Crypto as payment? We’re not there yet

Therese Raft

Welcome to Navigating the New Normal – Grant Thornton’s podcast exploring trends in business and the marketplace.

Today I am joined by Ian Renwood, our National Head of Technology Media and Telecommunications, and Jace Gawne-Buckland, a partner in our Private Business Tax and Advisory team. Today we're talking about a topic everyone seems to be talking about right now. cryptocurrency. Welcome Ian and Jace.

So firstly, what's the crypto landscape in Australia like at the moment? Is it as widely used in Australia as people think it is, Jace?

Jace Gawne-Buckland

Uh well, I guess it depends on what you mean by the term “used”. There are many use cases for crypto, but I suppose that the most commonly known use case is, that's popularised by the media – and the media loves crypto – is probably using it as an investment vehicle or as a digital currency.

So I suppose in terms of using it as an investment vehicle, it is – it is popular and, I mean you talk to anybody and they're going to know about crypto. Maybe not necessarily the finer details, but they would have heard about it before. I was actually reading in The Australian a couple of weeks ago… I think it was a recent study found that one in six Australians hold crypto. And so obviously it's out there.

Obviously people know about it, but adoption of crypto as an investment vehicle appears to be constrained by concerns over volatility. And I can tell you from personal experience, it is volatile. As many as – I think they said – 45% roughly of Australians saw volatility as a deterrent to investing. And if you invested in shares on the stock market, a 10-20% move in that share would be considered outrageous. Where as in cryptocurrency investment – investing in cryptocurrencies that can happen over the space of half an hour. So it is volatile. But it is widely used, I think at this point. I think you could say one in six Australians hold crypto – that it is widely used.

In terms of whether it's being used as a form of currency – so digital currency – it is, but I would say that it's probably not yet adopted by the mainstream and so it's not necessarily easy to use it as a form of currency. In saying that there are crypto based debit cards and there are Bitcoin ATMs and there's –you know – even crypto based merchant transaction hardware, and businesses are starting to use crypto as a form of payment.

And we've seen that it's been mentioned in the media and I think Amazon came out the other day and said they were going to consider accepting Bitcoin as a form of payment at the end of the year. Tesla has mentioned it in the past – they said that they were going to accept it, and they took that back, and now they're looking at accepting it again. But I suppose all that just shows you that it is going to happen in the future. I don't know when it's going to be widely accepted and used in business, but it is happening at the moment. But I would say that that's probably less than if you were talking about it in the form of an investment vehicle.

Ian Renwood

I think Jace’s given a very good, very good overview of the current landscape. There's a lot more interest out there than some people think. The number he quoted, one in six is actively using some form of it is a good illustration of that. But I would also add, as Jace said, there's a great deal of uncertainty as well. When you, when you log into the internet and you see David Koche, Jimmy Barnes or Paul Hogan, you know, their image – they're advocating and extolling the virtues of investing in some form of Bitcoin or some other cryptocurrency. You're naturally quite suspicious. So I think it's off to a good start. There's a lot of interest in it. There's a high degree of activity, a lot more than people think. But there's also a great degree of uncertainty as well before the broader community are likely to roll their sleeves up and get stuck into it.

Therese Raft

Right, so it's definitely around and people are using it, but are we set up to use it properly? So I understand there's a Senate Fintech inquiry which is I think now is known as the “Committee on Australia as a Technology and Financial Centre” investigating and the RBA is conducting research into a Central Bank digital currency. That suggests to me that perhaps we're not quite there yet.

Ian Renwood

Yeah, that's true. The landscape has been a bit, I guess, a bit like “quicksand” for the last few years. I mean, since about 2017, it's been broadly accepted as legally – um something that you can use or transact in – but it's not, it's not considered to be legal currency at this stage by the Reserve Bank. And there are a number of inquiries, but the one you mentioned there, the Future Technology one that started out being led by Andrew Bragg in the Senate around fintech, and Australia’s roll as a fintech innovator of fintech hub. They've been very encouraging of the ASIC – ASIC have set up their own innovation hub that's looking at various ways technologies such as blockchain and other derivatives of that, such as cryptocurrencies – Bitcoin specifically – can be leveraged for innovation reasons.

