Ganesh: Hello Viewers today we’ve got a wonderful guest from Australia, a tax lawyer and she’s going to put forward her perspective on what’s happening in the blockchain and crypto space today. What is ahead of us and the opportunities and challenges in this space. It’s going to be an interesting conversation with Ms. Joni Pirovich.
Would you like to tell us how and when you happened to associate yourself to the blockchain space?
Joni: Sure. I read an article about three years ago, which touched on real-time taxing through smart contracts and I didn’t understand what smart contracts or blockchain were at times. So I started reading more and trying to get answers and here I am three years after that and now a little bit more about blockchain and crypto and techs and, and it’s a big part of the work that I do for clients now. And, the tax policy work that I’m involved in from an Australian perspective.
Ganesh: How are crypto transactions taxed in Australia? Do you think this helps or hinders the use of crypto in the country?
Joni: So, the Australian taxation office has released some great guidance on the taxation of cryptocurrency. It has been updated a couple of times and every time the ATO tries to provide more detail, essentially the ATO position was announced in 2014 whereby, the ATO treats cryptocurrency like Bitcoin as a capital gains tax asset or black property. And because of that characterization, the very hotly contested crypto to crypto transactions means that you are disposing of crypto property or other property which is a taxable event. If you’re doing, so you need to calculate your gain or loss in Australian currency terms. So you can imagine for those in the world that has undertaken a great number of crypto to crypto transactions, that it would be very, very difficult to go back for a couple of months, let alone a couple of years to backtrack and figure out the Australian currency value of all of those transactions and try and get to what the ultimate tax position is.
Now, even though the ATO takes the position that cryptocurrency like Bitcoin is a CGT asset, there are other characterizations based on the behavior of a person. And if you are effectively running a business of cryptocurrency trading, similar to share trading, then the trading stock rules might apply to you as if you’re carrying on a business. Otherwise, if you are investing in cryptocurrency, so you’ve bought one parcel of bitcoin and you’re holding onto it for the longer term that looks a little more like an investment. So, you know, treated under the capital gains tax rules. So already, you know, I’m throwing out some terminology and quite a lot of tax record keeping and compliance obligations.
Nonetheless the ATO has just announced a month or two ago, that they have a data matching protocol for cryptocurrency whereby they’ll effectively be going to the Australian-based cryptocurrency exchanges to request regular data feeds of, of certain information so that they can, identify taxpayers that may not necessarily be complying with their tax obligations and if you are dealing with cryptocurrency. Part of it is also an education drive because there is a lot of confusion out there as forms of reporting, but because the ATO has made this announcement, it’s really the impetus behind people to get some tax advice if you don’t understand your obligations. But, in that announcement, the ATO, did make reference to their expectations; there around 500,000 to a million taxpayers of dealing in Crypto in Australia. So as portion size, I think that’s a significant people dealing in crypto, which may only increase if we improve education and awareness around blockchain and cryptocurrency.
Ganesh: How would Government track people who hold large volumes of cryptocurrency in order to ensure that they are complying with tax obligations? Is the technology developed to track such individuals?
Because what I see that whales in this industry, they trade outside exchanges. Like what do you see? So, how are these people being tracked?
Joni: Well, there’s a number of tools and tricks being deployed by regulatory authorities. And also there are organizations that are coming up with their own solutions that are for sale. I think CipherTrace is one of the big ones worldwide, but really the forensic procedures being applied by regulatory authorities, you’ll have to speak to them to get a sense of how they’re using those tools. But I mean, the point of the exercise is to identify patterns and behaviors, really using the public key addresses and connecting that with their existing information-gathering powers. So a really simple example is the ATO already has information gathered and how it is going. Let’s say they ask for information about me and they can see that there is a deposit in there that’s equivalent to $10,000 Australian and that the description is linked to a cryptocurrency exchange.
So then they can backtrack to identify, the cryptocurrencies and the conversions to Australian currency values to see if there was any open-source cryptocurrency transaction for which the public key is available. And then they can start to get a sense of my transaction with another public key address and if that happens often, which sort of criminal activity might be directed to the same sort of public-key addresses, they can start to make links between where money is going or what addresses are associated with each other and start to collect the pile of information and make assumptions and the suspicions and then potentially obtain warrants to obtain further information and other jurisdictions. So, the regulatory bodies are working together internationally and they do call each other regularly. But obviously we don’t get to know what they are talking about or the areas of focus, but cryptocurrency of course is an area where there is a bit of attention being given at least through, the J5 task force, I believe, which if you want to know more about it, just follow that project and you can probably get a sense of where they’re going with that.
