Michael Bacina, Steven Pettigrove, Tim Masters, Jake
Huang, Luke Higgins, Luke Misthos and Kelly Kim of the Piper
Alderman Blockchain Group bring you the latest legal, regulatory
and project updates in Blockchain and Digital
Law.
Entertainment giants Disney and Sony embracing a Web3
future
In a magical move that’s making waves, entertainment
juggernaut Disney is stepping into the blockchain realm with the
announcement of their NFT collectibles platform, Disney
Pinnacle. Partnering with Dapper Labs, the group behind the
wildly popular NBA Top Shot NFT marketplace, Disney Pinnacle
is aiming to bring collecting and trading of Disney IP into the
digital realm.
Much to the excitement of Disney fans and blockchain enthusiasts
alike, Dapper Labs Co-Founder and CEO Roham Gharegozlou announced
the news on X:
Drawing inspiration from the iconic pins scattered across Disney’s theme
parks, this platform will mint pin-inspired digital
collectibles as NFTs on the Flow blockchain, the same network that powers
the slam-dunk success of NBA Top Shot and NFL All Day.
Enthusiasts will be able to own a digital pin featuring the
charisma of Buzz Lightyear, the beauty of Disney Princesses, or the
dark allure of Darth Vader—no longer confined to physical
pinboards but securely nestled in the digital universe.
Disney Pinnacle is designed exclusively for mobile, and promises
that fans can dive into the world of NFT collectibles with ease.
Gharegozlou assured fans that this platform wasn’t just a remix
of Top Shot; it’s said to be a carefully curated platform for
the everyday fans and high-end collectors. While the platform is
currently twirling on the tip-toes of a waitlist, Gharegozlou
stated there will be gradual onboarding process for users to
beta-test the experience before its official launch.
As Disney dances into the blockchain spotlight, Sony is also
poised to join in the rhythm in what is a powerful duo of the
entertainment industry embracing blockchain technology. Just over a
month ago, Sony announced that it was partnering with Web3 builder
Startale Labs to build their own blockchain. In a recent blog post on the Sony Group portal, Sony
announced plans to leverage blockchain beyond the confines of
cryptocurrency, echoing a transformative belief in blockchain’s
potential to reshape social systems.
By harnessing its vast reservoirs of intellectual property
across electronics, movies, music, video games, and finance, Sony
envisions a future where blockchain orchestrates a harmonious
exchange of information. Masaaki Isozu, president of Sony Global
Education, believes blockchain has the potential to challenge the
established norms of capitalism. Sony Music Entertainment’s
newest service is called “soundmain”, and the company is intending
to leverage blockchain technology to manage copyright
information.
As Disney and Sony step onto the blockchain stage, the footsteps
of these two titans sends a resounding signal to the
world—the era of blockchain isn’t just a digital
spectacle, but has the power to reshape industries. Transcending
just cryptocurrency speculation, blockchain as a technology has the
potential to usher in a new era of innovation and
collaboration.
By Michael Bacina, Steven Pettigrove and Luke
Higgins
ATO crypto guidance draws attention to need for
legislative clarity
The Australian Taxation Office (ATO) has
released new non-binding web guidance addressing the
taxation of crypto assets for individuals engaging in crypto asset
activities.
The newly updated guidance is provided across three subsections,
being:-
- crypto asset transactions with gift cards or debit
cards; - crypto asset prizes and gambling winnings;
and - decentralised finance and wrapping
crypto.
The ATO’s definition of “crypto
assets”
Despite the lack of a formal definition of “crypto
assets” in the Australian taxation legislation, the ATO has defined “crypto assets” in their
non-binding web guidance as:
…a subset of digital assets that use cryptography to protect
digital data and distributed ledger technology to record
transactions. They may run on their own blockchain or use an
existing platform such as Ethereum…
There are no special tax rules for crypto assets. The tax
treatment will depend on how you acquire, hold, and dispose of the
asset.
