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UNCLASSIFIED
INVESTORS AND BUSINESSES THAT TRADE USING THE DIGITAL CURRENCY
BIT-COIN ARE ON NOTICE AS THE AUSTRALIAN TAXATION OFFICE PLANS TO
BE MONG THE FIRST TO CR CK DOWN ON UNDISCLOSEDC PIT L G INS
UNCLASSIFIED PAGE 2 OF 2
Bit-coins along with other alternative payment systems and
will provide further advice to taxpayers before J une 30.
"The ATO is working on a holistic understanding of the
taxation treatment of Bit-coin to be in a position to provide
certainty for the Australian community," he said.


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BITCOIN AND OTHER CRYPTO CURRENCIES
UNCLASSIFIED PAGE 2 OF 4
3 The ATO has been monitoring developments in Bitcoin through an informal team led by
TPALS with support from Tax Counsel, SB/IT, ITX, SNC, PGI and EST. The team is aware
of a number of private ruling requests and compliance activities related to the income tax
and GST aspects of bitcoin or bitcoin related activities. However we now need to ensure
that we have a complete stocktake of issues on hand.

4 It is now evident that a more substantial approach is required to address the various issues
raised by Bitcoin and other crypto currencies in a timely and more comprehensive fashion.

5 We will be forming a ‘task force’ to progress the ATO’s consideration of Bitcoin and related
issues. Initially we propose to include the team members already involved from various
business lines but we may need to involve more or different staff and you may be requested
to provide support to this task force as the work develops. A list of those people involved to
date is attached below, however if you have particular arrangements for your business line
you would prefer, please let me know.

6 We expect to commence with a planning and scoping workshop in the near future and will
look at the appropriate use of the consultation hub to have the community involved in our
thinking.

7


Action Required
8 Initially, I’d be grateful for your support in providing a list of officers in your business line
who may be dealing with:

(a) private rulings or similar advice matters; or
(b) compliance activity

in relation to Bitcoin or other crypto currencies. A brief description of the matter under
consideration in each case would also be appreciated.

9

10
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BITCOIN AND OTHER CRYPTO CURRENCIES
UNCLASSIFIED PAGE 4 OF 4
ATTACHMENT


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IMPLEMENTATION OF IGT RECOMMENDATION 7.1 (C)
For Official Use Only 1 PAGE 2 OF 3

- it is a digital equivalent to cash (can be anonymously transferred),
- there is no central issuing authority that might be used for compliance leverage; and
- it can be transferred in large volumes across the world almost instantly

Most law enforcement concerns have been about the potential for bitcoin (or similar products)
to facilitate criminal transactions including terrorism financing. Revenue concerns are from the
taxation aspects of criminal activity through to the use of bitcoin in the cash economy.

It should be noted that anonymous transactions and the ability to undertake international
transactions are not new risks, but bitcoin seems to represent a potentially convenient new way
of exploiting the risks.

Moderating views about risk

A review of public information about bitcoin from sources such as coindesk.com reveal some of
the concerns about bitcoin may be mitigated more easily than first thought.

From coindesk.com:

“ 3
W
na
4.

a
yo
at
Therefore, it is possible to know that bitcoin address “ABC” has a certain value of bitcoins, it is
just not immediately possible to associate that address with a natural person or business.

The “founder” of Bitcoin, Satoshi Nakamoto (a presumed pseudonym) is estimated to control
about US $100m. At the prevailing exchange rate of approximately $US 124.00 this would
imply that the founder holds over 800,000 bitcoins of the 11.8 m in circulation.

Bitcoins are “mined” through solving computer algorithms, which are designed to maintain the
integrity of the bitcoin system. “Satoshi” did not award himself or herself the bitcoins, but had to
mine them. The mining transactions are recorded in the bitcoin block chain.

As bitcoin has been operating since 2009, but not really attracting widespread public interest
until 2010-11, researchers assume that some of the earliest addresses associated with the
bitcoin block chain belong to “Satoshi” and at least one of these has accumulated over 800,000
bitcoins.

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For Official Use Only 1 PAGE 3 OF 3
It is not definitively known that the address with over 800,000 bitcoins is that of “Satoshi”. His or
her real world identity is also not known. However, it is possible to irrevocably associate a
particular bitcoin address with the over 800,000 bitcoins because of the cryptography involved.

If the owner of the address with over 800,000 bitcoins was to exchange some of those bitcoins
for $US, it is likely that the real-world identity of that individual would be known and could be
properly associated with the bitcoin address.


Bitcoin anonymity can be reduced if bitcoin users try to shift out of the bitcoin environment to
“physical” currencies or if they leave information that can allow association between their
bitcoin address and their actual identity.

As there are emerging moves to operate bitcoin bank, presumably these banks will need to
comply with relevant regulatory rules around anti money laundering and knowing your
customer.

We should be alert to the challenges of the “pseudo” anonymity, but not alarmed by them.

Opportunities

Less commented on is that bitcoin can have attributes programmed into it. There are already
extension protocols to create “coloured coins”.

Once again, the emerging desire in the bitcoin community to establish banks and public
recognition for bitcoin is likely to be a point of opportunity.

Advice or Issue
This is just a brief outline of material to assist our discussion next week.




Michael Hardy
Senior Assistant Commissioner

`37(2)(b)`INV`
`47C`DELIB`
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INTELLIGENCE PRODUCT - ALERT
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ENDORSEMENT/VERSION CONTROL
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INTELLIGENCE PRODUCT - ALERT
UNCLASSIFIED PAGE 3 OF 5
OBSERVATIONS
Bitcoin is a decentralised digital currency that operates on a peer-to-peer basis.
OCKO has previously identified Bitcoin as a potential matter of interest since the currency was
established in 2009. Other business lines including TPALS and SNC have investigated possible
risks relating to the digital currency. Bitcoin has also attracted interest from other agencies such
as AUSTRAC and the Australian Crime Commission.

