april 2015 australian senate inquiry submission€¦ · we are still the only mobile money platform...

mHITs Limited | Level 1 Melbourne Building 43-45 Northbourne Avenue Canberra City ACT 2601 Australia

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April 2015 | mHITs Limited | Senate Inquiry into Digital Currency

April 2015

Australian Senate inquiry submission

mHITs Limited

www.mhitslimited.com

mHITs Limited submission to the Australian Senate Inquiry into Digital Currency

Digital currencySubmission 48




9 April 2015

Senate Economics References Committee

CIO Senate Standing Committees on Economics

PO Box 6100

Parliament House

Canberra ACT 2600

Phone: +61 2 6277 3540

Fax: +61 2 6277 5719

Email: [email protected]

RE: Inquiry into Digital Currency

Dear Chairman Dastyari, Deputy Chairman Edwards, and Members of the Committee,

We thank you for the opportunity to provide this late submission to the committee. In part this

submission has been prompted by evidence given in the recent hearings and the particular interest

shown by the committee the application of crypto currency in cross-border remittance (or international

money transfer).

mHITs is an Australian based multi-award winning global pioneer in these fields and felt therefore

compelled to provide a submission to the committee. Furthermore, the interest shown by the

committee in mobile money services for the unbanked such as M-PESA in Kenya (with whom we work

with closely) and the emerging area of cross-border remittance to these mobile money services,

further motivated us respond.

mHITs has a long and well documented history in Australia of developing innovative, disruptive mobile

and digital payment services. We are still the only mobile money platform in Australia and the only

bank and mobile network independent mobile money service operator in the Pacific region. Despite

facing resistance by some sections of the mobile, banking and payment industry, we have persevered

and are now a global leader in the field of international mobile money transfer. We also have

experience in dealing with regulatory frameworks around new technology and new types of payment

instruments.

The structure of our submission is essentially an open whitepaper highlighting the importance and

application of digital currencies in our area of expertise. Our core recommendations are made at the

end of the submission.





Again we thank the committee for their work in this important area and look forward to hearing of its

recommendations in due course.

Your Sincerely,

Harold Dimpel

CEO

mHITs Limited





contents

contents 4

introduction 5

crypto currencies and the blockchain 6

the mHITs Australia mobile money service 6

remittance – the hidden force in global economics 7

cost of funds and the opportunity for crypto currencies 9

crypto currency price volatility no different to normal FX 9

crypto currencies as an irrefutable source of funds 10

crypto currencies and remittance for the unbanked 11

stigma of suspicion associated with crypto currencies 12

current ATO draft tax ruling for crypto currencies unworkable 13

digital currencies foster new innovative business models 13

regulation needs to foster fintech innovation 14

summary recommendations 15





introduction

mHITs (pronounced Em-HITS) is a multi-award winning Australian developer and operator of mobile

payment services. In Australia, mHITs operates the mHITs SMS mobile money payment service that

allows consumers to send and receive low value payments by SMS text message. mHITs is also

working in emerging markets in the design, deployment and operation of mobile payment solutions for

the so called “unbanked” (people who do not have access to traditional banking services).

Use of the mobile phone as a payment device is acknowledged as a logical payment solution for the

unbanked as people in developing countries often lack the formal identity requirements that traditional

banking services require such as a birth certificate, formal address or regular employment or income.

The lack of bank branches, volatile financial sector, limited number of ATM’s, limited access to the

Internet and the general low level of financial literacy in developing countries are contrasted by the

large-scale uptake of mobile phones in these same markets.

mHITs has received multiple awards for innovation both within Australia and Internationally. For more

details visit www.mhitslimited.com.

vendor work in international markets

mHITs is also an emerging exporter working in overseas markets in the design, development and

operation of mobile payment and applications. In particular, mHITs focus on solutions in the

developing world for the so-called “unbanked” or people who do not have access to traditional banking

products or services. In particular, the award winning mHITs BuyPower mobile prepaid electricity

vending service has deployed in PNG and Namibia with more deployments planned.

Depending upon the market and the product, mHITs products are deployed under our own consumer

facing brand or under a vendor model where the service is promoted by the end customer – usually

the mobile network operator.

Globally and across all mobile platforms and deployments, mHITs technology has processed in

excess of 20 million mobile transactions to date.

