The document provides an overview of cryptocurrency and its regulation. It discusses how cryptocurrency works through decentralized verification of transactions using cryptography. It also outlines some of the key stakeholders that influence cryptocurrency regulation, including domestic regulators, consumers, and miners. Currently, cryptocurrency regulation in Australia involves several agencies that oversee financial markets and institutions like AUSTRAC, which regulates bitcoin exchanges for anti-money laundering purposes. The document traces some of the history of Australia's regulatory approach to cryptocurrency regarding taxes and consumer protections.

1. Regulating
Cryptocurrency
Copyright © 2015 Orren Prunckun. All Rights Reserved.

2. A Primer On Currency,
Money & Banking…
• Currency is a system of money.
• “Commodity currency” is backed by a
commodity such as gold.
• “Fiat currency” is legal tender, but is not
backed by a physical commodity. Value is
created from supply and demand not the
physical material behind it.
• “Money “is the medium or exchange of value.
• “Cash” is physical money such as bank notes
and coins.
• You can prove cash existence - it is physical
and you can hold it.
• You can’t double spend it - you either have
cash or you don’t.

3. A Primer On Currency,
Money & Banking…
• With online/digital/e-money you cannot
prove its existence – you can’t hold it.
• A bank has to vouch that it exists (hence
many regulations to keep banks
accountable.)
• Electronic money is simply a number
attached to an account.
• Unlike cash money, electronic money has
the ability to double spend as it is simply a
number attached to an account.
• You also can’t keep electronic money on
your computer electronically, you need a
bank to store it.
• If everyone was to withdraw all of the
money in their bank accounts, there
wouldn’t be enough cash in circulation to
do so.

4. A Primer On Currency,
Money & Banking…
• Once you make an electronic bank transaction, the
bank validates it so you can’t double spend it - via
a time/date stamp, with a debit, credit & balance.
• Banks keep track of transactions through a
“ledger.”
• A ledger is a book/collection of financial accounts.
• This system works via trust we place in banks -
keep electronic money honest.
• The Federal Reserve Bank of Australia keeps cash
money honest by validating it with various
physical security measures.
• But, what if there was a way to transact in
electronic money without having banks?
• In other words, what if there was no need for a
central authority of money.

5. This is where cryptocurrency steps in…

6. Why Is Cryptocurrency Important
For Society?

7. The Libertarian Dream…
Cryptocurrency provides a way to exchange “value
online without having to rely on centralised
intermediaries, such as banks.” -The Economist
A Libertarian is a person who believes in the doctrine of
free will, freedom of regulation and small government.
No central authority is a Libertarian’s dream!

8. Byzantine Generals
Problem…
• Cryptocurrency gives a practical solution to
computer science problem called Byzantine
Generals Problem.
• Byzantine was Greek city on the Bosporus/Sea
of Marmara, renamed Constantine and
rebuilt/renamed Constantinople A.D.
• The Byzantine Generals Problem works like this:
many Byzantine army generals and their troops
gather around an enemy city.
• The generals can only communicate via a
messenger.
• All generals must agree upon a common battle
plan for taking over the enemy city.
• When all generals are working together (a
common plan) they win.

9. Byzantine Generals
Problem…
• If they do not have a common plan, they will be
over powered by the enemy - success relies on
working together.
• However one or more of the generals could be
traitors – thus lies the problem.
• The loyal Generals must reach an agreement for
attack.
• The Byzantine Generals Problem raises the
following question: how do you create trust
between unrelated parties over an untrusted
network (like the internet) where there is no
pre-existing trust or knowledge?
• The Byzantine Generals Problem relates to the
transfer of digital property from one user to
another – the transfer needs to safe and secure,
legitimate & clear it has taken place without
needing an intermediary such as bank or broker.

10. Source: https://medium.com/@DebrajG/how-the-byzantine-general-sacked-the-castle-a-look-into-blockchain-370fe637502c

11. Importance Of
Cryptocurrency…
• This means no approval is needed and
thus no or very low transfer fees.
• Low fees means growth for business, not
tax or banks.
• A new currency - anyone can use at any
time and could replace banks entirely.
• A new technology means fraud is almost
impossible, unlike for banking or credit
cards. Fraudsters don’t get information
so they can't steal.
• Investment vehicle (including ICO’s.)
• Touted as the future of commerce.
• Efficiencies compared to alternatives
(credit cards.)

