Cryptocurrencies, AML and 'moral panic'.

Cryptocurrencies provide a means for terrorist organizations and criminal syndicates to launder and relocate wealth across the globe quickly, easily, and privately, potentially even replacing bulk-cash smuggling.
— Joshua Fruth

Whether or not cryptocurrencies are, or are becoming, the subject of moral panic is contentious, but there can be little doubt that cryptocurrencies, and the threat they pose, are attracting increasing scrutiny and criticism.

This should not suggest that either increased scrutiny or critical examination are unexpected, unwarranted or undesirable. 

For every critic that dismisses non-government cryptocurrencies as 'junk', there is another well-researched piece that articulates the fundamental challenges presented by cryptocurrencies and the work required to mitigate those threats. 

On this latter point we'd highly recommend the article titled "'Crypto-cleansing:' strategies to fight digital currency money laundering and sanctions evasion" published by Thomson Reuters Financial Regulatory Forum. Joshua Fruth's article suggests that it may be less 'moral panic' than legitimate threat.


AUSTRAC steps up

Anti-money laundering and counter-terrorism financing

Financial Services Professionals would have little to occupy their time without regular regulatory tweaking and legislative amendments.

Thankfully, the Government identified the industry's insatiable appetite for compliance and introduced a raft of changes to the AML/CTF Act. 

Those of you playing along at home will know that the from the Anti-Money Laundering and Counter-Terrorism Financing Amendment Act 2017 (Cth)

  • was introduced in August 2017
  • received assent on 13 December 2017 and
  • will commence on or before 14 June 2018.

An excellent overview of these changes is available from our friends at Dwyer Harris.

We recommend their summary to your attention but we'll just focus on the elements of the reforms that address 'Digital Currency" and 'Exchanges'. 


Digital currencies

‘Digital currency’ (a term synonymous with 'virtual currencies' and 'cryptocurrencies') is defined as a digital representation of value that:

- functions as a medium of exchange, a store of economic value, or a unit of account;
- is not issued by or under the authority of a government body;
- is interchangeable with money (including through the crediting of an account) and may be used as consideration for the supply of goods or services; and
- is generally available to members of the public without any restriction on its use as consideration.

The Rules allow for the exclusion of items from this definition and the explanatory statement excludes “such things as loyalty programs where points are not redeemed as money, and game money or credits issued by the operators of massively-multiplayer online role-playing games where its use is limited to a specific community.”



The Act created a new designated service -  “exchanging digital currency for money" (or vice versa) - where the exchange is provided in the course of carrying on a digital currency exchange.”

Consequently, businesses providing digital currency exchange services are now 'designated services' that must comply with the general provisions of the AML/CTF Act.  This now requires them to implement adequate compliance measures including:

  • effective customer identification and due diligence (KYC),
  • identification and escalation of suspect and threshold transaction reporting, and
  • effective record-keeping,

As Dwyer Harris point out, the most significant aspect of these changes is that Exchanges will be subject to greater scrutiny and more effective oversight. Dwyer Harris note that the

Act creates a separate new registration requirement for digital currency exchange providers. They will have to enrol and register on the Digital Currency Exchange Register maintained by AUSTRAC and provide prescribed registration details.
— Dwyer Harris "AML/CTF changes in 2018"

The burdensome regulatory obligations have proved to be no impediment to local businesses. In February 2018, BTC Markets became Australia's first certified exchange. 

(c) Financial Review, 20 February 2018

(c) Financial Review, 20 February 2018

The Melbourne-based cryptocurrency exchange demonstrated that “rigorous” standards were achieved in meeting the expectations of multiple Australian regulators, most notably AUSTRAC.
— Financial Review, Street Talk, 20/02/22018


Equity v Utility

"Long-time listener, first-time caller", Troy Penney, recently observed that most coverage of ICO and Tokens/Coins (including their risks, implications and regulation) fails to adequately differentiate between Equity Tokens and Utility Tokens.

It's a fair point, because these types of ICOs are treated differently at law; while equity tokens are more likely to be securities or financial products, utility tokens are not. In Australia, ASIC recognise the complexity of ICO and differentiate ICO (and tokens and coins) by their underlying characteristics, structures and purposes. 

An assessment of what rights are attached to the coins (or tokens) issued under an ICO is the key consideration in relation to assessing the legal status of an ICO. For this purpose what is a right is to be interpreted broadly and includes rights that may arise in the future or on a contingency, and rights that are not legally enforceable. If the value of the coin is related to the management of an arrangement as described above, the issuer of the ICO is likely to be offering an MIS.
— ASIC on Initial coin offerings (INFO 225)


Essentially, if the ICO or the underlying token is a financial product then any service or platform that enables investors to buy, sell or trade these tokens is a financial service that may involve the operation of a financial market. Subject to exemptions, this requires the operator to have an Australian Market Licence

The US approach to ICO (and tokens and Coins) is similar to that adopted by ASIC but starts with the application of the Howey Test to determine whether the 'product' is an 'investment contract' that's subject to regulation. This approach, although consistent, is problematic and may not provide the clarity consumers, investors and providers require.


For a summary of the US approach to classification read "ICO Law and Compliance: Is Your ICO Subject To Regulation?"

For a clear and accessible explanation of the difference, read Strategic Coin's post.  


Cryptocurrency?: Not a currency!

We've previously observed that while cryptocurrencies may be assets, they are not currencies in any real sense. Because 'cryptocurrencies' are not generally accepted or in use, they are instead traded assets. 

Jacob Weindling's excellent article not only snarkilly addressed the casual misrepresentation of virtual currencies (and mining) but proposed an alternate conceptual model - 'cryptocurrencies' are commodities. Even without the arcade analogy, we'd recommend his well-considered and accessible piece. 

Bitcoin, and all these other cryptocurrencies, are not currencies. They’re oil for software platforms. They’re commodities.
— Jacob Weindling, "Bitcoin and Other Cryptocurrencies Are Not Currency"