For tax purposes, crypto assets are not a form of money.
The GST Act has
a definition of “digital currency” and trading
digital currency is largely a GST free activity.
Crypto asset transactions with gift cards or debit
cards
The ATO has carved out three particular examples. First, the
guidance states that a capital gains tax (CGT)
event occurs when an individual uses (i.e. disposes of) crypto
assets to acquire a gift card. This CGT event occurs regardless of
whether the gift card is denominated in AUD or crypto assets.
Example: acquiring a gift card with crypto
assets
Raj buys 50 ABC tokens for $50. Raj later uses these tokens to
buy a $100 gift card. A CGT event happens when Raj buys the gift
card, as he disposes of 50 ABC tokens in exchange for the gift
card.
Raj has a capital gain of $50.
A CGT event also occurs when loading or topping up a gift
or debit card using crypto assets. If an individual
transfers crypto assets to the digital wallet of the gift or debit
card provider for the purpose of loading or topping up the card,
the transfer of the crypto assets into that digital wallet is a
deemed CGT disposal. The proceeds for this CGT event are equal to
the amount by which the available balance of the card is increased
(in AUD equivalent).
Example: loading a debit card using crypto
assets
Yindi has a debit card that is linked to her crypto wallet.
Yindi uses her debit card to buy a television for $2,000.
The debit card provider draws crypto assets from Yindi’s
crypto wallet and converts them to AUD to pay to the merchant.
The capital proceeds for the disposal of crypto assets are
$2,000.
The release of this particular guidance is timely, given the
increase in the number of “crypto debit card” like
products being offered on the market today (see for example CryptoSpend, the Crypto.com VISA
Debit Card and the Binance Visa Card).
Where taxpayers use a gift or debit card that is denominated in
crypto assets, the AUD value of the available balance changes as
the price of the crypto assets change. The ATO provides the
following example of how such dealings may be taxed:
Example: using a gift card denominated in crypto
assets
Olivia has a gift card denominated in XRP. Olivia paid 500 XRP
to acquire the gift card and it has an available balance of 500
XRP.
At the time Olivia acquired the gift card, XRP had a market
value of $1 [per XRP].
Olivia uses the gift card to buy a guitar costing 400 XRP.
At the time Olivia acquires the guitar, XRP had a market value
of $0.95. Olivia has a capital loss of $20 and a remaining balance
of 100 XRP on the gift card.
This creates complexities for individual taxpayers using crypto
asset denominated cards. Given the inherent volatility of crypto
assets, taxpayers should be aware of the compliance (record
keeping) burden is placed on them when transacting with their card
as the price of crypto assets can change rapidly and often
dramatically.
Crypto asset prizes and gambling winnings
Subject to certain situations, prizes won in ordinary lotteries
(like lotto draws and raffles) and on game shows are not generally
considered ordinary income. The ATO guidance states that
individuals usually do not need to include details of capital gains
and capital losses made directly from gambling or prize games, a
re-statement of the ATO’s findings in Taxation Ruling IT 2584. It is important to
note that individuals who dispose of CGT assets (e.g. investments)
for gambling purposes still have a CGT event.
If an individual wins a crypto asset, the ATO guidance states
that that individual may hold the asset won as an investment. In
such circumstances, the ATO states that the eventual disposal of
that crypto asset may be subject to CGT, with the cost base of that
crypto asset being its market value as of the time of the win.
Example: crypto asset won in a lottery is held as
investment
Anwar pays $100 for tickets in an online lottery where the prize
is crypto assets. Anwar wins the lottery prize of $20,000 worth of
crypto assets. The winnings from the prize are not ordinary income
and any capital gain is disregarded.
Of course, any gains on the price of winnings of crypto-assets
when sold later will still be assessable for tax.
