Crypto Experts Praise Bragg Tech Report, Sceptical of Delivery

First published in the Australian Financial Review on 21 October 2021

Local experts say Senator Andrew Bragg’s crypto recommendations will turbocharge Australia’s innovation industry, giving operators and investors comfort to try new things with regulations to protect them, but some are still sceptical of the government’s capacity to deliver.

The final report of the Australia as a Technology and Financial Centre (ATFC) committee, tabled on Wednesday night, was largely met by a very enthusiastic community, describing it as “forward-thinking” and “thoughtful and thorough”.

“It’s a report that could make sure people and companies have the resources and governance to operate a cryptocurrency industry well,” said Adrian Przelozny, chief executive officer of Independent Reserve, an Australian cryptocurrency exchange.

“Regulations weed out the players that aren’t taking it seriously, protects consumers and gives us a chance to really grow the industry here.”

The committee recommends Treasury establishes a custody or depository regime as well as a market licensing regime for exchanges, including capital adequacy, auditing and responsible person tests.

As it stands, crypto exchanges have no capital requirements, auditing requirements or minimum security levels.

“While international custodians have done a great job in supporting our businesses, custody falling under the remit of Australian regulators acts as a risk minimiser for local investors,” said Caroline Bowler, chief executive officer at BTC Markets, a crypto exchange.

While Singapore, which has a licensing regime for crypto exchanges, was cited as an example throughout the report, some pointed to the risks of overbearing regulation.

“It must be said that the introduction of an onerous market licensing and/or crypto asset custody/deposit regime could risk driving these businesses offshore,” said Jonathon Miller, managing director of Kraken Australia, an exchange with operations in almost 190 jurisdictions.

One of the most significant recommendations – that decentralised autonomous organisations or DAOs be recognised under the Corporations Act – has been met with amazement.

“This is quite an extraordinary inclusion,” said Joni Pirovich, co-founder and director of the Digital Law Association.

“The implications of providing limited liability protection to groups of people wanting to work together will open doors in ways we can’t quite imagine yet.”

A DAO is a way of organising people and automating the contracts that bind them. They are used to coordinate financial contributors from around the world on a common project, but Australian law doesn’t recognise them.

If a corporation is a collection of employment and administrative contracts, managed by a board of directors for shareholders, then a DAO automates the management of those contracts and offers a way for the collective group of shareholders to make decisions about how their investments are spent.

“These are very forward-thinking recommendations,” said Michael Bacina, a partner at Piper Alderman.

“They aren’t about forcing something through, they are about starting a process with integrity.”

Some applaud the recommendation but are sceptical of whether it will ultimately be adopted.

“Inventing a new type of company structure based on software code is a hugely complex proposition.” said Nick Abrahams, global co-leader, digital transformation practice at Norton Rose Fulbright.

“We are talking about the most significant change in corporate entity law since the introduction of the limited liability company in the 1800s. This will not happen quickly as it is a contentious proposition.”

Clarity for taxpayers

“The report leaps into the world of the Distributed Autonomous Organisation as a new form of corporate entity,”

Regarding bitcoin mining, which uses large amounts of energy, the committee suggests local miners receive a company tax discount of 10 per cent if they source their own renewable energy.

“The digital asset mining incentive is a well-thought-out recommendation which will incentivise both renewables and digital asset mining in Australia,” said James Manning, chief executive officer of Mawson Infrastructure, an Australian-based cryptocurrency miner.

“It’s a win-win for both industries. The Bragg report is a significant step in the right direction for the cryptocurrency industry in Australia.”

The report also noted the unclear tax treatment for crypto transactions, recommending the capital gains tax regime be amended so that digital asset transactions create a CGT event only when they genuinely result in a clearly definable capital gain or loss.

As it stands, many digital asset transactions take place several steps away from a crypto-to-fiat-currency trade, with the tax treatment unclear.

“There are a large number of people triggering capital gains, or loss, events without realising it – and definitely not accounting for it,” said Mr Bacina.

Dr Elizabeth Morton, research fellow of the RMIT Blockchain Innovation Hub, agrees, adding reform will offer clarity for taxpayers and confidence in the tax system as a whole.

“We see an urgent need to ensure the tax system achieves balance in simplification, reflective of a digitally driven economy, encouraging tax compliance and protecting tax revenues from the risk of leakage,” she said.