Australian Digital Currency Commerce Association ACAMS PRES ENTATION 30 S eptember 2014 1
Agenda 1. What is Bit coin? 2. How are Bit coins Used? 3. The Growing Digit al Currency Indust ry 4. Taxing Digit al Currencies 5. Bit coin as a Payment S yst em 6. AML/ CTF issues 7. Account ing Cont rol 8. Q & A 2
What is Bitcoin ? What is Bitcoin?
Video 4
What is Bitcoin ? Bitcoin is a protocol that enables the transfer of value between two people. Bitcoin is a unit of value that is transferred between to people using the Bitcoin protocol. Bitcoin is denominated in S atoshis 100,000,000 Push based paradigm, rather than pull • A Protocol (like http, or tcp, or torrent , or any other set of rules which governs how something operates). • S tore of value - literally a number - like the number 5 on a AUD$5 note. (It ’s people who own them that assign them real world value, not unlike US D since detaching from gold in 1933). • Like dollars are broken into cents, Bitcoin can be broken down into 8 decimal points (colloquially, ‘ S atoshis’ ).
• What is Bitcoin ? It’s like traditional currency • Fully Traceable • Fully Auditable
What is Bitcoin ? What does Bitcoin look like? 13PBPB5MHTF4Z9kKj V99tS zVnwDfB1yBrD This is a Bitcoin address, a seemingly random j umble of letters and numbers. How Bitcoins are mostly interacted with. A QR code representation of the address (this is a donation to the IAPF address)
What is Bitcoin ? • Anyone can see the transaction on the Blockchain (a public, transparent ledger). • This example is from the site blockchain.info a publically available website that can traverse the Blockchain.
What is Bitcoin ? Mining Reward for each mathematical block solved in the block chain. The reward will reduce based a predetermined formula, cutting in half about every four years, once every 210,000 blocks - max 21 million bitcoins in circulation
What is Bitcoin ? Where do you keep a Bitcoin address? • Bitcoin addresses (and therefore Bitcoins) are kept in a ‘ wallet’ • The wallet is in your control and responsibility and has your Bitcoins in it • This is an example of a Bitcoin wallet on android
What is Bitcoin ? Private Keys A private key is a secret code which allows the user to prove his ownership of his Bitcoins. Every Bitcoin address has a matching private key, which is saved in the wallet file of the person who owns the balance. The private key is mathematically related to the Bitcoin address, and is designed so that the Bitcoin address can be calculated from the private key, but importantly, the same cannot be done in reverse.
What is Bitcoin ? What Does a transaction actually look like? S o lets look at an example: • IAPF – International Anti Poaching Foundation accepting Bitcoin as a donation.
What is Bitcoin ? • Coins get sent from one address to another. • Hit the Bitcoin network • One miner grabs the transaction and puts it with a bunch of others on the chain
What is Bitcoin ? The donor then scans the QR code with their phone, and in a few seconds the payment is received What happens is the donors Bitcoin wallet contacts the Bitcoin network and signals that it wants to Authorise transfer value from the current address to the one scanned in
What is Bitcoin ?
