During the hearing on VAT fraud to which I gave evidence yesterday I was asked how tax authorities should respond to the threat from crypto-currencies.
My response was simple and straightforward. I suggested that crypto-currency users want all the benefits of the state but are too-often inclined to avoid the obligations that are owed to those states. In that case the solution is simple. In my opinion states should make clear that if a contract is intended to be or is settled using a crypto-currency that does not actually information exchange with tax authorities on the identity of those making use of its facilities then transactions involving that currency will be unenforceable in the law of that place, with that lack of enforceability impacting on all rights associated with the supply.
In other words, a person can use a crypto-currency should be able to do so, but not expect any of the rights the state endows when doing so. Third parties and tax authorities would, however, still retain their full rights arising from the transaction.
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Are you sure you understand cryptocurrency? How do you think a cryptocurrency itself can exchange information? It’s just a ledger.
Perhaps you mean “cryptocurrency exchanges”, but they are already subject to CRS reporting (the European ones, anyway).
The currency does not exist bar the exchange?
Do you understand how they work?
And I note you agree my suggestion is plausible
Since you didn’t answer, I’ll ask again: how can a cryptocurrency exchange information, when it’s just a distributed ledger?
A distributed ledger can be shared, by definition
And I did not answer as I have been ill
Your impatience is not attractive
Did you include an example of case which has gone to Court under the current rules? A complainant and defendant both wanting to be anonymous at the time of the trade, who had made a contract to exchange in bitcoin for some product, which wasn’t of merchantable quality or some other reason why one side wanted to sue the other for their money back.
I’m assuming you had one to illustrate your excellent point.
I presume you are wholly unaware of how hearings work
There you go:
https://www.straitstimes.com/business/companies-markets/bitcoin-exchange-operator-sued-in-spore
https://www.telegraph.co.uk/technology/2018/02/27/bitcoin-inventor-craig-wright-sued-10bn/
https://arstechnica.com/tech-policy/2018/05/man-who-claims-he-created-bitcoin-committed-perjury-lawsuit-says/
and please don’t bore me with any questions or arguments. This ‘crypto’ fad is all hype, con and BS.
Marco Fante says:
“and please don’t bore me with any questions or arguments. This ‘crypto’ fad is all hype, con and BS.”
It’s trialling blockchain, in a milieu which will probably not survive. The Blockchain will be useful for something, but it’s not likely to be currency transactions.
The distributed ledger is here to stay. (Well that’s my guess).
Probably right.
At this point it seems like the central banks will takeover the currency aspect of it (for better and worse) thereby providing the legitimacy and security that currently does not exist. The remaining speculators and crims, as you suggest, will eventually pass into the annals of history.
Re. my reply to Andy I forgot to include this:
https://www.bis.org/publ/qtrpdf/r_qt1709f.pdf
Surely it diminishes the law and the democracy it upholds if it may be applied selectively? If it doesn’t apply to all, including those making use of cryptocontracts, then why should it reasonably apply to the poor, or blacks, or the left, or any other group the current authorities don’t happen to like?
I am not sure I see the causal link
Causal link ?
Any bloody link at all.
This is a civil law approach and risks the unintended effects of specific rule making prevalent in European legal systems including uncertainty and lack of flexibility for business people.
In similar areas of technological change European civil systems (and businesses) have been hamstrung by needing and being in the habitat of limiting legal procedure of contract to specific forms of technology/instrument (and having to update often).
Expressed as a matter of tax law for an obligation on the individual entering into a type of contract fine but to specify a contract is invalid due to a means of payment is against the centuries tradition of English common law (supplemented by statute). There may well be a measure introduced to the effect you describe but it will not be as a matter of contract law.
While you may hate the flexibility which English law provides you should accept how valued flexibility of English contract law is considered globally.
teflon don says:
“This is a civil law approach and risks the unintended effects of specific rule making …”
You mean there will be unintended consequences of any attempt to legislate ?…..
….Some of the people trying to frame laws to protect their interests will inadvertently be hoist with their own petard until they’ve figured out what it is that actually threatens their vested interests (?)
So what’s new ?
Exactly right Richard! One of the roles of tax is to provide a form of insurance on the validity of contracts. If you conceal the transaction to avoid the tax, your contract is not insured. When we bemoan the rise of street violence and gun crime, some of this represents an alternative method of settling contracts that have been concealed from the state. Likewise unexpected deaths of foreign oligarchs.
Michael Green says:
“When we bemoan the rise of street violence and gun crime, some of this represents an alternative method of settling contracts….”
Well, yes and no, Michael. It’s not the alternative method it’s the traditional method that pre-dates civilisation.
The default currency of the unregulated free market is violence.
