Last week, we discussed how just 5% or so of total Australian money exists as coins or notes. The rest is kept in digital form. This week, we thought we would talk a little more about that and examine a key difference between digital money and cryptocurrency as most people understand it.
While privately-traded cryptocurrencies are becoming more well known, they are unlikely ever to be used as ‘money’ in Australia. To understand why, it helps to understand what makes money, money.
The Reserve Bank of Australia defines money as something that is a:
- widely accepted means of payment;
- A unit of account; and
- A store of value.
This definition means there can be more than one form of money used in a community. Anything that meets each of these three parts of the definition can rightly be called ‘money.’ In the early days of European settlement in Australia, there were many different forms of money used. One of these was bottles of rum. Even today, in places such as prisons where Australian dollars are not present, other forms of money may be used – cigarettes being a common one.
While there are many potential forms of money, the same cannot be said for ‘legal tender.’ Legal tender is a very specific form of money. The RBA defines it as:
“a form of payment recognised by the legal system such that, when it is offered (‘tendered’) in payment of a debt, the debt is legally discharged (i.e. the creditor cannot refuse a legal tender and then later pursue the debtor in court for the debt).”
In Australia, only Australian dollars ($As) are legal tender. That is not to say that two parties to an agreement cannot agree to use something else. But it is to say that $As are the only things that creditors must accept as payment if offered.
This legal authority comes about through Government legislation and is one of the main impediments to something like cryptocurrency becoming widely used as money: creditors are not obliged to accept cryptocurrency in payment of debts that are owed to them. It is not ‘legal tender.’
The other thing stopping cryptocurrency becoming a widely accepted form of money is that it cannot be used to pay tax. Only $As can be used to pay tax. Taxation is the reason why, in developed countries like Australia, there tends always to be a single dominant form of money. Our dominant form of money is $As and this is because $As are the only money that people can legally use to pay their taxes. You cannot pay your taxes in cryptocurrency, or cigarettes, or bottles of rum. You must always pay tax using $As.
This means that even transactions that do use something other than $As must be ‘translated’ into $As before tax is paid. For example, if I own a unit in Sydney and you own one in Melbourne, we could simply decide to swap these assets. However, the Australian Tax Office will be alerted to the transfer of the titles and will then insist that we establish an $A value for the transaction. This $A value will then be used to calculate any tax liability. It will also be the basis of stamp duty at the respective Titles Offices, etc.
In Australia, when we exchange anything there is usually a taxing point not too far away. When we buy people’s labour they usually have to pay income tax; when we buy goods and services the seller usually has to pay GST on the transaction; when we transfer land ownership stamp duty needs to be paid. In a nutshell, when a valuable transaction takes place, at least one ‘taxpayer’ is created.
You can see how much of a hassle it would be for each of these taxpayers if they were constantly using multiple different forms of money. Each time there was a transaction, they would need to convert the transaction into $As in order to calculate their tax liability. Once or twice this is probably OK. But after a while it simply becomes easier to conduct the transaction in $As in the first place.
So, $As are the only legal tender and the only thing you can use to pay tax. What’s more, the only body in Australia that is legally allowed to create new $As is the Commonwealth Government. This gives the Government a lot of control over the way we live – which is generally seen as a good thing in a liberal democracy like ours. This control is why you should not expect any other currency to take the place of $As any time soon.