As accountants call for regulatory guidance on crypto assets, a bigger concern is brewing beneath the surface: enforcement.
Historically, with the exception of cash, global governments have enjoyed a tight grip on the the flow of money through the banking system. This has been achieved by the reporting regulations imposed on banks, brokerages and other businesses.
For example, in many jurisdictions, tax authorities are informed:
- When a company pays a dividend;
- When an managed fund pays a distribution;
- When an broker liquidates an investment; and
- When a bank pays interest.
While this has increased the administrative burden on the private sector, this reporting has benefited the taxpayer by simplifying record keeping. In turn, it has provided the tax authorities and tax accountants with confidence that investment income is being appropriately recorded.
When it comes to crypto assets however, governments have no grip on the crypto market, nor will they. It was designed that way. There’s a saying in the crypto community: “You can’t ban math.”
High probability of failure
The crypto asset sector is comprised of an ever increasing number of international corporations, as the internet knows no borders. Attempting to outlaw these would come at extensive cost, with a high probability of failure. For example, several nations have already attempted to outlaw corporations in this sector; only for these corporations to expatriate to other, more favourable, jurisdictions.
The sector also comprises of what’s called a ‘decentralised autonomous organisation’ (DAO). These DAOs are stateless, totally decentralized, peer to peer exchanges, with no staff or leadership. They are theoretically impossible to outlaw.
In their failure to outlaw or control the corporations, some governments have attempted to outlaw their citizens’ participation in the sector, under the guise of protection. While it may deter many, it has ultimately lead to motivated citizens bypassing regulatory barriers or expatriating to crypto-friendly nations.
Obscure their identity
Given the anonymous nature of crypto assets, one can easily obscure their identity without expatriating, in only a few simple steps. Such citizens are not likely to self report any gains if the market is outlawed.
Prohibition is not the answer.
By virtue of these constraints, enforcement is also extremely difficult. You cannot compel a foreign or decentralised exchange to report to local taxing authorities. The one thing governments can control is their own fiat currency.
They can compel local exchanges, by way of banking regulations, to report any inflows and outflows of fiat currency, and the taxpayer that effected these transactions.
With this in mind, this is where the regulation and enforcement conversation should have begun. Let us hope it gets there soon.