What is Bitcoin ? At this st age the payment has been received by recipient • The recipient then receives and is in control of the coins sent. • Payment processor can convert BTA to AUD/ FIAT
How Bitcoins Are Used? 17
Bitcoin businesses 1. Bitcoin miners (e.g. Digital CC) 2. Exchanges (e.g. Bit Trade Australia) 3. ATMs (e.g. ABA Technology) 4. Wallets (e.g. Xapo) 5. Payment Processors (e.g. BitPOS ) 6. Financial S ervices (e.g. Coin Arch) 18
Examples of bitcoins used commercially 1 Paying for services • Pay Mel B, former S pice Girl. • Pay your lawyer or other consultant. • Pay for space travel on Virgin Galactic. • 2 Paying for goods Buy a Lamborghini or Tesla car. • Pay for a coffee or buy a beer in S ydney. • Buy flights or book a hotel through Expedia. 3 Global Micropayments • S end money to relatives (e.g. in the Philippines) and avoid 9% remittance fees. • Trade with businesses in other j urisdictions for small transactions without attracting large bank fees. • Donate to charities across the globe and avoid 10% processing fees. 19
Bitcoin adoption rates Current market capitalisation is over $8 billion US D. 60,000 online retailers globally already accept Bitcoin. Expedia has j oined the likes of Overstock, S quare and Dell in accepting Bitcoins. PayPal announcement t hat t hey have part nered wit h Bit Pay, Coinbase, and GoCoin t o int egrat e bit coin payment s int o t he PayPal Payment s Hub. Growth from 40 businesses to 250 businesses in Australia between January to June 2014. 20
Bitcoin drives financial inclusion S ource: World Bank 21
Case S tudy: Philippines Credit card penetration is less than 5% . Less than 30% of Filipinos have a bank account. In 2010 Filipino expats sent $21.3 billion back into the PI. Average fees for these transactions was 9% . To use Bitcoin, all that is needed is a mobile phone. 22
The Growing Digital Currency Industry 23
Nearly 13 million bitcoins currently in circulation 24
December 2013 – Bitcoin overtook Western Union 25
Current market cap is $8.1 billion US D 26
Bitcoin investment Global investment in FinTech hit $3 billion in 2013. S et to reach $8 billion by 2018. Over $300 million US D invested into bitcoin ventures in the past 18 months, with $200 million in 2014 alone (Winklevoss twins). Bitpay raised US D$30m in series A funding from investors that included Richard Branson. Nearly $11 million has already been invested in Australia. $30 million investment fund launched in Australia (Future Capital Bitcoin Fund) set to invest in companies that are leveraging Bitcoin and crypto-currency services. 27
Global Regulatory Approach to Bitcoins 28
Recent Regulatory Developments California changes laws to declare bitcoin as ‘ legal money’ . The UK Revenue Commission considered the supply of bitcoin to be VAT exempt. Canada changes its AML/ CTF equivalent to extend its cover to bitcoins. European Banking Authority – cautions banks from dealing in bitcoins themselves until the currencies are regulated, but allows banks to continue relationships with bitcoin businesses. George Osborne the Chancellor of the Exchequer wants London to become the global capital of digital currencies In Australia AS IC current view bitcoin as a commodity like gold and don’ t believe it comes under the financial services remit 29
Taxation issues – Digital Currency Preparer: ADCCA 30
Difficulties in applying existing tax law to digital currency In August the ATO today delivered guidance on the taxation treatment of Bitcoin and other digital-currencies bitcoin transactions are treated like barter transactions with similar taxation consequences. Generally, no income tax or GS T implications for individuals that use bitcoin to purchase goods or services for personal use or consumption. Any capital gain or loss from disposal of the bitcoin will be disregarded as a personal use asset – provided the cost of the bitcoin is $10,000 or less. Businesses will need to record the value of bitcoin transactions as a part of their ordinary income. They must also charge GS T when they supply bitcoin and subj ect to GS T when receiving bitcoin in return for goods and services. 31
Tax Problems GS T applies to both parts of the transaction anomalies in dealings between registered and non-registered parties a taxable supply every time bitcoin is exchanged for another currency There may be fringe benefit tax consequences for businesses using bitcoin to pay employee salaries. Definitional problems ‘ Used as money, but not officially ‘ money’’ What if another country adopts Bitcoin as legal tender? Automatically legitimised as a Foreign Currency? 32
Bitcoin as a payment system Innovat ion & Compet it ion in t he payment syst em 33
S ettlement Process Every Bitcoin transaction is recorded on a global register that is publicly available (blockchain) Bitcoin to Bitcoin transactions are verified and settled within 4 – 10 minutes S ettlement is final There is no double spend on a Bitcoin transfer 34
S ettlement Risk Mitigation Payment services providers can simultaneously access multiple exchanges to ensure that if one exchange goes down, settlement can be achieved through other exchanges Decentralised arrangements guarantee the stability of the system, even in the face of currency fluctuation Transactions are fully transparent, traceable and highly secure There are inbuilt mechanisms to maintain security of each transaction (i.e. mining process) 35
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