Exploring Cryptocurrency

Introduction
It is estimated at least three million Australians now own 
some form of crypto asset
The most well-known crypto asset is cryptocurrency. 
Cryptocurrencies have proliferated rapidly over the last 
decade. Many individuals and businesses who purchase 
cryptocurrencies do so to speculate on their value. The 
fascination to date with these currencies appears to have 
been more speculative (buying cryptocurrencies to make 
a profit) than related to their use as a new and unique 
system for making payment
However, despite their widespread and accelerating 
adoption, cryptocurrencies remain a mystery to many 
Australians.
As Australia undergoes rapid transformation to an 
advanced digital economy by 2030, it is likely, the use of 
cryptocurrencies will continue to increase. In turn, a 
better understanding of what cryptocurrencies are, how 
they operate and can be used, and associated risks, 
must be fostered.
Cryptocurrencies offer a myriad of opportunities for 
facilitating business growth and the streamlining of 
financial operations. But with the good comes the bad. 
While the regulatory environment is rapidly evolving, due 
to the pseudo-anonymity they provide, cryptocurrencies 
remains a conduit for serious criminal activity. In 
addition, there are significant cyber security risks that 
need to be considered as cryptocurrencies are more 
widely adopted. 
The Committee welcomes the opportunity to contribute 
to robust and effective cyber security outcomes for 
Australia. Therefore, this report explores the cyber 
security and cyber crime implications of cryptocurrency 
and explores how these risks could be better mitigated. 
Although this paper discusses the risks and opportunities 
associated with cryptocurrency it does not offer financial 
advice or recommend particular investment strategies. 
Individuals and businesses should continue to seek 
independent legal, financial, taxation or other advice to 
check how such investments relate to their unique 
circumstances.

This Industry Advisory Council paper explores 
cybersecurity considerations with respect to:
● What cryptocurrency is;
● The risks associated with cryptocurrency;
● The nexus between cryptocurrency and crime;
● The current state of domestic and international 
cryptocurrency regulation;
● The opportunities cryptocurrency presents.
Finally, the recommendations provide some forward-

facing steps to help foster the secure adoption of 
cryptocurrencies in Australia, address crypto-related 
crime, as well as support crypto-driven opportunities in 
Australia.

What is Cryptocurrency?
Cryptocurrencies are crypto-assets (crypto), also known as 
coins or tokens. They are an emerging asset class without a 
physical form - they are digital tokens stored in a digital 
‘wallet’ and are both speculative and opaque. 
Cryptocurrency is typically used as a store of value, for 
investment, payment and to execute automated contracts.
The global market is rapidly expanding, with more than 6,000 
unique cryptocurrencies worldwide.
Cryptocurrency transactions allow direct peer-to-peer 
transactions without an intermediary (e.g., bank or other 
regulated financial entity). This model differs to traditional 
payment methods, which rely on a central party to maintain 
records of transactions. Instead, cryptocurrencies use 
distributed ledger technology - a distributed database shared 
among a network of computers - to maintain a decentralised 
record of transactions and currency ownership.
The most common form of distributed ledger technology is 
the ‘Blockchain’. When a new transaction occurs, it forms a 
part of a new block that is then added to the chain. As a 
result, the blockchain provides a record of every transaction 
that has ever occurred and is available to anyone to access. 
Most blockchain solutions enable a distributed, unanimous, 
immutable record of data and generates trust without the 
need for a trusted third party or intermediary. There are 
some instances, such as Monero, which are private 
decentralised ledgers that makes it more difficult to identify 
wallet addresses, transaction amounts, address balances, or 
transaction histories and therefore providing less 
transparency and traceability. 