Examples of products, services, deployments and case studies in these markets can be found at the

mHITs corporate website at www.mhitslimited.com.





crypto currencies and the blockchain

mHITs notes that numerous submissions have already covered in detail the technology and operation

of crypto currencies and the blockchain. It is therefore also assumed that the Committee is familiar

with the Bitcoin ecosystem including the role of exchange for on-ramping and off-ramping Bitcoin, the

role and operation of Bitcoin wallets, the speed and efficiency in which value is transferred within

crypto currency ecosystems and the transparency of the “open ledger” nature of the blockchain. This

submission will therefore not cover these areas and assume that the Committee is familiar with these

concepts.

the mHITs Australia mobile money service

mHITs operates Australia’s first and only bank and mobile operator independent mobile money service

launched in 2005. The service allows consumers to send and receive low value payments simply by

sending an SMS text message. The mobile number is used as the account number and the service

does not require a smartphone, app or internet capable mobile handset to use. The service is

ubiquitous – meaning it will operate on any mobile phone.

The mHITs mobile money service operates in a similar way to the M-PESA service in Kenya with the

key difference being the way funds are moved in and out of the system. As it operates in a highly

banked economy, the mHITs mobile money service does not rely on an over-the-counter agent

network for user registration, loading or cashing out funds. Instead, users register online and transfer

funds to their mHITs mobile money account via the Australian banking system using BPAY or Internet

Banking.

More information on the mHITs Australia mobile money service is available at www.mhits.com.au

mHITs Remit mobile international remittance

While we have launched a number of products and services over the years on the mHITs Australia

mobile money service, our main focus now is mobile international remittance. We have through very

complex bilateral partnerships, connected our Australian mobile money service to overseas

counterpart mobile money services – all in developing countries. This essentially allows people in

Australia to use their mobile phone to directly and instantly send money to friends and family overseas

simply by sending an SMS text message.





Current receiving mobile money services include M-PESA in Kenya, Globe GCASH and SMART

Money in the Philippines, MTN Mobile Money in Ghana, Indosat Dompetku in Indonesia, Telesom

ZAAD in Somaliland, eSewa in Nepal and Vodafone M-PAiSA in Fiji.

Funds are transferred instantly and do not require a transfer agent or bank.

The mobile remittance service known as mHITs Remit was the first model of its type in the world when

launched in August 2012. mHITs is now developing relationships with global mobile money operators

to expand the receiving market footprint with over 15 new markets expected to be added in the next 12

months.

Mobile remittance is far more efficient than traditional bank remittance as it is optimized for low value

remittance transfers with an average amount of around $200. This amount is simply too low to be

economically processed by the current banking network using the global SWIFT network.

The mHITs Remit service is aimed at low value, low risk personal remittance transactions – so called

micro-remittance. Indeed, multiple transaction limits apply at both the sending and receiving sides of

the ecosystem along with a complex transaction monitoring process to identify suspicious

transactions.

Each mobile money service is licensed by the central bank within the relevant jurisdiction and must

observe strict AML/CTF rules as required by local legislation and regulations. This also includes

mHITs who is an AUSTRAC registered independent remittance operator.

mHITs is also a founding member of The Australian Remittance and Currency Association (ARCPA)

who are working closely with government, banks and industry to ensure best practice compliance with

Australian regulation for money transfer businesses.

For more information on the mHITs Remit service see www.mhits.com.au/send-money.

remittance – the hidden force in global economics

Remittance is the hidden force in global economics. According to the World Bank, in 2014, over

US$640 billion was sent in remittance globally. By comparison, global foreign development aid was

less than a quarter of this amount at approximately US$135 billion.





Unlike foreign aid, remittance ensures funds are sent directly to individual people who need it and can

benefit from it the most. In many emerging markets, a significant % of GDP is from inbound

remittances.

Generally, remittances flow from wealthy countries to poorer countries. It is not uncommon for whole

communities to be supported by one family member working overseas and sending money home.

As was outlined by DFAT during the hearings, the majority of recipients of remittance are unbanked or

do not have access to a bank account, meaning they cannot use the formal banking system for

remittances. Instead they are required to use Money Transfer Operators such as Western Union who

due to their monopoly position in many emerging markets, traditionally charge very high fees.

However, these same recipients do have a mobile phone and in many cases have a mobile money

account linked to their mobile phone number. This means that for the first time, funds can be sent

directly to these recipients without the need for a bank or money transfer agent. This means the cost

of remittance could potentially be reduce by half the current rates on average.

