Security Notes: Crypto And the Tax Man

It’s ten years since Bitcoin made its big splash. More than a thousand coins now follow in its footsteps. Digital coins are still a tiny fraction of worldwide money movement, but the hype is on.

Very serious financial experts and economists predict a rosy future for this new technology. Many share a strong conviction that money is on an irreversible course towards digitization, a trend that is about to change payment, commerce, global sharing, and culture itself. But what path will it take, and how fast will this happen?

One possible pathway is rooted in irony. The original popularity of Bitcoin was due to the fear of Spanish and Italian account holders toward their own governments. They saw the European Union confiscating savings accounts in Cyprus, and regarded Bitcoin as a means to keep money out of government reach.

Bitcoin is a brilliant (albeit flawed) combination of well-known cryptographic ideas and some bold novelties. The most prominent are: (i) the public ledger listing all traded coins, and (ii) random allocation of out-of-the-blue-generated digital coins. These two novelties can be turned around and used by the very governments that Bitcoin was designed to evade.

The public ledger, and randomized allocation, may revolutionize the world of taxation. Taxes are an enigma, mostly based on income. A multibillion dollar industry is busy with accounting acrobatics to reclassify income as something else. The government is battling its citizens in a never-ending tax war.

And lo and behold, digital money may replace the income-tax paradigm with a wealth-based, cheat-resistant, fair alternative. Given the importance of taxation, this paradigm change may induce governments to welcome and embrace the new technology of money.

Remember the public ledger? It is a public list of all the digital coins in circulation. Bitcoin trade is based on the idea that this ledger is efficiently distributed and known throughout the trading universe. Suppose now that the World Bank declares that Bitcoin holders will be taxed 5% each year to pay for worldwide refugees, climate change, and natural disasters.

To do this, the bank will have to collect 5% of the trading coins. Seems like a daunting task. The owners of those publicly displayed coins are cryptographically masked.

Indeed, but the identity of the coins themselves is clearly marked. So all that is needed is a fair way to take over 5% of the Bitcoins on the public ledger. To do that, the World Bank can use the other Bitcoin novelty: randomness.

Bitcoin poses, every 10 minutes, a puzzle that amounts to randomized trial and error. This is ingenious. If the puzzle were solvable by intellect, the smartest trader would get all the new coins. So randomness projects fairness (though Bitcoin prefers those who wrestle randomness with heavy computing power). By applying a high-quality randomizer, the World Bank can hit 5% of the outstanding coins, and announce them as “taxed,” that is, taken over by the bank.

The bank can take over the randomly marked coins without having any idea who it is taking them from. It does not matter. And, since all the trading Bitcoins are listed, their owners cannot hide them in the mattress or in the Cayman Islands. And, being random, every outstanding coin stands the same chance to be “hit.”

Which means that Bitcoin traders will pay taxes in direct proportion to their holdings. This is a fair, wealth-based tax, and cheat-resistant at that. Public-ledger technology will instantly spread the word: these coins have been taken over as tax. The World Bank being a global institution, representing all 188 United Nations states and supported by global Internet organizations, it would be impossible to resist the coin confiscation.

I have used Bitcoin to explain this concept. Wealth-based taxation is much better applied to national currencies in digitized form, where the coins don’t vary in value, and the trade itself is fully managed by the respective central bank.

We recommend this concept be applied to government-issued fiat coins, as we do with BitMint, which combines this cheat-resistant fair taxation with the emerging concept of universal income, circulating taxes from the top to the bottom of the financial pyramid. The advantage of instant and fair taxation will be very pronounced for local communities issuing and taxing community dollars.

The impact on taxation will serve as an irresistible inducement for governments to embrace digital currencies.

—Gideon Samid • Gideon@BitMint.com