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Tuesday, July 21, 2015

Bitcoin exchanges gain traction, dodge VAT

The European Union's Court of Justice Advocate exempted bitcoin trading from Europe's value-added tax (VAT). The Luxembourg-based tribunal heard arguments from Estonia, Germany and Sweden before reaching the July 16, 2015, decision. These parties and the European Banking Authority had petitioned the court for guidance on taxing digital currencies.

In the absence of an English trial transcript, analysts used Google translation tools to review the ruling. They concluded that European authorities could find no legal precedent for taxing digital exchange conversions between digital money and fiat currencies. The ruling stipulates that digital currency products are created outside of the traditional banking system and therefore not subject to the same rules as fiat currencies. The ruling further instructs European member states to render all virtual currency transactions tax exempt including "payments, transfers, debts, checks and other negotiable instruments, but excluding debt collection."

This action is a big win for Swedish entrepreneur David Hedqvist who wanted to sell bitcoins on his website and initially asked Swedish tax authorities to clarify bitcoin's taxable status. This matter and similar cases in Estonia and Germany were escalated to the EU when regional authorities in their respective member states failed to adequately define taxation parameters.

US, Europe outpaced in bitcoin adoption

Financial analysts expect the ruling to advance bitcoin adoption throughout the EU. Analysts and digital currency stakeholders anticipate that growing awareness of bitcoin's tax exempt status, combined with growing acceptance of bitcoin and other digital currencies at online and brick-and-mortar establishments, will create a tipping point for consumers and merchants.

Jack Jia, Operations Manager at San Francisco-based Snapcard has seen digital currency acceptance vary by region. Emerging economies have been faster than developed nations to adopt bitcoin and digital currencies, he stated.

"Credit cards are popular in the U.S., where consumers get points, rewards and cash back," he said. "But in developing countries like Argentina and Brazil, where currencies have been devalued against the dollar, consumers find it useful to have a democratized currency that is essentially free and supported by everyone."

Blockchain: beyond payments

While digital currencies are a relatively new phenomenon, there is evidence of potential use cases for these technologies beyond the payments ecosystem. Here are several examples:

  • Investment products: Jia noted that bitcoin and digital currencies are viable stored value products that investors can use as a hedge against institutional risk. "It makes sense to have bitcoin as an asset class in a diversified investment portfolio," he added.

  • Cross-border payments: Digital currencies are an efficient mechanism for cross-border payments. "Big enterprises operating at a global level can send mass payments using bitcoin as a rail," Jia said. "Cross-border transfers bypass the banking system and deliver money in local currency."

  • Intellectual property registration: Melanie Swan, author of Blockchain: Blueprint for a new economy suggested there are other use cases for the distributed ledger technology that underpins bitcoin and other digital currencies. "[A] standard algorithm is run over a file (any file) to compress it into a short 64-character code (called a hash) that is unique to that document," she wrote. "The hash is then included in a blockchain transaction, which adds the timestamp [which is] proof of that digital asset existing at that moment." Swan believes any digital asset, regardless of its size, could be registered in the blockchain, adding it to a public record and effectively protecting its intellectual property.

Mobile web driving digital currency

Dr. Irving Wladawsky-Berger, Chairman Emeritus at the IBM Academy of Technology, attributes growing adoption of digital currencies to the evolution of the Internet, which has transformed the way we communicate and conduct business day to day.

"Now we're in a major next stage in the evolution of the Internet with digital money, digital payment and digital identity," he said, noting the disparity between banks, which are "conservative by nature, reacting at their own rate and pace," and technology companies that "move at the rate and pace of technology."

The cultural clash between slow-moving financial industries and fast-moving technology and telecommunications companies has been exacerbated by "the great new world of crypto-currencies" and their new infrastructures such as blockchain. These digital currencies facilitate financial transactions and payments without a central banking authority. "Instead, the crypto-currencies use very sophisticated peer-to-peer protocols to handle their transactions in very different ways," he stated.

Wladawsky-Berger also noted that bitcoin is the most famous crypto-currency; its standardized protocols and open source implementation make it widely accessible. However, bitcoin is "only one of hundreds of such digital currencies that are being invented all over the world," he said. "The rise of mobile devices, smart phones and the mobile Internet has created an explosion of Internet-connected phones [that] has spurred massive innovation in the ways in which we handle payments, all centered in the way we handle mobile currencies." end of article

Editor's Note:

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