Digitalisation, blockchain / crypto inflicts regulatory changes ahead
By Prof Robert Anthony, Anthony & Cie
It is important to highlight the acceleration of digitalisation globally, and the effect this has on business today. Things have evolved from the large mainframe computer to utilising the microcomputer. It is often using Apple and Microsoft technology, as well as Android software and equipment.
Initially, the assistance of information technology facilitated analytical data and automated Human Resources. It necessitated programmers, as well as the entry of data, to enable the practical usage of the technology. The invention of the calculator seems so recent. In 1960, engineers and mathematicians were using slide rules. The miniaturisation of hardware and the evolution of its reliability meant the mainframes for small and medium commercial businesses became of common use.
So, what has changed in the last few years? The implementation of artificial intelligence has created the ability to remove third-party human intervention into many transactions. It is important to say, however, it needs to be initiated at some stage by a human intervention albeit automated afterwards.
If we go back to the ancient Greek times, barter trade was a common thing. People exchanged valued commodities for food and animals, coins were there to substitute for goods being more portable, and intermediaries evolved into agents or brokers. Transportation by third parties did not enable direct trade, so agents/brokers took margins for acting as the middle. One of the first exchanges in the world occurred due to its geographical location, in Marseille, France, by The Old Port. Over the centuries, this became more sophisticated. We saw USA's Wells Fargo Bank often being cited in Western movies. They also transported gold.
Looking over these years, with the development of the international banking system, the globalisation of technology meant easy access to assets and services internationally. The ownership could also be dematerialised by way of digital ledgers, making the transfer and traceability much simpler. It was important, however, to have security and an audit trail. Computer software engineers worked on this issue and created anti-cyber-attack security and validation of transactions by different layers of security validation processes.
Back to barter trade, there were various websites offering it as a service. However, if it could advance by artificial intelligence, servicing costs would be simplified. If one could link different natures of asset classes and assets this would create a chain utilising, of course, the security validation. It gives birth to the blockchain. The blockchain can be closed within a few companies, or open to whoever connects giving an unlimited source of supply and demand. One sets one's terms and conditions, and the market determines the ability to transact.
After having established the opportunity, the next question was how to exchange the trade. It needed a common denominator, so the coin or token known as a digital currency was invented. Many companies could create their own tokens representing their offering; it is where things went out of hand. Innovative entrepreneurs decided to create new issues of tokens and coins for cash. Sometimes there was no substance behind the offering, creating a risk of losing money to the subscriber, as they were scams. At the time, the legislation of the ICO did not adequately protect the consumers either. These issues were considered a form of currency and did not fit into current government legislation. Like all transactions, there are good and bad transactions. Laws are there to protect the public, as the sudden volume of this new opportunity created alarm bells around the world.
China illegalised cryptocurrency. Switzerland, Malta, South Korea, and many others brought in new legislation, disrupting the banking system, as it needed to adapt to artificial intelligence. Today, the G20 has recognised the need to regulate cryptocurrencies. They need to be in line with the Financial Action Task Force standards. Anti-money laundering is necessary to control the financing of terrorism. The present legislation was not drafted to deal with this activity, and serious concerns were highlighted due to the use of cryptocurrencies for money laundering. There were arguments that traditional banks are just as susceptible to finance terrorism. However, no matter the right or wrong, the issues needed to be addressed. The digitalisation has an impact on international taxation, and it will be a matter of time until base erosion profit sharing and transfer pricing rules will apply to traded cryptocurrency and tokens. New exchanges have been established for trade, and they will become gradually regulated with the same licensing obligation as traditional trading platforms.
So, what does this all mean?
We have gone a long way since trading in the port of Marseille. We can trade on a telephone application, an offce computer, or a laptop in the house. But whatever we do, we will be taxed where the transactions take place. We will be regulated and controlled for financial services in different countries around the world. We will have the ability to automate our businesses and have paperless transactions at a lower cost, cutting out middle brokers. We will pay faceless service providers fees for using their facilities. If our security is sound, we will have peace of mind. If it is faulty, we may not even exist at all, as someone could steal our digital identity.
Today I am being asked to help entities structure in this new market place. It is exciting and passionate, but care is needed to ensure laws are respected and the evolution of new legislation anticipated. Different parts of the world are competing for the business. It is not just a question of tax and regulations, but also adequate know-how and labour to create a real substance to the activity. Small jurisdictions have limited labour force and, in my opinion, with the evolution of transfer pricing and BEPS may not be as attractive as first thought. The definition of a security token is essential and often misinterpreted. Great care is necessary there, to not make mistakes and to ensure a company is compliant both in fiscal and regulatory areas.
Published: January 2019 l Photo: Matej Kastelic - stock.adobe.com