Ganesh: So what are your thoughts about crypto exchanges that suffer cyber attacks and how they should respond to their customers?
Joni: This is a hard one because one of the recent questions that were put to us was around Mt Gox incident, uh, a couple of years ago now. But, but we’ve been asked to advise on the tax implications of that deal and that fallout. So, obviously, those that held crypto on the Mt Gox exchange had that value lost. And a hacker is, enjoying the value of, a number of hackers. And it seems that an American firm has bought the right to pursue the attacker or the attackers and try and collect and come good on keeping that hacker to account. But, the deal whereby that American company bought the right to take on that battle involved, an amount of consideration payable to I think some of the larger holders of cryptocurrency on Mt. Gox exchange.
I don’t know all of the details, but, in some cases, amounts of bitcoin were offered as consideration, in full and final settlement of any claims against Mt.Gox. So, this American company is certainly trying to pursue justice and collect all of the cryptocurrency stolen, but you know, the prospects of success are yet to be known, one to watch in this space as well. But for other cryptocurrency exchanges that have suffered these sorts of attacks, some of them are actually making, you know, helping their clients in the way of paying back the value lost from their own reserves. That’s obviously a huge investment to make. I think it was, was it Binance? One of the exchanges that did that. And then, you know, their reputation, the trust from their customer base was improved out of sight, so they had a more of a loyal customer base following that.
I think that insurance providers are still going to be reluctant to ensure any level of cryptocurrency held in custody by the exchange. So that’s gonna be a moving feast. But, one of the most basic things in cryptocurrency exchange can do is ensure that they’ve got secure custody arrangements and, I think even one, US-based solution is to actually have non-custodial solutions of the exchange. So, you know, shifting that risk so that the exchange is not a central point of failure. Again, so a number of different tactics. I think I just have to do what suits them best and what they can afford.
Ganesh: As a lawyer in the blockchain and crypto space, what guidance would you offer to those starting into blockchain and crypto projects as a startup in this domain?
Joni: Well in the peak of 2017-2018, we were flooded with inquiries of startups that were wanting to run blockchain-based projects because they wanted to tack on to, you know, that the price hike and the ICO fever. And as a result, we saw very early-stage ideas. I couldn’t even say businesses, to a large extent that’s been filtered out of the market and we’re seeing more mature projects now. But, the one trend or thing that the constructive criticism I would give them that would help us as lawyers, you know, it gets straight to the point and being able to give you your legal diagnostic or your list of legal advice that you need is employee a business person. You know, often the ideas are generated by the subject matter expert in the property industry.
They’re often the subject matter expert and they might bring in a technology expert that can talk blockchain, but there’s no business person that can actually get the business running and get the stakeholders and the investment that is needed to put a structure around that operation. So the public and particularly investors can have confidence in putting their time and money into that project. So you know, when you’re looking for founders or your initial team like I’d definitely try and get a business-savvy person that can just help you run those conversations and even just put a business plan together for you. And can mock up a term sheet for investors that just knows that their way around talking business.
Ganesh: So is Hall & Wilcox providing such services?
Joni: So, anybody interested can go to our website. We’ve got a specific page on blockchain, cryptocurrency, ICOs and STOs, initial coin offerings and security token offerings and under the majority of our departments, so tax, financial services, disputes, employment, product clients, and superannuation is dot points of the services that we can provide and examples of the advice that we can give you. So, and some videos, you know, similar to what we’re doing with you, where we actually go through what is an STO. We’ve also got links to all the articles that we’ve published on the latest laws and regulations in Australia or our submissions to the treasury to try and move the laws forward in this country.
Ganesh: Even outside Australia you are providing such services?
Joni: Yes. We provide Australian legal advice and if the project is and has an international aspect to it and most of these do we have a network of affiliated law firms which we call on to provide the advice that’s relevant to that country.
Ganesh: Previously, there have been instances where crypto owners claim to have their account hacked. How the revenue authorities like the Australian Taxation Office and Internal Revenue Office validate that an individual has authority over their funds?
Joni: I think this is a really hard one. Because I guess in Australia the onus is on the taxpayer to keep sufficient records. And if there has been a hack, probably the strongest piece of evidence that that individual, or company or whatever the entity is, whatever they could do to document the hack, at the time or around the time that it happens, this is what we call contemporaneous documentation. Whatever they can do to document that at the time is, is helpful for them to show appropriate records with, the adverse position being that if the commissioner of taxation identifies, you know, that $10,000 deposit in my account from cryptocurrency exchange or which is otherwise unexplained, they can assess me to the $10,000. If I’m unable to explain appropriately, it falls back on me to prove why I should or shouldn’t be subject to Australian tax. And, so the difficulties of proof around whether someone has actually been hacked or not would be a very unfair outcome if they had been hacked and they were still subject to tax. But, you know, there are avenues of review and appeal if an initial position or decision by the first level of interaction with the Revenue Authority. If that’s not appropriate, then generally legal systems have the system, that process of review and appeal to get to the right outcome. But, I think it’s a tricky one.