Decentralised finance and wrapping crypto
The ATO defines decentralised finance or “DeFi”
as:
a blockchain-based form of finance that is conducted without
relying on a financial intermediary (peer-to-peer)
The ATO warns that CGT events can arise in a DeFi environment,
usually in the form of CGT events A1 (Disposal of a CGT asset), C2
(Cancellation, surrender and similar endings), E2 (Transferring a
CGT asset to a trust), or H2 (Receipt for an event relating to a
CGT asset). Contentiously, this can be the case even where an
“equivalent” transaction or dealing takes place in a
non-DeFi environment (i.e. with “traditional finance”
assets or arrangements like lending and borrowing). The ATO states
that CGT events occur in DeFi scenarios as the beneficial ownership
of the relevant crypto asset ends due to the arrangement.
The ATO also expresses a view that a CGT event will generally
arise where an individual taxpayer transfers a fungible crypto
asset (for example, ETH or a similar ERC-20 compliant token) to an
address that the individual doesn’t control and/or that already
has a balance of the same fungible crypto asset. In this scenario,
the capital proceeds from the CGT event are equal to the market
value of the asset received by the taxpayer in return for
transferring the crypto asset.
The ATO provides the following example of a lending arrangement
with a DeFi platform:
Example: CGT treatment when you lend to a DeFi
platform
Mika buys 100 ZYX coins for $1,000 and ‘lends’ them to a
DeFi platform.
The terms of the contract are unclear about whether Mika retains
beneficial ownership of the 100 ZYX coins. The DeFi platform pools
the ZYX coins that Mika ‘lends’ at the same address as the
ZYX coins it receives from other ‘lenders’.
As ZYX coins are fungible, a CGT event happens in respect of
Mika’s ZYX coins at the time of the initial ‘loan’.
Under the contract, Mika has a right to receive 100 ZYX coins
from the DeFi platform at a future time. At the time Mika receives
the right (being the time she made the initial ‘loan’),
each ZYX coin had a market value of $9. Mika’s right was valued
at $900, so she has a capital loss of $100. Mika’s right has a
cost base of $900.
Three months later, the ‘loan’ is repaid and Mika’s
right to receive 100 ZYX coins from the DeFi platform is satisfied
by the transfer of 100 ZYX coins to her. At that time the market
value of each ZYX coin is $10, so Mika makes a capital gain of
$100. Mika now has acquired 100 ZYX coins with a cost base of
$1,000.
On the topic of liquidity pools and providers, the ATO states
that a CGT event happens when an individual deposits crypto assets
into a liquidity pool. The capital proceeds of this event are equal
to the market value of the property received by the tax payer in
return for deposited crypto assets. When the individual withdraws
the crypto assets from the liquidity pool, a CGT event occurs in
relation to the crypto asset or a right received from the original
deposit, with the proceeds being equal to the market value of the
withdrawal.
Example: exchange of crypto asset through the liquidity
pool
Martha is a liquidity provider who deposits one EH to the XA
liquidity pool. In exchange for the one EH, she receives 20 XA
tokens representing her share of the liquidity pool.
Martha acquired the one EH 3 years ago at a price of $2. The 20
XA tokens have a market value of $20 at the time of
contribution.
The deposit of one EH into the liquidity pool is a CGT event.
Martha has a capital gain of $18. Martha may be eligible for the
CGT 50% discount.
Finally, the ATO deals with the controversial issue of wrapped
tokens. The ATO defines wrapped tokens as a “tokenised
representation of another crypto asset”. Wrapping is
essentially a function that allows a user to use the value of their
crypto asset on another blockchain. By way of analogy, it is like
allowing a PC game to run on a Mac computer – it won’t
work properly unless you have special software.