The ATO are very much looking at that market at the moment. Jace's better qualified to talk about that in a few moments. But ASIC of recently – about three weeks ago – called for advisory, consulting firms, financial institutions to express their views on the regulatory framework or the right regulatory framework for cryptocurrencies. Now, that's got a specific brief around the use of Cryptocurrency and derivative products as part of investment funds, specifically exchange traded funds and things like that; which they've got some concerns about because they did a review and they discovered that there are about 700 different cryptocurrency related investment products at last count – and growing rapidly. So they're very keen to form some form of investment – I guess – structural framework, so people, consumers can go into that market with a lot more confidence than they may currently have at the present time.

As Jace also touched on, in terms of using it, there's really only a couple of dozen retailers in Australia that will actively accept cryptocurrencies, particularly – well very, very heavily weighted towards Bitcoin. There's probably only one or two that will accept other forms of crypto, but there's about, I think three dozen at the moment, a few dozen that will accept for retail kind of payments.

They're mostly in the food and beverage sort of area. The one interesting one there is specifically Subway. So that's an Australian or national chain across Australia – about 1200 stores – they will actually accept cryptocurrency or Bitcoin specific payments. And also Microsoft have recently stated that they will happily accept Bitcoin payments for their online transactions as well. So there is that growing use in the market and consumers are starting to get used to it.

There's not any of the strong demand that Jace just as outlined – the one in six around using it in terms of trading or investing in it – there's nowhere near that demand to use it as a retail payment platform at this particular point in time. My guess is that it will come because, you know, people have a degree of confidence and certainty around it as a currency or as an alternative to the standard currency, then they'll use it. I mean people thought that going away from physical payments was a big ask, but in the last decade – 11 to 12 years – we've gone from 76% of all retail payments being physical to less than 20% now. So then the Cryptocurrency world is a natural extension of that over the next four to five years I believe.

Jace Gawne-Buckland

I think Ian's covered that really well. Just to reiterate what he was saying is that, you know, Australian law at the moment doesn't recognise Cryptocurrency as money, and so the RBA doesn't really have any plans at the moment to release a central bank digital currency. They are looking into it, but at this point in time, it's not really happening now – they’re not going to release one to retail customers at the moment. Although we have seen cryptocurrencies brought into the scope for Australia's anti money laundering framework. What that means is that crypto exchanges need to register with the Australian Transaction Reports and Analysis Centre, or AUSTRAC. And also as Ian said, the ATO have attempted to clarify how cryptocurrency is taxed for consumers in Australia. But what I found from my dealings with people in the crypto world is that there's still a little bit of confusion around that for investors. So, I guess what's missing though is a consistent position on the sector at a federal level. So what can we expect from the Senate consultation on cryptocurrency in digital assets? Well, I think that primarily the Committee will be tasked with finding ideas and recommendations that will promote Australia as a financial technology centre through blockchain and cryptocurrency. And we know that this is an industry that can certainly deliver significant economic growth. But I think that the Committee will be looking to ensure that Australian consumers are well protected and I think Ian covered that well with the various different sectors and industries and areas of our life that could that cryptocurrency is starting to invade but also affect us.

Therese Raft

Well, that's really interesting and I wonder is this something that we need to get a bit of a wriggle on and hurry up and get it done. Jace, as you've mentioned there's speculation that Amazon is looking to accept digital currency as a payment and they operate worldwide, including here in Australia. And there are some other examples of Australian businesses who are already using it. Are businesses in Australia just generally chomping at the bit, really wanting to get cryptocurrency onto their platforms as a form of payment?

Jace Gawne-Buckland

I think that there is a level of demand for it and I think that that's going to get stronger over the next few years and as Ian said, there are a number of businesses already operating in Australia and using cryptocurrency is a form of payment. A couple of good examples on that. A couple of years ago Brisbane Airport became the first in the world to accept cryptocurrency payments. So if you're traveling through there you can use certain crypto at retail and food outlets throughout the terminals. And I've read the other day that a business called Business Hub will now accept Bitcoin and Ethereum, and a few other cryptocurrencies as payment for office spaces and business services.

So it's happening. Businesses are aware of it and there are questions coming through of: is it appropriate to use cryptocurrencies – or specifically it's more often just Bitcoin – as a form of payment. So I think that it is going to happen. I think that's going to happen relatively soon, so over the next few years. But I can't say that it's significant across my client portfolio.

