Financial Faux Pas Highlight the Need for Decentralised Currencies

Banks issue non-performing loans, credit card companies get scammed, insurers get defrauded – so why the focus on bitcoin?

AccessTimeIconMar 21, 2014 at 6:03 p.m. UTC
Updated Feb 9, 2023 at 1:24 p.m. UTC
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The failure of Mt. Gox attracted a lot of media attention on the world of digital currencies; it quickly became the most popular argument used and abused by bitcoin detractors. Though much of the criticism wasn't misplaced, the "we told you so" gloating was.

First of all, Mt. Gox is not and was not the future of bitcoin. To the contrary, it will go down as a good example of what not to do.

Its failure does not have much to do with any inherent weaknesses attributed to digital currencies. The company was mismanaged and it was clearly in over its head. It would have been run into the ground even if it was a traditional financial institution and it would not be the first time.

Banks issue non-performing loans, credit card companies get scammed, insurers get defrauded – all this happens on a regular basis. When any of them happen to be run by incompetent people, they go under.

In case the ripple effect of their collapse is too big for the economy to take, governments get involved – usually with heaps of taxpayer money. So why all the focus on bitcoin?

Your money is safe, unless the government wants it

"Money invested in banks, stocks, bonds or commodities is safer than money invested in speculative assets." This is another argument used by bitcoin critics, and it usually happens to be true. However, bank deposits aren't entirely safe.

Chancellor of the Exchequer George Osborne recently gave the HMRC the power to access private bank accounts to look for money that might be owed in taxes. The rule will only apply to Britons who have been asked to pay their taxes multiple times and who owe more than £1,000.

Debt collectors can seize money straight from the accounts, but they have to leave at least £5,000 in the targeted account.

While the move may surprise some Brits, many countries (including France and the US) have similar laws on the books and they routinely enforce them.

Civil rights advocates don't like the idea, as they believe it is an encroachment on liberties and privacy. They also question the legality of such plans, as they effectively allow the executive branch to "raid" accounts and seize people's money. They believe this is something for the judiciary to decide, as some tax debt could be disputed.

Richard Murphy, director of Tax Research UK, told the Huffington Post that the two issues need to be separated:

"One is about people not paying tax debt. Measures to help recover this are reasonable, including the power to take assets. The other is taking payment when the debt is disputed. That is unacceptable."

Acceptable or not, the HMRC now has the power to do so. If the debt is disputed, the taxpayer will be able to appeal, but by then the money will probably be seized. Once it is seized, the taxpayer will have 14 days to contact tax authorities and arrange a payment plan, or the taxman will keep the money.

Tax havens aren't what they used to be

There is a bit of a problem though. Tax dodgers tend to be aware of what they are doing and they go to great lengths to hide their money. This includes stashing it somewhere warm, with plenty of sunshine, in an offshore account. However, this is no longer as safe as it used to be.

A year ago the IMF agreed to help out Cyprus with a €10bn package, but in return it asked the government to do something that did not go down well with thousands of depositors.

The government was strong armed into imposing a one-time levy of 6.7% on deposits up to €100,000 and 9.9% on larger deposits.

That wasn't the end of it. The Central Bank of Cyprus then went to impose a levy of up to 47.5% on uninsured deposits. Account holders were supposed to compensated by bank stock equivalent to the levied amount, but in reality there was not much interest in holding stocks in a basket case banking sector.

Still, the big depositors in Cyprus (mostly Russian nouveau riche) should consider themselves lucky. In the early nineties many banks in Eastern Europe collapsed, leaving depositors to pursue compensation from the government. Some got bonds years after the fact, others got nothing. Depositors in Argentina, Yugoslavia, Zimbabwe and many other countries were exposed to hyperinflation, which ate up their life savings in no time.

However, the Cyprus levy did not do much to deter tax dodgers looking for untouchable offshore accounts. The Tax Justice Network estimates $21 – $32tn of hidden and stolen wealth stashed largely tax havens around the world. The bitcoin market cap stands at about $7.2bn.

So why exactly would anyone use digital currencies to dodge taxes, when it can clearly be done without them?

Digital currencies are not the answer

In some circles, digital currencies are viewed as a way of keeping the government out of the whole process, but this view is based on ideology rather than fact.

We would like to claim otherwise, but that would be disingenuous. Ideology and economics don't tend to mix well, much to the detriment of many totalitarian regimes and advocates of various utopian ideas.

For example, gold bugs came out of the woodwork following the 2008 financial crisis, but most of them have been silenced over the past year or two. The reason is simple: their predictions didn't pan out and people who invested in stocks over the last couple of years are now much better off than those who mixed ideology with economics and invested in gold.

Besides, if fear of big government is driving people to invest in gold or digital currencies, they might want to take a history lesson and read Roosevelt's Executive Order 6102, which criminalized the possession of monetary gold by citizens and non-governmental institutions.

The Roosevelt administration had good reason to do so and it acted in the interests of the people, during the worst economic crisis of the 20th century. If a totalitarian government turns against its people, strings of digits that rely on electricity the internet to make any sense won't help. A few cans of beans or any item that can be bartered would be more helpful than all the bitcoins out there.

Digital currencies should not be viewed as a hedge, nor are they a viable alternative to traditional long-term investments or even national currencies backed by central banks.

They can, however, complement national currencies, reduce transaction fees, make microtransactions possible and change the way content is monetized. It is their efficiency makes them interesting and potentially very useful. They should derive their value from their efficiency and their ability to save value rather than store it.

As for bad apples, it's the government's job to weed them out whether they run dodgy bitcoin exchanges or dodgy investment firms.

Nermin Hajdarbegovic is a freelance opinion and news writer for CoinDesk: his opinions do not necessarily reflect those of CoinDesk.

Piggy Bank image via Shutterstock


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