It’s an age-old issue – the wheels of the legislative process move at a glacial pace. By the time a cogent and coherent framework has been issued and subsequently understood by the masses, it’s already rapidly becoming obsolete. Consider, for instance, the GDPR, only recently brought into law in Europe: prior to its existence, collection, storage and holding of data was governed by archaic regulation such as the UK’s 1998 Data Protection Act.
As systems and infrastructures evolve, it’s of critical importance that regulators not only understand the changes, but provide clarification to ensure individuals and businesses stay on the right side of the law. In the absence of the creation of new laws, it’s critical that guidance that interprets new technology in light of old legislation is issued.
Recent concerns have sparked over the emergence and proliferation of cryptocurrencies – by any metric, these are poised to cause significant disruption to existing infrastructures in personal wealth / business operations. With the UK government recently criticised for its failure to adapt to digital advances, many are confused as to what the future will hold, not only for their investments into the nascent asset class, but as to taxes in the digital realm as a whole (Phillip Hammond recently hinted at plans by the treasury to implement a ‘digital services tax’).
Such regulations, if adopted, would increase the tax collected from tech giants such as Amazon. In a society that’s slowly but surely migrating into a digital era, it’s imperative to ensure that innovation can proceed unhindered, with sensible handling of the tax laws that govern this new paradigm. Hammond’s intimation that such regulations should be crafted in such a way so as to not disadvantage smaller businesses should not be taken lightly if they’re to grow on a global scale.
This is a particularly prominent concern amongst tech businesses in Europe – from big data to AI, governments have repeatedly failed to advise on how new developments fit into the existing framework. Many businesses involved in accepting, investing in and mining digital currencies have complained about this – though the UK was one of the first European nations to issue tax guidance on cryptocurrencies in 2014, it has since lagged behind others, resulting in blockchain businesses migrating towards much more welcoming and less restrictive jurisdictions such as Malta, Switzerland, or Singapore. It goes without saying that the landscape is vastly different to what it was four years ago.
Creating an interoperable cryptocurrency framework should be a high priority for all European countries, especially if they wish to successfully hamper tax evasion, money laundering or other illicit activities (and, of course, foster a burgeoning industry). For all intents and purposes, it seems that very little has been done to truly address some of the European Central Bank’s Virtual Currency Schemes’ uncertainties around law since its publication in 2012, although a Swedish case in 2015 classifies cryptocurrency as currency for tax purposes.
It’s not good enough that events like initial coin offerings are being dealt with on a case-by-case basis (especially considering their rapid proliferation and appeal). It may have worked when they were few, but this model is not scalable, and leaves a lot of investors in the dark. A UK task force has been assembled to put an end to this, but it remains to be seen whether this will yield any clarity, and whether they can establish a general purpose set of easily-understandable criteria for ICO-launching startups and their investors alike.
Overall, this lack of certainty is posing an obstacle to the flow of funds into the rapidly-growing space. At the moment, many concerns appear to stem from the difficulties of tying virtual currencies to specific users (and the implication this has on criminal activity), though the most recent amendment to the the 4th AML Directive has attempted to make cryptocurrencies compatible with existing AML regulations.
Regulation must be flexible, consistent and perhaps most importantly, forward-looking, so as to compensate for technological advances that seem to be growing at an exponential rate. As we enter this new paradigm, it’s crucial that developers, businesses, entrepreneurs and users are aware of their liabilities and rights in order to continue to thrive.
About the authors: Sean Ryan and Perry Woodin, are the Founders of NODE40. NODE40 Balance is a robust cryptocurrency reporting software that integrates directly with major cryptocurrency exchanges. Members of the blockchain community transacting in, trading, or mining digital currency, have likely triggered a taxable event and can be unaware of how to properly disclose these transactions to the government.
Interested in hearing leading global brands discuss subjects like this in person? Find out more at the Blockchain Expo World Series, Global, Europe and North America.