AUD$64m (9.36m BTC). The maximum number of BTCs is limited by design to 21 million, although the high divisibility and potential for exchange rate increase of the BTC could substantially increase the equivalent AUD$ value in circulation. Virtual currencies with a high degree of anonymity are of interest for their potential in facilitating money laundering or transfer of funds between Australia and secrecy havens. The risk of wages being paid in BTC is currently considered to be low, but if the currency grows in value and popularity this risk could escalate. The instrumental nature of currencies such as Bitcoin in enabling illicit online commerce and other activities to occur in darknet forums and market places is acknowledged.
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Which may emerge as a similar, Government-backed alternative to Bitcoin.
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COMMENTARY The workshop was useful in gaining an enhanced understanding of how `0`OOS` Bitcoin issues are affecting other regulatory and law enforcement agencies. To that end the workshop provided a practical insight into how this threat is evolving, and the methods other agencies are employing in responding to that threat currently. The following commentary is a summary of the information presented at the workshop, with the discussions on `0`OOS` and Bitcoin presented separately. Also identified are some specific ATO implications that arise from material presented and discussed at the workshop. Unless otherwise referenced, statements in this briefing relate to information obtained from representatives at the workshop either from formal presentations or personal discussions, based on the author’s contemporaneous notes, and numerous clarifying email and telephone conversations with relevant participants following the workshop. `0 22`OOS REL`
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As explained below, the use u se of a highly hig hly anonymous virtual virtu al currency like Bitcoin provides ample opportunity for laundering profits and injecting them into the mainstream financial system.
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BITCOIN Regulation Re gulation of Bi tcoin According14to AUSTRAC, the Bitcoin (BTC) appears to exist in a regulatory gap as far as AML/CTF legislation is concerned - there is no central issuer, just a network of users. `3`37(2)(b)`INV`
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According to the t he ACC there t here is some som e evidence of speculative hoarding of BTC currency on the expectation of large exchange rate increases. Analysis also reveals some evidence of an increase in the exchange of Euros to BTCs as a result of European financial instability. Any potential for wider, more mainstream mainstrea m use of the BTC probably presents the greatest threat to the ATO from a general compliance and tax crime perspective. AUSTRAC is presently working on a strategic assessment which is intended to include some hypotheses on the potential for legitimate and more mainstream use of BTCs, and a copy of this assessment will be provided to ATO/SNC when it is published. It was acknowledged at the workshop that regulation/registration of BTC exchanges would go some way to countering the potential for BTC mischief. The issue of formal regulation of TRAC. It was noted there is only approximately AUD$64m equivalent BTCs in worldwide circulation currently (9.36m BTC at a current exchange rate of approximately AUD$6.80). The maximum number of BTCs is limited by design to 21million; however the high divisibility and potential for exchange rate increase of the BTC could substantially increase the equivalent value in circulation.
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AML/CTF: Anti-Money Laundering and Counter-Terrorism Financing Act 2006.
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Bitcoin excha exchanges nges Three Australian BTC exchanges have been identified by agencies represented at the workshop:
– Bitpiggy https://bitpiggy.herokuapp.com/ `0`OOS SUM`, `0`OOS COM` `
. – Crypto_X_Change http://www.cryptoxchange.com/ `0`OOS COM` – Spendbitcoins https://www.spendbitcoins.com/ `0`OOS COM`, `0`OOS SUM` . The largest BTC exchange in the world is Mt. Gox (https://mtgox.com/). https://mtgox.com/). According to ACC research, in January 2012 this Japan-based exchange reportedly handled 92% of world-wide BTC trade. The main currencies exchanged for BTCs and their respective turnover in the period November 2010 to November 2011 were:
– US$ - 15.8m (AUD$15.5m) – Euro - 6.2m (AUD$7.4m) – GBP - 240k
(AUD$365k)
Money Mone y laundering and funds tr ansfe ansferr oppor tuniti es The highly anonymous nature of BTCs means it is a currency that lends itself to money laundering, and the ease with which it can be exchanged would also make it of interest to taxpayers seeking to transfer funds between Australia and secrecy havens. Australian BTC exchanges will cash BTCs for AUD$ currency and a nd transfer it to Australian bank ban k `0`OOS COM` accounts. In addition to standard bank accounts, `0`OOS COM`
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Technical Te chnical vulnerabilities of Bi tcoin Bitcoin is a highly anonymous currency but is by no means completely anonymous. All Bitcoin trades are necessarily public to some extent because the protection from double spending of bitcoins built into the currency’s design requires that information about successive trades is stored in the “block chain” of data comprising each bitcoin. `37(2)(b)`INV`
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A BTC wallet file can be copied/backed-up and stored in multiple locations, but once the BTCs in in any one of the copies are spent or exchanged, all BTCs in any of the other copies of the wallet will be identified by the BTC network as worthless if an attempt is made to spend or exchange them.
