ATO to monitor Bit-coin growth

8/12/2019 ATO to monitor Bit-coin growth

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UNCLASSIFIED INVESTORS AND BUSINESSES THAT TRADE USING THE DIGITAL CURRENCYBIT-COIN ARE ON NOTICE AS THE AUSTRALIAN TAXATION OFFICE PLANS TO

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Bit-coins along with other alternative payment systems andwill provide further advice to taxpayers before June 30.

"The ATO is working on a holistic understanding of thetaxation treatment of Bit-coin to be in a position to provide

certainty for the Australian community," he said.


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UNCLASSIFIED BITCOIN AND OTHER CRYPTO CURRENCIES


3 The ATO has been monitoring developments in Bitcoin through an informal team led byTPALS with support from Tax Counsel, SB/IT, ITX, SNC, PGI and EST. The team is awareof a number of private ruling requests and compliance activities related to the income taxand GST aspects of bitcoin or bitcoin related activities. However we now need to ensure

that we have a complete stocktake of issues on hand.

4 It is now evident that a more substantial approach is required to address the various issuesraised by Bitcoin and other crypto currencies in a timely and more comprehensive fashion.

5 We will be forming a task force to progress the ATOs consideration of Bitcoin and relatedissues. Initially we propose to include the team members already involved from variousbusiness lines but we may need to involve more or different staff and you may be requestedto provide support to this task force as the work develops. A list of those people involved todate is attached below, however if you have particular arrangements for your business lineyou would prefer, please let me know.

6 We expect to commence with a planning and scoping workshop in the near future and willlook at the appropriate use of the consultation hub to have the community involved in ourthinking.

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Action Required

8 Initially, Id be grateful for your support in providing a list of officers in your business linewho may be dealing with:

(a) private rulings or similar advice matters; or(b) compliance activity

in relation to Bitcoin or other crypto currencies. A brief description of the matter underconsideration in each case would also be appreciated.

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UNCLASSIFIED BITCOIN AND OTHER CRYPTO CURRENCIES


ATTACHMENT

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For Official Use Only IMPLEMENTATION OF IGT RECOMMENDATION 7.1 (C)

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- it is a digital equivalent to cash (can be anonymously transferred),- there is no central 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 thetaxation 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 internationaltransactions are not new risks, but bitcoin seems to represent a potentially convenient new wayof exploiting the risks.

Moderating views about risk

A review of public information about bitcoin from sources such as coindesk.com reveal some of

the concerns about bitcoin may be mitigated more easily than first thought.

From coindesk.com:

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Therefore, it is possible to know that bitcoin address ABC has a certain value of bitcoins, it isjust not immediately possible to associate that address with a natural person or business.

The founder of Bitcoin, Satoshi Nakamoto (a presumed pseudonym) is estimated to controlabout US $100m. At the prevailing exchange rate of approximately $US 124.00 this wouldimply 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 theintegrity of the bitcoin system. Satoshi did not award himself or herself the bitcoins, but had tomine them. The mining transactions are recorded in the bitcoin block chain.

As bitcoin has been operating since 2009, but not really attracting widespread public interestuntil 2010-11, researchers assume that some of the earliest addresses associated with thebitcoin block chain belong to Satoshi and at least one of these has accumulated over 800,000bitcoins.

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For Official Use Only IMPLEMENTATION OF IGT RECOMMENDATION 7.1 (C)

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It is not definitively known that the address with over 800,000 bitcoins is that of Satoshi. His orher real world identity is also not known. However, it is possible to irrevocably associate aparticular 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 bitcoinsfor $US, it is likely that the real-world identity of that individual would be known and could beproperly associated with the bitcoin address.

Bitcoin anonymity can be reduced if bitcoin users try to shift out of the bitcoin environment tophysical currencies or if they leave information that can allow association between theirbitcoin address and their actual identity.

As there are emerging moves to operate bitcoin bank, presumably these banks will need tocomply with relevant regulatory rules around anti money laundering and knowing yourcustomer.

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 alreadyextension protocols to create coloured coins.

Once again, the emerging desire in the bitcoin community to establish banks and publicrecognition for bitcoin is likely to be a point of opportunity.

Advice or Issue

This is just a brief outline of material to assist our discussion next week.

