Crypto-currency-- Financial inclusion vs Tax evasion

Terence Zimwara

Reports that the United States Internal Revenue Service (IRS) has sent out letters to crypto-currency holders reminding them of their tax obligations adds intrigue to Washington’s changed tact towards this fintech.

In the last few weeks, the US government has come out more vociferous in its opposition towards crypto-currencies in general and against the upcoming Libra stablecoin in particular. The IRS is telling the world that it has ‘evidence’ that some American holders of crypto-currencies are skipping their tax obligations.

Just like other US government agencies, the IRS seems to assert that those opting to use or trade in crypto-currencies are doing so in order to hide nefarious activities like illicit financials transactions, money laundering or tax evasions. According to institutions like the IRS, the US financial system remains solid and effective, therefore there are no valid reasons for American citizens in particular to avoid using it. In fact, that is the case in pretty much all developed states, there is really no reason to start looking for alternatives when the present model works well! . By 2018, it is estimated that at least 5% of US citizens own a crypto-currency, an insignificant but telling figure.

Meanwhile, as an additional plus to the United States, the US dollar remains the world’s most dominant currency—for now anyway—and logically, there should not be any valid reason for an American to own or store wealth in the form of alternative currencies like Bitcoin.

Interestingly, the same arguments are hollow when applied to developing or poor economies which are plagued by unstable currencies. The very architecture of the financial system is designed to benefit the elite, those in living in urban centres or those in formal employment. The unemployed and the rural populations—who are the majority in many developing countries—are usually excluded from such a system.  

Since the financial system cannot accommodate the less affluent or those staying in remote areas , crypto-currencies present a unique opportunity to access financial services. Crypto-currency like Bitcoin are already popular in these parts of the world because they enable ordinary people to make small payments, send and receive money cheaply. The usual barriers like lack of identification documents or high bank service charges are not important thus are ignored. One only needs a Smartphone plus a data package and they are off.

Just like those using mobile money—another popular fintech in the developing world—crypto-currency users in poor countries have not embraced this fintech to avoid paying taxes.  Their miserly earnings mean many fall outside standard taxable income thresholds hence the tax evasion argument does stick here.

Crypto-currencies are primarily used for micro-payments, remittances and cross border payments and here too the perceived tax liability is negligible, if any.

Bitcoin and alt-coins might originate from developed and wealthy states—where the use case is presently insignificant—but for developing countries the same cryptos have emerged, either by design or otherwise, as a viable alternative to the one size fits all fiat currency financial system.

As already highlighted, the now widely embraced mobile money has proven there is place for alternatives to the conventional financial system. And just like crypto-currencies, mobile money initially faced resistance from some traditional players in the financial services sector even as it was embraced by masses.

Technology firms and mobile network operators (MNO) identified this long un-serviced need and went on to provide a solution without the involvement of banks and now the benefits are clear for everyone to see. Even those previously opposed now accept the utility of mobile money and the impact it has had on societies in some lands.

To understand this, one has to familiarize themselves with the findings of a growing number of global surveys on this topic. For instance, in its overview, the World Bank Global Financial Index survey of 2018 states that a growing body of research reveals many potential development benefits from financial inclusion — especially from the use of digital financial services, including mobile money services, payment cards, and other financial technology (or fintech) applications.

As an example, the index quotes a study in Kenya which found that access to mobile money services delivered big benefits, especially for women. It enabled women-headed households to increase their savings by more than a fifth; allowed 185,000 women to leave farming and develop business or retail activities; and helped reduce extreme poverty among women-headed households by 22 percent.

Meanwhile, in countries like Zimbabwe, mobile money has come in handy for citizens grappling with the country’s ongoing cash shortage problem. A glance at the country national payments records reveals that mobile money now leads in terms of transactions volumes, meaning Zimbabweans have largely embraced mobile money as an alternative to fiat cash, which remains in short supply. At the same time, large dollar value transactions are still being settled in the traditional way i.e. bank transfers, point of sale machines etc.

In Zimbabwe’s case, mobile money is currently the preferred method for making micro payments, hardly transactions that fund terrorism. Illicit financial flows involve huge sums of money and only traditional financial channels can efficiently carry out such transactions.

To users in developing countries, crypto-currencies are similar to mobile money in many respects, if not better. Payments are settled much quicker, the service charges or fees are lower because there are a few intermediaries involved and lastly, there are no restrictions or limits on payments across borders.

This latest fintech clearly works well in the developing world and those opposed to it have few valid reasons to justify the opposition.

So perhaps the question now is; Why should crypto-currency users in the developing world be concerned with events in the US congress earlier this month? Why should they be concerned with Maxine Walters and Co. comments and moves to curtail Facebook’s Libra and Bitcoin?

Well, in normal circumstances, crypto-currency users from developing lands need not to worry about events thousands of miles away. Unfortunately, US power is not normal power, domestic decisions made by the American Congress are often felt across that country’s borders. The US can almost single handedly cripple any economy by cutting it off from the global payments system. Crypto-currencies are a little bit more complex but the US can still have its way by attacking or reining on Silicon Valley tech firms that facilitate this nascent industry.

To illustrate this point we look at the African continent. It is true that some on the African continent are confident that Libra will bring about financial inclusion because Facebook, the US based tech firm behind the token, already has the infrastructure to successfully bring this dream to fruition.

However, that the US congress can order Facebook to halt work on Libra until it is satisfied that US government concerns are duly addressed underlines the power Washington has. Therefore this means tax evasions concerns, which primarily concern one country, the United States, could stand in the way of an innovation that can potentially bring financial services to those currently excluded and many of such people are in Africa.

So yes, citizens of developing countries have an interest in the American government’s drive to stop or stifle Libra and other crypto-currencies. American power has the potential to deny marginalized societies a chance to break from their present situation.

So perhaps, a better question would be; at what point do interests or concerns of a small group of politicians trump (no pun intended) the benefits that can accrue to a billion plus people? The question has to be asked because that is precisely what is happening, US congress is only interested in maintaining a system that gives the country an advantage even if it comes at the expense of a greater number of people.

This is a reverse for a country renowned for being amenable to change, a place that encourages innovation and where freedom is celebrated. Many innovative entrepreneurs around the world see it as the best place to launch new ideas.

Attempts to crush new innovations like Libra might as well serve as signal that the country is no longer happy to lead and rivals will now feel encouraged to seize the initiative.

Aside from that, the United States has, by virtue of its position as a global superpower as well as a defender of freedom and democratic ideals, a responsibility to help bring positive change to the poor and those marginalized. This includes supporting innovations that will bring about financial inclusion as well as the improvement of living standards of citizens of the world’s poorest countries.

While tax evasion and money laundering concerns are justified, they should not stop America from remaining a global leader. A balance must be struck between finding solutions to tax evasions or terrorism funding problems and the genuine need to bring financial services to the poor. Facebook might have taken the important steps of seeking audience with skeptical politicians but this has to be reciprocated. A solution can only be found via engagement.