The Rise of Cryptocurrencies for Tax Avoidance/Evasion (1/29/18)

A good article on Cryptocurrencies and Taxes.  Rob Urban, Governments Worry That Cryptocurrencies Could Be the ‘Next Swiss Bank Account’ (BloombergMarkets 1/29/18), here.  Excerpts:

Authorities around the world worry that cryptocurrencies could become tax havens. 

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British Prime Minister Theresa May and Indian Prime Minister Narendra Modi are among the world leaders who’ve expressed alarm at the rise of virtual cash to move money offshore. The U.S. Congress held hearings this month, and Treasury Secretary Steven Mnuchin called on the world’s 20 biggest economies to work together to make sure cryptocurrencies don’t “become the next Swiss bank account.” The concern comes after a successful international crackdown on tax havens in traditional banking. 

“Every country is scrambling to come up with an answer,” said Drake, who serves on the boards of 25 public and private companies. “There needs to be a regulated structure that won’t kill the industry.” 

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There’s demand for fresh ways to hide assets after U.S. and European regulators clamped down on traditional banks. They’ve ramped up enforcement of “know-your-customer” and anti-money-laundering rules and forced offshore financial institutions to disclose client information. The campaign prompted many mainstream financial firms to limit customers’ access to Switzerland’s secretive banking system. That’s made it harder to hide funds from the government, courts, spouses or other prying eyes back home. 

Cryptocurrency exchanges are covered by the rules, but enforcement hasn’t been consistent, particularly outside the U.S. 

The use of virtual money to store assets offshore is evolving rapidly, with the introduction of so-called privacy coins, such as ZCash and Monero, which use methods like encryption to make them untraceable. About $10 trillion is held offshore worldwide, according to Grayscale Investments, a New York-based firm that’s offering a ZCash Trust to investors. ZCash could capture as much as 10 percent of that by 2025, said Grayscale’s Matthew Beck. 

“This is the first time anyone in the world can store their cash privately and be their own bank,” Beck said. “Privacy is a dwindling resource and one that people are going to be willing to pay for.” 

Even though ZCash touts the impenetrability of its encryption technology, Beck argues that government oversight is still needed. 

“We don’t think this ecosystem can grow without regulation,” Beck said. 

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Bitcoin, the most popular cryptocurrency, is anonymous, though it can be traced, with the electronic public ledger called blockchain keeping track of every transaction. Even though all that’s revealed of buyers and sellers are strings of letters and numbers, law enforcement has developed technology to track and seize illicit Bitcoins. 

Existing laws require banks to report suspicious activity, including withdrawals of more than $9,999, while digital-currency exchanges are required to keep customer records and take similar measures. Once Bitcoin is purchased, there’s software that can detect patterns and trace the owner, said Kerry Myers, clinical professor of forensic accounting and law at the Lynn Pippenger School of Accountancy at the University of South Florida in Tampa.