Ganesh: What’s your take on Libra’s regulatory tussle that it is facing now with Congress? There have been a series of testimonials given by the chief of Libra coin. So how do you look at it?
Joni: With great fascination and, you know, all of us in blockchain, crypto world are following this closely and, I just think it’s a fantastic case study and it’s great that Facebook is heading these wins because they’ve got the resources behind them to respond, you know, with legal resources and a lot more resources behind them. And, in contrast, you know, Bitcoin, which is not a central authority, we know it’s decentralized managed and there’s no word of Satoshi Nakamoto; there’s no clear entity to hold responsible for this peer to peer version of electronic cash that has gone global and to compare bitcoin and the uptake and global use of that with Facebook’s Libra, which is really intended to do the same thing, but it will be privately managed at least initially. It’s just fascinating to see, and a lot of people are saying that it’s just going to show the true value of a bitcoin and being managed by a decentralized network.
I’m most astounded by, the US Congress let House I think a week or so ago, asking Facebook to stop all works on Libra and Calibra, the wallet and, and that, you know, there’s the talk of this fine per day that a technology company offers financial services. And, I think that that kind of slap, you know, punitive approach or refine per day, it leaves no incentive or the US congress or any other regulatory authority around the world to deal with these issues promptly. And to prioritize them it actually incentivizes them to think very long and hard and delay the project because there’ll be receiving out penalty revenue as a result of it. And, that keeps US Congress to account in that respect. So, yeah, I could talk for a long time on this, but um, we’re all watching it with great interest.
Ganesh: Can you describe Australia’s policymaking attitude towards blockchain and crypto? Is it Pro-Crypto? How is the scene there?
Joni: As I mentioned from a tax perspective, the ATO has issued quite a few iterations of web guards and there are some public rulings there as well that talk about bitcoin and cryptocurrencies with the same characteristics as bitcoin being traded as CGT assets, it goes to other aspects of trading and cryptocurrency at a very general level. ASIC which is like our corporate and funds regulatory body along with APRA and the ACCC which looks after our competition laws. Each of those regulatory authorities has had a say in some way or another through fact sheets or even participation in public events. But, our treasury released a consultation paper earlier this year seeking input from the industry as to the environment and the appropriate regulations around initial coin offerings and dealings in cryptocurrencies. And, what we would recommend as an ideal regulatory environment in Australia. So, at Hall & Wilcox, we participated by putting together a submission and then we’re invited to the round tables, we are also part of a number of industry bodies like Blockchain Australia, Fintech Australia and The Australian digital commerce association. And helped them along with their respective submissions. So, we’re a pretty small community, but, and most of us know each other. So I think that we all want the best for Australia. We certainly want economically beneficial blockchain projects to occur. And, you know, obviously don’t want the scams that really were so pervasive through 2017-2018; we want Australia to do this right. And to put an even better reputation around blockchain and cryptocurrency. And that’s sort of what we’ve proposed to the treasury.
Unfortunately, there’s been no official response, yet. There has been a national blockchain roadmap announced, so we’ll see some steps towards that over the coming months and years. And, we’ve also got the Standards Australia Organization leading the International Standards Organization development of blockchain standards. So if you go to the ISO website, you can see eight or nine standards that are being worked on. And one of the ones which is going to be great for the industry worldwide is this sort of taxonomy of blockchain terminology. And I think that’s expected to be released around 2020 and that’ll give us a unified language to it to talk about this stuff. So, which will help regulatory bodies make policy around this. One of the big things being definitions around the types of tokens, so payment, digital cash, stable coins, utility tokens, security tokens, and what that means in terms of our existing laws applying to those categories of tokens. So I’d say that we have some good processes going. Obviously, that could be better and faster, but we also have to work with the system and we’ve got some open-minded officials and some really interested and engaged people in our community. I think that it’s a good environment and, but we’ll take some time to get more regulations around blockchain and crypto but looking forward to being a part of it and shaping it.
Ganesh: Thank You so much, Ms. Joni, for sharing your thoughts and insights on the progress happening in Australia and space overall.