Graham Turner Update:
Sorry for going off topic but you will want to be aware that Graham Turner of GFC Economics has doubled-down on the errors of his BoE /Productivity report by replying in length to a Bloomberg opinion piece that was critical of the report. See link below and click on “Comments” at the bottom of the article. His should be the first to appear:
https://www.bloomberg.com/view/articles/2018-06-25/jeremy-corbyn-has-a-terrible-economics-idea
Thanks
He really does seem intent on missing the point, as you correctly made clear in your comments
You did answer, you just dodged the question. And you have done so again. How can a distributed ledger exchange information with a tax authority? Saying it can be shared is silly – as by definition everyone can view it. The point is that it is pseudonymous. Viewing the ledger doesn’t tell you who the people transacting are.
If you are saying you want to ban pseudonymous cryptocurrency then you should say so.
But it would have been better, Richard, when someone asked you a question about cryptocurrency to say “I am not completely familiar with the subject and so will decline to comment”.
I made the correct point: if the data cannot be shared then no protection should be provided for transactions undertaken in it
It is a matter of choice that the ledger is pseudonymous
And that case it will be a matter of choice to see claims unenforceable
And there’s nothing very odd about this. After all gambling debts are unenforceable. It is not as if there is no precedent
“After all gambling debts are unenforceable.”
I thought you were a tax expert?
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm28130
First, notice the date – in contract terms this 8s recent
Second, notice the limitation in scope
Third, note the motive
In other words a) I am right that the president exists b) I am right that if a debt can be made enforceable it can also be made unenforceable and c) it san still remain taxable
Thanks for providing the link to reinforce the point
And let’s also be clear, I do not claim to be all knowing, by a very long way, just for the record
“And let’s also be clear, I do not claim to be all knowing, by a very long way, just for the record”
Feet of clay, Richard. Feet of clay 🙂
So, just to be sure you understand, your proposal requires all existing crypto currencies to be replaced with ones with a ledger that identifies (to the entire world) the names and details of each person using the currency, and details of each transaction.
You thought there could be an “exchange” only with a tax authority. There can’t, because the ledger is open.
You clearly didn’t realise that. Now that you do, it is quite okay to change your mind. You could, for example, focus on the crypto exchanges. It doesn’t really matter if tax authorities don’t know who holds crypto. They just need to capture where it’s turned into cash, or used in the real economy. That is workable and doesn’t involve the lunacy of open fully-identifiable ledgers.
So they’ll have to work out a way of making it only available to tax authorities
This is the sort of thing regulation requires
Deal with it
I was well aware of what I was asking for. I didn’t say I was trying to make life easy for them
No, Richard. You don’t understand. It can’t be available to tax authorities and nobody else. That’s not how the private key algorithms at the heart of crypto work.
Why do you feel you can comment on this stuff without understanding it? There is no shame in saying you’re not an expert on everything. You would enhance your credibility if you sometimes acknowledged this.
I do understand
Either change it
Or work without the protection of the law
That is exactly what I was saying
Is it really that hard for you to understand that?
After all, my comment would bnot have made sense otherwise, would it? I was acknowledging that the data is not available when making it after all
I knew exactly what I was talking about
You just don’t want to believe it
“transactions involving that currency will be unenforceable” … This is an interesting point. But one needs to factor in that crypto-currencies support self-enforcable contracts. These so-called smart contracts are programs, running on top of a blockchain, that make sure that a currency transaction takes only place in case the contract is fully executed. Even fully autonomous companies have been implemented. It is not clear now how far this idea can be pushed into the real economy, but as more and more economic activity consists essentially in trading data, the scope of smart contracts, which do not need support by an authority such as a government, is potentially vast.
I really do not think there are contracts that do not require the support of government
What you’re saying is there is a smart world where the rule of law does not apply
I do not think that exists
“What you’re saying is there is a smart world where the rule of law does not apply”
Not quite. What I am saying is:
There is a “smart” world where the rule of law is not needed because the rules are already built into the software that runs this “smart” world. The point is that if the software is correctly implemented these rules cannot be broken, by design. So no enforcement needed.
So while I understand, and like, the idea that people who deal in crypto will not be allowed to appeal to the law to enforce contracts, it may turn out that they will just not care as they do not have a need for this.
I loge your faith in software and those who design it
“I loge your faith in software and those who design it”
It is not a matter of faith. The technology works. I admit that we dont know its societal implications yet. But it is worth keeping an eye on it.
One example of the technology that works already is Storj, which implements a decentralised cloud storage system in which users decide for themselves how much storage is made available. The contract is that a user pays (or gets paid) depending on how much storage they need (or provide). The contract is not a text, but a program that runs on top of a cryptocurrency. The contract is the program. It enforces itself by running.
And people once hailed Google and Facebook……
@ Alexander Kurz
Were there not a couple of moldy old Greeks who had a barney relevant to your post, as follows. One was boring the arse off everyone in the Athen’s forum by wittering on about how he wears the armour against the Spartans so the likes of the cowardly sod opposite him didn’t have to. His opposite number replied, “yes…. but who guards the guards?”
