By Jame DiBiasio
Whatever your view of crypto-currencies, there is no question that they enable a great number of users to engage in the Seven Deadly Sins. Cryptographic money is being exchanged, often via dark-web connections, in order to:
- Commit fraud
- Sell narcotics
- Traffic people
- Hire assassins
- Finance terrorism
- Dodge sanctions (e.g. North Korea)
But among these sins, it’s the seventh that will really drive regulation:
- Evade tax.
China got our attention by banning ICOs and bitcoin exchanges. As the biggest source of both mining and trading of Bitcoin, this will deprive that specific currency of the network effect it relies on. Perhaps this will prove fatal, or maybe it just means activity will shift to Japan, the U.S. or other places.
China’s priority is to maintain social stability, as defined by the Communist Party. To that end, it takes capital outflows very seriously. There was no way Beijing was going to allow mass, private, unchecked capital movements via digital assets.
Similarly, there is no way that the U.S. or other governments are going to allow mass, private, unchecked capital movements that go undeclared and untaxed.
The power of governments
China has the means to stamp out mass outflows (while probably keeping a window open for elites’ own affairs). Similarly, the U.S. has the power to begin regulating crypto as taxable assets.
FATCA, the Foreign Account Tax Compliance Act, came into effect in 2010. It gives the Internal Revenue Service coercive power over offshore licensed financial institutions to report any activity involving U.S. clients, or U.S. assets.
Moreover, many developed countries assign individuals and companies taxpayer identification numbers (TINs).
Core infrastructure is therefore in place there for enforcing people to declare digital transactions and pay capital gains or income tax on them, should developed countries make this a priority. As long as crypto-currencies still need to ultimately convert in and out of paper fiat money, governments will have a means of enforcing taxation.
Libertarians and crypto-utopians may chafe at this, but I think this is actually good news for the ultimate spread and conquest of digital assets.
Crypto currencies are not going to enjoy widespread consumer and merchant take-up until regulators and banks accept it. And that will happen when these things come under a proper regulatory and tax footing.
Helping crypto-currency gain traction
For ICOs, the U.S. Securities and Exchange Commission set the pace by outlining conditions in which they would be regulated as securities – conditions that Singapore and Hong Kong quickly emulated. This doesn’t eliminate scams in token sales, but it begins to define what is acceptable. It is a step towards driving the worst practices to the edges of the market, and attracting liquidity to the most reliable jurisdictions.
For broader use of Bitcoin for payments, Japan has been the pacesetter. Official blessing has given its banks the green light to accept, and encourage, consumer and merchant use of Bitcoin. The Financial Services Agency has begun to license crypto-currency fintechs. I expect Japan to see greater use of digital currencies for payments.
Better regulated markets will attract innovators. The future technologies that link markets seamlessly will be developed where usage is greatest. China is going to miss out on this, although it could reemerge as a crypto powerhouse if it establishes a viable digital renminbi; it also has a track record of using protectionism to develop unique conditions for other internet technologies.
I don’t know if Bitcoin per se is going to survive, or flourish as ‘digital gold’, no more than I can tell how other crypto-assets will fare. But Bitcoin is better than gold because of its ease of transfer and global access, and that is true whether or not it’s done in total secret. For crypto-currencies to thrive, though, there’s going to be a tradeoff: taxation for scale.
Jame DiBiasio is co-founder and editor of DigFin.