Despite
the contention from tax professionals that a wrapping event
should simply be a non-taxable activity performed to provide
software compatibility to a token, the ATO considers that a
wrapping event creates a CGT event. Under that logic, when
individuals wrap or unwrap a crypto asset, they exchange one crypto
asset for another and a CGT event happens. The capital proceeds
from this CGT event equal the market value of the wrapped token at
the time of the exchange. The ATO provides the following
example:
Example: CGT treatment when exchanging wrapped
tokens
Kal bought 1 BTC for $60,000 in January 2022 and then wrapped it
through a smart contract for 1 WBTC in April 2022.
The market value of WBTC at the time of the exchange was
$70,000. A CGT event happens when the BTC is wrapped through that
smart contract. Kal will have a capital gain of $10,000.
This could very well lead to unexpected and potentially absurd
results. For example, the unwrapping of a token will also be a CGT
event. Continuing the ATO’s example of Kal above, if Kal were
to use a miniscule portion of the wrapped bitcoin, WBTC, on another
blockchain (say 0.0002 WBTC) before unwrapping the remaining WBTC
almost immediately, Kal would likely be unwrapping a near
equivalent amount of $70,000. Although the capital gain or loss in
this instance would be nominal (as Kal’s cost base for the WBTC
would be similar to the proceeds of the unwrapped BTC given the
short time frame), Kal has still incurred a ~$10,000 capital gain
on the initial wrapping event simply for converting his existing
asset into a software compatible form to perform a single nominal
transaction on a different blockchain.
In a more straightforward example, the simple act of wrapping
and unwrapping a token, without an actual substantive disposal, can
create huge inadvertent income tax liabilities for
individuals.
This approach is not surprising, and has in fact been the
assumed position of the ATO by industry professionals for
years.
Conclusion
In the ever evolving landscape of the blockchain ecosystem, it
is important that regulatory bodies take into account the unique
nature of blockchain and distributed ledger technology when making
laws and industry guidance but ultimately until there is
legislative clarity regulators can only enforce the laws which are
on the books. Individual taxpayers must proceed with caution,
noting the significant tax compliance burdens which the ATO is
signaling around crypto asset activities.
There remains significant uncertainty in relation to the
taxation of crypto assets, and with the Board of Taxation review due in February 2024, taxpayers will have to
wait a little longer for better clarity on taxation of
crypto-assets.
By Michael Bacina, Steven Pettigrove and Luke
Higgins
Hong Kong to tokenise investments
Earlier this month, the Hong Kong Securities and Futures
Commission (SFC) published two highly-anticipated
circulars providing guidance to intermediaries engaging in tokenised securities-related activities
(Tokenised Securities Circular), and on the tokenisation of SFC-authorised investment
products (Investment Products Circular)
(together, Circulars).
These Circulars, along with other initiatives taken by the Hong
Kong government (including the new Virtual Asset Trading Platform licensing
regime which became effective on 1 June 2023) signifies Hong
Kong’s efforts to embrace financial innovation using
distributed ledger technology (DLT) and to foster
a responsible regulatory environment for the sector.
The focus on tokenisation corresponds with the growing global
interest in tokenising traditional financial instruments and
expanding these products to retail. Over the past year, powerful
financial institutions such as JP Morgan, Citi and BlackRock have voiced their ambition in this
space commencing work on various tokenisation projects.
The key points in these Circulars are below.
See-through Principle
Deviating from its 2019 Statement which regarded all security
tokens as “complex products” requiring enhanced investor
protections, SFC now explicitly adopts a “see-through”
approach to tokenised investment products. SFC said in their
Tokenised Securities Circular:
…the nature of Tokenised Securities are fundamentally
traditional securities with a tokenisation wrapper, the existing
legal and regulatory requirements governing the traditional
securities markets continue to apply to Tokenised Securities.
This reflects a significant change of position for SFC. It means
that the distribution and marketing of Tokenised Securities will no
longer be strictly limited to professional investors (so called
PI-only restriction), as required in the 2019
Statement.