As DFAT advised, services such as mHITs are providing a facility where banks and other providers

simply cannot. mHITs Remit provides an essential lifeline to many communities which in some cases

have no other form of receiving funds. It is therefore critical that this sector be allowed to continue to

innovate which includes the use of crypto currencies as a potential payment method and source of

funds.

Traditionally, the transaction fees applied to international remittance are in the order of 10- 20% of the

transaction amount. This increases to around to 40% when amounts are below $100. This is mainly

due to the inefficiency of the banking sector in facilitating cross-border transfers and the number of

stakeholders required to facilitate a transaction.

The mHITs Remit service allows for the first time amounts as low as $50 to be sent instantly and

efficiently with fees as low as $5.50 per transaction. This is achievable only through the use of digital

payment technology such as mobile money and removing the traditional bank and agent network

structures.

Please note, physical funds settlement between Australia and receiving countries still occurs via the

banking system only the settlement transfers are massively aggregated to reduce costs, savings which

are then passed on to customers.





cost of funds and the opportunity for crypto currencies

All remittance businesses must receive funds from customers. Traditionally this includes over-the-

counter cash, electronic funds transfer, BPAY, and also card payment. Each of these funding sources

come with a degree of risk and cost.

An important aspect which may not have been addressed in the inquiry is the cost of funds and how

crypto currencies address this issue. By cost-of-funds, we mean to receive or hold money or indeed

any other form of stored value, there is a cost to this process. Traditionally this cost is highest for

cash but the same cost of funds principle applies also for electronic money and crypto currencies.

Typically, the real cost of funds for a remittance operator is between 1 and 2% of the amount.

Depending upon the amount, this can increase to between 3 and 4% if the funds are drawn from a

credit or debit card.

Crypto currencies generally provide a lower cost of funds due to their increased efficiency. Inherently

Bitcoin for example can be transferred at no cost. In practice however, crypto currencies are not

completely immune from the cost-of-funds predicament. Crypto currency exchanges which facilitate

the exchange of crypto currencies for fiat currency do charge transaction fees. Volatility of crypto

currency values can also add some cost however in practice when used as a transactional payment

instrument (rather than a speculative investment product), from a customer perspective, crypto

currencies offer a lower cost payment medium than traditional electronic money transfer alternatives.

In summary, while a holder of crypto currency may pay a small cost to exchange their fiat currency for

a crypto currency, these costs are still vastly lower than those applied by traditional banking products

and services in particular when compared with card surcharges and foreign exchange margins applied

by banks.

crypto currency price volatility no different to normal FX

A frequent concern is the perceived price instability of crypto currencies. In practice, the market price

volatility for crypto currencies is no greater than other normal fiat currency pairs or other commodity

items such as gold, silver, copper or even ion ore. In an open market, while a central bank may

intervene to attempt to prevent a currency fall, in practice nothing can prevent large market swings in

any currency or commodity if the market lacks confidence in it. As an example, even the Australian

dollar has dropped by over 20% to the US dollar over the last 6 months.





Crypto currency price volatility is a risk mainly for speculators who hold large amounts of crypto

currencies for capital gains. While holders may gain from price increases, they are also exposed to

potential losses. This in many ways is no different to normal commodity trading in the open market.

As a transactional payment instrument, provided adequate settlement and hedging strategies are

used, the price volatility of crypto currencies is in practice no different to regular online trading where

prices are set according to a particular currency (e.g. USD). For crypto currencies, the volatility risk is

rests mainly with the business accepting crypto currency for payment as they are likely to hold a larger

amount as opposed to an ordinary user who would be likely only to hold enough for personal use.

crypto currencies as an irrefutable source of funds

By far the greatest interest for the use of crypto currencies for online and digital businesses is its

irrefutability – the non-reversible nature of the payment transaction.

Card-based payment products operated by banks are a very insecure form of online payment having

never been designed for use on the Internet. Numerous attempts at securitising card transactions

have been attempted (including tokenization) but fraud can never be eliminated altogether.

Unfortunately, due to the ubiquity of card products in many OECD markets, the majority of global

commerce relies on cards products issued by banks. Fraud is simply managed as a cost of doing

business online.

Furthermore, online card transactions are generally subject to escrow provisions and transactions can

be reversed by a bank – so called charge-backs. This charge-back exposure is levied on the business

(merchant) who in most cases has no option but to accept these transaction losses. These losses

become highly significant for businesses which ship or deliver digital goods and services instantly,

online or in the case of remittance, send funds overseas as there is usually no recourse to ever

recover the product and/or the funds.