Bitcoin has fluctuated in popularity since its inception in 2009 and has had security and
legitimacy issues. Its apparent anonymity and use as a medium of exchange for the purchase
of drugs and weapons raised questions as to the credibility and reliability of the currency as a
genuine means of exchange. Despite these setbacks, the system is still operating and has
gradually attracted legitimate suppliers and retailers to accept the currency as a payment
method.

Part of the attraction of Bitcoin is in its lack of centralised authority. Since its commencement
Bitcoin has risen in prominence and attracted publicity, however has essentially retained a
novelty factor rather than being accepted as a mainstream currency.







4

5














1
http://www.smh.com.au/digital-life/digital-life-news/bitcoin-boom-breakthrough-moment-or-billiondollar-bubble-
20130403-2h68h.html
2
http://www.theregister.co.uk/2013/03/21/bitcoin on a roll in spain/
3
ibid
4
http://www.theregister.co.uk/2013/03/21/bitcoin on a roll in spain/
5
http://www.smh.com.au/digital-life/digital-life-news/bitcoin-boom-breakthrough-moment-or-billiondollar-bubble-
20130403-2h68h.html
6
European Central Bank, ‘Virtual currency schemes’, October 2012
7
http://au.businessinsider.com/cyprus-bitcoin-atm-guy-responds-2013-4
8
http://www.bbc.co.uk/news/technology-21863593
`0`OOS SUM` FN 1`
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`0`OOS SUM` FN 3`
`0`OOS SUM` FN 4`
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`0`OOS SUM` FN 7
`0`OOS SUM` FN 8
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INTELLIGENCE PRODUCT - ALERT
UNCLASSIFIED PAGE 4 OF 5

SIGNIFICANCE
From an Australian perspective, evidence suggests that the driver for the use of Bitcoin is not in
response to the usability of the method itself but rather a casual factor of the frustration entities
are displaying in their interactions with traditional banks and payment institutions. While the
cases of its installation continue to be of an isolated nature in Australia and is unlikely to be
currently considered a significant threat, the ATO and relevant decision makers should be
aware of its current use in Australian business for consideration in compliance activities.



ACTIVITY
Bitcoin should be continued to be monitored by OCKO from a strategic level and it is suggested
that individual business lines that could be potentially be affected by any rise in prominence of
Bitcoin monitor its progress on an operational and tactical level.
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INTELLIGENCE PRODUCT - ALERT
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APPENDIX A – FURTHER PUBLISHING DETAILS
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UNCLASSIFIED
PMIPOTENTIAL MATTER OF INTEREST - BITCOIN BOOM: ‘BREAK THROUGH
MOMENT' - TPALS INFORMATION REPORT 207991
UNCLASSIFIED PAGE 2 OF 3














SIGNIFICANCE

Bitcoins are not real money and not even a type of commodity. It
is a global virtual currency floating in cyberspace with no
guarantees and only exists because people believe it has
monetary value. There are signs of it being perceived as an
alternative investment strategy encouraged partly by the current
global economic environment of large government fiscal deficits
and money printing exercises, which has eroded some world
currencies and has created a fear of the unknown consequences
and loss of money value.

Bitcoins have no serial numbers or any physical characteristics
and have no central bank nor is it regulated. Nevertheless, Bitcoin
is significantly growing as a potential threat to government tax
revenue and community confidence, as no tax is paid on gains
made by Bitcoin trades and purchases as in normal business
currency transactions, FOREX and share trades. This is assisted
by the virtually untraceable anonymous nature of bitcoin
transactions. However, Bitcoin is not recognised as a fiat currency
in the world which may render earnings unlikely to be taxable.

There is evidence emerging that more businesses including
Australian businesses are accepting bitcoins as a payment for
goods and services
12
and this is increasing the risk of omitted
income in BAS and tax returns, as its virtually untraceable and
essentially operates like a cash payment, with no paper or
transaction trail; and completed with a currency that is not officially
recognised in the world.


7
ibid
8
Murphy J , ‘Hackers blamed for Bitcoin plunge’, Australian Financial Review, 12 April 2013
9
Mt. Gox, www.mtgox.com, accessed 12 April 2013.
10
Faiola A, ‘Digital currency surges to a new mystery high’, Australian Financial Review, 6 April 2013
11
ibid
12
Murphy J , ‘Hackers blamed for Bitcoin plunge’, Australian Financial Review, 12 April 2013
`0`OOS SUM` FN 8
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FN 9`
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`0`
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UNCLASSIFIED
PMIPOTENTIAL MATTER OF INTEREST - BITCOIN BOOM: ‘BREAK THROUGH
MOMENT' - TPALS INFORMATION REPORT 207991
UNCLASSIFIED PAGE 3 OF 3

The use of bitcoins allows businesses and individuals to bypass
currency exchange fluctuations, GST and transaction fees and is
thus an incentive to accept bitcoins. The rapid continued growth of
this virtual currency and the increasing acceptance levels being
observed worldwide, partly helped on the back of perceived global
financial instability and distrust for banks and governments; in
addition to fear from increased cross border tax bilateral
agreements, creates a favourable scenario for Bitcoin to become
more mainstream, which would potentially cause significant
regulatory headaches to central banks and governments.

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SIGNIFICANCE
`0`OOS`
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4. Tax Crime and general tax implications in relation to
Bitcoin
The potential Tax Crime and general tax implications in relation
to Bitcoin have been previously identified. Broadly these
implications relate to:

• Anonymous transfer of funds by organised crime
interests;
• Profit from exchange gains;
• Income of exchange dealers;
• Income on profits from ‘mining’ cryptocurrency; and
• Longer term, potential to support the cash economy.