SFC instructs intermediaries to adopt the see-through approach
and:
… determine whether a Tokenised Security is complex or not by
assessing the underlying traditional security…
However, the offerings of Tokenised Securities to the Hong Kong
public will continue to be subject to SFC’s public offering
regimes, which prescribes prospectus and other documentary and
procedural requirements.
SFC has also noted that existing conduct requirements for
securities-related activities will apply to the distribution of or
advising on Tokenised Securities, management of funds investing in
Tokenised Securities and secondary market trading of Tokenised
Securities on licensed Virtual Asset Trading Platforms.
SFC’s guidance for Tokenised Securities
In the Tokenised Securities Circular, SFC has set out
considerations for intermediaries choosing to engage in Tokenised
Securities-related activities. Some of them are:
- Managing new risks: intermediaries should
manage new risks created by tokenisation in relation to ownership
(e.g. how ownership interests are transferred and recorded) and
technology (e.g. forking, network outages and cybersecurity risks,
depending on the type of DLT network used); - Issuance of Tokenised Securities: where
intermediaries issue Tokenised Securities which they also intend to
deal in or advise on (e.g. fund managers of tokenised funds), they
remain responsible for the overall operation of the tokenisation
arrangement, even if they have entered into outsourcing
arrangements with third parties. - Dealing in, advising on, or managing portfolios
investing in Tokenised Securities: intermediaries should
conduct due diligence on the issuers and their third party vendors
/ service providers, as well as the features and risks arising from
the tokenisation arrangement. They should be satisfied that
adequate controls are in place to before engaging in any
of these activities; and - Disclosure: intermediaries should make
adequate disclosures to clients of material information (including
risks) specific to Tokenised Securities.
SFC considers that some securities that utilise DLT are not
traditional financial instruments “wrapped” in a token
– rather, they are complex products called Digital
Securities, on the basis that they are likely to be bespoke in
nature, terms and feature. Digital Securities should generally not
be offered to retail investors.
SFC’s guidance for other tokenised investment
products
The Investment Products Circular separately sets out SFC’s
considerations for tokenisation of other investment products (i.e.
SFC-authorised investment products) for offering to the Hong Kong
public. It is worth noting that SFC requirements for Tokenised
Securities will also apply to the tokenisation of SFC-authorised
investment products.
Applying the same “see through” approach, SFC will
allow primary dealing of tokenised SFC-authorised
investment products provided that the underlying product meets
certain product authorisation requirements, for example:
- Having in place a sound tokenisation arrangement;
- Making clear and comprehensive disclosure in offering documents
of a tokenised SFC-authorised investment product; - Only regulated intermediaries (e.g. licensed corporations or
registered institutions) can distribute tokenised SFC-authorised
investment products. - Staff competence; and
- Prior consultation with SFC will be required for tokenisation
of existing SFC-authorised investments and the introduction of new
investment products with tokenisation features.
Meanwhile, driven by investor protection concerns, SFC has
adopted a more prudent stance regarding the secondary
trading of SFC-authorised investment products. SFC believes further
consideration is required in order to provide investor protection
on a substantially similar level to those provided for
non-tokenised products. SFC flagged a few considerations including
maintenance of proper and instant token ownership record, readiness
of trading infrastructure and market participants to support
liquidity, and fair pricing of tokenised products.
What’s next?
The Circulars provide welcome guidance to intermediaries in
relation to tokenisation of traditional financial instruments. It
is clear that SFC will expect intermediaries to closely engage with
them prior to embarking on any activities in relation to tokenised
products. Apparently undeterred by the recent JPEX scandal, the Hong Kong government
is pressing ahead with a regulated approach to protect consumers,
foster a better innovation environment for crypto business, and to
regain its status as Asia’s crypto
hub.
By Steven Pettigrove, Michael Bacina and Jake Huang
Party amid a rally? AusCryptoCon 2023
Amid the biggest crypto rally in 2023 which sent the Bitcoin
price to a 12-month high, the Australian Crypto Convention was successfully
held over the weekend of 11 and 12 November in Melbourne.
