The Age of Digital Currency: Changing Landscape of Global Regulations and its Legal Status in China
Introduction
The Anti-Money Laundering and Counter-Terrorism Financing Amendment Bill 2017 (the Bill) has passed both house on 7 December 2017, [1] which means the Federal Government of Australia will regulate the activities of digital currency exchange services providers. It is the latest piece of legislation which embarks on the global trend of regulating cryptocurrency.
Summary of the Legislations and Regulations in Australia
Prior to the Bill, the Australia Government has applied new taxation treatment of digital currency from 1 July 2017 to effectively remove digital currencies as from the list of intangible property that was subject to 10% of the Goods and Services Tax (GST) which aims to promote Bitcoin transactions. [2] The taxation treatment of digital currency also provides an insight of the perception of the Australian policy makers: digital currency is neither money nor a foreign currency and the supply of digital currency is not a financial supply for goods and services. It is akin to a barter arrangement. Note that the transaction of digital currency is still subject to CGT.
• The establishment of a Digital Currency Exchange Register recording details of those approved by Australian Transaction Reports and Analysis Centre (AUSTRAC) to provide digital currency exchange services.
• Updated definition of digital currency: a digital representation of value that functions as a medium of exchange, a store of economic value, or a unit of account that is not issued by, or under the authority of, a government body, and is interchangeable with money in that it may be used as consideration for the supply of goods or services.
• Imposed the following requirements to the digital currency exchange services providers:
1. Enrol with AUSTRAC and register on Digital Currency Exchange Register：
a. The registrations can be granted subject to conditions and, in some circumstances, cancellation;
b. It will be a criminal offence to provide digital currency exchange services without an AUSTRAC registration. Penalties of up to 2 years’ imprisonment and/or 500 penalty units (currently equal to $105,000) apply for a first offence, with significantly increased penalties applying for repeat offences. Offenders can alternatively be pursued under the civil penalty provisions which currently provide for penalties of up to $2.1 million for corporations and $420,000 for individuals.
2. Perform customer due diligence by identifying and verifying the identities of their customers.
3. Report to AUSTRAC certain suspicious matters, international transactions and any transactions involving physical currency of $10,000 or more;
4. Adopt and maintain an anti-money laundering and counter-terrorism financing program to identify and manage money laundering and terrorism financing risks;
5. Keep certain records about transactions and customer identification for 7 years.
Influence to global legislations
The UK Treasury reveals earlier in December that the UK government and EU Government are looking into regulating virtual currency to bring it in line with the existing anti-money laundering and counter-terrorism financial legislation. [3] Considering the similar legislative intention, it is expected that EU and UK governments will adopt similar approaches of the Australian Government.
Currently in the United States of America, the federal government has not exercised its constitutional pre-emptive power to regulate blockchain and digital currency to the exclusion of states. [4]
Earlier this year, several governments including Vietnam, Indonesia and China decided to halt virtual currency trading. [5] In September, China clamped down on cryptocurrency trading by banning initial coin offerings and has labelled virtual currency as illegalby releasing two notices:
• Notice of Seven Ministries Including the People’s Bank of China on Guard against Risks of Token Offering and Financing (released on September 4, 2017); and
• Notice on the Rectification of Token Offering and Financing Activities (Zheng Zhi Ban Han [2017] No.99) (circulated internally on September 2, 2017 by the Office of Internet Financial Risks Rectification Working Group among its local offices).
The above notices revealed the concerns of Chinese government regarding virtual currency:
1. Definition of virtual currency does not sit well with the legal definition of currency, category of property and financial products;
2. The exchange of virtual currency will affect the stability of financial market;
3. Virtual currency could be utilised to fund crimes or terrorism;
4. Illegal Financial Activity including illegal public financing and financial scams.
Considering the scale of blockchain related industries and the proliferation/ market penetration of e-finance in China, observers see this as a temporary measure and not a permanent ban.
We expect that when the ban is lifted, similar regulatory approaches in the Bill may be adopted by the Chinese government to eliminate the above mentioned concerns. We believe that Chinese government will re-characterise the legal definition of virtual currency so as to distinguish digital currency from traditional currency, and to establish monitoring authority and to impose tightened legal obligations to digital currency exchange services providers.
There are many other important aspects of Chapter 11. This note merely provides an overview. For further information, please contact any of the Guantao Law Firm lawyers listed below.
[1]The text of the Bill and its explanatory memorandum are available at the Parliament of Australia:
https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r5952.
[2]Treasury Laws Amendment (2017 Measures No. 6) Act 2017 (Cth), the text of the Act and its explanatory memorandum are available at the Parliament of Australia:
https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r5972.
[3]See article of Julia Kollewe of Guardian dated 5 December 2017:
https://www.theguardian.com/technology/2017/dec/04/bitcoin-uk-eu-plan-cryptocurrency-price-traders-anonymity
[4]See Article of Joanna Diane Caytas of the Columbia Science and Technology Law Review dated 30 May 2017:
http://stlr.org/2017/05/30/blockchain-in-the-u-s-regulatory-setting-evidentiary-use-in-vermont-delaware-and-elsewhere/#_edn24
[5]See article of Charlie Osborne of ZDNet:
http://www.zdnet.com/article/vietnam-bans-payments-in-bitcoin-cryptocurrencies/
If you have any questions, please feel free to contact:
Shun Cheng
Managing Partner
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E: Shun.cheng@cslawyers.com.au; chengshun@guantao.com
Calvin Mai
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