`0 22`OOS REL`
`0 22`OOS REL`
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BITCOIN GAINS MOMENTUM 3 YEARS ON 197438
UNCLASSIFIED PAGE 2 OF 2

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AN UPDATE ON RECENT INTELLIGENCE ON THE BITCOIN VIRTUAL
CURRENCY 211258
FOR OFFICIAL USE ONLY

PAGE 2 OF 8
ENDORSEMENT/VERSION CONTROL
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AN UPDATE ON RECENT INTELLIGENCE ON THE BITCOIN VIRTUAL
CURRENCY 211258
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PAGE 3 OF 8
TABLE OF CONTENTS
INTRODUCTION..........................................................................................................................4
CONTEXT....................................................................................................................................4
COMMENTARY ...........................................................................................................................4
Further Information.......................................................................................................................6
APPENDIX A...........................................................................................................................7
Source evaluation....................................................................................................................7
APPENDIX B...........................................................................................................................8
Further Publishing Details.....................................................................................................8
Keywords List........................................................................................................................8


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AN UPDATE ON RECENT INTELLIGENCE ON THE BITCOIN VIRTUAL
CURRENCY 211258
FOR OFFICIAL USE ONLY

PAGE 4 OF 8
INTRODUCTION
This briefing provides an overview of recent intelligence conducted in relation to the Bitcoin
virtual currency.
CONTEXT
Serious Non Compliance is monitoring the Bitcoin virtual currency with a view to understanding
its implications for the enterprise tax crime risk and ATO compliance more broadly.
COMMENTARY
`0`OOS COM`
`0`OOS COM`
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CURRENCY 211258
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PAGE 5 OF 8
2. AUSTRALIAN CRIME COMMISSION - STRATEGIC ASSESSMENT OF THE
BITCOIN MARKET IN AUSTRALIA
In May 2013 the Australian Crime Commission (ACC) published a strategic assessment of the
Bitcoin market in Australia. Key findings from the assessment (that can be published in this
briefing) include:
– Virtual currencies such as Bitcoin represent an unregulated financial market which
creates opportunities for criminal entities to facilitate illicit activities.
– Speculators concerned with profit making are a considerable purchaser of Bitcoins in
Australia.
– The five main reasons Bitcoins are being purchased in Australia are:
 Silk Road purchases (illicit drugs)
 Speculative investment
 Payment for services
 Gambling
 A vehicle to allow transfer of money offshore.
– Bitcoin is not an e-currency for the purposes of AML/CTF Act
1
and there are currently no
regulatory requirements for Bitcoin dealers in Australia - any person can commence
business as a Bitcoin exchange provider.
– Lack of Austrac reporting requirements for the Bitcoin market could facilitates money
laundering and transfer of money offshore by organised crime groups, bypassing AML-
CTF controls.
– The financial crisis in Europe, in particular the Cyprus bank deposit tax is contributing to
the substantial price increase of Bitcoin. This is likely because currencies such as
Bitcoin are perceived as not being controlled by any government – something attractive
to organised crime.
– Attacks on the Mt Gox Bitcoin exchange (the world’s largest) have been carried out with
the intention of destabilising the Bitcoin price.

1
Anti Money Laundering – Counter Terrorism Financing Act
`0`OOS COM`
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AN UPDATE ON RECENT INTELLIGENCE ON THE BITCOIN VIRTUAL
CURRENCY 211258
FOR OFFICIAL USE ONLY

PAGE 6 OF 8
– While it seems unlikely that the Bitcoin will ever represent a full-scale challenge to
regular money, it points to a rise of virtual currencies and changing definition of e-
currency that policy makers need to be aware of.

The assessment also includes information on:


FURTHER INFORMATION
For further information or to obtain a copy of the products referred to in this briefing contact
Stephen Hoult, SNC Strategic Intelligence, x36565.
`0`OOS COM`
`0`OOS COM`
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AN UPDATE ON RECENT INTELLIGENCE ON THE BITCOIN VIRTUAL
CURRENCY 211258
FOR OFFICIAL USE ONLY

PAGE 7 OF 8
APPENDIX A
Source evaluation

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AN UPDATE ON RECENT INTELLIGENCE ON THE BITCOIN VIRTUAL
CURRENCY 211258
FOR OFFICIAL USE ONLY

PAGE 8 OF 8
APPENDIX B
Further Publishing Details





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UNCLASSIFIED
POTENTIAL MATTER OF INTEREST
UNCLASSIFIED PAGE 2 OF 2
The Tax office needs to be vigilant with the increasing
popularity of virtual currency to be prepared for it being
implemented in business transactions in Australia. There
are risks to correct reporting and record keeping.



3
Dutch food delivery site takes bitcoins, Herald Sun online, 6 November 2013,
http://www.heraldsun.com.au/business/breaking-news/dutch-food-delivery-website-takes-bitcoins/story-fni0xqe4-
1226754123624
4
Virgin Galactic to accept bitcoin for space flights, Amanda Holpuch, The Guardian, 23 Nov 2013,
http://www.theguardian.com/technology/2013/nov/22/virgin-galactic-bitcoin-space-flights-payment
`0`OOS SUM` FN 3 AND FN 4`
`0`OOS SUM FN 1`
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POTENTIAL MATTER OF INTEREST
UNCLASSIFIED PAGE 2 OF 2
SIGNIFICANCE
Why is this matter significant?
Does it pass the MI Significance Test?

This is an indication that bitcoin is increasingly becoming of
concern to overseas economies.

The ATO needs to be vigilant with the increasing popularity of
virtual currency to be prepared for it being implemented in
business transactions in Australia. There are risks to correct
reporting and record keeping.


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POTENTIAL MATTER OF INTEREST
UNCLASSIFIED PAGE 2 OF 2
It is of interest that a multi-national company is prepared to
accept payment by bitcoin.

The Tax office needs to be vigilant with the increasing
popularity of virtual currency to be prepared for it being
implemented in business transactions in Australia. There are
risks to correct reporting and record keeping.


