Education

Bitcoin is the Biggest (black) Fiscal Hole of The Century

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Due to the nature of its currency, Bitcoin is a great fiscal black hole of enormous proportions; Just like we can’t see the light that falls into the gravitational orbit of a black hole, the money that falls in Bitcoin stops being fiscally visible for our Treasury department.

I am aware that I have several analyses alerting you to certain risks related to Bitcoin, and some techies may be thinking that I have some personal bias against the crypto-currencies. Nothing is further from reality.  I am a strong supporter of the necessary and essential catalytic role of technology in our world of the future. But it is also obvious that Bitcoin has penetrated us into the terrain of the unknown for our socioeconomics, and that is why I must warn that it also carries (some) (potential) risks. Having said that, I must confess that the crypto-currencies seem to me a really exciting subject, and that, thanks to Satoshi Nakamoto, we are witnessing one of the great economic experiments of all time.

Crypto-coins and our socio-economic future

Crypto-currencies in general, and Bitcoin in particular, still have much to prove. For the moment, these virtual currencies carry risks, but it is no less true that they can be the key to an economic future that leads to greater progress: therefore, it is our duty to shape that future and to make it socioeconomically sustainable.

Due to its nature of continuous appreciation, which can be seen even when the maximum number of Bitcoins in circulation (21 million per crypto-currency design) is reached, Bitcoin is an inflationary currency in terms of its own value. However, in the face of the products and services we will buy with it, Bitcoin’s economic landscape resembles a constant (and probably) strongly deflationary environment, in which Bitcoins can buy more and more.

Is the Bitcoin ecosystem currently a tax haven by its very nature?

How do you tax a revaluation of our possible investment in Bitcoins? What if we do not sell them? Which entity sends us a creditable valuation that we have assets for a value of X to tax as a wealth tax, and a revaluation of Y when there is still an even academic debate about whether Bitcoin is an asset?

One can invest money in Bitcoin, have a very important equity increase (denominated in Bitcoins) for its revaluation, and if he never changes it back to dollars, he does not have to pay tax for it with the current fiscal framework. It is totally different from, for example, buying stocks, where in order to be able to spend that money, you first have to monetize the stocks by selling them, and then they are taxed.

A proposal for the complicated question: How should Bitcoin be taxed?

A possible solution would be, for example, that, even for small amounts, the payments in Bitcoins would be taxed exactly like capital gains. Another issue is the technological complexity due to the massive computational load that this model could bring in the future, because not only must we process the taxation for each micro-transaction, but we must also take into account the valuation of Bitcoin at each precise moment, especially considering the high volatility of this crypto-currency. Multiply these calculations by all transactions, purchases and sales in stores every minute, and then store it and you can see how unwieldy this could become.

bitcoin money stack

But in spite of the technical constraints, this solution seems to be the only one that would be adequate in all aspects, since it calculates the value of Bitcoin at every instant and taxes accordingly. However, this will imply a massive computational burden for both payment and wallet issuers denominated in Bitcoins, as well as for the Bitcoin network itself, and finally, the Treasury Dept.

The current border between Bitcoin and the traditional banking world

Another factor associated with Bitcoin that places it in a black hole according to our current banking model, is its distance from the mainstream world, which it nevertheless aspires to conquer. This is due to the fact that the financial sector still does not know how to approach the crypto-currencies, without breaking away from its legal obligations (compliance with anti-money laundering regulations, etc.).  And with currency markets, virtual exchange companies still far from the standards usually demanded of the industry and to which the general public is accustomed, there is a long way to go before mass market adoption can be enabled.

However, I must mention that there are already promising initiatives that are intended to cover this new gap, championed by recognized industry executives.

Once again, it is urgent to legislate with equanimity

I suppose you will agree that it is urgent to legislate the issue of Bitcoin worldwide, but of course, you know that legislation is always behind, and until the problem becomes more mainstream, nothing will be done about it. Of course, this is an obvious problem of legal stability that at some point can seriously damage the Bitcoiners and the currency itself as a project.

The risk is that with the current speed of technological progress and adoption of new technologies, the legislation may come too late. Therefore, future legislation can end up being as disruptive as the currency itself, with the great legal insecurity that could it end up bringing to a crypto-currency that will probably already be global and become more used as it experiences organic growth.

As soon as the situation becomes unsustainable, regulators may try to stop the big snowball of adoption, and that big snowball can end up exploding in the face of the world’s regulators (and all of us as users). At that point of no return, the only viable option to patch this fiscal hole of the century in some way seems to be a new bail-out. We could be headed for a financial crisis all over again.

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