Your faith in software to be a law keeper guard is touching, but try telling that to this bloke who was fired by a software run machine. Even the bloke’s manager and company’s directors couldn’t over-ride the pesky software. Took 3 weeks till he got his job back, without pay! He’s since left of his own volition, and who can blame him.
https://www.bbc.co.uk/news/technology-44561838
The above of course could be the exception that proves the rule, but I somehow doubt it. It’s not for nothing that the expression ‘Computer says no’ has entered everyday speech. It was initially human error that led to his inadvertent sacking, but that’s the point. Once ‘the machine’ initiated his sacking due to human error it couldn’t be stopped until weeks later.
Given that human error will always occur (to err is human and all that) unless such software has an overide built in to account for the inevitable then such mistakes will proliferate. I fail to see why cypto currency software would be any different.
Also the software you have such faith in sounds more like a 21st Century criminal’s charter. Not unlike those self-regulating islands that pirates ruled over in the 17th Century with their own laws, courts (also antwacky cypto-currency perhaps?) and everything.
Imagine what would’ve happened if some pirate went running to some government demanding that said government’s law courts pursue Blackbeard as BB had broken his contract by denying said pirate his share of the booty taken from some ship under the said government’s jurisdiction.
The words ‘yard arm’ and ‘swinging from’ spring to mind!
As Andy Crow has already pointed out, my metaphorical pirate’s dispute would’ve been settled outside of government law via violence. Even the pirates’ own courts were ultimately ruled by a might is right principal. So I wouldn’t fancy the chances of said pirate up against the likes of Blackbeard.
Not unlike our own law courts now, come to think of it. Especially now Legal Aid has been so decimated under the tories/coalition governments… but that’s going off at a tangent; a bad habit of mine.
@ Linda Travis
LT says: No, Richard. You don’t understand. It can’t be available to tax authorities and nobody else. That’s not how the private key algorithms at the heart of crypto work.
So what if they currently don’t? Presumably if crypto currencies have private key algorithms they can also be developed to have public ones too, and the half-way house of only being available to tax authorities? If not, why not? Would that be because public/tax authority ones would go against the point & purpose of crypto currencies? That then beggars the question, why? Is it because many wanting to use such currencies wish to take advantage of its wild west attributes and wish it remain that way for as long as possible?
Let crypto traders choose. I’m sure there are lots of legitimate reasons why a trader would wish to keep their transactions private. Surely it is not beyond the wit & ken of humans to devise a system which offers protection to legitimate traders in legitimate circumstances without it being a free for all regarding dodgy dealers?
RM may, or may not, have the answers. But he’s at least asking the right questions and raising the right issues. That’s as good a place to start as any, and better than most.
Thanks
I appreciate your comments, on and off theme
P.S.
Alexander Curtz says: The point is that if the software is correctly implemented these rules cannot be broken, by design.
‘Correctly implemented’ being the operative words here. Anyone relying on that is in for a rude awakening. As for ‘these rules cannot be broken, by design’, that’s on a par with Maggie Thatcher saying that there would never be a female PM in her lifetime. Rules may not be designed to be broken, they may even be designed to NEVER be broken by software, but you can safely bet your last dollar that they will be. That’s as inevitable as taxes and death!
Sandra Harvey says:
“Alexander Curtz says: The point is that if the software is correctly implemented these rules cannot be broken, by design.”
“Correctly implemented”……. is a real ‘big if’ isn’t it ?
It assumes good will from all parties, and that doesn’t happen often. Any system which can be devised for whatever purpose can be subverted and there has always been a sometimes quite small, sometimes larger, contingent of clever-bugger who see any system as a challenge; particularly a security system.
Has anyone yet produced an unpick-able lock ? Make the door secure and the determined interloper will go through the wall next to it. Even if there is nothing on the other side that is worth having.
PS…and that’s only to consider the human intervention angle.
Add to that …..even as you rivet the last plate to your unsinkable ocean liner hull, long before you have supplied the deckchairs and distributed the passenger tickets, a glacier is calving the iceberg which will begin to move into the precise location to precipitate a fatal collision.
I don’t believe in fate, but I do think pride inevitably comes before an eventual fall.
I am struck that the comments about crypto currencies apply equally well (if not even better) to cash which is a form of anonymous transaction that doesn’t leave behind a trail of transactions that could be reviewed at a later stage or result in some form of automatic reporting to the tax authorities.
Would you recommend that cash transactions be unenforceable unless a process is followed which includes declaring them to the tax authorities?
We have done our very best to beat that opacity and are beating it. That is what a lot of AML la has been about. And it has worked.
I am saying we will need to do the same with crypto-currencies.
The physical nature of cash makes it impossible to make very large, instant transactions globally or across any large distances. And trusted representatives from both parties need to be present in the same place at the same time for the transaction to occur.