`0`OOS SUM` FN 1
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POTENTIAL MATTER OF INTEREST
UNCLASSIFIED PAGE 2 OF 2
SIGNIFICANCE
Why is this matter significant?

Bitcoin is becoming more accessible to a wider variety of
people who may choose to use it in the place of traditional
currency. This could make it more difficult for governments
to regulate transactions using Bitcoin, meaning people may
find it easier to hide income and avoid paying tax.


5
J ohn Southurst, Get Paid in Bitcoin With BitPay’s New Payroll API, published 14 J anuary 2014,
www.coindesk.com, accessed 17 J anuary 2014.
6
Michael Krieger, ‘Want to Receive Part of Your Paycheck in Bitcoin? Here’s How…’ from
www.LibertyBlitzkrieg.com, accessed 16 J anuary 2014.
`0`OOS SUM` FN 5 AND 6 ` links as per footnotes`
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UNCLASSIFIED
POTENTIAL MATTER OF INTEREST
UNCLASSIFIED PAGE 2 OF 2
Why is this matter significant?
Does it pass the MI Significance Test?
concern to overseas economies.

The ATOneeds to be vigilant with the increasing popularity of
virtual currency to be prepared for it being implemented in
business transactions in Australia. There are risks to correct
reporting and record keeping.


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UNCLASSIFIED
PMI - J PMORGAN APPLIES FOR BITCOIN STYLE PATENT
UNCLASSIFIED PAGE 2 OF 2

SIGNIFICANCE

The announcement from a major well recognised international
financial institution to roll-out an anonymous electronic payment
system that will allow people to pay for things and store funds in
an e-wallet over the internet, without divulging their personal
details, appears to be in response to capitalising on a rapidly
growing trend by consumers embracing anonymous internet
systems to pay for goods online and as part of holding cash in e-
wallets for instant transactions and to protect personal details from
identity fraud when transacting online.

There are a number of possible reasons why this trend is
occurring as it has many perceived advantages for consumers to
use anonymous electronic systems.

With more anonymous and harder to trace electronic payment
systems being developed with increase security of personal client
details and tracing, there may be risks in the cash economy
associated with:
 concealment of wealth;
 concealment of income;
 hard to trace offshore transfers of funds;
 ability to determine income by internet sellers
 ability to determine accurate income by virtual businesses that
who have a home base in Australia etc



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FOR OFFICIAL USE ONLY
TAX CRIME PMI 13 - LITECOIN CRYPTO CURRENCY - A VARIATION ON
BITCOIN 212270
FOR OFFICIAL USE ONLY PAGE 2 OF 4
Format

SIGNIFICANCE
The potential tax crime and general tax implications previously
identified in relation to Bitcoin apply also to Litecoin.

Broadly these implications relate to:
 Anonymous transfer of funds by organised crime interests;
 Profit from exchange gains;
 Income of exchange dealers;
 Income on profits from ‘mining’ cryptocurrency; and
 Longer term, potential to support the cash economy.

These implications are of course contingent on Litecoin gaining
trust in specific communities (organised crime, currency dealers,
investors, crypto currency miners) or the general community more
broadly.

As a lower cost and more accessible partner to the Bitcoin,
Litecoin has the potential to increase acceptance of both
currencies. In this way Litecoin’s emergence potentially
represents an increase generally in the previously identified threat
from highly anonymous cryptocurrencies.

The main impediment to Litecoin use by organised criminal
interests, speculators and exchange dealers currently will be
removed once it is listed for trading with the Mt. Gox Bitcoin
exchange (and the many smaller exchanges which will no doubt
follow).



4
Source: http://litecoin.info/About Litecoin, accessed 13 J une 2013.
5
On 24 April 2013 Mt. Gox issued a statement that they had planned to list Litecoin in the following two
weeks but this had been delayed due to the denial of service attacks the exchange had been subject to.
It is understood Mt Gox still has plans to list Litecoin in the near future. Source:
https://mtgox.com/pdf/20130424 ddos statement and faq.pdf, accessed 12 J une 2013.
6
Source: http://litecoin.info/Comparison between Litecoin and Bitcoin, accessed 13 J une 2013.
Deleted
MATTER
`0`OOS SUM` FN 4-6`
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TAX CRIME PMI 13 - LITECOIN CRYPTO CURRENCY - A VARIATION ON
BITCOIN 212270
FOR OFFICIAL USE ONLY PAGE 3 OF 4
Format
In relation to taxpayers seeking to profit from Litecoin mining, the
lower computer hardware requirements for Litecoin make this
activity more accessible and potentially more widespread
compared to Bitcoins. Identifying and taxing the profits on
Litecoin and Bitcoin mining will remain problematic.

From a cash economy perspective, for Litecoin (and Bitcoin) to
represent a viable threat for the ATO they would have to gain
acceptance as a practical currency, acceptable to a wide range of
merchants willing to receive it in exchange for their goods or
services.

In this regard Litecoin, with its greater accessibility, lower value,
and quicker transaction confirmation times, probably represents
an increased cash economy threat relative to Bitcoin.


