Make Australia a leader in the crypto economy

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The industrial revolution led to a massive drop in transportation costs, leading to an increase in the size of the market and a demand for large companies. But the organizational technology was clumsy. The first forms of the stock company led to scandal and bankruptcy. Eventually, however, the limited liability company as we know it today emerged. Today, this form of organization dominates the global economy.

A new form of organization has recently emerged in the crypto economy. Decentralized Autonomous Organizations (DAO) are the 21st century equivalent of joint stock companies. The first DAOs also led to scandals and loss of money. Like modern business in the 19th century, DAOs need legislation to legitimize them. The Bragg report makes precisely this recommendation.

If adopted, Australia would be the second jurisdiction in the world, after the US state of Wyoming, to legitimize this new form of organization. Not only would that make it clear that Australia is open for business, but Australia would be the business. This would massively stimulate the existing service sector, not to mention all the supporting industries that would emerge and evolve around this new organizational form.

The other major obstacle to the growth of the crypto-economy is our tax system – in particular, the CGT regime. The CGT sets up a safety net for the income tax system preventing leakage and avoiding schemes in which income is artificially reclassified as capital. The CGT, however, has a catastrophic impact on the crypto economy where it operates in a manner equivalent to a cascading sales tax. This creates unprecedented complexity and uncertainty and encourages non-compliance.

To be fair, the ATO has little leeway to apply the law differently. Nonetheless, a cascading sales tax is bad policy in an industrial economy, and it is very bad policy in a crypto-economy. The Bragg report recognizes this.

In addition to being sane in the CGT, the Bragg report invites a debate on crypto-taxation in general. Rightly, he wants to avoid endorsing revenue leakage and widespread tax evasion (if not tax evasion), but at the same time, it is recognized that serious debate needs to be held to ensure that a highly innovative industry is not strangled by a twentieth century tax system (our expression is not theirs).

Our state-of-the-art organizational form dates back to the 19th century and our tax system to the 20th century. They have served us well and in many cases will continue to serve us well.

We can do better.

We are doing better.

The Bragg Report presents a bold vision of Australia as a leading crypto economy in the 21st century. Of course, this represents a radical change in policy. The changes in our economy will be dramatic. The challenge facing policymakers is whether Australia will be proactive or reactive to these changes. In producing this report, Andrew Bragg and his colleagues have chosen to be proactive.

Sinclair Davidson and Elizabeth Morton are both at the RMIT Blockchain Innovation Hub.

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