So your comparison with cash has some merit but its not quite right, not entirely.
Michael says:
“Would you recommend that cash transactions be unenforceable unless a process is followed which includes declaring them to the tax authorities?”
Without an appropriate paper trail a lot of cash transactions are unenforceable, or at last difficult to enforce. You would have no proof of purchase. Take your complaint to the small claims court and I don’t think you’d get far with no evidence to present.
Illegal gambling debts and drug dealings are commonly settled with baseball bats I believe.
“Your faith in software to be a law keeper”
This is distorting my point. I was talking about the fact that in the digital economy it is possible to set up contracts that are software that enforces itself. No need for a law keeper, or even for law.
Let me give an example. In the olden days, I bought a book online. If the book didn’t come or was damaged, but I had payed, I might need laws and courts to get my money back. But today, I can buy a book in electronic form. This means that the whole exchange, money and goods, takes place inside the digital economy.
I can now maybe make my point clearer.
What I am saying is that inside the digital economy it is possible to implement transactions in such a way that it is impossible for the seller to get the money without the customer getting the goods.
So no need anymore for dispute resolution in this example.
I am not saying that the digital economy will replace all of the traditional economy. I am merely saying that the digital economy offers new technological possibilities that are becoming reality right now.
20 years ago there were no social media, no smart phone, no wikipedia, no Google, …. And the technology changes faster than ever, so it is reasonable to expect that the next 20 years will change our world even more drastically.
So to come back to your point about faith in software. It is not about faith. It is a fact that software is changing our world in unprecedented ways. If we like it or not, we have to face it.
Sorry, but that makes no sense
Of course I can pay digitally for a mdgital commodity and not get it, or get a corrupted version
“Sorry, but that makes no sense. Of course I can pay digitally for a mdgital commodity and not get it, or get a corrupted version.”
Yes, but only because the technical solutions to this problem are currently not implemented when we do e-commerce. What I am saying is that the technology known under the buzzwords of smart contracts plus cryptocurrencies solves these kind of problems.
The really interesting question is, once this technology becomes widely used, how will it change the digital economy and the society?
I can only reiterate that I admire your faith
I do not share any Of it because I think it hopelessly misplaced
“It assumes good will from all parties, and that doesn’t happen often. Any system which can be devised for whatever purpose can be subverted and there has always been a sometimes quite small, sometimes larger, contingent of clever-bugger who see any system as a challenge; particularly a security system.”
While I agree that software reliability is a difficult problem, this does not prevent us from writing bespoke software that is extremely reliable. For example, we usually trust the software in cars and airplanes. And bitcoin has been running for 10 years and not been subverted in a significant way.
Overall, while there is a lot of unreliable software, there are also examples where software is more reliable than hardware.
Alexander Kurz says:
“Overall, while there is a lot of unreliable software, there are also examples where software is more reliable than hardware.”
…and indeed many instances where digital or mechanical systems are much more reliable than human agency.
I have no doubt we will keep pursuing the goal of secure transactions, and despite the cock-ups on the way (which will naturally be very high profile news items) I guess our future is dependent to a large degree on getting it close to right.
Future generations will marvel that we were once content to allow vehicles on the roads controlled only by individuals with brains made of meat.
Crypto is a commodity, rather than a currency. Its like a chunk of gold that can be sent over the internet.
Trade using exchange of commodities is barter. We already have laws for this.
And (as a IT literate computer programmer and geek, with a strong interest in macroeconomics), I wouldn’t touch it – Why might the government need tax denominated in crypto? It has no reason to want drive the value of crypto any more than it is.
I expect the question was asked by someone who thinks the government needs tax in order to fund itself.
Tony Weston says:
“Crypto is a commodity, rather than a currency. Its like a chunk of gold that can be sent over the internet.”
I’m not yet convinced you are quite right about that, but its an interesting take on what crypto currencies are. In a very real sense if you can trade with them they become a currency, though I take your point about the interpretation of this as a barter transaction. Not something I’d thought of before.
One of the most interesting aspects of the crypto currency ‘revolution’ is the amount of discussion it has aroused as to what these mysterious entities are. With numerous pundits maintaining stoutly that they aren’t really anything at all.
It has also focussed a lot of attention on what we regard as real currencies and how they work and why they aren’t also a scam if we consider cryptocurrencies to be a scam.
The few vast fortunes made by individuals speculating on them has served to muddy the waters considerably.
I go with the barter line
“I can only reiterate that I admire your faith”
Do you agree with me that the relevant technology already exists?
(This is not a matter of faith.)
The question is whether this technology will become widely used or not. We dont know yet, but I think indeed that it is likely that it will … wouldnt call this faith, though …
Software exists in a moment
And changes
That is my point. It can itself be the con trick, morphing at a person’s will