Many individuals and businesses who purchase 
cryptocurrencies do so speculatively. Cryptocurrencies have 
no legislated or intrinsic value - they are simply worth what 
people are willing to pay for them
. 
As a result, large numbers of cryptocurrencies have become 
insolvent overnight. Many are registered companies in 
foreign countries with different laws than where they reside 
and are therefore without any legal recourse. Most are not 
registered in Australia and neither the government nor the 
courts have jurisdiction. Additionally, as a store of value, 
deposits in all modern economies are insured and 
guaranteed by the local government. This is typically not the 
case for mainstream cryptocurrencies. 
The rise of cryptocurrencies has provided a new opportunity 
for criminals to launder proceeds of crime. Criminals are 
known to be early adopters of emerging technologies and it 
has become the currency of choice on the dark web.

The evolution of crypto
Cryptocurrencies, other than stablecoins, are known for 
their high volatility, some cryptocurrencies have halved or 
doubled in value in the space of a month. Bitcoin, one of 
the most well-known cryptocurrencies, is the top performing 
asset of any class over the past decade – climbing a 
staggering 9,000,000% between 2010 and 2020

Due to the evolving nature of cryptocurrency, Australia, 
like its global counterparts, has been considering the 
regulatory regime.

Cryptocurrency exchanges

Much like traditional financial exchanges, cryptocurrency 
exchanges allow customers to trade cryptocurrencies for other 
assets, such as conventional fiat currency or other digital 
currencies. Some particular exchanges have adopted a 
structure, acting as an intermediary, where they hold the 
relevant private encryption keys required to transact.
Major economies, in some instances, refuse to recognise 
cryptocurrency as legal tender as this may undermine 
government authority by circumventing capital controls and by 
removing intermediaries. Hence, cryptocurrencies can 
potentially disrupt and destabilise existing financial 
infrastructure systems.
In 2014, the world’s then largest cryptocurrency exchange, Mt 
Gox, which handled more than 70% of currency transfers, 
suspended trading, closed its website, and commenced 
bankruptcy liquidation. This occurred after the theft of about 
850,000 bitcoins – worth roughly AU$72 bn - from the 
exchange’s wallet. 
Since the collapse of Mt Gox, a more rigorous approach and 
additional scrutiny has been begun to be applied by regulators 
and customers of cryptocurrency exchanges. 
Therefore, exchanges and the regulatory environment 
surrounding them will play a key role in mitigating crypto theft, 
the use of cryptocurrencies for criminal activity and ensuring 
cyber security is up to scratch. 
In 2017, the Government amended the Anti-Money 
laundering/Counter-Terrorism Financing (AML/CTF) Act to 
regulate Digital Currency Exchanges (DCEs) in recognition of 
the emerging money laundering and terrorism financing risks. 
DCEs in Australia are regulated under the AML/CTF Act when 
they exchange digital currency for fiat currency and vice versa 
(but not for digital currency/digital currency exchanges).
And in December 2021, the Australian Government signalled 
it would create a licensing framework for cryptocurrency 
exchanges as a part of its payments industry overhaul
. 
Australian peak bodies, such as Blockchain Australia, certify 
exchanges with a code of conduct
. Whilst not a cyber 
security standard or a statement of financial viability, this can 
give some confidence to consumers regarding best practice 
standards in legal compliance, reputation, AML/CTF 
protections and consumer protection.

Tokenised “money”
● Stablecoins - privately issued digital assets 
designed to decrease volatility by tracking a fiat 
currency (e.g. US dollar), commodity (e.g. gold) or 
basket of other cryptocurrencies (e.g. Circle’s USDC). 
Issued by blue chip, notable and stable firms.
● Central Bank Digital Currencies (CBDC) -
a new form of digital money that would be a liability 
of the central bank, these might be retail CBDCs 
(available to the public) or wholesale (analogous to 
central bank settlement accounts) (see China’s 
CBDC project).
● Mainstream cryptocurrencies - privately issued 
digital assets that are not denominated in the currency 
of any sovereign (e.g. Bitcoin, Ether).
Tokenised other assets
● There has been a proliferation of other assets being 
tokenised, some of these are ‘digitally native’ (non 
physical) and are defined by their existence on a 
blockchain ledger (e.g. Non-fungible Tokens).
Others may represent pre-existing real world assets 
such as tokenised representations of real property or 
financial instruments.

Exploring Cryptocurrency