Blockchain Can Boost Governments’ Tax Systems: U.K. Crypto Sector

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By Ben Stupples

The technology behind the online logbook that underpins the global digital currency framework can improve governments’ tax systems, according to U.K. crypto businesses and trade groups.

In written evidence to U.K. lawmakers as part of an ongoing inquiry into digital currencies, the London-based companies and associations cited that distributed-ledger technology can both simplify and raise the transparency of tax collection.

“Through the distributed-ledger technology (DLT) behind them, cryptocurrencies can be accurately traced through to their origin,” CryptoUK, a trade body representing some of Britain’s leading crypto companies, said in its written submission. “This offers great opportunity for eliminating fraud and improving the transparency of tax calculation and collection in a way that is impossible with cash.”

The written evidence was published in May in the lead-up to a Treasury Select Committee July 4 evidence session, also part of the inquiry it launched in February.

Similarly, consulting business Cryptonomy said the technology can “reduce the overheads and increase the simplicity of orchestrating tax collection and filing for both government and citizen.”

Light Touch Regulation?

The U.K. wants to approach regulating cryptocurrency in the same way it has regulated other areas of the financial-technology sector, David Raw, the U.K. Treasury’s deputy director for banking and credit, told lawmakers in the July 4 evidence session.

“We don’t want to stifle innovation, particularly in relation to the underlying technology” of digital ledgers, he said. “Quite a lot of countries around the world are in exactly the same position of trying to understand the benefits, trying to understand the risks,” and then “map out exactly where the regulatory perimeter it,” he added.

Origins of Blockchain

Blockchain is the digital public ledger that securely records cryptocurrency transactions, increasing record-keeping transparency.

Like bitcoin, the flagship cryptocurrency, blockchain emerged after the 2008 financial crisis as part of a payment system that is independent from central banks and governments.

The rise in value of cryptocurrencies like bitcoin, meanwhile, soaring from 1 cent to $16,000 per bitcoin from 2010 to 2017, has brought digital currencies to the attention of lawmakers across the globe.

However, amid the U.K. crypto sector’s efforts to highlight the benefits of blockchain, governments have expressed concern about the lack of regulation and relative anonymity around cryptos.

In March, the Group of 20 countries said cryptocurrencies pose risks for tax evasion and money laundering.

More recently, a July 5 European Parliament report echoed these concerns, commenting that regulators have become increasingly concerned about criminals using them to finance illegal activity.

“The key issue that needs to be addressed is the anonymity surrounding cryptocurrencies,” the report said. The relative anonymity of cryptos “prevents transactions from being adequately monitored, allowing shady transactions to occur outside of the regulatory perimeter,” it added.

Targeting Tax Avoidance

Along with enhanced transparency and reduced complexity, the U.K.’s crypto sector has also cited how the distributed-ledger technology behind blockchain can target abusive tax planning.

As transactions on the blockchain are public, the distributed-ledger technology brings “a level of certainty” for seeing tax abuse in this area, Cryptonomy said in its submission. “Tax avoidance monitoring can be achieved by a government agency scanning the data on the blockchain or DLT in real-time.”

Likewise, the technology can enable “public audit of spending and taxation, reducing opportunities for waste and the potential for corruption,” the Electronic Money Association said in its evidence.

‘Transformative Potential’

Within Europe, the U.K. Treasury responded early to the emergence of bitcoin and blockchain, issuing a call for evidence on digital currencies in 2014. The same year, the U.K.’s tax agency said in its first guidance on the matter that it would review the taxation of cryptos on a case-by-case basis.

Responding to its call for evidence, the U.K. Treasury noted in March 2015 the tension between how cryptos offer enhanced privacy and how the digital ledger that supports them gives more transparency. It also identified early concerns around the abuse of cryptos for tax evasion and money laundering.

More recently, the U.K. government set up a crypto task force in April to explore the potential benefits and challenges of digital currencies, with a report on its findings due before the end of September.

The U.K. will also introduce into domestic legislation the European Union’s Fifth Anti-Money Laundering Directive, introducing closer regulation of crypto exchanges and wallet providers.

The government plans bring the directive into law by the end of next year and will consult on how it does so in 2018, Raw said in the July 4 evidence session.

To contact the reporter on this story: Ben Stupples in London at bstupples@bloombergtax.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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