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TAX CRIME PMI 13 - LITECOIN CRYPTO CURRENCY - A VARIATION ON
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FOR OFFICIAL USE ONLY PAGE 4 OF 4
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APPENDIX A - FURTHER PUBLISHING DETAILS
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UNCLASSIFIED
MI - BITCOIN AND CHINA'S IMPACT
UNCLASSIFIED PAGE 2 OF 3
viable Bitcoin could be as an alternative currency.
Economists are speculating that China is looking to exert more
financial influence on a global scale. China now controls a large
portion of the Bitcoin market and if Bitcoin emerges as a
sustainable part of the global economy and undermines the US
dollar’s status as the world’s reserve currency, China could view
this as an opportunity to grab power and influence.
So why have the Chinese flocked to uptake the Bitcoin currency?
Some of the reasons being put forward by economists are:
1. A highly regulated currency regime makes it difficult to get
wealth out of the country. Bitcoin makes the move of
monies overseas relatively easy. As Bihang, another
Chinese currency exchange, states “in 200 milliseconds
you can move Bitcoin data to the US for almost no cost”.
2. BTC China, which only trades in Chinese Yuan, currently
offers no-fee trading.
3. Because the property market in China is capped and
controlled and the stock market isn’t doing too well,
wealthy Chinese are using Bitcoin for speculation
purposes. Bitcoin is an alternative to hedge bets to
increase profits.
SIGNIFICANCE The Chinese rush into the Bitcoin market has quadrupled the
currency’s value in less than a month and China now controls a
large portion of the Bitcoin market. The significant increase in the
value of the Bitcoin also takes it just that bit closer to global
mainstream acceptance. If this happens then China will be able
to exert more influence on global economies.
Previous analyses of Bitcoin have identified significant risks to
taxation if it does become an accepted global currency, and
ongoing monitoring of Bitcoin’s progression has been
recommended.
However the implications of China having a major influence on
the Bitcoin begs further questions:
 What are the implications if Bitcoin moves from just
allowing ease of international trade to becoming a
mainstream investment/speculation platform?
 If the Yuan improves and becomes more viable for
speculation will this wipe-out Bitcoin?
 If the Yuan fails does the reliance on Bitcoin increase,
pushing it further to become the global reserve currency
instead of the US$?
 What will be the impact of these scenarios on the
Australian Tax Crime environment, including:
– Non declaration by Australian taxpayers of very
significant short term capital gains fuelled by Chinese
influence on the value of Bitcoin;
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MI - BITCOIN AND CHINA'S IMPACT
UNCLASSIFIED PAGE 3 OF 3
– Potential for the concealment of proceeds of crime (and
the ability to accumulate further wealth by the increase in
value of Bitcoin); and

APPENDIX A - FURTHER PUBLISHING DETAILS
`0`OOS ADMIN`
`37(2)(b)`INV`
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UNCLASSIFIED
POTENTIAL MATTER OF INTEREST - SUPER INVESTED IN LITECOIN 215675
UNCLASSIFIED PAGE 2 OF 2

In conclusion, self-managed super funds are required to put
forward an investment strategy to the Australian Tax Office upon
registration as an SMSF, which is reviewed annually.
SIGNIFICANCE

The Tax Practitioners & Lodgment Strategy business line is
responsible for managing the cash economy risk. Any new
research and observations found in the environment needs to be
monitored and where relevant, necessary mitigation strategies
implemented.

Issues for consideration include:

 Litecoin super investment might exist on a small scale,
but its does challenge traditional concepts of what
constitutes a form of investment and currency
accepted by regulators; and
 Bitcoin and Litecoin may be accepted as currency but
is not always traceable and could be used to hide
taxable income


5
Australian Financial Review 24 J une 2013:
http://www.afr.com/p/technology/ato targets bitcoin users oawpzLQHDz2vEUWtvYLTWI
6
GAO Virtual Economies and Currencies Additional IRS Guidance Could Reduce Tax Compliance Risks
May 2013 http://www.gao.gov/assets/660/654620.pdf

`0`OOS SUM` FN 5 AND 6`
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BITCOIN RECENT EVENTS - STRATEGIC OUTLOOK
FOR OFFICIAL USE ONLY PAGE 2 OF 6
Regulatory reform of Bitcoin

Since March 2013 numerous countries have reviewed the regulation of
Bitcoin, largely in response to money laundering concerns. There has
also been a desire for regulation from some members of the Bitcoin
community who are developing businesses based on Bitcoin.

Some notable examples of this reform are documented below.

4
Sources: http://fincen.gov/news room/nr/html/20130318.html,
http://www.fincen.gov/statutes regs/guidance/html/FIN-2013-G001.html, accessed 21 October,
2013.
5
Sources: http://www.reuters.com/article/2013/10/11/idUS397843744220131011,
http://www.huffingtonpost.com/2013/05/17/bitcoin-operator-accounts-seized n 3293937.html,
http://techcrunch.com/2013/08/23/feds-seize-another-2-1-million-from-mt-gox-adding-up-to-5-
million/, accessed 22 October, 2013.
6
Source: http://info.datauthority.org/wordpress/blog/2013/10/05/the-announcement/
7
Source: http://www.finextra.com/News/FullStory.aspx?newsitemid=25184, accessed 22 October,
2013.
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8
Source: Bitcoin London Conference, as reported at http://techcrunch.com/2013/07/02/regulation-
means-the-bitcoin-gold-rush-will-not-happen-in-the-us-say-experts/, accessed 21 October, 2013.
9
Source: http://www.coindesk.com/germany-official-recognises-bitcoin-as-private-money/,
accessed 22 October, 2013,
10
Source: http://www.coindesk.com/german-government-relieves-capital-gains-tax-on-bitcoin-
positions/, accessed 22 October, 2013.
11
Source: https://www.mtgox.com/press release 20130530.html, accessed 21 October, 2013.
12
http://www.forbes.com/sites/andygreenberg/2013/05/30/not-so-anonymous-bitcoin-exchange-
mt-gox-tightens-identity-requirement/
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SIGNIFICANCE The tax and tax crime implications of Bitcoin (and other crypto
currencies) have been documented previously
13
.

Broadly these implications, which are complicated by the anonymity
inherent in the design of Bitcoin, relate to:
 Profit from exchange gains;
 Income of exchange dealers;
 Income on profits from ‘mining’ cryptocurrency;
 Longer term, potential to support the cash economy; and
 Money laundering and anonymous transfer of funds by organised
crime interests.

The closure of the Silk Road site had the potential to significantly affect
the value of Bitcoin and its position as a trusted medium of exchange.
A failure of confidence in Bitcoin would have threatened its ongoing
viability, potentially negating the tax and tax crime implications
previously identified.

