Crypto tax evasion; Bitcoin: Asset or Currency; Investors Bullish


The Blockchain Bitcoin & Crypto Weekly CXO Briefing is all you need to know, each week, jargon free for CXO level business leaders and investors who will use this technology to change the world. Each week we select the 3 news items that matter and explain why and link to one expert opinion.

For the intro to this weekly series, please go here.

News Item 1: US Department of State Concerned Over Use of Cyber Currencies in Costa Rica for Money Laundering

Decrypted: Every year, over $4 billion is laundered in Costa Rica, where a high degree of financial openness combined with the country’s growing role in the regional drug trade has created conditions ripe for money laundering.

The strong appeal of cryptocurrencies is that they are beyond the reach of governments and regulators. This certainly introduces issues related to money laundering and the facilitation of illicit purchases. In the traditional banking system, a government can unrightfully lay claim to the assets of an individual or organization and seize them at the bank level, preventing access.

A report by the US State Department outlines to Costa Rica’s vulnerabilities when it comes to organized crime and money laundering:

“Transnational criminal organizations continue to employ Costa Rica as a base for financial crimes due to limited enforcement capacity and its location on a key transit and operations route for narcotics trafficking.”

Since the middle of 2017, there have been government efforts to regulate the market. The majority of these efforts have been centered on KYC and AML regulations.

Our take: Money laundering is the process of making illegally-gained proceeds appear legal. Money laundering is huge and according to UNODC its estimated at 2–5% of global GDP, or $800 billion every year.

Countries like France, South Korea, the United States, and even Japan have also made efforts to improve the KYC and AML rules in operation in the crypto markets of their respective countries.

“Know Your Customer” (KYC) is the process of obtaining relevant identifying information about the customers of a service, like photo id, bank accounts or credit card information, utility bills etc. Through of KYC, a service can limit access and disqualify people from gaining access.

“Anti Money Laundering” (AML), refers to a set of procedures, laws and regulations designed to stop the practice of generating income through illegal actions. AML regulations require institutions issuing credit or allowing customers to open accounts to complete due-diligence procedures to ensure they are not aiding in money-laundering activities. The mainstream financial ecosystem has been developed in such a way that there are numerous checks and balances that help prevent money laundering.

In the recent G20 meeting, Japan urge its counterparts to beef up efforts to prevent cryptocurrencies from being used for money laundering. While many of 20 finance leaders said some form of regulation would eventually be necessary for cryptocurrencies, some did not agree with this plan, as in the case of Brazil that said cryptocurrencies will not be regulated in the country. In the meantime, the G20 pledged to apply the standards of the Financial Action Task Force (FATF), an intergovernmental body formed to fight money laundering and terrorist financing to cryptocurrency.

The Financial Action Task Force (FATF) said that it will step up its efforts in monitoring the use of cryptocurrencies in money laundering. The global agency has not specified or has yet to put a concrete policy for implementation, but the meeting nonetheless signals growing attention from regulators over illicit uses of the cryptocurrency.

The European Parliament in conjunction with the European Central Bank passed a ruling in 2017 that introduced robust KYC and AML rules into the crypto market. The EU reached a political consensus on amendments to the 4th AML directive and, among other changes, introduced a definition of “virtual currencies”. Providers of exchange services between virtual and fiat currencies, and custodian wallet providers will have to comply with the AML directive.

South Korea’s financial regulator, the FSC enforced a complete ban on anonymous trading of cryptocurrencies to introduce a new ‘real name trading system’ wherein cryptocurrency traders are required to use their real names with their crypto accounts and their bank accounts. In essence, any new cryptocurrency purchases or withdrawals in fiat will require traders and adopters to comply with the new KYC rules.

South Korea, the United States, the United Kingdom, and the European Union have made KYC and AML rules an integral part of all cryptocurrency regulatory frameworks, but the truth is, money laundering and terrorism are not what really bother governments.

One of the selling points of Bitcoin is the fact that is completely decentralized and not tied to any central entities like banks or governments. But this is not exactly true. While there are ways to remain fully anonymous, while transacting inside the Bitcoin network, it is almost impossible to convert your coin into fiat currencies, without revealing your identity. While exchanges claim that your privacy is their priority, if they are issued a court order to hand out your transaction details, they will.

The real reason that governments dislike cryptocurrency is because it could be the perfect tool for tax evaders. Governments think that if people can avoid taxes, they will, and therefore any technology that supports this must be banned.

Governments will probably tax cryptocurrencies. With governments up to their eyeballs in debt, there may be an incentive to impose crushing taxes on cryptocurrency gains or capital gains taxes levied from exchanges.

As long as governments can find a way to tax crypto then it will be safe, otherwise it may not be around too long. Like online gambling sites, the USA made it almost impossible to put money in or take money out. While taxes would severely delay the rise of cryptocurrencies, it would not halt the advance. Government’s best approach would be to adapt to this new technology and find a place in a new equilibrium. Time will tell whether we’re just at the beginning of this revolution or at the end.

News Item 2: Dutch Court Finds Bitcoin A Legitimate “Transferable Value”

Decrypted: Many people countries are debating on whether Bitcoin is an asset or a currency. The debate also took place the recent G20 summit in Argentina. However, an answer may have been found, after a Dutch court classified Bitcoin as a transferable value.

