In our latest Digital Discussions interview, SW Tax Partner, Simon Tucker, talks to Cameron Nelson, CEO of DAME Technologies, a sustainability-first renewable energy bitcoin mining company, about how utilising renewable energy in crypto and bitcoin mining can support both the fluctuating needs of the electricity grid while also supporting renewable energy investors by utilising energy production that doesn’t make it to the grid.

Simon has worked with Cam and DAME Technologies for several years and SW appreciates his time. Cam articulates the DAME offering succinctly and has some great insights to share. Take a look.

The post Renewable energy bitcoin mining – how does it work? | SW talks to DAME Technologies appeared first on SW Accountants & Advisors.

Increased usage has led to a raft of new products and platforms, prompting governments and regulatory bodies around the world to review the suitability of existing regulatory frameworks and engage with industry to ensure regulation and protections are suitable.

While there are currently three types of stablecoin, Novatti has launched its Australian stablecoin, AUDD. Backed by a fiat currency – the Australian dollar – it is less volatile than other cryptocurrencies and more efficient than traditional payments methods.

SW’s Danny Armstrong sat down with Peter Cook, the CEO of Novatti, for the first of our SW Financial Services interviews on the digital asset landscape.

Peter takes us through the different types of stablecoin, the AUDD point of difference, the Stellar platform, future plans and the trade and payment benefits for exporters, importers and domestic businesses.

Click below to watch the full interview and reach out to our Financial Services Digital Assets team for further assistance.

The post SW talks Australian stablecoins with Novatti appeared first on SW Accountants & Advisors.

China’s ban on crypto

In September 2021, the People’s Bank of China (PBOC), along with nine other authorities including the Supreme People’s Court (SPC), Supreme People’s Procuratorate (SPP), the Ministry of Public Security (MPS), and the State Administration of Foreign Exchange (SAFE), jointly announced that cryptocurrency is not legal tender in China. Further, the notice determined that all cryptocurrency transactions in China are illegal, including offshore exchanges to provide services to Chinese citizens. In this pronouncement it was made clear that China-based employees of offshore exchanges, and third parties supporting them by providing marketing and promotion, payment and settlement, technical support or other services, will be investigated and prosecuted.

Court rules Bitcoin as property rights

Nevertheless, on 5 May 2022, the Shanghai High People’s Court issued a statement on their official WeChat channel regarding a civil case involving Bitcoin. In commentary, the court held that Bitcoin has virtual property attributes and is therefore regulated by the legal norms of property rights, sparking a new debate over its legal status in China. While not the first court in China to characterise Bitcoin as virtual property (a previous dispute in 2019 at the Hangzhou Internet Court reached a similar determination), it is worth noting this is the first case involving Bitcoin to reach the level of the Shanghai People’s High Court.

In China, the judicial authority of the Shanghai High People’s Court is second only to the Supreme People’s Court.

Will China move to legalise crypto?

Some observers see the Shanghai High Court’s ruling as indicating an increasing trend to recognise Bitcoin as virtual property which may influence future civil disputes involving cryptocurrency. Others, however, point out that under the sweeping prohibition announced late last year, Bitcoin cannot be considered legalised by identifying it as virtual property.

In China’s civil law system, the law means statutes and excludes case law. In other words, because only rules codified by the legislature, the executive, and the judiciary are laws, and except for “Guiding Cases” (指导性案例) selected by the Supreme People’s Court, rulings from lower courts do not often serve as a precedent. For that reason, it remains to be seen what impact the Shanghai High Court’s determination will have on the status of Bitcoin in China.

Contributor:

Toby Graham

The post Is Bitcoin now legal in China? appeared first on SW Accountants & Advisors.

The increased accessibility and uptake of digital assets by personal, retail, wholesale and institutional investors throughout 2021 has had global regulators playing catch up and in Australia, crypto assets and associated platforms have become increasingly mainstream.

Driven predominantly by evolutions in global payment technologies, several domestic industry reviews have culminated in the final report and recommendations from the Senate Select Committee on Financial Technology and Regulatory Technology in 2021.

The Australian Government announced on 21 March 2022 that the next stage of the reforms to Australia’s payment systems are now being progressed. Industry feedback is being sought for crypto asset licensing and custody requirements by the end of May, including terms of reference for the taxation of digital transactions and assets.

Existing legal and regulatory challenges with crypto assets

There has been some legislative reform related to digital currencies with regard to GST, and whilst the Australian Taxation Office (ATO) has provided some guidance on the income tax treatment of crypto and digital assets, this has been particularly limited given the prevalence of crypto ownership in Australia.

The inability of the ATO to provide comprehensive binding guidance is due, in part, to the fact that crypto includes a broad range of tokens and other ‘things’ with different rights, entitlement and obligations. Therefore without a specific crypto regime it is difficult for the ATO to administer the law in a consistent and sensible way.