It is seen as a measure of Bitcoin’s strength and growing broader
acceptance that the Silk Road closure hasn’t caused users and
speculators of Bitcoin to abandon it. This event and its aftermath only
serve to strengthen Bitcoin’s reputation and ongoing viability.

Strategic Outlook

Moves to regulate Bitcoin, particularly the approach being reported in
the UK and Europe, represent a positive from a taxation regulator’s
perspective.

The potential of Bitcoin and other crypto currencies to interrupt
mainstream finance business models, particularly in relation to
international currency transfers, has been recognised. Bitcoin
entrepreneurs are seeking to capitalise on this potential and this
requires some level of regulation and legitimacy.

The move by the Mt. Gox exchange to identify account holders is one
example of increasing regulation which is likely to minimise those
elements of the Bitcoin threat which stem from its anonymity. It also
Analysing the strategic outlook for Bitcoin and other crypto currencies
however reveals a counterpoint to this creeping regulation and
legitimisation of Bitcoin which needs to be considered.



13
See for example: Tax Crime PMI 13 - Litecoin crypto currency - a variation on Bitcoin 212270;
and An update on recent intelligence on the Bitcoin virtual currency 211258;
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Some in the Bitcoin community see its development as a competition
between ambitious Bitcoin entrepreneurs seeking legitimacy, and
libertarians who want to develop new protocols that make Bitcoin more
anonymous and more distinguished from mainstream finance.

If Bitcoin rises in prominence to become a legitimate part of
mainstream finance, the needs of its libertarian supporters may no
longer be met. There are currently around 30 competing crypto
currencies which have relatively little scale or support, and the above
scenario could serve as a trigger for one of those currencies to fill the
void created by the legitimisation of Bitcoin.

Developed with the benefit of the Bitcoin experience, a new crypto
currency could provide its users with even greater anonymity and less
vulnerabilities than Bitcoin.

Another hypothesis would see those Bitcoin exchanges seeking
legitimacy competing with those seeking to protect the anonymity of
their clients. Increasing regulation of the point at which Bitcoin
currency meets mainstream finance, could see Bitcoin exchanges
emerging in secrecy havens and other jurisdictions supportive of the
Bitcoin libertarian ideal.

Currently, the value of Bitcoin, the number of users, and its limited
circulation and acceptance means that the threat of Bitcoin is minimal
and would barely register in terms of the ATO’s existing risks.
However the threat from Bitcoin (and other crypto currencies) relates
more to its potential as it grows in value, circulation, legitimacy and
community support.
For this reason SNC Intelligence will continue to monitor and report on
developments in relation to Bitcoin and crypto currencies generally.

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APPENDIX A - FURTHER PUBLISHING DETAILS
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UNCLASSIFIED
POTENTIAL MATTER OF INTEREST
UNCLASSIFIED PAGE 2 OF 2
SIGNIFICANCE
Why is this matter significant?

Cryptocurrencies like Bitcoin have previously been thought
to be a way to avoid government regulation including
taxation, much like cash transactions have.

Providing users with an option to directly pay their tax using
Bitcoin highlights the continual expansion in use of this
digital currency and is indicative of substantial changes
underway in the broader economy.

Ongoing monitoring of shifts in the Bitcoin environment is
particularly important at this time, as the ATO is forming a
taskforce to progress the consideration of Bitcoin, to ensure
that a holistic ATO approach and view can be formed.






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`0 22`OOS REL`
`0`OOS ADMIN` version control`
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TABLE OF CONTENTS
EXECUTIVE SUMMARY .............................................................................................................4
INTRODUCTION..........................................................................................................................6
CONTEXT....................................................................................................................................6
Background.............................................................................................................................6
ATO Position on and Bitcoin......................................................................................7
..7
Bitcoin...................................................................................................................................7
COMMENTARY ...........................................................................................................................8
Bitcoin....................................................................................................................................15
Regulation of Bitcoin...........................................................................................................15
Bitcoin exchanges...............................................................................................................16
Money laundering and funds transfer opportunities............................................................16
Technical vulnerabilities of Bitcoin......................................................................................17
Further information and reading in relation to Bitcoin.........................................................18
CONCLUSIONS.........................................................................................................................18
APPENDICES............................................................................................................................20
APPENDIX A - Supporting Documents .................................................................................20
APPENDIX B – Source Evaluation........................................................................................21
APPENDIX C – Further Publishing Details............................................................................22
Keywords List......................................................................................................................22
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EXECUTIVE SUMMARY
OBSERVATION
The ACC’s multi-agency workshop on and Bitcoin was useful in
providing an enhanced understanding of how the use of this technology is evolving and the
methods other agencies are employing in responding to it.
By serving as a forum to share information and strategy the workshop also establishes a
platform for further cross-agency cooperation as the nature of this threat continues to evolve.
SIGNIFICANCE
Participation by the ATO in the workshop directly contributed to an enhanced understanding of
the tax crime and general compliance implications arising from the use of this technology, and
this briefing is intended to capture and share this information.

A number of the law enforcement agencies represented at the workshop are experienced in
policing criminal offences enabled by darknets and Bitcoin, and it was evident that their
success depended to a high degree on an awareness of this technology and its vulnerabilities,
in combination with the use of appropriate established and developing treatment strategies.

A challenge for the ATO will be in applying the experience of other agencies to tax crime and
general compliance risks, determining how the risks might manifest, and how they can best be
treated in the context of our available treatment strategies.


The use of Bitcoin technology is presently a niche practice by those with largely,
though not necessarily, illicit intent. Perhaps one of the major threats to the ATO is the
potential for and Bitcoin to become mainstream tools, and this briefing identifies
numerous trends that could support such a hypothesis.