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Further information and reading reading in rela relation tion to Bitcoi n There are numerous open source wikis available on the internet providing information on how to acquire, where to buy, and how to use BTCs, and also a charting tool to track the overall volume and value of BTC trade:
– – – – –
http https:/ s://en. /en.bit bitcoin coin.it/ .it/wik wiki/Ma i/Main in Page Page https://en.bitcoin.it/wiki/Trade https://en.bitcoin.it/wiki/Trade https://en.bitcoin.it/w https://en.bit coin.it/wiki/Buy iki/Buying ing bitcoins bitcoins http://www.bitcoinplus.com/howbitcoinworks http://bitcoincharts.com/charts/ http://bitcoincharts.com/charts/
CONCLUSIONS The ATO’s attendance at the workshop was useful in gaining an enhanced understanding of how the use of darknet and Bitcoin technology is evolving and the methods other agencies are employing in currently responding to it. In particular, the technical information provided by a number of cyber crime and AUSTRAC specialists at the workshop was useful in enhancing SNC’s understanding of the threat posed by darknets and Bitcoin. This briefing is intended to serve as a compendium of the information and strategy shared at the workshop, and to enhance intelligence holdings in relation to the tax crime and general compliance implications previously identified. `0`OOS`
The greatest threat to the ATO, from tax crime and general compliance risks, stems from the potential for `0`OOS and Bitcoin technology to gain widespread or mainstream acceptance in the community. ` By recognising this threat now the ATO can raise awareness of its implications and ensure it is adequately prepared as this threat continues to evolve. It is recommended this briefing be widely circulated to ATO Risk Owners and Risk Managers in order to raise awareness of `0`OOS and Bitcoin, and assist in the ongoing assessment of the tax implications arising from their `use. `0`OOS`
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It is recommended that continued collaboration with ICT`0`OOS and other BSLs occur in order to better understand and quantify the threat presented by and Bitcoin, and that future ` opportunities to collaborate with the ACC and other external agencies in relation to these threats are similarly supported.
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APPENDICES APPENDIX A - Sup po r ti ng Doc Docum um ent s SNC Strategic Intelligence - Potential Matter of Interest #9:
PMI 9 Tax crim crime e implications of the da
Office Minute: CMC presentation – darknet and vir tual cur rencies
Office Off ice Mi Minute_CMC nute_CMC Presentation_Dark N
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Lee, D, ‘U.S. stand on bitcoins puts HK in frame While America wavers over use of virtual currency entrepreneurs are keen to jump on gravy train, and city could cash in on boom ,’ South China Morning Post; 17 Post; 17 November 2013 6 The Guardian: http://www.theguardian.com/technology/2013/nov/06/bitcoin-price-hits-all-time-high-of269 7 Lee, D, ‘U.S. stand on bitcoins puts HK in frame While America wavers over use of virtual currency entrepreneurs are keen to jump on gravy train, and city cit y could cash in on boom ,’ South China Morning Post. Post. 17 November 2013 8 The Age, 21 November 2013 2013 Gillespie, I, ‘Net ‘ Net mining for coin of the realm ‘‘The 9 Coin Desk Website; http://www.coindesk.com/australian-photography-bitcoin-discount/ 10 Gizmodo website: http://www.gizmodo.com.au/2013/10/should-bitcoin-be-illegal/. http://www.gizmodo.com.au/2013/10/should-bitcoin-be-illegal/ . Comments 8 November 2013
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SIGNIFICANCE
The Tax Practitioners & Lodgment Strategy business line is responsible for managing the cash economy risk. Any new research and observations found in the environment needs to be monitored and where relevant, necessary mitigation strategies implemented. Issues for consideration include: Bitcoin’s endorsement by the US government is likely to cause it to expand rapidly internationally;
Bitcoin might exist on a small scale in Australia, but its a growing currency that will challenge traditional concepts of what constitutes a form of goods exchange; Businesses especially small cash economy industries may increase use of this virtual currency to avoid GST and other costs; and
Bitcoin may be accepted as currency but is not not always always traceable and could be used to hide taxable income
The TPALS Intelligence I ntelligence Unit is currently preparing an intelligence intelligence scan on community perceptions of Bitcoin.
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SIGNIFICANCE Why is this matter significant? Test? ? Does it pass the MI Significance Test
POTENTIAL MATTER OF INTEREST
The increasing popularity and ease of obtaining bitcoins necessitates the ATO to take a position on their legitimacy as a currency in preparation for its implementation in business transactions in Australia. There are risks to correct reporting and record keeping.
