he anonymity of payments using digital currencies make them attractive for terrorism financing, according to Australia's financial intelligence agency, AUSTRAC, which is co-hosting a counter-terrorism financing summit with Indonesia in Bali this week.
Justice Minister Michael Keenan will inform the summit of the work Australia is doing to improve its anti-money laundering and counter-terrorism financing legislation after a review recommended the regulation of digital currencies
"The report … recommends strengthening an already robust legal framework to respond to new and emerging threats," Mr Keenan said.
"The government is committed to facilitating growth and innovation in this sector and appropriate anti-money laundering and counter-terrorism financing regulation will aid that development."
The AUSTRAC report, Terrorism Financing in Australia 2014, said electronic, online and new payment methods posed an emerging terrorism financing risk, which was likely to increase over the short term as use of these systems grew.
"Terrorist groups engaged in radicalization, recruitment and communication online (such as through social media) are a particularly high risk of using online payments systems and digital currencies," it said.
"Prepaid travel money cards (a type of stored value card) have also been used to transfer funds offshore for terrorism financing."
AUSTRAC's acting national manager of strategic intelligence and policy, Brad Brown, said there were examples of the misuse of bitcoin globally.
He pointed to Mt Gox, a defunct bitcoin exchange in Tokyo where bitcoins worth hundreds of millions of dollars went "missing", and Silk Road, a now closed online black market that sold illegal drugs.
"I think it's important to regulate where there is a potential risk of abuse of money laundering and terrorism financing," Mr Brown said
The statutory review of the Anti-Money Laundering and Counter-Terrorism Financing Act, which Mr Keenan tabled in Parliament on April 29, recommends the act be amended to regulate activities relating to digital currency.
It also recommends the definition of e-currency be broadened to include digital currencies such as bitcoin that are not backed by a physical asset.
"While digital currencies have undoubted legitimate uses, the transfer of convertible digital currencies can occur without passing through the formal financial sector," it says.
"This provides another tool for criminals and terrorist financers to move and store illicit funds beyond the reach of law enforcement and other authorities and purchase illicit goods and services."
In 2014, Canada became the first country to regulate bitcoin and other virtual currencies under its anti-money laundering and counter-terrorism financing laws.
Under the legislation, digital currencies are subject to the same record keeping, suspicious transaction reporting and verification as other money services businesses.
However, many countries do not have proper regulatory frameworks for digital currencies.
Last month a Florida judge dismissed a money-laundering case involving an alleged illegal sale of bitcoins on the grounds the digital currency was not real money under the laws of the state.
In 2014 the Australian Tax Office designated bitcoin as an "intangible asset" rather than a currency, making it subject to GST. This led to several bitcoin start-ups leaving Australia.
However, in March Treasurer Scott Morrison said digital currencies such as bitcoin would be exempt from GST.