12. Source: https://www.finder.com.au/credit-card-info-for-dummies-beginners-and-first-time-credit-card-owners

13. “Innovation will drive productivity growth in
Australia….“The Government is committed to
establishing Australia as a leading global financial
technology (FinTech) hub and is announcing a new
package that aims to position our local fintech
industry as a world leader.”
-The Australian Budget 2017-2018

14. Value…
• Cryptocurrency doesn’t itself have value.
• It is like fiat currency which is not backed by
physical commodity.
• Value is created from supply and demand not
the physical material behind it.
• Value is created by system itself, its use now
and potential increased use in the future.
• Similar to cash money, the cultural system
determines the value of cash, which is based
on trust and use.
• Nothing exists unless there is agreement that
it exists.
• Therefore, something is only valuable if all
agree it is valuable.

15. • Cryptocurrency needs to have value before
people will start to uses it – a horse and cart
problem.
• Network effects are needed – the more who use
it, the more valuable it is like the telephone,
web, Facebook, etc.
• Inflation/supply of money also creates value
(later).
• Currency fluctuates in value in relation to other
currencies because of supply and demand.
• Popularity (demand) means more users of the
system.
• More users of the system means more
transactions and coin becomes circulated.
• More users mean higher value of the currency.
• Talking of users and uses…
Value…

16. The block chain is “A digital ledger in which
transactions made in bitcoin or another
cryptocurrency are recorded chronologically
and publicly.”

17. Use Of The Block
Chain/Ledger…
• Voting.
• Identity.
• Signatures.
• Contracts.
• Keys & locks.
• Cars sales.
• Property sales.
• Stocks & bonds sales.
• Money.
• International remittance (40% with no bank
accounts + reduced fees to help raise quality of
life).
• Micro payments to 8 decimal places (Newspaper
content, email get rid of spammers).

18. What Is Cryptocurrency?

19. Cryptography:
“The art of writing or solving
codes.”

20. “Practice and study of techniques
for secure communication in the
presence of third parties called
adversaries.”

21. Currency:
“a system of money in general use
in a particular country.”

22. Cryptocurrency:
“A digital currency in which
encryption techniques are used to
regulate the generation of units of
currency and verify the transfer of
funds, operating independently of a
central bank.”

23. “A type of digital currency in which
encryption techniques are used to
regulate the generation of units of
currency and verify the transfer of
funds, operating independently of a
central bank.”

24. What Is The History Of
Cryptocurrency?
.

25. The History Of
Cryptocurrency…
• 1998: Wei Dai published the B-money
proposal of an anonymous, distributed
electronic cash system
• 1998: Nick Szabo created Bit gold and
the “proof of work” theory.
• 2004: Hal Finney created a “proof of
work system” for currency.
• 2008: Satoshi Nakamoto (unknown
identify) created Bitcoin.
• Hundreds of alternative
cryptocurrencies have been created
since.

26. 6D’s of Disruption…
• Cryptocurrency is not past Digitization &
Innovators stage.
• Currently in the Deception and Early
Adopters/Majority stage.
• It potentially needs to be easier to use
for the common person to reach the
Disruption and Early Majority stages.
• Cryptocurrency is not currently
intuitive to use..
Source: Peter H. Diamandis & Steven Kotler, Bold: How to Go Big, Create
Wealth and Impact the World (1st ed, 2015)
Source: http://open.lib.umn.edu/mediaandculture/chapter/16-6-mass-
media-new-technology-and-the-public/

27. What Are Some Types Of
Cryptocurrency?

28. Types Of
Cryptocurrency…
• Bitcoin.
• Ethereum.
• Litecoin.
• Dogecoin.
• And many, many more…
For example:
• Bitcoin is a specific currency system.
• bitcoins are the money/currency of
Bitcoin.

29. How Do Cryptocurrencies Work?

30. How Cryptocurrencies
Work…
• Instead of entrusting 1 bank, trust is
distributed over many users, with no
personal information exchanged.
• In other words a decentralized bank.
• Bitcoin is a distributed ledger.
• The ledger has a fixed number of slots.
• A “coin” is a slot in the ledger.