Michael HardySenior Assistant Commissioner

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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 wasestablished in 2009. Other business lines including TPALS and SNC have investigated possiblerisks relating to the digital currency. Bitcoin has also attracted interest from other agencies suchas AUSTRAC and the Australian Crime Commission.

Bitcoin has fluctuated in popularity since its inception in 2009 and has had security andlegitimacy issues. Its apparent anonymity and use as a medium of exchange for the purchaseof drugs and weapons raised questions as to the credibility and reliability of the currency as agenuine means of exchange. Despite these setbacks, the system is still operating and hasgradually attracted legitimate suppliers and retailers to accept the currency as a paymentmethod.

Part of the attraction of Bitcoin is in its lack of centralised authority. Since its commencementBitcoin has risen in prominence and attracted publicity, however has essentially retained anovelty factor rather than being accepted as a mainstream currency.

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1http://www.smh.com.au/digital-life/digital-life-news/bitcoin-boom-breakthrough-moment-or-billiondollar-bubble-

20130403-2h68h.html2http://www.theregister.co.uk/2013/03/21/bitcoin on a roll in spain/

3ibid

4http://www.theregister.co.uk/2013/03/21/bitcoin on a roll in spain/

5http://www.smh.com.au/digital-life/digital-life-news/bitcoin-boom-breakthrough-moment-or-billiondollar-bubble-

20130403-2h68h.html6European Central Bank, Virtual currency schemes, October 20127http://au.businessinsider.com/cyprus-bitcoin-atm-guy-responds-2013-4

8http://www.bbc.co.uk/news/technology-21863593

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SIGNIFICANCE

From an Australian perspective, evidence suggests that the driver for the use of Bitcoin is not inresponse to the usability of the method itself but rather a casual factor of the frustration entitiesare displaying in their interactions with traditional banks and payment institutions. While thecases 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 beaware 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 suggestedthat individual business lines that could be potentially be affected by any rise in prominence ofBitcoin monitor its progress on an operational and tactical level.


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APPENDIX A FURTHER PUBLISHING DETAILS

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UNCLASSIFIED PMIPOTENTIAL MATTER OF INTEREST - BITCOIN BOOM: BREAK THROUGHMOMENT' - TPALS INFORMATION REPORT 207991


SIGNIFICANCE Bitcoins are not real money and not even a type of commodity. Itis a global virtual currency floating in cyberspace with noguarantees and only exists because people believe it hasmonetary value. There are signs of it being perceived as analternative investment strategy encouraged partly by the currentglobal economic environment of large government fiscal deficitsand money printing exercises, which has eroded some worldcurrencies and has created a fear of the unknown consequencesand loss of money value.

Bitcoins have no serial numbers or any physical characteristicsand have no central bank nor is it regulated. Nevertheless, Bitcoinis significantly growing as a potential threat to government taxrevenue and community confidence, as no tax is paid on gainsmade by Bitcoin trades and purchases as in normal businesscurrency transactions, FOREX and share trades. This is assistedby the virtually untraceable anonymous nature of bitcointransactions. However, Bitcoin is not recognised as a fiat currencyin the world which may render earnings unlikely to be taxable.

There is evidence emerging that more businesses includingAustralian businesses are accepting bitcoins as a payment forgoods and services12and this is increasing the risk of omitted

income in BAS and tax returns, as its virtually untraceable andessentially operates like a cash payment, with no paper ortransaction trail; and completed with a currency that is not officiallyrecognised in the world.

7ibid

8Murphy J, Hackers blamed for Bitcoin plunge,Australian Financial Review, 12 April 2013

9Mt. Gox, www.mtgox.com , accessed 12 April 2013.

10Faiola A, Digital currency surges to a new mystery high,Australian Financial Review, 6 April 2013

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12Murphy J, Hackers blamed for Bitcoin plunge,Australian Financial Review, 12 April 2013

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UNCLASSIFIED PMIPOTENTIAL MATTER OF INTEREST - BITCOIN BOOM: BREAK THROUGHMOMENT' - TPALS INFORMATION REPORT 207991


The use of bitcoins allows businesses and individuals to bypasscurrency exchange fluctuations, GST and transaction fees and isthus an incentive to accept bitcoins. The rapid continued growth of

this virtual currency and the increasing acceptance levels beingobserved worldwide, partly helped on the back of perceived globalfinancial instability and distrust for banks and governments; inaddition to fear from increased cross border tax bilateralagreements, creates a favourable scenario for Bitcoin to becomemore mainstream, which would potentially cause significantregulatory headaches to central banks and governments.