All the businesses that I talk to at this point in time, there are questions around it and there are some businesses looking to put it in place. And I think that one thing is that it's a steep learning curve to start using cryptocurrency for an Australian business when it comes to transacting. And so they just need to ensure that they are set up properly. So they have the right systems, the processes, the governance frameworks, the softwares, the risk policies, the storage solutions, the record keeping, the right consultants in the business to handle it. So there's a bit to go into actually using cryptocurrency as a form of payment, but it is getting more popular and we will get there.

Therese Raft

It does seem to be moving really fast. From what I understand, crypto has been around for a while. In the meantime we've had Buy Now Pay Later completely change the way that we transact. So what is the potential for crypto beyond crypto mining and trading?

Ian Renwood

Yeah, so I think when you look at crypto in the broadest possible sense and I'm thinking here about… look we both touched on, Jase and I have touched on the application from a retail perspective – be that to settle for payments and that will evolve and grow over the next few years. There's no doubt about that. The ability for people to invest in it – that's given as well. That will evolve in a very cautious way going forward.

Um, when I think about the actual – the rails that it runs on – and I don't want to get away from the key topic here of cryptocurrency, but when you talk about the digital ledger and the blockchain, it has a fantastic ability to be applied to solve a whole bunch of problems. So there are a number of payments platforms that could be built off the back of that. Indeed, a number of people when Australia was going to market a few years ago to build a new MPP platform, a lot of people advocating back then that it should be some digital ledger enabled platform to increase interoperability and potentially reduce barriers between countries, et cetera. So there's applications, broad applications around payments platforms. There's a very strong demand for cross border, cross country payments at this particular point in time, by the by the retail consumer. And as anybody will know, there's not a lot that's been done to address that in a cost effective or a timely fashion unless you're a corporation and even then a corporation of some significant scale. I note that Westpac had a go at doing a remittance platform two years ago in partnership with the Bank of the Philippine Islands and it proved to be very good for migrant workers remitting funds back over to the Philippines, who were domiciled in Australia.

It was a lot faster and a lot more cost effective than the normal payments remittance platforms that were in place at the time. Unfortunately, it fell foul of anti-money laundering provisions – which is well documented, so I won't dwell upon that. But that doesn't diminish the validity of the platform and its application. So there are a raft of properly done and properly executed solutions like that over the next few years that could see cryptocurrency being leveraged for much, much broader application in the community.

When you think about 3% of all cross border payments are related to people remitting funds back home or to tourism, and that. And a lot of those funds are small amounts of money, and there really isn't a cost effective way at the moment – there's an ability to leverage that in the technology in the market to create opportunity for that market, which is in the billions of dollars globally.

I will say that also opens up the risk of big tech. So you want to ensure that those kind of, you know, solutions are not developed and then monopolised by big tech. You know, the original founders or founder, rumored founders, of the Bitcoin blockchain technology wanted to ensure that it was a democratising force. And if that can be done to give access to a whole raft of people – unbanked and others – means to transfer funds in a cost effective way, then that would be fantastic. So that's just one area where the technology can be applied. There are many, many others. So I see a lot of innovation going forward. A lot more of it will be opened up as the regulators start to settle on what some of the rules are in more of a black and white frame than they are at present

Jace Gawne-Buckland

Just to add to what Ian’s saying: the different use cases for cryptocurrency are really exciting. And so just to give you an example of a few of those, I mean we've talked about it as a digital currency but it does have the ability to essentially “bank the unbanked”. And so in countries where you potentially have political instability or hyperinflation, or whether the population just can't get or has limited access to banking facilities – but they have phones because that's the way the world is going – is that Bitcoin or cryptocurrency presents an option to participate in finance and also create a store of value.

A big part of cryptocurrency or blockchain technology is distributed computing which includes decentralised applications or DAPPS and smart contracts. So the ERC20 Standard and smart tokens are the technological foundation of blockchain based assets such as utility tokens. And so utility tokens convey holders the right to use those DAPPS or preferential access to the ecosystem, or online gaming or security tokens which transfer investors shares of the company issuing the token. So it's wider than digital currency.

The technology also lends itself to the Internet of Things, which I find really exciting. And a particular example of that is the Iota Project – IOTA – where the objective is to create an environment in which machines trade services and resources with each other. And so an example of that – and I believe that it's actually in place and it's a real world example – is smart wallet technology in the scope of connected car services. So basically you, as a driver earn credits to pay for your road tolls or your parking by sharing the data that your car collects with road or traffic authorities. And I think that's really cool.