Online businesses accepting card payments have little or no recourse for recovery of funds and

ultimate liability for losses are borne by the business (merchant) who must wear directly losses due to

bank and card fraud. Interestingly, banks often do not classify charge-backs as a fraud or a loss as

they are not directly out of pocket – funds are recovered from the merchant. In practice, the REAL

value of fraud due to charge-backs is much higher than that reported as many businesses to not report

these losses due to the embarrassment caused.





Crypto currency transfers however, are irrefutable (non-reversible) and immune from charge-back

exposure. The very design of crypto currencies mean that once a recipient has funds, the transaction

cannot be reversed. Any “reversal” must occur by way of a new transaction from the receiver of the

funds to the original sender.

This charge-back immunity means crypto currencies are ideal for low value, real-time, digital content

and other online businesses but also as a low cost source of funds for money transfer operators.

Accepting payment via crypto currency represents one of the most secure forms of payment unrivalled

only by cash, which of course is impossible for an online business.

For a remittance business, low operating margins mean security and integrity of received funds is

critical. In most cases, this means card payment cannot be accepted. In this context, crypto

currencies represent a secure irrefutable form of electronic funds transfer. Notwithstanding the need

to ensure appropriate KYC/AML/CTF compliance when accepting crypto currencies as payment, the

reduced costs, reduced risks, and increased efficiency of crypto currencies can mean potential

savings could be passed to customers. This could manifest in further reducing the cost of remittance.

However, the tax treatment of crypto currencies is critical to their potential use as a funding source.

Applying GST to crypto currencies or any similar form of double taxation means that their use as a

secure low cost payment method in Australia will be impossible.

crypto currencies and remittance for the unbanked

There has been some discussion on the use of crypto currencies as a method of end-to-end cross-

border remittance – in particular to emerging markets. By of example we mean that a person living in

country A sends Bitcoin directly to a person living in country B.

It is our view that this application of crypto currencies to cross-border remittance is unlikely to be

successful in the short term. This is primarily because of the complex on-ramp and off-ramp

processes required at the sender and receiver sides to exchange crypto currencies for respective fiat

currencies and the associated costs. In practice, people receiving remittances need to purchase goods

and services in cash. Without a sophisticated ecosystem which supports ubiquitous spending of the

crypto currency in the receiving market, receipt of remittance via crypto currency would almost

certainly need to be able to convert the crypto currency to cash in the fiat currency.





While this processes may be somewhat easier in highly banked OECD markets via ATMs etc,

emerging markets which represent by enlarge the recipient of remittances still have an unclear

regulatory approach to crypto currencies making their widespread use limited.

Furthermore and more importantly, recipients of remittance generally are unbanked and do not have

access to a PC, the Internet or a smartphone which are necessary to receive a crypto currency

payment.

This combination of demographic, regulatory and technology miss-match are the main hurdles for end-

to-end crypto currency remittance adoption and success. However, this does not take away from the

fact that crypto currencies can still be used as a source of funds for remittance transactions in a

particular sending market. For example BitPesa (www.bitpesa.co) in Kenya presently use this

approach to provide remittance services between the UK and Kenya.

It is our view, crypto currencies alone not likely to be used directly for cross-border remittance for the

unbanked in the short term.

stigma of suspicion associated with crypto currencies

There is a subtle but significant “stigma of suspicion” associated with crypto currencies and in

particular use of crypto currencies for remittance. There is a community perception that both

remittance and crypto currencies mysteriously represent a suspicious activity that warrants a special

high degree of oversight and scrutiny. This perception is simply incorrect and unhelpful in the

development of new technology and services aimed increasing the remittance efficiency and reducing

costs.

As is evidenced by many studies, remittance is an essential part of global commerce. While there

most certainly isolated incidents of money laundering, terrorism financing and regulatory non-

compliance, this is not limited to the remittance and crypto currency sectors alone. Infact, by far the

largest and most serious breeches occur within the regular banking sector. Several large compliance

breeches which (indirectly) facilitated money laundering activities by organized crime have occurred in

the last few years for a number of major global financial institutions including some Australian banks.

We feel that some banks and payment industry members and their business models are threatened by

crypto currencies by both denying and misrepresenting the opportunity they provide and overstating

the risks.





