Cryptocurrency: Mark Story Ins and outs of bitcoin
Bitcoin – once regarded as “fake internet money” – has come of age as an official payment method
Trading currencies is risky at the best of times, so given that bitcoin isn’t recognised as a hard currency its recent soar in value might seem unfathomable to serious investors. It nudged $US2900 ($3800) apiece in early June, having gone up by more than 170% in six months. This took the value of all bitcoins in existence to an estimated $US45 billion.
But the tide turned several weeks later as the price of bitcoin and its fellow cryptocurrencies, such as ether, collapsed over concerns about the rollout of new software used by the “miners” who have the computing power to run the system. At the time of writing traders were expecting a period of even greater volatility.
Despite these dramas, much of the recent growth can be attributed to revelations that what many regarded as “fake internet money” is inching closer to the real-world economy as an online payment system. Instead of speculating on upward price momentum, people are using bitcoin like a mature currency to buy goods, pay utilities or send cash overseas, and Australia is no exception.
While bitcoin remains largely unregulated across Asia, in early April Japan recognised it as a commodity. Now that it’s a legal payment method there, businesses are adopting it to accommodate payments in line with the new regulations. For example, electronics retailer Bic Camera began accepting bitcoin at two stores in Tokyo in May. The restaurant booking site Gurunavi will also let diners pay with bitcoin later this year, and other retailers are following suit.
Meanwhile, Russia’s largest online retailer, Ulmart, began accepting bitcoin ahead of the country’s plans to consider using it in 2018. Then in late May China’s three biggest bitcoin exchanges resumed customer withdrawals for the first time since February.
Adding to global optimism about bitcoin is the steady growth of international money-transfer services, such as venture-backed start-up Ripple, to move cash from one country to another. Equally exciting are hints that central banks will issue their own digital currencies, with the UK, Canada, China and Singapore likely to lead the way.
Closer to home, what’s making Australians realise that bitcoin is more than a speculative instrument is its
rapid adoption as an alternative payment system. As a case in point, Brisbane-based Living Room of Satoshi (LRoS), a bitcoin bill payments company, has seen a spectacular increase in bitcoin and other cryptocurrencies in the first half of 2017.
In June, CEO Daniel Alexiuc says LRoS alone processed $1 million in everyday bills paid by Australians using bitcoin. “Bitcoin is starting to become a normal part of life, with Australians using it to pay for things such as health care, insurance, car loans, credit cards and rent, and even paying the ATO,” he says.
Landmark ruling
What’s likely to drive bitcoin further into the real economy as an online payment system, says Alexiuc, are revelations that Australia is the second country globally to amend its tax laws to accommodate digital currencies. The decision to remove GST from digital currencies (from July 1, 2017), as announced in the 2017-18 federal budget, removes the tax office’s former 2014 ruling which, by treating bitcoin like a “barter” transaction, created a competitive disadvantage compared with “fiat currencies”, such as the Australian dollar and its forex counterparts.
“The July 1 ruling opens up all businesses to use bitcoin from [local] providers, which up until now were forced to use overseas exchanges to avoid the GST cost,” says Alexiuc.
While the ATO’s decision is a game changer for bitcoin, what remains unclear, says Mark Chapman, tax communications director at H&R Block, is whether it’s an asset subject to capital gains tax. “While currency is not a CGT asset, the government has said nothing about CGT so we must presume the ATO’s earlier guidance [from December 2014] still applies,” says Chapman. “This makes it clear that bitcoin is an asset for CGT purposes, albeit one which can be subject to the personal use exemption, where the cost is less than $10,000.”
Despite uncertainty around the tax treatment, Rami Brass, director of tax services with RSM Australia, reminds businesses that paying employees in bitcoin as part of their salary will attract fringe benefits tax if it’s processed under a salary sacrifice scheme. Otherwise, it will need to have normal pay-as-you-go deductions applied. “Businesses receiving bitcoin as payment will also need to record the transactions in terms of their value at the time in Australian dollars, and declare it as part of their taxable income,” he says.
Getting started
While BTC Markets is the biggest bitcoin exchange in Australia, other buyers and sellers, including CoinJar, Bitcoin Australia, CoinLoft, CoinTree and Buyabitcoin, have been facilitating online transactions for a modest commission of around 4%.
Last year two tech start-ups, Bitcoin.com.au and Blueshyft, launched an over-the-counter platform for selling bitcoin via around 1200 newsagents nationally. The system works by using an iPad at each newsagency location and an application that connects to bitcoin and its platform. You can also buy and sell bitcoin via one of 15 ATMs operated Australia-wide by BitRocket Capital.
As a virtual currency, bitcoins are kept in a digital wallet that can be used to pay for things from any entity willing to accept them as payment. In addition to using a mobile app such as Mycelium (Android) or Xapo (iPhone), bitcoins can also be stored on a PC using software like Bitcoin Core or, for larger amounts, a “hardware wallet” like Trezor.
Interestingly, while financial planners may be precluded from providing advice about bitcoin – which the regulator ASIC doesn’t regard as a financial product – Wayne Leggett, of Paramount Financial Solutions, is concerned that operators of digital currencies who don’t have a licence to provide advice may be allowed to do so.
“I’ve never had a client approach me about bitcoin but if I did I’d start by recommending they seek independent research,” says Leggett. “There’s nothing wrong with adding some speculation into your investment portfolio mix but you need to recognise that if you’re trading bitcoin that’s exactly what you’re doing.”
Making a quick exit
For those without a stomach for volatility, Leggett says it’s important to remember that when bitcoin’s value previously took off, once in 2011 and again in 2013, it subsequently fell dramatically. He says the volatility clearly raises some issues for those wanting a fast exit.
With liquidity on Australian bitcoin exchanges being demonstrably low, Alexiuc says it’s hardly surprising the bitcoin price in Australia can be out of sync with global prices. The issue for people trying to exit bitcoin for cash quickly is that even relatively small sell orders can distort the market price, he says.
“GST currently prevents all but the most sophisticated arbitrageurs from normalising the market price, and the fact that local businesses are also forced to use overseas exchanges only compounds the local liquidity problem. We expect these issues to begin to ease after July 1 if some of those bitcoin businesses forced to relocate overseas, due to the tax issues in 2014, return home.”
Until myriad imponderables around how digital currencies intersect with all parts of the economy are clarified by regulators, Danielle Szetho, CEO of FinTech Australia, expects price volatility to continue. However, if the number of ATMs, exchanges and resellers increases as it did in Japan, following its recognition as a legal payment method, she expects bitcoin liquidity issues to progressively dissipate.
“If you plan to experiment with bitcoin, stick with the core fundamentals rather than getting lost in the detail,” says Szetho. “There is nothing to stop you treating it as both a speculative asset and an alternative payment method.”
The tax office’s decision on capital gains tax is a game changer for digital currencies