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APPENDIX A - FURTHER PUBLISHING DETAILS

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UNCLASSIFIED BITCOIN GAINS MOMENTUM 3 YEARS ON 197438



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FOR OFFICIAL USE ONLY AN UPDATE ON RECENT INTELLIGENCE ON THE BITCOIN VIRTUALCURRENCY 211258


TABLE OF CONTENTS

INTRODUCTION..........................................................................................................................4

CONTEXT....................................................................................................................................4

COMMENTARY ...........................................................................................................................4

Further Information.......................................................................................................................6

APPENDIX A...........................................................................................................................7

Source evaluation....................................................................................................................7

APPENDIX B...........................................................................................................................8

Further Publishing Details.....................................................................................................8

Keywords List........................................................................................................................8

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INTRODUCTION

This briefing provides an overview of recent intelligence conducted in relation to the Bitcoinvirtual currency.

CONTEXT

Serious Non Compliance is monitoring the Bitcoin virtual currency with a view to understandingits implications for the enterprise tax crime risk and ATO compliance more broadly.

COMMENTARY

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2. AUSTRALIAN CRIME COMMISSION - STRATEGIC ASSESSMENT OF THEBITCOIN MARKET IN AUSTRALIA

In May 2013 the Australian Crime Commission (ACC) published a strategic assessment of theBitcoin market in Australia. Key findings from the assessment (that can be published in thisbriefing) include:

Virtual currencies such as Bitcoin represent an unregulated financial market whichcreates opportunities for criminal entities to facilitate illicit activities.

Speculators concerned with profit making are a considerable purchaser of Bitcoins in

Australia. The five main reasons Bitcoins are being purchased in Australia are:

Silk Road purchases (illicit drugs)

Speculative investment

Payment for services

Gambling

A vehicle to allow transfer of money offshore.

Bitcoin is not an e-currency for the purposes of AML/CTF Act1 and there are currently noregulatory requirements for Bitcoin dealers in Australia - any person can commencebusiness as a Bitcoin exchange provider.

Lack of Austrac reporting requirements for the Bitcoin market could facilitates money

laundering and transfer of money offshore by organised crime groups, bypassing AML-CTF controls.

The financial crisis in Europe, in particular the Cyprus bank deposit tax is contributing tothe substantial price increase of Bitcoin. This is likely because currencies such asBitcoin are perceived as not being controlled by any government something attractiveto organised crime.

Attacks on the Mt Gox Bitcoin exchange (the worlds largest) have been carried out withthe intention of destabilising the Bitcoin price.

1Anti Money Laundering Counter Terrorism Financing Act

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While it seems unlikely that the Bitcoin will ever represent a full-scale challenge toregular money, it points to a rise of virtual currencies and changing definition of e-currency that policy makers need to be aware of.

The assessment also includes information on:

FURTHER INFORMATION

For further information or to obtain a copy of the products referred to in this briefing contactStephen Hoult, SNC Strategic Intelligence, x36565.

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APPENDIX A

Source evaluation

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APPENDIX B

Further Publishing Details

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UNCLASSIFIED POTENTIAL MATTER OF INTEREST


The Tax office needs to be vigilant with the increasingpopularity of virtual currency to be prepared for it beingimplemented in business transactions in Australia. Thereare risks to correct reporting and record keeping.

3Dutch 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-fni0xqe4-12267541236244Virgin Galactic to accept bitcoin for space 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?

Does it pass the MI Significance Test?This is an indication that bitcoin is increasingly becoming ofconcern to overseas economies.

The ATO needs to be vigilant with the increasing popularity ofvirtual currency to be prepared for it being implemented inbusiness transactions in Australia. There are risks to correctreporting and record keeping.


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It is of interest that a multi-national company is prepared toaccept payment by bitcoin.

The Tax office needs to be vigilant with the increasing

popularity of virtual currency to be prepared for it beingimplemented in business transactions in Australia. There arerisks to correct reporting and record keeping.

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SIGNIFICANCE


Bitcoin is becoming more accessible to a wider variety ofpeople who may choose to use it in the place of traditionalcurrency. This could make it more difficult for governments

to regulate transactions using Bitcoin, meaning people mayfind it easier to hide income and avoid paying tax.