In contrast to utility tokens that I spoke about before – asset backed tokens have intrinsic value that is directly linked to a physical asset that backs up that token. And so the tokenisation of assets enhances the liquidity of real world assets in the markets. And so an example of that is offering people the opportunity to invest in digitised precious metals. So metal tokens backed by actual physical assets like gold which is stored and insured in volts. And so then these tokens can be swapped for any other digital asset. And so just adding to what Ian was saying, is that there's a whole lot of use cases for cryptocurrency and it's extremely exciting.

Therese Raft

That is absolutely fascinating. And both of you have mentioned that democratisation and also “banking the unbanked” which I've never heard of before. Now from what I understand though there are currently more than 4000 different cryptocurrencies in existence. By comparison there are 180 currencies recognised as legal tender. To me, this sounds like a bit of a recipe for disaster.

Ian Renwood

Well, potentially, yes. I mean as I touched on earlier, you've got all your favourite celebrities advertising how much money they've made based upon various investments in the cryptocurrency sphere. Almost entirely untrue, of course. There are there are quite a few examples that have come out recently of – it’s the ultimate Ponzi scheme in many ways, because the footprint that you can use to hide your identity to rip people off is significantly greater than setting up an old investment scheme or questionable commodity that you're trying to position with people. A number of schemes have been outed recently as very much like the Madoff scheme in the in the U. S. a decade or more ago. Being able to show people that they had exponential growth in their trading accounts for investing in Currency X / Currency Y. And using that as a way to leverage them to invest further funds. And then all of a sudden when they wanted to retrieve their money, there were demands made for cash transfers and then they disappear without trace. So there's been quite a few schemes like that. So there's definitely a great deal of risk, attendant risk in the current market place.

There are certain things you can do to minimise the likelihood of that risk. For example, going with reputable wallets and reputable intermediaries, if you're looking at putting a toe in the water and potentially investing or transferring some funds into the crypto space. There are a number of reputable wallets out there that can be used. There are various types of wallets. There are some well known ones. I won't recommend any specifically. But a bit of research with Dr Google will point you in the direction of some of the more reputable ones.

There's different kinds of subsets of those wallets. So you can have ones that are known as hot wallets which are software driven and hence dependent upon the platform that they're operating under. More likely to be more susceptible to being hacked and cybersecurity risks. But there's also colder wallets which are more hardware based, which are more likely to be more secure. So there's quite an opportunity for regulators at the moment and there's a degree of cynicism in the broader communities – which is why there are at least three or four bodies, as you and Jace have outlined, that currently have or are about to announce investigations into what sort of regulatory framework needs to be put in place.

Jace Gawne-Buckland

I probably don't have too much to add to that, Ian’s covered it pretty well. Unfortunately, yes, there is risk in the cryptocurrency world and that's why you just need to do significant research and take a cautious approach.

Therese Raft

So I can see the benefits of cryptocurrency, of a cross border currency, particularly considering the world economies are all coming together on issues like tax rates and transfer pricing. But how do you regulate and police something that is clearly so easy to exploit, kind of hard to explain and is so very transient?

Jace Gawne-Buckland

At the moment, I would say with great difficulty. So in relation to the ATO specifically – the ATO’s cryptocurrency data matching program has been in place now since I think it was mid-2019. And so this is where the ATO matched data from their system with that of Australian designated service providers just to pick up where tax laws potentially aren't being adhered to. And so the ATO is also working with other regulators as well, in particular, AUSTRAC that I mentioned before, and ASIC as well. And it's really to ensure that tax law requirements align, and they're approaching it from a whole of system approach.

Basically from the ATO’s perspective, cryptocurrency or investments in cryptocurrency is treated the same as you would a share, and so it's a capital asset. And so if you sell that capital asset, then you either have a capital gain or a capital loss and you have capital gains tax then applied to that. If you hold cryptocurrency for sale or exchange in the ordinary course of your business, so you are running a cryptocurrency trading business, then effectively the trading stock rules apply.