ASIC has also provided some guidance from an investment asset and corporations law point of view. For the most part, however, crypto investments will tend to fall outside of the ambit of the Corporations Act, and therefore effectively outside ASIC and the government’s control. 

In terms of financial reporting, the Australian Accounting and Standards Board (AASB) has not provided any interpretive view on the classification of crypto assets in Australia. The International Financial Reporting Interpretations Committee (IFRIC) has considered this issue and has provided an interpretation that crypto will either be regarded as an intangible asset or trading stock, subject to its use. Importantly it will not be classified as a financial asset in any circumstance.

The AASB is relying upon the IASB to set the standards in this area and is following their interpretation. Such an interpretation does itself cause challenges for crypto as an investment class for its tax treatment where it is held as an investment asset in an Australian managed fund.

On the whole, tax and other regulatory reform for crypto/digital assets is now a necessity.

Board of Taxation review

A review by the Board of Taxation into the appropriate policy framework for the taxation of digital transactions and digital assets, including cryptocurrency and non-fungible tokens (NFTs), is due for completion by 31 December 2022. Considering the pace of innovation in the sector, the landscape may look quite different by this time again.

The review is being conducted on the basis that it will not increase the overall tax burden.

The terms of reference for this review have been released by the Government. Specifically, the Board is asked to:

• consider the current Australian taxation treatment of digital assets and transactions and emerging tax policy issues
• consider the awareness of the taxation treatment by both retail and wholesale investors and those transacting in digital assets as part of their business
• consider the characteristics and features of digital assets and transactions in the market, including the rapid evolution of technology supporting the broader digital asset ecosystem
• analyse the taxation of digital assets and transactions in comparative jurisdictions and consider how international experience may inform the taxation of digital assets and transactions in Australia, and
• consider whether or not any changes to Australia’s taxation laws and/or their administration are warranted in the context of digital assets and transactions, both for retail and wholesale investors.

We expect the Board to consult with taxpayers, tax representative bodies, industry stakeholders, and academics both domestically and abroad, and carefully consider experiences from other governments in regulating and enforcing the taxation of these forms of transactions and assets.

Looking forward

This move by the Government signals an increasing desire for Australia to be at the forefront of technology and innovation, and we are excited to see what the Board of Taxation releases following this review.

In the meantime, the range of guidance provided by the ATO and other regulatory authorities attempts to apply existing principles to the tax and accounting process of these assets.

SW experts are fully across these principles and continue to advise and work with a range of clients working with digital assets of all kinds. Reach out to your SW contact or the SW Digital Assets team for a complimentary consultation to see how we can assist you.

Contributors

Jae Debrincat

The post Government moves forward with crypto – payments reform appeared first on SW Accountants & Advisors.

Since the first transaction of bitcoin in 2009, new cryptocurrencies, networks, platforms and brokers have been established and continue to evolve. This new world of digital assets offers different ways for both providers and customers to think about investment opportunities.

There has been a significant uptake in institutional investment from well-established multinational companies such as JP Morgan, MicroStrategy, Mastercard, Microsoft, Tesla, Amazon, Facebook and many more. This institutional uptake of crypto assets has been attributed to an inflationary hedge, as well as a sign that diversified investments will ultimately include crypto.

Currently in Australia, there is no specific regulatory regime that caters for the various financial assets that have developed, and cryptocurrencies have specifically been classified as not being a foreign currency. Accordingly, any gain or loss from any disposal (including staking and wrapping) is subject to the capital gains tax provisions, the trading stock provision or ordinary income concepts, depending on the activities and circumstances of the investor.

Additionally, without it being classed as a financial product, in a lot of cases the Corporations Law will not apply to cryptocurrencies. In these instances, the application of cryptocurrencies as an investment asset will be outside of the jurisdiction of ASIC unless bundled up into a fund or a derivative.

Regulatory change is currently being explored. The resulting regime could mean that businesses investing, dealing or advising in relation digital or crypto assets may require some sort of financial licencing.

In this article, we look at both the origins and current trends for crypto and digital assets as Australian regulators will be considering how to manage these as part of the broader industry and payments landscape.

Crypto beginnings

The origins and development of the technology can be used to further understand the crypto market and its potential to revolutionise financial markets. Below we give a high-level overview of the developments, and the core ideological underpinnings that drive innovation in the crypto asset market.

Bitcoin (BTC) was the first decentralised cryptocurrency. BTC was created by Satoshi Nakamoto (the pseudonym give to the anonymous creator/ creators) as a means to operate an international payment system without the need to rely on financial intermediaries. Bitcoin was intended to function as money that did not rely on intermediaries to process and authorise transactions. Instead, Bitcoin relies on cryptographic hashing to generate proof of work to authorise transactions.

The second largest cryptocurrency network, Ethereum, was created by Vitalik Buterin in 2014. Ethereum introduced greater functionality by enabling smart contracts, which could facilitate the creation of decentralised applications (dApps), which ran off the Ethereum network. This increase in functionality spurred further innovation into significant new areas such as Decentralised Autonomous Organisations (DAOs), Non-Fungible Tokens (NFTs) and Decentralised Finance (DeFi).