5John Southurst, Get Paid in Bitcoin With BitPays New Payroll API, published 14 January 2014,www.coindesk.com, accessed 17 January 2014.6Michael Krieger, Want to Receive Part of Your Paycheck in Bitcoin? Heres How from

www.LibertyBlitzkrieg.com, accessed 16 January 2014.

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Does it pass the MI Significance Test?concern to overseas economies.

The ATOneeds to be vigilant with the increasing popularity ofvirtual currency to be prepared for it being implemented in

business transactions in Australia. There are risks to correctreporting and record keeping.


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UNCLASSIFIED PMI - JPMORGAN APPLIES FOR BITCOIN STYLE PATENT


SIGNIFICANCE The announcement from a major well recognised internationalfinancial institution to roll-out an anonymous electronic paymentsystem that will allow people to pay for things and store funds inan e-wallet over the internet, without divulging their personaldetails, appears to be in response to capitalising on a rapidlygrowing trend by consumers embracing anonymous internetsystems to pay for goods online and as part of holding cash in e-wallets for instant transactions and to protect personal details fromidentity fraud when transacting online.

There are a number of possible reasons why this trend isoccurring as it has many perceived advantages for consumers touse anonymous electronic systems.

With more anonymous and harder to trace electronic paymentsystems being developed with increase security of personal clientdetails and tracing, there may be risks in the cash economyassociated with:

concealment of wealth;

concealment of income;

hard to trace offshore transfers of funds;

ability to determine income by internet sellers

ability to determine accurate income by virtual businesses thatwho have a home base in Australia etc


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FOR OFFICIAL USE ONLY TAX CRIME PMI 13 - LITECOIN CRYPTO CURRENCY - A VARIATION ONBITCOIN 212270


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SIGNIFICANCE The potential tax crime and general tax implications previouslyidentified 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 gainingtrust in specific communities (organised crime, currency dealers,investors, crypto currency miners) or the general community morebroadly.

As a lower cost and more accessible partner to the Bitcoin,Litecoin has the potential to increase acceptance of bothcurrencies. In this way Litecoins emergence potentiallyrepresents an increase generally in the previously identified threatfrom highly anonymous cryptocurrencies.

The main impediment to Litecoin use by organised criminal

interests, speculators and exchange dealers currently will beremoved once it is listed for trading with the Mt. Gox Bitcoinexchange (and the many smaller exchanges which will no doubtfollow).

4Source: http://litecoin.info/About Litecoin, accessed 13 June 2013.

5On 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:https://mtgox.com/pdf/20130424 ddos statement and faq.pdf, accessed 12 June 2013.6Source: http://l i tecoin.info/Comparison between Litecoin and Bitcoin, accessed 13 June 2013.

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In relation to taxpayers seeking to profit from Litecoin mining, thelower computer hardware requirements for Litecoin make thisactivity more accessible and potentially more widespreadcompared to Bitcoins. Identifying and taxing the profits on

Litecoin and Bitcoin mining will remain problematic.

From a cash economy perspective, for Litecoin (and Bitcoin) torepresent a viable threat for the ATO they would have to gainacceptance as a practical currency, acceptable to a wide range ofmerchants willing to receive it in exchange for their goods orservices.

In this regard Litecoin, with its greater accessibility, lower value,and quicker transaction confirmation times, probably representsan increased cash economy threat relative to Bitcoin.

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UNCLASSIFIED MI - BITCOIN AND CHINA'S IMPACT


viable Bitcoin could be as an alternative currency.

Economists are speculating that China is looking to exert morefinancial influence on a global scale. China now controls a largeportion of the Bitcoin market and if Bitcoin emerges as asustainable part of the global economy and undermines the USdollars status as the worlds reserve currency, China could viewthis 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 getwealth out of the country. Bitcoin makes the move ofmonies overseas relatively easy. As Bihang, anotherChinese currency exchange, states in 200 millisecondsyou can move Bitcoin data to the US for almost no cost.

2. BTC China, which only trades in Chinese Yuan, currentlyoffers no-fee trading.

3. Because the property market in China is capped andcontrolled and the stock market isnt doing too well,wealthy Chinese are using Bitcoin for speculationpurposes. Bitcoin is an alternative to hedge bets toincrease profits.