The coupling of crypto currencies with remittance as previously outlined has the potential for

benefitting consumers through increased security, increased efficiency and also the potential for

significant cost savings. We are concerned that undue over regulation of crypto currencies may create

an impression of miss-trust in this technology thereby killing innovation, benefits, and potential savings

their use could bring to consumers.

current ATO draft tax ruling for crypto currencies unworkable

The current draft tax ruling by the ATO in respect of crypto currencies is unworkable for businesses

seeking to accept payments via these methods. Effectively the draft ruling will mean Australia will be

globally disadvantaged forcing some Australian technology company’s to locate overseas or simply

close.

Indeed, the present draft ruling will mean the use of crypto currency as a low cost source of funds for

remittance transactions will be impossible.

Furthermore, the current draft ruling will mean mHITs may also be forced to relocate overseas should

we seek to expand our current service offering to include a global sending presence other remittance

(sending) markets as crypto currencies will likely feature as a major source of funds for this future

model.

digital currencies foster new innovative business models

In February, mHITs launched BitMoby, the worlds fastest and easiest way to buy international mobile

top-up (prepaid credit or airtime) using Bitcoin.

For more information on the service see www.bitmoby.com.

The BitMoby service provides one of the simplest and easiest methods of purchasing mobile top-up

available with an unrivalled user experience. Users simply send Bitcoin to a Bitcoin wallet address and

the BitMoby service automatically credits the mobile number with the top-up value requested. There is

no user registration and the transaction process requires only one step to execute. The BitMoby

service can also be used to purchase mobile top-up for a third party.

BitMoby is an example of how digital currencies such as Bitcoin can be used to demonstrate a highly

efficient integrated transaction process where the payment instruction itself can uniquely identify the





transaction and incorporate payment information. This innovation simply cannot be achieved via

existing card-based technology. This means that no shopping cart or checkout process is

required, providing for a simple, fast and efficient user experience.

BitMoby is a global service servicing over two hundred counties and over 400 mobile network

operators. The viability of the BitMoby service is directly under threat from the current draft ATO ruling

due to the double taxation issues.

regulation needs to foster fintech innovation

Any new regulation needs to foster the development of Australian fintech – not block it. As a

disruptive fintech business, we have had our share of challenges in the market. This has led us to us

exporting to emerging markets where the application of our technology is more suited.

Our experience with regulators and some aspects of the banking sector is such that we know the

current oligopoly means there is very little payment innovation by Australian banks. In an oligopoly

there is also little incentive to innovate when priority is mainly around protecting core business

activities, preserving market share and improving shareholder returns. Lack of competition further

breeds inefficiency.

By definition new and emerging fintech startups including mHITs represent a potential threat to the

status quo. In our 10 years of operation, we have observed the reluctance of Australian banks to

embrace innovation outside the comfort of core business products of lending, cards and insurance.

Transactional banking and mobile payments including use of crypto currencies do not represent core

business for banks – they are a reluctant byproduct of the banking sector needing to facilitate

movement of funds between customer accounts.

The Australian Government has a responsibility to provide a framework and a supportive environment

for new technology and innovation. This is especially important given the banking sector in Australia

does not naturally innovate beyond core business. The high risk required for new business models

and technology is diametrically apposed to the low risk philosophy projected by banks. Indeed this is

evidenced by industry failure to implement the New Payments System – requiring the Reserve Bank to

intervene and implement the service.





summary recommendations

mHITs encourages the government to take a “wait and see approach” to regulation of crypto

currencies in Australia. The market capitisations of crypto currencies are still very small and therefore

do not at present represent a threat to the stability to the Australian financial system.

In this context, it would be prudent to not overly regulate crypto currencies. This would allow

innovation and experimentation in the sector to develop and evolve. Over regulation will have the

effect of dis incentivising the development of new business models and potentially rob Australia of the

development new technology and services.

We believe the existing Australian regulatory framework is sufficient to ensure stability within the

financial sector whilst also proving for the development in fintech innovation in crypto currencies.

However we specifically oppose the draft ATO ruling deeming Digital Currencies as a commodity,

good or service subject to GST. If this draft ruling is legislated, it will likely prevent mHITs from

working with crypto currencies in Australia.

mHITs also fully supports the ADCCA submission to the inquiry on all counts, specifically:

1. the adoption of its self-regulatory model for Digital Currency proposed by the ADCCA in line

with their Code of Conduct.

2. deeming Digital Currencies as ‘currency’ for tax treatment purposes, not a commodity, good or

service subject to GST.

3. amending the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF)

to specifically include Digital Currencies and take a more technology-neutral approach.

4. recommend giving Digital Currency businesses access to the Document Verification Scheme

in order to better facilitate Know Your Customer (KYC) operations.


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