Attendance at the workshop also identified, or enhanced our understanding of, numerous
implications for tax crime and general compliance, including:


– Use of Bitcoin to support money laundering and the transfer of funds between Australia
and secrecy havens;
– Bitcoin as a virtual secrecy haven for online businesses; and

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RECOMMENDATIONS
– The ATO recognise the potential threat from and Bitcoin technology gaining
widespread or mainstream use and the implications this may have for the tax crime and
general tax compliance risks.
– This briefing be widely circulated to ATO Risk Owners and Risk Managers in order to
raise awareness of these threats and ensure the ATO is prepared for them as they
evolve.


– SNC continue to collaborate with ICT and other BSLs in order to better understand and
quantify the threat presented by and Bitcoin, and support future opportunities to
collaborate with external agencies to respond to these threats.
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INTRODUCTION
The combination of and virtual currencies like Bitcoin is
facilitating a growing level of online illicit commerce, fraud and other serious crime.

CONTEXT
This briefing is intended to summarise the information and strategy shared at the workshop,
identify tax crime or general tax compliance implications relating to Bitcoin, and
make recommendations for further assessment of these issues where appropriate.

The workshop was an initial step in raising the collective level of understanding of the
represented agencies in relation to and Bitcoin. Further cooperation is anticipated in
order to close intelligence gaps and identify new strategies as these threats continue to evolve.
BACKGROUND




Bitcoin is a relatively anonymous virtual currency. While it has legitimate uses it has also
emerged as the default currency for online illicit market places hosted within darknets. These
market places deal in commodities such as illicit drugs, weapons, and stolen identities, and
host forums which provide instruction on how to commit fraud and other crimes.
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SNCSIACCDARKNETANDBITCOINWORKSHOP 192390
ATO POSITION ON BITCOIN
Throughout the course of the workshop and in discussions with other representatives there
were numerous opportunities to share and discuss the ATO’s current thinking with regard to the
threat posed by Bitcoin. A brief summary of this position is presented below.
Bitcoin
The ATO presently has Bitcoin (BTC) and similar currencies like the Canadian Mintchip
2
on a
watching brief. From a cash economy perspective the total circulation of BTC in worldwide
circulation is just AUD$64m (9.36m BTC). The maximum number of BTCs is limited by design
to 21 million, although the high divisibility and potential for exchange rate increase of the BTC
could substantially increase the equivalent AUD$ value in circulation.

Virtual currencies with a high degree of anonymity are of interest for their potential in facilitating
money laundering or transfer of funds between Australia and secrecy havens. The risk of
wages being paid in BTC is currently considered to be low, but if the currency grows in value
and popularity this risk could escalate.

The instrumental nature of currencies such as Bitcoin in enabling illicit online commerce and
other activities to occur in darknet forums and market places is acknowledged.

2
Which may emerge as a similar, Government-backed alternative to Bitcoin.
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COMMENTARY
The workshop was useful in gaining an enhanced understanding of how Bitcoin
issues are affecting other regulatory and law enforcement agencies. To that end the workshop
provided a practical insight into how this threat is evolving, and the methods other agencies are
employing in responding to that threat currently.

The following commentary is a summary of the information presented at the workshop, with the
discussions on and Bitcoin presented separately. Also identified are some specific
ATO implications that arise from material presented and discussed at the workshop.

Unless otherwise referenced, statements in this briefing relate to information obtained from
representatives at the workshop either from formal presentations or personal discussions,
based on the author’s contemporaneous notes, and numerous clarifying email and telephone
conversations with relevant participants following the workshop.

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SNCSIACCDARKNETANDBITCOINWORKSHOP 192390
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As explained below, the use of a highly anonymous virtual currency
like Bitcoin provides ample opportunity for laundering profits and injecting them into the
mainstream financial system.
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BITCOIN
Regulation of Bitcoin
According to AUSTRAC, the Bitcoin (BTC) appears to exist in a regulatory gap as far as
AML/CTF
14
legislation is concerned - there is no central issuer, just a network of users.

According to the ACC there is some evidence of speculative hoarding of BTC currency on the
expectation of large exchange rate increases. Analysis also reveals some evidence of an
increase in the exchange of Euros to BTCs as a result of European financial instability.

Any potential for wider, more mainstream use of the BTC probably presents the greatest threat
to the ATO from a general compliance and tax crime perspective. AUSTRAC is presently
working on a strategic assessment which is intended to include some hypotheses on the
potential for legitimate and more mainstream use of BTCs, and a copy of this assessment will
be provided to ATO/SNC when it is published.

It was acknowledged at the workshop that regulation/registration of BTC exchanges would go
some way to countering the potential for BTC mischief. The issue of formal regulation of
TRAC.

It was noted there is only approximately AUD$64m equivalent BTCs in worldwide circulation
currently (9.36m BTC at a current exchange rate of approximately AUD$6.80). The maximum
number of BTCs is limited by design to 21million; however the high divisibility and potential for
exchange rate increase of the BTC could substantially increase the equivalent value in
circulation.

14
AML/CTF: Anti-Money Laundering and Counter-Terrorism Financing Act 2006.
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Bitcoin exchanges
Three Australian BTC exchanges have been identified by agencies represented at the
workshop:

– Bitpiggy https://bitpiggy.herokuapp.com/
– Crypto_X_Change http://www.cryptoxchange.com/ .
– Spendbitcoins https://www.spendbitcoins.com/

.
The largest BTC exchange in the world is Mt. Gox (https://mtgox.com/). According to ACC
research, in J anuary 2012 this J apan-based exchange reportedly handled 92% of world-wide
BTC trade. The main currencies exchanged for BTCs and their respective turnover in the
period November 2010 to November 2011 were:

– US$ - 15.8m (AUD$15.5m)
– Euro - 6.2m (AUD$7.4m)
– GBP - 240k (AUD$365k)
Money laundering and funds transfer opportunities
The highly anonymous nature of BTCs means it is a currency that lends itself to money
laundering, and the ease with which it can be exchanged would also make it of interest to
taxpayers seeking to transfer funds between Australia and secrecy havens.