31. How Cryptocurrencies
Work…
Buying In
• One can buy into the ledger/slots with cash
(no credit).
• Purchasing into the block chain is via an
online “Exchange.”
• One connects a bank account to an online
exchange.
• One transfers local fiat currency into the
exchange and changes it for Bitcoin, much like
a Foreign Currency Exchange at an airport.
• An example is Coinbase or MtGox.
• AUD Bank account --> AUD Exchange --> Bitcoin
Exchange/address.
• The alternative it to sell a product or service
and be paid Bitcoin.

32. How Cryptocurrencies
Work…
Transacting
• It is Pseudo anonymous not fully
anonymous.
• Every transaction is tracked and logged
forever in the block chain/ledger, for all to
see.
• The block chain grows indefinably, like a
chain.
• Only 1 ledger/block chain - massive
collection of all verified transaction
• Unlike single personal ledger in your
banks.
• A transaction is a piece of the block
chain.

33. How Cryptocurrencies
Work…
Transacting
• Transfer form public key to public key.
• Bitcoin Exchange/address --> another
Bitcoin Exchange/address .
• Public key/address/id number, belong to
real people.
• There is no physical transfer, only
transfer of keys.
• history, coin don’t sit on an account,
therefore don’t lose the key.
• No waiting 3-5 days for transfer like with
banks.
• Ones own part of the block chain.

34. Source: http://feexit.blogspot.com/2016/07/silent-weapons-12.html

35. How Cryptocurrencies
Work…
Selling out
• Can trade out at any time – to
reduce risk of volatility of price.
• A string of numbers sent (random
series of letter and numbers).
• Wallets store private keys. 3 types
of wallets:
• Computer or mobile storage.
• Cloud storage - they have access
to your funds such as Coinbase.
• Paper storage - printed Private
Key and address + QR code.

36. How Cryptocurrencies
Work…
Verification
• Verification of transactions is done via
“Mining,” instead of a central bank.
• Many people checking to make sure that
transaction is legitimate.
• Competition to validate creates an
incentive to get reward/payment.
• Work together to solve a problem and
split the reward.
• It is like “competitive bookkeeping.”
• They are rewarded with Bitcoins or parts
of Bitcoins.

37. How Cryptocurrencies
Work…
Verification
• They are paid to validate which create
maintain/integrity in the system, just like a
bank.
• Paid only if validate/results/outcomes not by
the hour like in banks.
• This means no one can corrupt the system.
• Mining technically is done via specialized
computers, commuting power and software
to solve a mathematical puzzle/problem.
• They create a hash of block header.
Hash is representation of information
in a bundle. And a Header is a summary
of the contents of the block.

38. How Cryptocurrencies
Work…
Verification
• Mining occurs in 10 minute blocks - 20
minutes in batches of 25 coins.
• Miners take pending transactions and turns
into mathematical puzzles.
• Miners needs to find solution and announce
it.
• Other Miners check if answer is correct and
the transactors have the right to transact.
• If majority agree on both the grant approval
of the transaction.

39. Source: https://bitcoin.org/en/how-it-works

40. Circulation & Inflation…
“Currency in circulation is the total value of currency
(coins and paper currency) that has ever been issued
minus the amount that has been removed from the
economy by the central bank.”

41. Circulation & Inflation…
In Australia:
• Currency: Cash $70.9 billion approx.
• M1: Currency plus bank current deposits from
the private non-bank sector.
• M3: M1 + all other bank deposits from the
private non-bank sector, plus bank certificate
of deposits, less inter-bank deposits.
• A maximum of 21 million Bitcoins issued can
be issued by 2024. Drops ½ every four years.
• Increase of money supply creates monetary
inflation (as opposed to price inflation which
is just raising prices.)
• More Bitcoins (use of the system) creates
Bitcoin inflation which creates higher price of
the coin.
Source:
https://en.wikipedia.org/wiki/Money_supply#/media/File:Australian_Money_Supply.PNG

42. Who Are The Various Stakeholders
That Influence The Development Of
Legal Regulation Of
Cryptocurrency?

43. Stakeholders That Influence The Development
Of Regulation For Cryptocurrency…
Domestic Regulators
• The Australian Executive (Department of Industry, Innovation and Science).
• Parliament of Australia.
Entrepreneurs, developers & their legal entities building on the block chain.
• Exchanges – Coinbase etc.
• Wallets.
• Infrastructure.
• Payment Processors.
• Financial Services.
• Currency block chains – Bitcoin etc.
Consumers.
Merchants.
Miners.