With over 10,000 attendees, 250 speakers and 250
sponsors/exhibitors, Aus Crypto Con 2023 created a huge buzz at the
Melbourne Convention and Exhibition Centre by the Yarra river.
Presentors included industry heavyweights and prominent
professionals, such as:
The agenda included a jam-packed list of presentations and panel
discussions across two days. The following is a brief recap.
Regulation
With an increasingly strong enforcement approach by the Australian Securities and
Investments Commission (ASIC) and the release of
the Digital Assets Platform consultation paper by the Treasury, regulation of the
industry was at the forefront of many minds and the focus of
several presentations.
These include: Binance’s investigations team sharing their
experience in protecting users’ assets and cooperating with law
enforcement; Michael Bacina from Blockchain Australia and Mark
Monfort from NotCentralised explained Australia’s new digital
asset regulations in layperson’s terms; Aaron Lane from the
RMIT Blockchain Innovation Lab also discussed current cases and
future trends of Crypto Law.
Bitcoin
As the Bitcoin price reached 12-month highs, it could not have
been better timing for Michael Saylor to show his unwavering belief
in Bitcoin. Taking the audience on a deep dive into the crypto
universe, Michael Saylor emphasised Bitcoin’s
status as the best property in the world and how it has
transformed MicroStrategy’s approach to investment.
Saylor also offered his views on the highly-anticipated Bitcoin
ETF and the challenges to educate the public about
cryptocurrency.
The surge in the Bitcoin price also prompted discussions on
mining. Will Wright, co-founder of the Mining Store, shared his
views on the results of mining Bitcoin since 2014, and the
strategies their clients have adopted over the years.
Mainstream adoption
One cannot attend Aus Crypto Con without noticing PayPal (and
their booth handing out an unbelievable loot of lollies), whose
presence is not at all surprising given PayPal has demonstrated
strong interest in crypto including issuing its own USD stablecoin and simplifying crypto purchases. PayPal discussed
their continuous commitment to building consumer trust in
crypto,
…at the intersect between 400m consumers and 30m merchants
enabling $1.4T in transactions every year… PayPal can
meaningfully contribute to the crypto landscape over the coming
years.
Tokenisation
Edward Wong, International Strategic Advisor from ASIC and Simon
Callaghan, CEO of Blockchain Australia took the audience on a
journey from traditional financial systems to a tokenised digital
economy. They reflected on the position of the IMF-FSB joint policy roadmap and the IOSCO recommendations, dived into the latest
innovation in banking and fintech, and envisioned the expansive
future of the digital economy.
Jack Jiang from Wealth Pi and Brooks Huang from Joltify Chain
also discussed how tokenisation of real world assets could enhance
liquidity, increase accessibility and unlock new investment
opportunities.
Web3 development
A dynamic panel which includes Darren Rogan, CEO of Horselink
and Harrison Dell of Cadena Legal delved into the world of Web3
gaming and discussed how blockchain technology is reshaping the
gambling industry.
Emerging talents from several Australian universities also
provided insights on how to educate, engage and empower the student
masses within Web3.
Decentralised finance
Justin Sun provided an expert analysis of the exponential growth
and increasing adoption of DeFi, highlighting the dramatic rise in
the user base and broadening array of services.
Blockchain and AI
You cannot have a successful conference on emerging technologies
without mentioning AI a few times. Web3 Educator Danielle Marie
presented on the convergence of blockchain and AI in the context of
future identify management.
The Conclusion
Compared with last year’s Aus Crypto Con, the themes again
demonstrated focus on regulation, compliance and exploring the way
forward for the industry, probably thanks to the high-profile
collapses of several crypto firms. However, one only needed to
spend 5 minutes in the room to conclude that the enthusiasm from
the attendees and industry participants has not wavered.
By Michael Bacina, Steven Pettigrove and Jake Huang
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