SIGNIFICANCE The Chinese rush into the Bitcoin market has quadrupled thecurrencys value in less than a month and China now controls alarge portion of the Bitcoin market. The significant increase in the

value of the Bitcoin also takes it just that bit closer to globalmainstream acceptance. If this happens then China will be ableto exert more influence on global economies.

Previous analyses of Bitcoin have identified significant risks totaxation if it does become an accepted global currency, andongoing monitoring of Bitcoins progression has beenrecommended.

However the implications of China having a major influence onthe Bitcoin begs further questions:

What are the implications if Bitcoin moves from justallowing 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 Bitcoin increase,pushing it further to become the global reserve currencyinstead of the US$?

What will be the impact of these scenarios on theAustralian Tax Crime environment, including:

Non declaration by Australian taxpayers of verysignificant short term capital gains fuelled by Chineseinfluence on the value of Bitcoin;


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Potential for the concealment of proceeds of crime (andthe ability to accumulate further wealth by the increase invalue of Bitcoin); and


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UNCLASSIFIED POTENTIAL MATTER OF INTEREST - SUPER INVESTED IN LITECOIN 215675


In conclusion, self-managed super funds are required to putforward an investment strategy to the Australian Tax Office uponregistration as an SMSF, which is reviewed annually.

SIGNIFICANCE The Tax Practitioners & Lodgment Strategy business line isresponsible for managing the cash economy risk. Any newresearch and observations found in the environment needs to bemonitored and where relevant, necessary mitigation strategiesimplemented.

Issues for consideration include:

Litecoin super investment might exist on a small scale,but its does challenge traditional concepts of whatconstitutes a form of investment and currencyaccepted by regulators; and

Bitcoin and Litecoin may be accepted as currency butis not always traceable and could be used to hidetaxable income

5Australian Financial Review 24 June 2013:

http://www.afr.com/p/technology/ato targets bitcoin users oawpzLQHDz2vEUWtvYLTWI6GAO Virtual Economies and Currencies Additional IRS Guidance Could Reduce Tax Compliance Risks

May 2013 http://www.gao.gov/assets/660/654620.pdf

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FOR OFFICIAL USE ONLY BITCOIN RECENT EVENTS - STRATEGIC OUTLOOK


Regulatory reform of Bitcoin

Since March 2013 numerous countries have reviewed the regulation ofBitcoin, largely in response to money laundering concerns. There hasalso been a desire for regulation from some members of the Bitcoincommunity who are developing businesses based on Bitcoin.

Some notable examples of this reform are documented below.

4Sources: http://fincen.gov/news room/nr/html/20130318.html,

http://www.fincen.gov/statutes regs/guidance/html/FIN-2013-G001.html, accessed 21 October,2013.5Sources: http://www.reuters.com/article/2013/10/11/idUS397843744220131011,

http://www.huffingtonpost.com/2013/05/17/bitcoin-operator-accounts-seized n 3293937.html ,http://techcrunch.com/2013/08/23/feds-seize-another-2-1-million-from-mt-gox-adding-up-to-5-million/, accessed 22 October, 2013.6Source: http://info.datauthority.org/wordpress/blog/2013/10/05/the-announcement/

7Source: http://www.finextra.com/News/FullStory.aspx?newsitemid=25184 , accessed 22 October,

2013.

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8Source: Bitcoin London Conference, as reported at http://techcrunch.com/2013/07/02/regulation-

means-the-bitcoin-gold-rush-will-not-happen-in-the-us-say-experts/ , accessed 21 October, 2013.9Source: http://www.coindesk.com/germany-offic ial-recognises-bitcoin-as-private-money/,

accessed 22 October, 2013,10

Source: http://www.coindesk.com/german-government-relieves-capital-gains-tax-on-bitcoin-positions/, accessed 22 October, 2013.11

Source: https://www.mtgox.com/press release 20130530.html, accessed 21 October, 2013.12

http://www.forbes.com/sites/andygreenberg/2013/05/30/not-so-anonymous-bitcoin-exchange-

mt-gox-tightens-identity-requirement/

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SIGNIFICANCE The tax and tax crime implications of Bitcoin (and other cryptocurrencies) have been documented previously13.

Broadly these implications, which are complicated by the anonymityinherent 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 affectthe value of Bitcoin and its position as a trusted medium of exchange.