44. What Are The Current International
And Domestic Frameworks That
Regulate Cryptocurrency?

45. Current Regulatory
Frameworks…
Domestic Regulations
Banks are regulated by the Australian Legislature:
• Australian Prudential Regulation Authority Act
1998 (Cth).
• Corporations Act 2001 (Cth).
• Reserve Bank Act 1959 (Cth).
• Banking Act 1959 (Cth).
• Financial Sector (Shareholdings) Act 1998 (Cth).
• Anti-Money Laundering and Counter-Terrorism
Financing Act 2006 (Cth).
• Financial Sector (Collection of Data) Act 2001
(Cth).
• Australian Notes Act 1910 (Cth).
• Bank Notes Tax Act 1910 (Cth).
• Competition and Consumer Act 2010 (Cth).

46. Current Regulatory
Frameworks…
Domestic Regulations
Supervision of financial institutions and markets
are done with the following Executive
departments and agencies:
• Australian Prudential Regulation Authority
(APRA).
• Supervision of banks and insurance.
• Australian Securities and Investments
Commission (ASIC).
• Companies, markets and investor
protection
• Reserve Bank of Australia (RBA).
• Monetary policy.
• Federal Treasury.
• Economic policy.

47. Current Regulatory
Frameworks…
Domestic Regulations
• Australian Competition and Consumer
Commission (ACCC).
• Fair trade.
• Australian Taxation Office (ATO)
• Taxation.
• Australian Transaction Reports & Analysis
Centre (AUSTRAC).
• Anti-money laundering.
• Foreign Investment Review Board (FIRB).
• Foreign investments.
• The Australian Securities Exchange (ASX).
• Domestic investments.

48. A Brief History…
Trading
“You can hold US dollars or euros or whatever in Australia
completely freely if you want to and there would be
nothing to stop people in this country deciding to transact
in some other currency in a shop if they wanted to. There’s
no law against that so we do have competing currencies.”
-Glenn Stevens former Governor of the Reserve Bank of
Australia ,December 2013.

49. A Brief History…
GST
“GST won’t be paid more than once. In 2014 the Australian Tax Office
designated bitcoin as an "intangible asset" rather than a currency, making it
subject to GST.”
“The Government will make it easier for new innovative digital currency
businesses to operate in Australia.”
"From 1 July 2017, purchases of digital currency will no longer be subject to
the GST, allowing digital currencies to be treated just like money for GST
purposes. Currently, consumers who use digital currencies can effectively
bear GST twice: once on the purchase of the digital currency and once again
on its use in exchange for other goods and services subject to the GST.”
-The Australian Budget 2017-2018

50. AUSTRAC…
• Because of anonymity of transaction it could be
seen as a way to launder money.
• First regulations for Australia Regulate Bitcoin
exchanges under AUSTRAC via “Know Your
Customer.”
• This could be seen as a detriment to the
cryptocurrency ideology.
• Regulate where there risk:
• MtGox launched in 2010 handled over 70%
of Bitcoin transactions had $420,000,000
of Bitcoins stolen.
• Silk Road Marketplace launched in 2011 as
an online black market.
• AUSTRAC may be inadequate to deal with
offshore exchanges that serve Australian
customers.

51. Current Regulatory
Frameworks…
Other domestic regulations
that related to use of block chain:
• Consumer laws.
• Car sales.
• The Fair Trading Act
• House sales.
• Conveyancers Act 1994.
• Land Agents Act 1994.
• Land and business (Sale and conveyancing)
Act 1994.
• Land and Business (Sale and Conveyancing)
Regulations 2010.
• Voting.
• Stock sales.

52. Are The Current International And
Domestic Frameworks That
Regulate Cryptocurrency
Adequate?

53. Activity
• You have been tasked with create new regulations for Bitcoin.
• Represent each stakeholder group from before:
– Domestic Regulator.
– Entrepreneurs, developers & their legal entities building on the block chain.
– Libertarian Consumers/Merchants/Miners.
– Currency Investors.
• Determine your stakeholder groups interests (15 minutes).
• Create a regulations based on International treaties and Australian domestic law
that regulate Bitcoin taking into consideration your stakeholder groups interests
(15 minutes).
• Discuss if this is mutually beneficial for all stakeholder groups (15 minutes).

54. More Questions…
• Should cryptocurrencies be further regulated in the
future?
• If so, regulated by what type of regulations?

55. See more at:
http://OrrenPrunckun.com