Australian BTC exchanges will cash BTCs for AUD$ currency and transfer it to Australian bank
accounts. In addition to standard bank accounts,
















`0`OOS COM`
`0`OOS COM`
`0`OOS SUM`, `0`OOS COM`
`
`0`OOS COM`
`0`OOS COM`, `0`OOS SUM`
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FOR OFFICIAL USE ONLY PAGE 17 OF 22
Technical vulnerabilities of Bitcoin
Bitcoin is a highly anonymous currency but is by no means completely anonymous.

All Bitcoin trades are necessarily public to some extent because the protection from double
spending of bitcoins built into the currency’s design requires that information about successive
trades is stored in the “block chain” of data comprising each bitcoin.


A BTC wallet file can be
copied/backed-up and stored in multiple locations, but once the BTCs in any one of the copies
are spent or exchanged, all BTCs in any of the other copies of the wallet will be identified by the
BTC network as worthless if an attempt is made to spend or exchange them.

17

`0`OOS COM`

`0`OOS COM`
`37(2)(b)`INV`
`37(2)(b)`INV`
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Further information and reading in relation to Bitcoin
There are numerous open source wikis available on the internet providing information on how
to acquire, where to buy, and how to use BTCs, and also a charting tool to track the overall
volume and value of BTC trade:

– https://en.bitcoin.it/wiki/Main Page
– https://en.bitcoin.it/wiki/Trade
– https://en.bitcoin.it/wiki/Buying bitcoins
– http://www.bitcoinplus.com/howbitcoinworks
– http://bitcoincharts.com/charts/

CONCLUSIONS
The ATO’s attendance at the workshop was useful in gaining an enhanced understanding of
how the use of darknet and Bitcoin technology is evolving and the methods other agencies are
employing in currently responding to it.

In particular, the technical information provided by a number of cyber crime and AUSTRAC
specialists at the workshop was useful in enhancing SNC’s understanding of the threat posed
by darknets and Bitcoin.

This briefing is intended to serve as a compendium of the information and strategy shared at
the workshop, and to enhance intelligence holdings in relation to the tax crime and general
compliance implications previously identified.




The greatest threat to the ATO, from tax crime and general compliance risks, stems from the
potential for and Bitcoin technology to gain widespread or mainstream acceptance in
the community.

By recognising this threat now the ATO can raise awareness of its implications and ensure it is
adequately prepared as this threat continues to evolve.

It is recommended this briefing be widely circulated to ATO Risk Owners and Risk Managers in
order to raise awareness of and Bitcoin, and assist in the ongoing assessment of the
tax implications arising from their use.

`0`OOS`
`0`OOS
SUM`
`0`OOS
SUM`
`0`OOS`
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It is recommended that continued collaboration with ICT and other BSLs occur in order to better
understand and quantify the threat presented by and Bitcoin, and that future
opportunities to collaborate with the ACC and other external agencies in relation to these
threats are similarly supported.
`0`OOS`
`0`OOS
SUM`
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APPENDICES
APPENDIX A - Supporting Documents

SNC Strategic Intelligence - Potential Matter of Interest #9:

PMI 9 Tax crime
implications of the da

Office Minute: CMC presentation – darknet and virtual currencies

Office Minute_CMC
Presentation_Dark Ne


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APPENDIX B – Source Evaluation
`0`OOS ADMIN`
`0 22`OOS REL`
`0 22`OOS REL`
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`0`OOS ADMIN`
`0`OOS ADMIN`
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UNCLASSIFIED
POTENTIAL MATTER OF INTEREST
UNCLASSIFIED PAGE 2 OF 3

5
Lee, D, ‘U.S. stand on bitcoins puts HK in frame While America wavers over use of virtual currency
entrepreneurs are keen to jump on gravy train, and city could cash in on boom ,’ South China Morning Post; 17
November 2013
6
The Guardian: http://www.theguardian.com/technology/2013/nov/06/bitcoin-price-hits-all-time-high-of-
269
7
Lee, D, ‘U.S. stand on bitcoins puts HK in frame While America wavers over use of virtual currency
entrepreneurs are keen to jump on gravy train, and city could cash in on boom,’ South China Morning Post. 17
November 2013
8
Gillespie, I, ‘Net mining for coin of the realm ‘The Age, 21 November 2013
9
Coin Desk Website; http://www.coindesk.com/australian-photography-bitcoin-discount/
10
Gizmodo website: http://www.gizmodo.com.au/2013/10/should-bitcoin-be-illegal/. Comments 8
November 2013
`0`OOS SUM FN 3`
`0`OOS SUM`FN1-5`
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UNCLASSIFIED
POTENTIAL MATTER OF INTEREST
UNCLASSIFIED PAGE 3 OF 3
SIGNIFICANCE

The Tax Practitioners & Lodgment Strategy business line is
responsible for managing the cash economy risk. Any new
research and observations found in the environment needs to be
monitored and where relevant, necessary mitigation strategies
implemented.

Issues for consideration include:

 Bitcoin’s endorsement by the US government is likely
to cause it to expand rapidly internationally;
 Bitcoin might exist on a small scale in Australia, but its
a growing currency that will challenge traditional
concepts of what constitutes a form of goods
exchange;
 Businesses especially small cash economy industries
may increase use of this virtual currency to avoid GST
and other costs; and
 Bitcoin may be accepted as currency but is not always
traceable and could be used to hide taxable income

The TPALS Intelligence Unit is currently preparing an intelligence
scan on community perceptions of Bitcoin.

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UNCLASSIFIED
POTENTIAL MATTER OF INTEREST
UNCLASSIFIED PAGE 2 OF 2
SIGNIFICANCE
Why is this matter significant?
Does it pass the MI Significance Test?
The increasing popularity and ease of obtaining bitcoins
necessitates the ATO to take a position on their legitimacy as
a currency in preparation for its implementation in business
transactions in Australia. There are risks to correct reporting
and record keeping.


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