Ep. 34 Innovation for Thought Leaders: Govtech and Blockchain

In this episode, I will comment on one WEF disruption innovation described in a Survey published in 2015 related to the Government (Govtech) and Blockchain.

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During the 2015 WEF annual meeting, 800 SMEs were asked about the likelihood that a Government would be able to collect taxes via Blockchain. The response received was that 72% of the responders saw a possibility that by 2025 that disruptive Innovation will be in place.

To measure the accuracy of this initial survey, we made a new one this week on LinkedIn, asking more than 450 Thought Leaders to share with us their predictions, and here are the results.

What is your opinion on WEF projection on Blockchain being used to collect taxes by a Government by 2025?

Lessons Learned from the Survey Results

• Subject Matter Experts perceive significant progress in adopting Blockchain, contrasting with the previous case analyzed (Episode 32 – Innovation for Thought Leaders: Implantable Mobile Phones ). In 2015, 72% of responders considered a valid scenario to occur by 2025, and this month, 71% of responders still give this scenario an a significant change by 2030 (or a five-year skew, great!)

• It seems the response varies depending on the region where the SME is located: USA, LATAM, EMEA.

Ok, Jose, and what is your interpretation of the scenario?

Current trends in Government and Blockchain

Before responding to that, I think it is relevant to explain some concepts related to Blockchain, Cryptocurrencies, and Tax Collection rules.

What is Blockchain in the Govtech context?

As many of you know, Blockchain is a technology that allows assigning a value to an asset and tracking the history of the asset without the need for a central repository.

Follow me: When you buy a House, the transaction is recorded on a ledger (a title) by a third-party organization (title company). Every time the asset changes ownership, it is required to issue a new title and register the change of ownership as a separate transaction.

Blockchain is a technology that replaces the third-party organization (the external ledger, the title company). Every time the asset changes ownership, the event is recorded using an incremental digital trail within the same original record.

Ok, but what this has to do with GovTech?

Bear with me another couple of paragraphs to close the loop.

Blockchain can be used to assign a history tag to a physical asset, or a digital asset, or to create a history trail to a monetary instrument (Cryptocurrency).

So, the question to be analyzed can be described as the possibility of a Government collecting Taxes using different currencies.

Please think this: As the USA administration has a legal currency supported by the Central Administration (Federal Reserve), the US dollar (a sovereign currency, also called FIAT currency), it is not likely an individual or organization will pay their dues to the Government using a different currency (euro, Mexico Pesos, Chinese yuan, Japanese Yen, you name it). In that case, the payee must convert their currency into USD dollars before making the payment.

So the transformation here has two branches:

What is the challenge for a Govtech collecting taxes with Blockchain?

Let us analyze this case in two dimensions. Those are:

• Case1: How will the Government react to an asset -physical or digital- linked to a Blockchain system?
• Case2: How likely would it be for a Government to accept payments in currencies (FIAT, crypto) different than their legal currency?

Case 1: Change of value of an asset (physical or digital) connected to a Blockchain.

Imagine this: If a person or organization assigns value to an asset using Blockchain, how will the governments treat the value change of the asset?

Let’s say you have a collectible card connected to a Crypto instrument (non-fungible token), or you have an investment in Cryptocurrencies (Bitcoin, Ethereum)

Depending on your country, you must know the tax rules affecting selling these crypto assets.

• Several countries in EMEA (Central Europe) have special regulations for nontaxing many crypto assets.
• I think Portugal has a particular regulation, so short-term crypto asset transactions (traders) are treated differently than long-term ones (investors).
• Others, like the USA, require these transactions to be reported, and eventually, you will be asked to pay (or tax credit) based on the FIAT change of value.
• Finally, in El Salvador, Bitcoin is accepted as a currency everywhere. In contrast, the Tax entity considers Crypto assets as property: subject to taxes based on value appreciation compared to a FIAT asset. (Balboa?)

Hmm, any reason why there are different tax regulations between countries?

Typically, we hear that some countries use softer tax rules to attract selective immigration: Nomad workers and Crypto Investors.

Question here is: as asset appreciation is made based on FIAT value over time, taxes to collect must be paid in FIAT.

Got it; another question: What happens with crypto assets created by the original owner, also known as Mining?

My interpretation is these assets are considered income.

but, But, BUT

This episode is not about Tax Law but about understanding legal scenarios and the gap to cover, so Government will consider and treat Blockchain assets (crypto assets) as cash -and not- as property.

Let’s talk about the second case, which is also very interesting

Case 2: How likely would it be for a Government to accept payment in other sovereign currencies (FIAT) or digital (crypto) currencies

I think this is where the real challenge is: Asking a government to collect taxes on any asset different from FIAT (legal currency in this country) is not easy.

From a process and legal standpoint, it is the same challenge for a government to accept payments via transferring a Real Estate Property as to accept a cryptocurrency.

Even El Salvador, where Bitcoin is a valid payment currency, considers Bitcoin transactions a property (subject to taxation) rather than a currency (subject to tax based on dividends only).

Ok, Jose, I got all that, but I am still intrigued by your opinion about the WEF question. When do you consider the scenario may occur?

My interpretation of the WEF Challenge

Knowing the Newsletter has many Crypto Gurus subscribers, may I ask you to stand up and help us enrich my opinion?

I think the most likely scenario of a Govtech collecting taxes with Blockchain will not occur on a country level but on a State or City level.

There are a couple of examples of cities promoting the creation of crypto instruments to allow citizens to make long-term investments. The holder of the crypto assets will capitalize on any profit from revenue generated by the City’s utilization of the funds.

Similarly, the City will be allowed to use these funds to support initiatives (public works, new transportation systems, etc.) to improve the life quality of its inhabitants.

Miami is one example. Miami’s major is seriously exploring this model. There are other cities in the US exploring this model. I would not be surprised if I learned other international cities are exploring this model.

So, as these instruments are government-made, I see a higher probability of Govtech accepting tax payments via the transfer of these instruments. It probably will be used to pay for City / State taxes initially.

I see a good chance this will happen before 2030.

On a national level, I think we should monitor two scenarios.

• El Salvador is likely to be the first country. Not sure if this will happen by 2030 because current Bitcoin taxation rules support El Salvador’s National budget.

• Initiatives led by National Government to create sovereign Crypto Assets, or CBDC (Central Banks Digital Currency).

I’m not sure if this will be successful in the short term: many investors dislike the idea of Crypto Assets, and others are vehemently opposed to CBDC.

Hmm, any example?

In the US, the Federal Reserve is actively working on evaluating changes in the Financial System that will allow the US Government to create a CBDC.

If they succeed in their intentions, a direct consequence would be that a Government would be capable of collecting Taxes with Crypto Assets.

As the previous scenarios analyzed were based on incremental steps (evolution) the CBDC should be considered a quantum leap approach (disruption).

If we would like to evaluate the CBDC scenario properly, it would take several episodes. If you are interested in knowing more, you may find the most recent position of the Federal Reserve on Central Banks Digital Currencies by clicking on this Link (US Federal Reserve on CBDC)

Good enough?

I hope you like this “doing-together” exercise.

What are your thoughts on the subjects raised in this edition of the Digital Acceleration Newsletter?

Now it’s your time to share your thoughts and close the loop.

This is about growing together: your contribution is essential and welcome.