DeFi, DAOs and NFTs are three of the most significant and innovative developments in the crypto-asset ecosystem. They pose a significant challenge to the way we think and interact with finance services, art and governance online.

DeFi

Decentralised finance (DeFi) is a financial technology that is used to undertake peer-to-peer transactions on distributed ledgers called blockchains. Rather than transactions being made through a centralized intermediary such as a cryptocurrency broker, securities exchange or a financial institution transactions are executed between participant directly which are verified through the programmed rules of the relevant blockchain

Because of this DeFi is a means of providing financial services without a financial intermediary. It is primarily used in crypto loans, decentralised exchanges, generating interest on tokens (known as yield) through staking, and play-to-earn gaming. DeFi applications rely on smart contracts to execute these functions. DeFi can be risky as the assets locked are an attractive target for hackers or nefarious actors who may want to defraud the DeFi platform.

DAOs

DAOs are Decentralised Autonomous Organisations, which are a new type of organisation structure. Participants of the DAOs can vote on decisions in accordance with the number of tokens or stake in the organisation. Voting power is often granted through governance tokens, which are allotted to users. DAOs can be used as investment vehicles, or other such dApps.

DAOs have attracted academic inquiry across the world as many jurisdictions struggle to define where the liability for a DAO will lie. Many DAOs are not yet fully decentralised, with key individuals holding the majority of governance tokens. Attributing liability in the case of fraud, or gross negligence in a truly decentralised organisation, will challenge existing company laws.

NFTs

Non-Fungible Tokens (NFTs) are by far the most popular and mainstream crypto asset outside of the major tokens such as Bitcoin and Ethereum.

NFTs are tokens that can be used to represent ownership of unique items. They allow things to be tokenised like art, collectibles, contracts, limited edition handbags and even real estate because each of these items are not interchangeable for other items because they have unique properties.

They can only have one official owner at a time, and no one can modify the record of ownership or copy/paste a new NFT into existence. Conversely, Fungible items, can be exchanged because their value defines them rather than their unique properties.

An NFT is essentially a unique token that can have metadata attached to it, for example an avatar picture. This metadata could contain anything (that fits within the limited storage capacity), and has been used most notably for art.

By attaching the metadata to the token, a public, immutable ledger of ownership is created on the blockchain. Ownership of art can be traced and authenticated to an individual wallet address, and therefore enables royalties to be earned in perpetuity. The use of NFTs in digital art demonstrates the growing importance and significance of the online world and digital identity.

NFTs have also been used for other purposes, such as certification of authenticity for pearls, and many foresee the use of NFTs to create digital identities and communities.

Australian Regulation

The crypto market capitalisation surpassed $3 trillion in January 2022 and while it dipped significantly afterwards, it is climbing back at a rapid rate. Despite this volatility, there is significant economic value in products and technological innovations using blockchain.

The rapid growth of digital assets and associated products have seen governments across the globe scramble to create new and suitable regulation. The Australian Government’s Blockchain Roadmap includes plans to update Australia’s payments system, with new regulation expected by the end of 2022. Three recent reviews on the topic, including the Senate Select Committee on Financial Technology and Regulatory Technology led by Senator Bragg in 2021, have issued a total of 41 recommendations to the government and regulators.

A particular focus of the reforms is to regulate buy now, pay later (BNPL) companies, digital wallets such as Apple Pay and Google Pay, and cryptocurrency. Treasurer Josh Frydenberg announcing this will be the largest legislative reform made to our payments systems in 25 years.

While there is tax guidance on how to treat digital assets by the ATO, fluctuating values of assets make it a more complex asset for accounting calculations. Furthermore, the difference between the protocols of cryptocurrencies make it extremely challenging for the ATO to make blanket interpretations across the universes of tokens.

Part of the reforms announced by Treasury include working with the ATO to create more specific guidance around current tax laws alongside a review of the current tax laws by the Board of Taxation. SW has reviewed these laws and can answer any questions you might have.

Where to from here?

Crypto experienced a breakthrough in 2021, with prices at all-time highs (followed by huge drops), multiple institutional buy-ins by major companies and explosive interest in crypto from payments companies to private and everyday investors. However, the industry is still in its infancy and continues to evolve.

While it’s difficult to predict the long-term trends, in the coming months, regulators and governments will be grappling with questions of  long-term regulation that remains fit for purpose and institutional adoption of crypto payments.

How SW can help

Understanding the risks, rewards and potential legal implications of blockchain opportunities can assist in being more confident with how you choose to engage with any crypto assets.

If you have any questions, feel free to contact SWs Digital Assets team.

Contributors

Natasha Woods

The post Innovations & regulation – the future of crypto appeared first on SW Accountants & Advisors.