Deconstructing Digital Currency and Its Risks: Why ASIC Must Rise to the Regulatory Challenge

Publication Date01 March 2019
AuthorPaul Latimer,Michael Duffy
Date01 March 2019
DOI10.1177/0067205X18816237
SubjectArticles
Article
Deconstructing Digital Currency
and Its Risks: Why ASIC Must
Rise to the Regulatory Challenge
Paul Latimer* and Michael Duffy**
Abstract
Digital currency is a ‘disrupter’ of financial services and currency markets, and as such presents
new regulatory challenges. International regulatory responses to digital currency range from being
largely ignored in some jurisdictions to being banned in others, with most jurisdictions charting a
middle course of ‘wait and see’ while attempting to deal with pressing issues (such as taxation
liability and potential money laundering and terrorism financing issues). This article explains digital
currency, its benefits, its problems, its risks and the regulatory response so far. It analyses the
extent to which the Australian Securities and Investments Commission (ASIC, the national
securities regulator) may or may not have regulatory power and jurisdiction under existing
Australian law, and the role of other relevant regulators and institutions. It concludes that digital
currency may well be a ‘financial product’ under Corporations Act 2001 (Cth) s 763A (though many
suppliers/issuers of that product will be website operators located outside Australia). If it is a
financial product, ASIC would also have jurisdiction over issuers and markets that trade in that
product. This conclusion could easily be fortified by legislative confirmation; however, it is sug-
gested that ASIC should in all events test its powers to determine whether any legislative change is
needed. Regulation by ASIC would add to recent moves to deal with digital currency by the
Australian Transaction Reports and Analysis Centre (AUSTRAC) and the Australian Taxation
Office (ATO). In all cases, this article argues that the time has come for Commonwealth regulation
of digital currencies by ASIC as the relevant regulator. This would then trigger the obligations set
out in the Corporations Act and the ASIC Act, including Australian Financial Services Licensing,
Australian Market Licensing, standards of efficiency, honesty and fairness, disclosure provisions,
possible market offences and corporate regulation generally. The suggested jurisdiction of ASIC
would build on its existing role as well as the roles of the Australian Competition and Consumer
Commission, the ATO and AUSTRAC.
* LLB, LLM (Sydney), PhD (Monash), Adjunct Professor, Swinburne Law School. The author can be contacted at platimer@
swin.edu.au.
** B Com, LLB, LLM (Melbourne), PhD (Monash), Director, Corporate Law, Organisation and Litigation Research Group
(CLOL). Senior Lecturer, Department of Business Law and Taxation, Monash University. The author can be contacted at
michael.duffy@monash.edu. The authors are grateful to Dr Andrew Serpell and to the anonymous referees for their
useful comments.
Federal Law Review
2019, Vol. 47(1) 121–150
ªThe Author(s) 2019
Article reuse guidelines:
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DOI: 10.1177/0067205X18816237
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Introduction
The arrival of digital currency as a technological innovation and ‘disrupter’ of settled currency
practices and markets presents new challenges to national governments and regulators. While
delivering competition to existing payment and currency systems operated by banks and traditional
financial intermediaries through potentially greater speeds and lower costs, digital currency also
poses significant risks and problems. These include financial risks for purchasers and users of
digital currency as well as problems for law enforcement, given the potential for use in anonymous
trade in illegal goods and services, money laundering and terrorist financing. While governments
have taken some action in relation to law enforcement, regulation for the benefit of investors in and
users of digital currency for legitimate purposes has hardly been attempted in Australia, even
though the legal and regulatory structure may already exist.
What is Digital Currency?
Digital currencies are electronic money, cryptocurrency or virtual currency which do not physi-
cally exist as a coin or note.
1
Digital currencies operate without a central bank to issue the currency or private banks to
store the currency; they are based on a piece of code which cannot be replicated. As an alter-
native to traditional currencies, their value comes from the number of users prepared to accept
payment for goods and services in the digital currency. Their value also comes from the will-
ingness of digital currency exchanges or others to convert them into other currencies. There are
now over 600 digital currencies, such as Bitcoin, Dash, Ethereum, Ripple and Zcash.
2
Digital
currency appears to be more like traditional ‘money’ than an asset, as it has no link to underlying
assets. Digital currency operates through the World Wide Web and is a substantially borderless
system. As such, it certainly provides challenges to fundamental ide as of government control of
currency and the established banking structure.
3
The Case for Digital Currency
If the use of digital currency continues to grow as it has to date, users, traders, retailers, consumers
and investors will seek clarification of the rules as to its use to provide confidence and certainty in
the market.
There is a range of views about digital currency. Some go so far as to suggest that it is likely that
privately stored digital currency will ‘not be satisfied just to rival banks, but will seek to displace
banks altogether’.
4
On the other hand, Bitcoin in particular has been described as a ‘quasi-ponzi
scheme, selling something that has no value ...a currency that doesn’t do anything, is not backed
by any sovereign nation, is not accepted anywhere, is hard to buy and sell, and has no fundamentals
supporting it’.
5
The advocates of digital currency may argue that the focus on digital currency as a bubble may
miss the point, insofar as there is evidence that blockchain technology, at least, is here to stay and
will have a number of uses into the future, particularly within and between companies and
organisations.
6
Digital currency advocates can also point to a narrative in which there may be a
risk that governments, companies and the finance industry generally could ‘miss out’ on the growth
of digital currency. This narrative points to examples of private companies’ failure to see the
importance of new technologies, with the familiar examples of IBM missing the early rise of
personal computers, Kodak missing digital cameras and Nokia missing changes to smartphone
122 Federal Law Review 47(1)

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