What are bitcoins?

Bitcoins are a category of digital currency or crypto-currency that has been developed as an alternative to traditional currencies. The electronic money does not physically exist and is not issued through a central bank. It is a virtual currency that is used to buy goods and services online without incurring large transaction fees or charges. Bitcoins are recorded through the "Block Chain", which is a public ledger that records every holder of every bitcoin ever in existence. Every transaction is broadcast to the Block Chain, so any ownership claim can be verified (although owners can remain anonymous).

Because there is no central bank with responsibility for monetary policy, the supply of bitcoins is constrained through a process known as 'mining'. Bitcoin miners must run sophisticated algorithms in order to add more blocks to the Block Chain and unlock the remaining supply of bitcoins. There will only ever be 21 million bitcoins issued – as at February 2015, slightly less than 14 million are in circulation.

ASIC's website, 'Money Smart', finds that these currencies were an attractive option to users because they allow the user to remain anonymous. However, the fact that it is not guaranteed by any bank, makes it more volatile and it may not be accepted in many places. Additionally, the anonymity of the currency exposes it to the risk of being used for money laundering and other illegal activities.
Read more about virtual currencies and the risks involved with dealing in them here.

Senate inquiry into digital currency

In December 2014 ASIC made a submission to the Senate inquiry into digital currency. The submission discussed whether or not digital currencies, such as bitcoins, are a financial product. ASIC ruled that digital currencies do not fit within the current legal definition of a 'financial product' and therefore an Australian Financial Services Licence (AFSL) is not required to deal in the products.

ASIC also considered the regulation of facilities associated with digital currencies, such as those which enable the use of a digital currency to make payments. ASIC found that these facilities may be a financial product that is regulated by ASIC, but this will depend on how the facility works and its particular terms.

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