Last week, Australia reversed a long standing policy and recognized Bitcoin as money, thereby ending years of double taxation on transactions using the cryptocurrency. But the move comes at a time where the rise of the price of Bitcoin transaction fees means that perhaps the cryptocurrency’s role as money should be reexamined.
Take this basic question, for example: Is Bitcoin money, or is it a commodity like gold?
The answer differs by market. Some markets refer to Bitcoin by the ticker BTC, others by XBT. BTC would imply that it is money, a currency not unlike the USD or GBP. XBT is a naming convention that means it is a commodity, similar to XAU (gold) and XAG (silver).
Back in 2014, the Australian Tax Office dealt a blow to Bitcoin by issuing a ruling that the cryptocurrency was to be treated as a commodity, and that any trades made with Bitcoin were to be considered as barter. The ruling was a double whammy for users of Bitcoin down under. On the one hand, as a commodity, Bitcoin itself was subject to GST, which meant that businesses accepting Bitcoin faced double taxation – first on the item they sold, and again on the Bitcoin used to buy it. Everyone buying and selling Bitcoin had tax responsibilities to calculate capital gains from the time they got the Bitcoin to the time they parted with it.
Needless to say, if the bookkeeping headache of having to calculate capital gains on Bitcoin did not kill it off, the double taxation would have done the trick. The ruling has made Australia one of the lesser friendly jurisdictions for FinTech companies to set up shop. But last March, the Australian government vowed to end this double taxation and encourage the FinTech innovation around blockchains and digital currencies that had so much potential to reduce costs and change the financial scene.
And so, thanks to last week’s decision, Australia will recognize Bitcoin as money starting July 1, ending the double taxation and bringing Australia in from the FinTech cold.
As it happens, Japan issued a similar decree recognizing Bitcoin as money from April this year, and the result has been a boom in adoption as well as price of the cryptocurrency. (For the record, Germany was one of the first countries to recognize Bitcoin as legal currency back in August 2013, and many more are following suit.)
On a side note, there is a distinction between legal currency – in which Bitcoin is treated not unlike a foreign currency – and legal tender, a legal construct that means that it must be accepted as settlement of debt. With legal currency, for example, one may choose to accept Bitcoin to settle a debt or not, similar to a merchant in Hanoi, say, agreeing to accept US dollars at the till, while another merchant may only accept dong. With legal tender, the merchant has no choice but to accept it.
The anatomy of money
But that brings us to the question: what is money?
Money has three functions. It is a store of wealth, a unit of account and a medium of exchange. For most of history, the three have all been tied to national currencies because there has been no other way to create trust outside of the government’s backing.
However Bitcoin has changed that, and the three roles are beginning to clearly separate.
For example, if you use Bitcoin to buy something from, say, BIC Camera in Japan (which was the first major retailer to take advantage of the Japan tax ruling in April to accept Bitcoin), the prices are all in yen. That means that within the transaction, the unit of account is the Japanese yen while the medium of exchange is Bitcoin. (This isn’t unprecedented, by the way – this separation has been used by the Panama Canal, which prices the canal toll in Special Drawing Rights – an IMF basket currency.)
As a medium of exchange, Bitcoin was (note the past tense) very efficient and did away with expensive cross-border exchange and exorbitant bank fees.
As a store of wealth, its appreciation has generally meant it is better than most fiat currencies that are prone to inflation in the long run.
However, as a unit of account, Bitcoin is terrible. Thanks to its notoriously radical price fluctuations, pricing anything in Bitcoin makes no sense to anyone.
So Bitcoin has performed two of the three functions of money over the years, and it has done them so well that countries are moving to recognize it as money. But today we are at a tipping point just as it goes mainstream. Until Bitcoin adopts Segwit and Lightning to drastically lower transaction costs, its growing adoption as money means that transaction costs are rising far too fast. Last year, Bitcoin fees were negligible. Last month, a transaction was about 25 cents. Today, a transaction can cost over a dollar in mining fees to get included in the next block.
Suddenly, Bitcoin’s use as money does not look that promising. The high mining fees are starting to mean that retail use is now out of the question, and it becomes more like gold, which is not that easy to move. Granted, one dollar is still a bargain compared to the $25 or more typically charged for a cross-border bank transfer, but who knows how expensive a Bitcoin transaction will become soon as users compete for space on the limited blockchain size?
It’s ironic, then, that just as Australia finally got its head round Bitcoin to recognize it as money, more users are now treating it as a commodity. It is becoming primarily a store of wealth and a medium of exchange only for large-value items – not unlike gold – which, while being a change from the status quo, is certainly not a bad thing.
Photo by adamdachis