It has been nearly a year since I last addressed Blockchain Australia Week.
When I made that address, I announced that the Select Committee which I Chaired – then called the Senate Select Committee on Financial Technology and Regulatory Technology – would be extended under new Terms of Reference.
These Terms of Reference would focus largely on Blockchain technology.
As I said at the time:
‘When we first applied our investigative lens to the digital asset sector, we expected it to be one of the many exciting developments in Australia. But it has become clear that blockchain, and its attendant fields of digital assets and cryptocurrency represent an altogether different challenge for policymakers’
- In April, the Committee was reconstituted as the Select Committee on Australia as a Technology and Financial Centre, under revised Terms of Reference.
- From May through until June, the Committee received and reviewed 88 submissions, and consulted widely with the sector.
- Through August and September, the Committee heard testimony from 71 witnesses across three hearing days
- In October, the Final Report was handed down. The Final Report made 12 recommendations, of which 11 were either noted or accepted by Government.
On 8 December, the Treasurer announced a formal timetable for the implementation of these recommendations. The Government has committed to, by mid-2022:
- Complete consultation on the licensing of crypto markets.
- Finalise consultation on the custody regime.
- Receive advice from the Council of Financial Regulators on the causes and policy responses to de banking.
By end-2022, the Government will have:
- Received a report from the Board of Taxation on taxation of digital transactions and assets. • Undertaken a token mapping exercise.
- Examined the potential of Decentralised Autonomous Organisations and how they can be incorporated into our legal and financial frameworks.
As the Treasurer said:
‘This is a substantial and complex body of work. Implementation will be key. For this reason I have asked Senator Andrew Bragg, who chaired the Senate Select Committee on Australia as a Technology and Financial Centre, to work closely with me in implementing these changes. It represents the most significant reforms to our payments system in 25 years.’
Crypto and sanctions
Without proper measures, crypto will be a loophole in international sanctions. Some of the most nefarious actors in the world will benefit. This needs to be addressed. The removal of Russia from SWIFT and the sanctioning of the Russian Central Bank has given this issue fresh urgency.
The Russian invasion of Ukraine has triggered unprecedented financial sanctions. In addition to the conventional sanctions applied to governments, businesses, and targeted persons, these sanctions have also applied to Central Banks, an unprecedented step even more serious than cutting Russia out of SWIFT.Russia’s foreign exchange reserves remain largely frozen, having been held by the European Central Bank.
While this has been going on, cryptocurrency transactions have been allowed to occur unsanctioned. According to the Australian Computer Society, at one point, the volume of high value daily cryptocurrency transactions – worth more than US$100,000 – was worth US$16 billion when Western countries cut Russia from SWIFT. It quadrupled to US$64 billion just two days later.
It is possible Russian entities are using cryptocurrency to exchange currency. We can’t have a situation where a product which is used by millions of people can become a backdoor for sanctions. When individuals, businesses, investment funds, pension funds, sovereign wealth funds, are being compelled to divest from Russian assets, it doesn’t make sense to allow crypto to provide a back door.
I have engaged with AUSTRAC to ascertain what we can do to ensure crypto doesn’t provide a backdoor under the current minimalist Digital Currency Exchange (DCE) regime. Their view is that not much can be done under the DCE system, which is more fodder to move ahead with our reforms.
The reality is we don’t live in a libertarian nirvana. We cannot have regulatory arbitrage.
To get on with the reforms, at the end of January, I convened a series of roundtables to nail down the finer details.
Fifty eight individuals came to the table: experts, industry leaders, peak body representatives, lawyers, academics, entrepreneurs, and representatives from the Treasury and the Board of Tax. We examined recommendations for markets licensing, custody, DAOs, debanking, tax and tokens.
We now have the next level of detail.
Create a Digital Services Act
Across these roundtables there has been strong agreement about the need to address this as a matter of public interest.
This means addressing this issue wholeheartedly and comprehensively. It means using the highest policy tool we have – an Act of Parliament – to lay the foundations for the new Digital Asset ecosystem.
This is why, today, I am calling for these reforms to be consolidated into a comprehensive legislative package – a Digital Services Act.
To do this would make Australia one of the only jurisdictions confronting this issue head-on, signalling that we fully appreciate the promise and potential of blockchain technology. It would protect consumers – who at last count were 20% of the Australian public – against malicious operators.
The Digital Services Act needs to be guided by four principles:
1. Technology neutrality
2. Broad, flexible principles, not a prescribed code.
3. Regulation by a Minister, not bureaucratic agencies.
4. Within Government, cooperation and appropriate powers, resourcing and personnel.
This will show Australia is open for business and things are clear and clean.
This will build on the work of Peter Verwer AO, the Prime Minister’s Special Envoy of Global Business and Talent Attraction.
Mr Verwer is leading the Global Australia taskforce, a whole-of-nation initiative consisting of a partnership between the Department of Home Affairs, Austrade, PM&C, Treasury, DFAT, and state and territory Governments. More information on this suite of initiatives can be found at globalaustralia.gov.au.
