France’s Finance Committee released a report recently summarising the results of a “fact-finding mission” on virtual currencies, blockchain technology, what roles each is likely to play in France’s future, and how they may be regulated.
Included in the report is a foreword written by the Finance Committee’s President, Éric Woerth. He clearly has a very solid grasp on cryptos and blockchain technology in general. That being said, the foreword is both insightful and far-fetched at different junctures. He expresses disappointment with the apparently crypto-friendly findings of the fact-finding committee in the report, as well as a rather unequivocal disdain for cryptocurrencies in general, particularly those meant to provide complete anonymity (i.e., XMR, ZCASH, PIVX), while simultaneously acknowledging crypto’s significant role in financing innovation, as well as praising blockchain technology and the possibilities offered by it as a whole.
Woerth appears to be reaching quite a bit at various points in his foreword to justify absolute condemnation, and, yes, even a blanket banning of anonymous cryptos, the true reason for which will become clear a little later.
Woerth begins the foreword by pointing out that crypto’s market capitalization has fallen from $800 billion at the end of 2017, when the fact-finding mission began, to $120 billion at the beginning of January 2019. He then uses this data point to assert rather matter-of-factly that this loss in market capital has all but destroyed any future possibility of cryptos replacing national currencies in any form.
Nevertheless, he does acknowledge that crypto still maintains some ambiguous role in society while opining that “[m]ais séparer le bon grain de l’ivraie” (separarting the wheat from the chaff) requires a detailed analysis of the nature of crypto-currencies, along with the possibilities and risks posed by them.
He then states that France does not have to be a “crypto-nation” (a term apparently used several times in the report.) Funny he’d feel the need to point that out at all, considering his previous assertion that crypto’s loss in market capital over the last year basically destroyed any possibility of any nation becoming a “crypto-nation.” Though his argument against becoming a “crypto-nation” is indeed compelling, while the decentralised nature of cryptos is often touted as one of its greatest assets, Woerth points out the potential dangers of any currency created outside a democratic/national framework, in constant competition with others of its ilk, with predefined limits, no “lendor of last resort” to fall back on, or real legitimacy outside its technical framework.
He then recalls periods of “currency competition,” such as the United States’ “free banking” era in the 1800s. Free banking is a monetary arrangement in which banks are able to issue their own currency (banknotes), with little to no oversight, backed by a commodity (such as gold), fiat money, or bonds issued by a central bank.
In the United States’ case, this presented many problems over time, including difficulty converting, liquidity risks, more complicated transactions, high transaction costs, and lack of a “lendor of last resort.” A number of banks failed (though certain free banking systems from the same period in the US are historically heralded as wild successes). This eventually led to the establishment of the Federal Reserve in 1913.
Thus, in Woerth’s view, the shortcomings of our current central banking system are a major improvement over past systems, and the prospect of replacing a centralized national currency with unregulated cryptos would constitute a reversion to the follies of the Free Banking Era.
Regardless, his concerns in this sphere are primarily focused around what he describes as the paradox crypto’s “opacity” is based on: the innovations made possible by the blockchain’s inherently transparent nature (i.e., the contractual ramifications of autonomous certification) are what make the technology’s future so promising.
He isn’t wrong. Though Woerth then goes the extra step in suggesting a clear distinction be drawn between blockchain technology and the cyrpotocurrencies that fostered its very creation. The circulation of cryptocurrencies meant to maintain anonymity in particular, he says, ought to be wholly condemned for the trafficking facilitated by them.
Helpful in this endeavor, Woerth says, is an amendment he’s made to 2019’s finance bill, defining cryptos more precisely. Essentially, the amendment defines crypto-currencies as any digital representation of a security not issued or guaranteed by a central bank or public authority. He seems to want to create a clear delineation between cryptos and other freely traded securities, such as stocks. Regardless, his definition is dicey at best and open to interpretation.
Woerth then points out the issues surrounding crypto’s volatility. Indeed, its volatility is perhaps the primary reason why the number of transactions made with crypto involving goods and services in general remains relatively low (DNMs excluded), and the majority of crypto-transactions currently made are most likely for purely speculative purposes. For this reason, crypto-currencies do appear capable of posing some significant risk the financial system in general. At the same time, Woerth also acknowledges the added value cryptos have the potential to bring to the financial system, by simplifying the international monetary system, for instance; due to the simplicity and expedience with which they allow the conversion of official currencies between them (i.e., shapeshift.io and xmr.to, though I doubt that’s what Woerth had in mind).
Next, Woerth discusses the positive result of clarifying crypto’s place in the “tax framework.” Basically, crypto is applicable to capital gains – a sensible and attractive approach for France, no doubt. Yet, he disagrees with the report’s recommendation in one key area with regard to the “tax framework:” that capital gains on crypto only be taxable when they are transferred to a person’s bank account. Should this be the case, Woerth argues, goods and services rendered using crypto as payment, as well as capital gains converted to legal tender on any other platform would also be exempt from taxation.
Surely, it is here we reach the crux of Woerth’s staunch anti-anono-crypto stance. He wants to tax every transaction made with crypto and all capital gains made on crypto, despite their volatility, and regardless of whether they’ve been cashed out. So, while Woerth makes some very compelling arguments regarding crypto and what role it should be encouraged to play in the grand scheme of things, it is hard to see past the conspicuous milieu of maximal taxability that seems to permeate each of his arguments, no matter how seemingly sound.
Anonymous cryptos like XMR are the layman’s Swiss Bank Account. Can’t tax what you can’t see. Condemn all you want, can’t regulate what you can’t see either, Woerth. If you’re so dead set on squeezing the common Frenchman for every penny he’s worth, maybe you should try raising gas prices or something?