Why the IMF believes that crypto is an 'obstacle' to tax collection systems.

This week, the International Monetary Fund published a paper about the significant problems that cryptocurrency poses to taxation law and enforcement, and warned that these problems could get worse.

At the core of it, the problems stem from how regulators should classify cryptocurrency assets. At present, different regulatory bodies and governments have taken different approaches to classifying cryptocurrency, all claiming jurisdiction over cryptocurrency assets and companies based on a variety of different definitions.

In the US, the Securities and Exchange Commission is suing Coinbase and Binance, claiming that they are operating as unlicensed exchanges. At the same time, the Commodities and Futures Trading Commission is also suing Binance for offering commodity derivatives trading services to US-based users without the proper licenses.

Meanwhile, other countries and jurisdictions have also taken different approaches. Singapore has classified cryptocurrencies in a league of their own as Digital Payment tokens, methodically investigating and applying different rules and principles from traditional finance that make sense for the cryptocurrency industry.

However, the IMF report also touched on something more fundamental to crypto- what they termed as the ‘pseudonymity’ of cryptocurrencies and cryptocurrency transactions.

According to their blog, “Transactions use public addresses that are extremely difficult to link with individuals or firms. This can make tax evasion easier. Implementation is thus at the heart of the matter for tax authorities.”

The IMF also notes that regulators have been developing regulations to ensure that centralised cryptocurrency exchanges are subject to know-your-customer regulations, which would make tracking wallet identities and cryptocurrency ownership easier.

However, they also recognise that there might be a possibility that such regulation will simply drive cryptocurrency holders to use exchanges based outside of where they need to pay taxes, or that cryptocurrency holders will simply switch to using decentralised exchanges, where there are no centralised bodies to monitor such transactions.

Despite all this, the IMF is not exactly anti-blockchain.

On the contrary, the IMF praised the technology earlier this year, saying that the technology had the potential to improve payments, particularly cross-border payments, and help to achieve public policy objectives.

According to a blog post dated February 23 this year, the IMF suggested that tokenisation could help to cut down on transaction costs, and highlighted the possibility of using CBDCs to provide liquidity in payments.

However, the IMF also frowned upon the anonymity that is often found in cryptocurrency ecosystems, arguing that it undermined financial integrity.

And the IMF isn’t alone in this- the European Union’s Markets in Crypto Assets (MiCA) legislation which passed earlier this year would also force all transactions that involve European customers to identify and verify customers, as per the Financial Action Task Force’s Travel Rule regulations.

Why the obsession over anonymity?

Evidently, there is a deep ideological divide between regulators and cryptocurrency enthusiasts over both the nature and purpose of anonymity.

Many in the cryptocurrency industry argue that anonymity protects privacy of individuals, while regulators counter that in order to counter illegal activities such as money laundering and terror financing, anonymity is an obstacle.

In some sense, neither party is wrong. Regulators are right that anonymity makes it harder to track down criminals and make the space safe for consumers, because any investigation will be stymied by a lack of information.

At the same time, privacy is one of the key reasons why many people turn to cryptocurrencies for their transactions, even though they may only use it for legal reasons.

Given how strongly either side feels about these issues, it is unlikely that there will be any compromise on issues of principle- and this only serves to frustrate both sides.

In fact, this is evident from the emerging developments from the cryptocurrency and blockchain space.

Many central banks are developing CBDCs, and cracking down on cryptocurrency activity, especially those that take a particularly dim view of cryptocurrency as merely a front for criminal activity.

Meanwhile, the cryptocurrency world has also managed to develop new infrastructure, such as cryptocurrency mixers that can be used to deliberately obfuscate the paper trail.

Without a consensus on what blockchain technology should be used for, this trend is likely to continue, with privacy proponents and opponents continuing to develop blockchain products that suit their own purposes and ideologies.