Tackling the existential threat from DAOs
The Committee recommended that Decentralised Autonomous Organisations be brought under the fold of the Corporations Act, providing for standards of corporate governance and corporate personality.
Decentralised Autonomous Organisations can replace Companies. It might be the most significant development since the first joint stock companies were floated on the Amsterdam Stock Exchange in 1602.
If that doesn’t make policymakers listen, perhaps this will. Given that DAOs are recognised as partnerships, not companies, they are not liable to pay company tax. Company tax accounted for 17.1% of total Commonwealth government revenue in 2020-21- the fourth highest level in the OECD- behind Colombia, Chile and Mexico. It is nearly double the OECD average of 9.6%.
Our reliance on company income tax is unsustainable. The 2021 Intergenerational Report makes it clear that there will be ongoing challenges to the budget: By 2060, The age old dependency ratio is projected to fall from 4.0 to 2.7. The participation rate is projected to decline from 66.3% to 63.6%. Spending on health and aged care will rise.
DAOs are an existential threat to the tax base. They must be recognised and regulated as a matter of urgency.
Recognising the fact that DAOs are self-regulating and transparent, with an in-built system for governance.
Nonetheless, the legal recognition of DAOs means we should legislate minimum standards:
• A responsible person within the jurisdiction.
• A consumer protection framework distinguishing between wholesale and retail DAOs.
• Standards for audit, assurance, and product disclosure as appropriate.
• Limited liability
• Replaceable rules to standardise DAO governance protocols.
The Treasury will need to address these issues, leaving the field open for DAOs to continue to live up to their name. Any attempt to prescribe a code be self-defeating.
This also provides us with an opportunity. An opportunity to ensure that the framework for tax and regulation, while adhering to essential principles, can be a help, not a hindrance, in building an open and competitive marketplace. In ten or twenty years time we may well be talking about the inverse situation: applying the rules for cryptocurrency to traditional finance. This brings me to the next issues: taxation and token classification.
Changes on tax and tokens
Tax reform is hard. The road to reform is strewn with casualties. The history is almost too fraught to detail.
The last major tax reform, introducing the GST, took nearly 20 years. Generations of politicians were defeated in the attempt.
Australia collected a greater share of tax revenue from personal income than all 37 OECD countries bar Denmark. At 42%, the share of revenue derived from personal income tax is nearly double the OECD average. Corporate tax accounts for 17.1% of government revenue. The fourth highest in the OECD behind Columbia, Chile, and Mexico. The OECD average is 9.6%.
Australia is never going to be the Isle of Man, the Bahamas, Singapore, or Jersey. There are a myriad of reasons why this might be the case – not all admirable.
But as a lawmaker I would be lying if I said I didn’t envy the fact that a smaller, more centralised government is also more nimble, more reactive, and more experimental. The endless Canberra cycle of drafting, consulting, redrafting, reviewing, and debating is certainly lacking in this respect.
But we can’t use this as an excuse. We should be aiming for a digital assets sector which is just as good, if not better, than these countries.
We can have regulatory structures in place which are just as innovative as those in place in these jurisdictions. It’s a cop-out to say that because we aren’t going to be these jurisdictions, that we shouldn’t aim to learn from them.
But that doesn’t mean we should just give up. The reform agenda for Digital Assets presents an opportunity to re-evaluate our tax and regulatory settings.
Our tax system is based on sound, time-honoured principles. We want those same principles to apply, as much as possible, to digital assets on a level playing field those principles are far from realised in the existing tax framework.
If we attempt to apply existing tax law wholesale to the Digital Assets ecosystem, if such a thing were possible, the sector would be suffocated. On the other hand, we do not want to create a two-speed world where the tax arrangements for digital assets are efficient, effective and proportionate while the analogue economy is constrained by the existing system.
How do we get beyond this conundrum?
The process of building a tax system for digital assets can be a spur for wholesale tax reform. We are applying the tax system to a new and emerging realm, conducting a root-and-branch examination of the existing system.
The conceptual framework that this process will produce is a once-in-a-generation opportunity to clean out our regulatory settings. Right now, we are talking and thinking about applying tax laws which apply in the analogue economy to the digital world. It is not impossible to imagine that in a decade’s time, we will be talking about the opposite.
The Board of Taxation will be reviewing the tax arrangements for digital assets at the Treasurer’s request. It must be as broad as possible, examining all tax issues arising from digital assets.
This review will need to look carefully at the granular details, clarifying the tax status of, among other issues, Initial Coin Offerings, play-to-earn games, airdrops, staking, and the currency state of stablecoins and CBDCs.
Alongside the Board of Taxation review, a token mapping exercise will be convened by Treasury. Clarifying assets will be a delicate task. We don’t want to pigeonhole tokens within confined and inflexible categories.
Like the rest of the reform process.
The token mapping exercise will be the centrepiece or the wider reform process. The exercise will sit alongside, but separate to, the Board of Taxation review. The guidance produced as a result of this exercise will be invaluable. It will form the foundations for future reforms.
- This was Senator Andrew Bragg’s address to Blockchain Week 2022 on March 21.