A court in Amsterdam found that Bitcoin possesses properties of wealth, following a civil rights case.

A Dutch court ruled in favor of a person who was owed 0.591 BTC according to the court documents. The claim was filed in a Dutch court by Mr. J.W. de Vries on 2 February 2018 against Koinz Trading BV, a non-public company, which was previously ordered by a lower court of Midden-Nederland to pay mining proceeds in the amount of 0.591 BTC owed to the petitioner, or a penalty payment up to a €10,000 maximum.

Our take: The Dutch court ruling explicitly states that Bitcoin demonstrates all the characteristics of a “property right”, and hence a claim to transfer BTC under property rights is legitimate:

“Bitcoin exists, according to the court, from a unique, digitally encrypted series of numbers and letters stored on the hard drive of the right-holder’s computer. Bitcoin is ‘delivered’ by sending bitcoins from one wallet to another wallet. Bitcoins are stand-alone value files, which are delivered directly to the payee by the payer in the event of a payment. It follows that a Bitcoin represents a value and is transferable. In the court’s view, it thus shows characteristics of a property right. A claim for payment in Bitcoin is therefore to be regarded as a claim that qualifies for verification.”

While the Dutch court may have taken steps toward digital money being recognized as a currency, other organizations are not.

The G20 Financial Stability Board issued a document on March 20th that implied that it considers digital currency to be assets, rather than actual currency. The document says that digital currencies, “lack the traits of sovereign currencies.”

The court’s decision is significant as it sets a precedent for the recognition of contractual agreements for Bitcoin in future.

The possibility of having a monetary value and legal back gives the community a climate of tranquillity superior to that of previous years where the Bitcoin had a certain level of illegitimacy.. Also it is probable that governments all across the globe could recognize the potential use of digital assets in cases like this.

While a lot still has to be done to make cryptocurrency adoption easier, this ruling sets an example which other nations should follow. With assets like Bitcoin currently being treated at par with fiat currencies, things are certainly looking up for crypto at large.

News Item 3: Bitcoin falls back below $9,000 after Japan adds to regulatory uncertainty

Decrypted: Bitcoin fell below $8,400 on Thursday on news that the Japanese government was planning to tell Binance to stop operating in the country without a license.

The Financial Service Agency (FSA), Japan’s regulatory agency, issued a warning to the Hong-Kong based cryptocurrency exchange on March 23 and addressed to Binance CEO Changpeng Zhao.

Bitcoin, the world’s largest cryptocurrency, has faced downward pressure after hitting highs near $20,000 in mid-December as investors fear the impact of heightened government regulation on crypto markets around the world.

This news was first reported by Nikkei which also stated that if the crypto exchange fails to respond to the charges it might further face criminal charges from the agency.

Our take: Binance is one of the biggest cryptocurrency exchange operators in the world. News that Japan, one of the most active markets for digital assets, is taking actions on the exchange had an impact on Bitcoin and the entire cryptocurrency market.

Changpeng Zhao, the CEO of Binance, made a post on Twitter denying that the exchange received any mandates from the FSA and described Nikkei’s report as irresponsible journalism.

The Japanese regulator has taken a firmer hand to the market amid the Coincheck hack in January, which loss $530 million from theft. It conducted onsite inspections across 32 cryptocurrency exchanges in the country to determine if they are compliant with the procedures.

FSA has issued licenses to 16 exchanges. However, it permitted another 16 exchanges to continue operations while waiting for their applications to be processed. The FSA has ordered two exchanges, FSHO and Bitstation, to halt operations for a month because of improper management procedures. The financial watchdog has also ordered five exchanges to present a “security improvement plan” by March 22.

Japan has been a haven for cryptocurrency trading. It rolled out a system for licensing cryptocurrency exchanges, soon after it deemed Bitcoin legal tender within the country in April 2017. Being a crypto-friendly nation a lot of exchanges from China, which banned crypto trading last year, shifted their base to Japan. With the licensing system it introduced in 2017, it hoped to improve oversight and thwart the use digital currency exchanged for illicit activity such as money laundering, tax evasion and fraud.

Yet with all this going on, we are seeing an increasing number of positive voices that are coming out to support Bitcoin. Investors are turning again bullish on cryptocurrencies because they think it will increase in value even more with new things like Lightning Network coming to the market. Many of the enthusiasts are actually predicting higher peaks as well as newer peaks for the cryptocurrencies.

In an interview with The Times of London, Jack Dorsey, the CEO of Twitter and Square, expressed a strong belief in Bitcoin’s shot at outliving its growing pains in order to grow into a ubiquitous digital currency.

“The world ultimately will have a single currency, the internet will have a single currency. I personally believe that it will be bitcoin, probably over ten years, but it could go faster.”

The tightening grip of the market since the beginning of the year has caused the cryptocurrency market to struggle and has largely remain stagnant over the last three months.

Governments and regulators across the world have voiced concern about digital currencies, with China and South Korea already having implemented strict regulations on crypto-mining. Last week, Bank of England Governor Mark Carney slammed cryptocurrencies for causing a “global speculative mania”.

It remains to be seen whether Bitcoin will significantly increase in value by the end of this year, remain at these levels or drop even more.

Image Source

Ilias Louis Hatzis is a Blockchain entrepreneur who writes the Blockchain Bitcoin & Crypto (BBC) Weekly CXO Briefing each Monday.

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.