And if you receive cryptocurrency for goods and services that you provide as part of your business – so that's going back to if you’re a business and you’re accepting currency as a form of payment – then you need to include the value of that cryptocurrency in Australian dollars as part of your ordinary income of the business. And so this is the same process essentially as receiving any other non-cash consideration, just as if you were receiving property in the form of payment.

The ATO are data matching, and we have seen letters being sent out from the ATO to taxpayers saying essentially we've picked up that you may have investments, and that you may have made sales of cryptocurrency and that you should ensure that your report appropriately. But you can see that from the way that the ATO is approaching cryptocurrency is that you really need to make sure that you have a good record keeping and sometimes it’s not overly easy. And also the way that the ATO is approaching cryptocurrency doesn't necessarily lend itself to using crypto, possibly the way that it was meant to be used as well. And so, you know, the old world view of approaching tax may actually not be appropriate for some cryptocurrencies moving forward. But we get to see how that is actually going to be approached by the ATO at the moment. It's a bit of a blanket approach that they've taken. So, and I mean just an example on that – there's a certain crypto out there that your holdings actually fluctuates on a daily basis, and it fluctuates in line with the demand and supply of that day. And so when you go back to your normal concepts around tax, with how many units of that asset or how many shares do you hold – if you no longer hold shares, then you've had a capital event – well, that may not necessarily apply to that particular cryptocurrency. So, you can see that there are difficulties there, but that's the ATO’s approach at this point.

Therese Raft

Well, jeez it seems a bit like “watch this space” when it comes to the regulatory environment for crypto in Australia. I can't help but think that we've probably raised more questions than we've answered today. Uh, for anyone, people or businesses that are listening at the moment and they're keen to know if now is the time to jump onto the crypto bandwagon. What would you say?

Ian Renwood

I'd say any business in the current environment needs to be aware of emerging technology and its potential applications to their business – be it a threat or something that they can leverage to improve the company's bottom or top line. So any payments platform – and let's be honest, this is another payments platform of a certain kind – organisations need to be aware of it, I believe, and start to understand. And it's still it's still early days, relatively speaking, as Jace and I've outlined.

There's a great deal of work there being undertaken by the regulators, the Bank of International Settlements (BIS) is currently looking at a global framework in cahoots with a number of the global reserve central banks, and that will be a key driver of potential digital currencies at a national level and a global level going forward. In fact one area that indicates the need to be innovative and need to be open minded about this is by the Winter Olympics – so it's quite topical given we're currently experiencing the Summer Olympics, albeit a year delayed. The Winter Olympics, which is coming up in the early part of next year, the Chinese government has said that the Chinese Yuan will be available in digital form. So that will be the first global digital currency that will be available. So it will be interesting to see how that will be received as part of, or as an adjunct to the Winter Olympics next year. And that will be a very interesting step in the future of the application of digital currencies in the broader sense. So as I said: in closing, I believe that people need to be aware there's a great deal of expertise, you know, with our firm. Jace's outlined some excellent points on the regulatory, taxation and financial side. And we also have a number of folks who understand the technology applications of it as well. So I think people need to need to be educating themselves, need to keep an eye out on the regulators to know how can potentially impact, or how it can be leveraged the advantage of their businesses.

Jace Gawne-Buckland

Well, I will say that I think that blockchain and cryptocurrency will be a big part of the future. So it would only make sense to educate yourself now and get involved where appropriate now. However, as I said, it is a bit of a steep learning curve and so you should just ensure that you have the right advice, you have the right governance, you have the right policies, procedures, software and hardware – whatever it needs today.

Therese Raft

Ian and James thank you so much for your time.

Jace Gawne-Buckland

Pleasure. Thanks for having me.

Ian Renwood

Likewise. Thanks a lot and really enjoyed the conversation, Therese and with you as well, Jace. Thank you.

Therese Raft

Now can people track you both down on LinkedIn, phone, email if they would like to talk more about what's next for cryptocurrency?

Ian Renwood

Absolutely. I know both of us – I am and I'm sure that we are both available on our firm's website and also I'm LinkedIn and other forms of social media. And I, for one will be very happy to answer any questions or direct them into the people in the firm will have specific expertise if they've got an area of concern or particular passion.

Jace Gawn-Buckland

Yeah, absolutely. I'm always up for a chat on crypto.

Therese Raft

If you liked this podcast and would like to hear more, you can find and subscribe to Grant Thornton Australia on Apple Podcasts or Spotify.

-end-