A failure of confidence in Bitcoin would have threatened its ongoingviability, potentially negating the tax and tax crime implicationspreviously identified.

It is seen as a measure of Bitcoins strength and growing broaderacceptance that the Silk Road closure hasnt caused users andspeculators of Bitcoin to abandon it. This event and its aftermath onlyserve to strengthen Bitcoins reputation and ongoing viability.

Strategic Outlook

Moves to regulate Bitcoin, particularly the approach being reported in

the UK and Europe, represent a positive from a taxation regulatorsperspective.

The potential of Bitcoin and other crypto currencies to interruptmainstream finance business models, particularly in relation tointernational currency transfers, has been recognised. Bitcoinentrepreneurs are seeking to capitalise on this potential and thisrequires some level of regulation and legitimacy.

The move by the Mt. Gox exchange to identify account holders is oneexample of increasing regulation which is likely to minimise thoseelements of the Bitcoin threat which stem from its anonymity. It also

Analysing the strategic outlook for Bitcoin and other crypto currencieshowever reveals a counterpoint to this creeping regulation andlegitimisation of Bitcoin which needs to be considered.

13See for example: Tax Crime PMI 13 - Litecoin crypto cur rency - a variation on Bitcoin 212270;

andAn update on recent in tel ligence on the Bitco in vi rtual currency 211258;

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Some in the Bitcoin community see its development as a competitionbetween ambitious Bitcoin entrepreneurs seeking legitimacy, andlibertarians who want to develop new protocols that make Bitcoin moreanonymous and more distinguished from mainstream finance.

If Bitcoin rises in prominence to become a legitimate part ofmainstream finance, the needs of its libertarian supporters may nolonger be met. There are currently around 30 competing cryptocurrencies which have relatively little scale or support, and the abovescenario could serve as a trigger for one of those currencies to fill thevoid created by the legitimisation of Bitcoin.

Developed with the benefit of the Bitcoin experience, a new cryptocurrency could provide its users with even greater anonymity and lessvulnerabilities than Bitcoin.

Another hypothesis would see those Bitcoin exchanges seekinglegitimacy competing with those seeking to protect the anonymity oftheir clients. Increasing regulation of the point at which Bitcoincurrency meets mainstream finance, could see Bitcoin exchangesemerging in secrecy havens and other jurisdictions supportive of theBitcoin libertarian ideal.

Currently, the value of Bitcoin, the number of users, and its limitedcirculation and acceptance means that the threat of Bitcoin is minimaland would barely register in terms of the ATOs existing risks.However the threat from Bitcoin (and other crypto currencies) relates

more to its potential as it grows in value, circulation, legitimacy andcommunity support.

For this reason SNC Intelligence will continue to monitor and report ondevelopments in relation to Bitcoin and crypto currencies generally.


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SIGNIFICANCE


Cryptocurrencies like Bitcoin have previously been thoughtto be a way to avoid government regulation includingtaxation, much like cash transactions have.

Providing users with an option to directly pay their tax usingBitcoin highlights the continual expansion in use of thisdigital currency and is indicative of substantial changesunderway in the broader economy.

Ongoing monitoring of shifts in the Bitcoin environment is

particularly important at this time, as the ATO is forming ataskforce to progress the consideration of Bitcoin, to ensurethat a holistic ATO approach and view can be formed.

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TABLE OF CONTENTS

EXECUTIVE SUMMARY ............................................................................................................. 4

INTRODUCTION..........................................................................................................................6

CONTEXT....................................................................................................................................6

Background ............................................................................................................................. 6

ATO Position on and Bitcoin ...................................................................................... 7

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Bitcoin ...................................................................................................................................7

COMMENTARY ...........................................................................................................................8

Bitcoin....................................................................................................................................15

Regulation of Bitcoin ...........................................................................................................15

Bitcoin exchanges...............................................................................................................16

Money laundering and funds transfer opportunities............................................................16

Technical vulnerabilities of Bitcoin ......................................................................................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 ACCs multi-agency workshop on and Bitcoin was useful inproviding an enhanced understanding of how the use of this technology is evolving and themethods other agencies are employing in responding to it.

By serving as a forum to share information and strategy the workshop also establishes aplatform 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 ofthe tax crime and general compliance implications arising from the use of this technology, andthis briefing is intended to capture and share this information.

