The Cost of Failing to Support the little to be Great – How Cryptocurrencies can Diversify Domestic Resource Mobilization for Developing Countries: A Rejoinder on UNCTAD Policy Brief on Cryptocurrencies with Policy

Developing countries need to diversify domestic revenue mobilization to finance for development. The usual and current frameworks for revenue mobilizations have not achieved the intended measurable outcomes with so much corruption, leakages, lack of transparency and low payment of taxes.

It is time we look elsewhere and diversify to mobilize enough revenue for economic development, and cryptocurrencies have all the features to drive for such transformation.

In the UN’s conference on Trade and Development (UNCTAD) policy brief No.102, it stated that “…cryptocurrencies have become a new channel undermining domestic resource mobilization in developing countries”. In as much we understand that tax havens are controlled by banks and governments, cryptocurrency is also controlled by private individuals.

Though there exist crypto exchanges operating under the peer-to-peer contract of trust and others registered as legal entities in most developed countries, Governments of the developing countries however, have not put up a regional and sub-regional conversation on cryptocurrency adoption and regulation to help diversify domestic revenue mobilization.

Most people in developing countries understand the risks in cryptocurrency investment. These crypto enthusiasts understand the volatility and often pay a majority of the indirect taxes in the form of buying servers, internet data, offline fiat transfers, banking and use of e-commerce platforms, the buying of dollar for crypto conversions and other related activities. In a way, crypto asset holders pay both direct and indirect taxes to the government.

Tax havens are off-shore jurisdictions with little to no taxes on savings of the wealthy and corporations. These havens or secrete off-shore savings and deposits allows the wealthy groups and individuals to hide their financial details and dealings from the rule of law. Tax haven is estimated to collectively cost governments $500 to $600 billion annually. Developing countries have a share of $200 billion annually with most being government officials exporting funds to be invested into tax havens.

There have been competitions among countries including Switzerland and Panama, to help the wealthy to avoid taxes. This is not illegal because governments of these countries have reduced taxes on their investments.

African government officials have “stolen” huge sums of public funds and aid, and have hidden them in tax havens leading to inequality and abject poverty. The International Monetary Fund (IMF) and UNCTAD estimated an annual lost of $100 billion in corporate tax $213 billion in tax avoidance to development countries respectively.

Globally, tax evasion and avoidance have existed and Africa is consistently losing $14 billion annually (According to Oxfam).

The UNCTAD has not been able to help to tame and prevent the multi-corporations, super-rich and government officials from diverting what belongs to the poor into the pockets of the wealthy.

In Africa, it is the middle-income earners and the poor unemployed youth who are investing into cryptocurrencies with their meagre incomes and undertaking passive activities in the blockchain ecosystem to earn incomes for living. These poor and unemployed youths are having no intentions of tax evasion. They also see the cryptocurrency as a safe avenue for investment and could lift them out of poverty.

Tax evasion is not a new thing in Africa and cryptocurrency should not be branded as the new lead in the expansion of tax evasion. It is therefore important to stop governments of developing countries from pilfering public funds and saving them in tax havens than to stop cryptocurrencies from diversifying domestic revenue assurance.

It is imperative to note that most developing countries do not have tax regulations on cryptocurrencies and have declared cryptocurrency as high-risk venture, and released uncountable pressers warning citizens against its use.

This has made users and investors unable to openly trade and use because governments of the developing countries are not ready to put up infrastructures leading to regulations and adoption that could allow for tax collections.

People have accepted the risk nature of cryptocurrencies since 2009 when the first Genesis block was mined and coming in to tax a project that had be discredited by governments is quite unfounded.

Cryptocurrency users are therefore not to be blamed for tax evasion if it exists, but that of unreadiness of governments to create favorable legislations for tax compliance. It is worthy to note that cryptocurrency is not the next tax haven 2.0, but the next poverty alleviation tool 2.0, for developing countries.

Also, to note that, cryptocurrency is the most transparent financial ecosystem more than the traditional central bank’s fiat currencies where supply and distributions are not known to the taxpayers. This is why the fiat form of money laundering would always exist because there is nothing recorded on transactions between two parties making it completely untraceable.

However, when using cryptocurrencies, transactions are public and transparent for all which government’s fiats do not exhibit same. This is not tax haven and evasion but one that is redefining financial inclusion for revenue diversity.

Recommendation

Equally while not exhaustive, the following would provide the potential means to encourage usage for tax compliance.

Regulating cryptocurrencies for tax compliance would require a case by case with much emphasis on cultural relativism of financial operations through transparent compliance platforms that are open and accessible to users and the population while protecting the financial sovereignty of a state. That could be difficult because, cryptocurrency is currently deepening globalization with wallet creation and asset holdings. The wallets created are can be used globally and that the UN should instead find the means to use cryptocurrencies to drive for a more globalized economy.

Cryptocurrencies instead have had a positive socioeconomic impact on the people of developing countries through poverty alleviation programs in the blockchain ecosystem. Imposing higher taxes to discourage it usage would instead make crypto asset holders reluctant to declare their assets and holdings in the virtual space. The higher taxes would also push those who have been lifted out of poverty through cryptocurrency back to poverty making the fight on poverty endless and unachievable.
Limiting the amount of transactions and trade inflows on exchanges by governments would bring back the traditional individual-to-individual or peer-to-peer exchanges that existed before the built-in platforms for exchanges. This would also further increase unemployment in developing countries. The exchanges have created jobs and brought about competitive innovations and this could dry up competitions and financial inclusion.
Almost all the cryptocurrencies (tokens/coins) are not created and mined in developing countries but in developed countries. Global, regional and countries should be clear on what they intend to regulate. Is it the supply or the trade and usage or the exchanges? It is therefore important to think of how cryptocurrencies could be used to end corruption, terrorism financing and money laundering than to band its use.
Taxing cryptocurrencies is taxation without representation. No service is provided by the government when a civilian purchase the crypto he/she has already paid for. Governments should therefore provide services in the crypto ecosystem to but those services must be transparent and public to allow for maximum trust.

Peter Bismark Kwofie

Coin Liberty

Institute for Liberty & Policy Innovation

Tema – Ghana

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