The US and Canada treat Bitcoin as a taxable and tradable commodity, akin to stocks and capital assets (though in June 2014 California removed a ban on using currencies other than the US dollar, which could boost confidence in such alternative payment methods). Meanwhile, China has forbidden Bitcoin outright, while France, Germany and Korea do not recognise its legitimacy.
In “The Bitcoin Question: Currency versus Trust-less Transfer Technology,’’ the OECD’s special advisor to the secretary-general on financial markets, Adrian Blundell-Wignall, explains the draws of Bitcoin while outlining some policy challenges. As a so-called crypto-currency, Bitcoin transactions bypass conventional third parties such as banks, reducing the costs of ownership transactions vis-à-vis credit cards and money transfers. These crypto “money” transmissions are also untraceable and can easily be used for tax evasion, money laundering and illicit financing. Without the legal backing of a commodity or an inherent market value, Bitcoin also falls prey to irrational “greater-fool” trading and volatility.
Mr Blundell-Wignall suggests policies that tackle the challenges of anonymity, while permitting the development of “trust-less transfers.’’ This technology promises to be “disruptive” to all intermediaries and the high costs they charge for their technologies and services. These developments should encourage competition and improve consumer welfare. But anonymous money transmission is entirely another matter. Registration of participants should be mandatory to allow tax, consumer protection, and anti-laundering authorities to authenticate the identity of the users. Income statements and balance sheet reporting within digital currency networks would increase accountability. Most importantly, policymaking must be agile in our heady world as already, second-wave digital currencies such as Litecoin, Worldcoin and Mastercoin have emerged to rival the Bitcoin, while new technologies such as the Ripple protocol are already being used (with some banks getting involved early in order to minimise
Blundell-Wignall, A. (2014), “The Bitcoin question: Currency versus trust-less transfer technology”, OECD Working Papers on Finance, Insurance and Private Pensions, No. 37, OECD Publishing. http://dx.doi.org/10.1787/5jz2pwjd9t20-en
©OECD Observer No 299, Q2 2014
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