A number of the law enforcement agencies represented at the workshop are experienced inpolicing criminal offences enabled by darknets and Bitcoin, and it was evident that theirsuccess 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 andgeneral compliance risks, determining how the risks might manifest, and how they can best betreated in the context of our available treatment strategies.

The use of 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 thepotential for and Bitcoin to become mainstream tools, and this briefing identifiesnumerous trends that could support such a hypothesis.

Attendance at the workshop also identified, or enhanced our understanding of, numerousimplications for tax crime and general compliance, including:

Use of Bitcoin to support money laundering and the transfer of funds between Australiaand secrecy havens;

Bitcoin as a virtual secrecy haven for online businesses; and

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RECOMMENDATIONS

The ATO recognise the potential threat from and Bitcoin technology gainingwidespread 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 theyevolve.

SNC continue to collaborate with ICT and other BSLs in order to better understand and

quantify the threat presented by and Bitcoin, and support future opportunities tocollaborate with external agencies to respond to these threats.

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INTRODUCTION

The combination of and virtual currencies like Bitcoin isfacilitating a growing level of online illicit commerce, fraud and other serious crime.

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 Bitcoin, andmake recommendations for further assessment of these issues where appropriate.

The workshop was an initial step in raising the collective level of understanding of therepresented agencies in relation to and Bitcoin. Further cooperation is anticipated inorder to close intelligence gaps and identify new strategies as these threats continue to evolve.

BACKGROUND

Bitcoin is a relatively anonymous virtual currency. While it has legitimate uses it has alsoemerged as the default currency for online illicit market places hosted within darknets. Thesemarket places deal in commodities such as illicit drugs, weapons, and stolen identities, andhost forums which provide instruction on how to commit fraud and other crimes.

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COMMENTARY

The workshop was useful in gaining an enhanced understanding of how Bitcoinissues are affecting other regulatory and law enforcement agencies. To that end the workshopprovided a practical insight into how this threat is evolving, and the methods other agencies areemploying in responding to that threat currently.

The following commentary is a summary of the information presented at the workshop, with thediscussions on and Bitcoin presented separately. Also identified are some specificATO implications that arise from material presented and discussed at the workshop.

Unless otherwise referenced, statements in this briefing relate to information obtained fromrepresentatives at the workshop either from formal presentations or personal discussions,based on the authors contemporaneous notes, and numerous clarifying email and telephoneconversations with relevant participants following the workshop.

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FOR OFFICIAL USE ONLY SNCSIACCDARKNETANDBITCOINWORKSHOP 192390


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As explained below, the use of a highly anonymous virtual currencylike Bitcoin provides ample opportunity for laundering profits and injecting them into themainstream financial system.

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BITCOIN

Regulation of Bi tcoin

According to AUSTRAC, the Bitcoin (BTC) appears to exist in a regulatory gap as far asAML/CTF14 legislation is concerned - there is no central issuer, just a network of users.

According to the ACC there is some evidence of speculative hoarding of BTC currency on the

expectation of large exchange rate increases. Analysis also reveals some evidence of anincrease in the exchange of Euros to BTCs as a result of European financial instability.

Any potential for wider, more mainstream use of the BTC probably presents the greatest threatto the ATO from a general compliance and tax crime perspective. AUSTRAC is presentlyworking on a strategic assessment which is intended to include some hypotheses on thepotential for legitimate and more mainstream use of BTCs, and a copy of this assessment willbe provided to ATO/SNC when it is published.

It was acknowledged at the workshop that regulation/registration of BTC exchanges would gosome 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 circulationcurrently (9.36m BTC at a current exchange rate of approximately AUD$6.80). The maximumnumber of BTCs is limited by design to 21million; however the high divisibility and potential forexchange rate increase of the BTC could substantially increase the equivalent value incirculation.

14AML/CTF: Anti-Money Laundering and Counter-Terrorism Financing Act 2006.

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Bitcoin exchanges

Three Australian BTC exchanges have been identified by agencies represented at theworkshop:

Bitpiggy https://bitpiggy.herokuapp.com/

Crypto_X_Changehttp://www.cryptoxchange.com/ .

Spendbitcoins https://www.spendbitcoins.com/

.

The largest BTC exchange in the world is Mt. Gox (https://mtgox.com/). According to ACCresearch, in January 2012 this Japan-based exchange reportedly handled 92% of world-wideBTC 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 laundering and funds transfer opportunities

The highly anonymous nature of BTCs means it is a currency that lends itself to moneylaundering, and the ease with which it can be exchanged would also make it of interest totaxpayers seeking to transfer funds between Australia and secrecy havens.

Australian BTC exchanges will cash BTCs for AUD$ currency and transfer it to Australian bankaccounts. In addition to standard bank accounts,

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Technical 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 doublespending of bitcoins built into the currencys design requires that information about successive

trades is stored in the block chain of data comprising each bitcoin.

A BTC wallet file can becopied/backed-up and stored in multiple locations, but once the BTCs in any one of the copiesare spent or exchanged, all BTCs in any of the other copies of the wallet will be identified by theBTC network as worthless if an attempt is made to spend or exchange them.

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Further information and reading in relation to Bitcoin

There are numerous open source wikis available on the internet providing information on howto acquire, where to buy, and how to use BTCs, and also a charting tool to track the overallvolume and value of BTC trade:

https://en.bitcoin.it/wiki/Main Page

https://en.bitcoin.it/wiki/Trade

https://en.bitcoin.it/wiki/Buying bitcoins

http://www.bitcoinplus.com/howbitcoinworks

http://bitcoincharts.com/charts/

CONCLUSIONSThe ATOs attendance at the workshop was useful in gaining an enhanced understanding ofhow the use of darknet and Bitcoin technology is evolving and the methods other agencies areemploying in currently responding to it.

In particular, the technical information provided by a number of cyber crime and AUSTRACspecialists at the workshop was useful in enhancing SNCs understanding of the threat posedby darknets and Bitcoin.

This briefing is intended to serve as a compendium of the information and strategy shared atthe workshop, and to enhance intelligence holdings in relation to the tax crime and general

compliance implications previously identified.

The greatest threat to the ATO, from tax crime and general compliance risks, stems from thepotential for and Bitcoin technology to gain widespread or mainstream acceptance inthe community.

By recognising this threat now the ATO can raise awareness of its implications and ensure it isadequately prepared as this threat continues to evolve.

It is recommended this briefing be widely circulated to ATO Risk Owners and Risk Managers inorder to raise awareness of and Bitcoin, and assist in the ongoing assessment of thetax implications arising from their use.

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It is recommended that continued collaboration with ICT and other BSLs occur in order to betterunderstand and quantify the threat presented by and Bitcoin, and that futureopportunities to collaborate with the ACC and other external agencies in relation to thesethreats are similarly supported.

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APPENDICES

APPENDIX A - Supporting Documents

SNC Strategic Intelligence - Potential Matter of Interest #9:

PMI 9 Tax crimeimplications of the da

Office Minute: CMC presentation darknet and vir tual currencies

Office Minute_CMCPresentation_Dark N


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APPENDIX B Source Evaluation

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5Lee, 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;17November 20136The Guardian: http://www.theguardian.com/technology/2013/nov/06/bitcoin-price-hits-all-time-high-of-

2697Lee, 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. 17November 20138Gillespie, I, Net mining for coin of the realm The Age, 21 November 2013

9Coin Desk Website; http://www.coindesk.com/australian-photography-bitcoin-discount/

10Gizmodo website: 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 isresponsible for managing the cash economy risk. Any newresearch and observations found in the environment needs to bemonitored and where relevant, necessary mitigation strategies

implemented.

Issues for consideration include:

Bitcoins endorsement by the US government is likelyto cause it to expand rapidly internationally;

Bitcoin might exist on a small scale in Australia, but itsa growing currency that will challenge traditionalconcepts of what constitutes a form of goodsexchange;

Businesses especially small cash economy industries

may increase use of this virtual currency to avoid GSTand other costs; and

Bitcoin may be accepted as currency but is not alwaystraceable and could be used to hide taxable income

The TPALS Intelligence Unit is currently preparing an intelligencescan on community perceptions of Bitcoin.


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SIGNIFICANCE


Does it pass the MI Significance Test?

The increasing popularity and ease of obtaining bitcoinsnecessitates the ATO to take a position on their legitimacy asa currency in preparation for its implementation in businesstransactions in Australia. There are risks to correct reporting

and record keeping.