Category: Payments

Ever since computers were first introduced into the retail banking system in the late 1950s, there has been the vision of a future world where cash is obsolete. The near death of personal cheques, increase in debit and credit card use, and innovations such as PayPal, Square, Apple Pay and Bitcoin, have led us to believe the cashless society is well within our reach.

But data from Retail Banking Research, one of the most authoritative sources in the area, suggests that even though cashless payments are growing rapidly across the world, hard currency remains resilient. This trend was corroborated by a study commissioned by the ATM Industry Association of a panel of 13 countries. It suggested that global demand for cash grew 4.5% between 2009 and 2013 (when the latest figures were available).

So 50 years into the journey and we are still not there yet. However, a number of innovations have taken place around the world. Here’s how different continents stack up.

Europe

One in ten card payments were contactless for the first time in 2015 in the UK. By making small payments easier and quicker, contactless marks a major threat to cash. London is also fast becoming the world’s fintech capital, despite having substantially fewer resources available for investment than the US.

Next summer Copenhagen will host Money 20/20, the world’s major annual event for emerging payment technology. It will be the first time the forum convenes outside the US, bearing witness to the increasing importance of Europe when it comes to innovation in payments and financial technology. In countries like the Netherlands there are cafes and even supermarkets that no longer accept cash.

Many have pointed to the slow death of cash in Scandinavia, but cash is unlikely to completely die out – few may develop a mobile app suited to the needs of refugee migrants there, for example.

North America

Despite playing host to the world’s top technology firms and research centres, the US lags behind when it comes to implementing some of this tech. Chip and pin payment cards were only launched in October 2015 and do not seem to have done well over the Christmas holiday season, with reports of large retailers bypassing card readers and going back to signatures. This might seem backward but it’s important to remember that chip and pin cards are as much a protocol to determine who will bear the cost of fraud as a security feature.

And, while the US has been slow to introduce chip and pin, there have been developments in smartphone payments. The bank JP Morgan Chase and retailer Walmart have both launched rivals to Apple Pay, which shows how retailers, banks and regulators are innovating to bring about faster payments and a potential cashless society.

Africa and the Middle East

The success of the mobile payments system, M-Pesa, in increasing financial inclusion in Kenya is well known, with the majority of the population able to transfer money using their phones, despite not having a bank account. And there has been similar growth of mobile payments in Botswana and South Africa. But Safaricom (the telecom company behind M-Pesa) has failed to replicate its model in neighbouring countries such as Tanzania. The jury is also out regarding the Cash-less Nigeria Project by its central bank, which aims to reduce the the amount of physical cash circulating in the economy.

Africa and the Middle East remain the areas with the lowest global numbers of adults with a bank account while MENA countries (as well as China and other Asia Pacific nations) have been and will continue to be the worlds’ growth markets for ATM manufacturers. This suggests the high use of banknotes in the everyday life of people in these regions.

Asia, Latin America and Oceania

In China, the mobile app WeChat is one to watch. WeChat, part of digital behemoth Tencent, has grown from its original service as a messaging app in 2011 to include cab-hailing, food-ordering and money transfers. WeChat ranks as China’s most popular app with 650m users and is used to send both RMB and cryptocurrencies like Bitcoin between users.

Technology as a promoter of financial inclusion is the name of the game in poor economies where the bottom third of the population hardly have any access to the financial sector and mobile money is seen as the potential solution. Chile is a notable example of successful government initiatives in this direction. But the one to watch is the Indian government’s drive to replace money with mobile payments on top of a growing private network made up of 140,000 private business and public sector bank correspondents.

The challenge for mobile money, however, is that it sits at the intersection of finance and telecommunication and so faces regulations from both. On top of that, India and other countries in Asia and Latin America have a significant number of transactions that take place outside the formal financial sector and typically, an over-regulated telecommunications sector. At the same time, those at the “bottom of the pyramid” are fearful of and distrust established financial institutions.

Australia offers a much brighter outlook. The introduction of contactless payment cards in 2010 has proven hugely successful and as a result plastic has significantly eroded the use of cash and ATMs. Indeed, a recent study by the Reserve Bank of Australia found that the use of banknotes and coins fell from 69% in 2007 to just 47% in 2013. That decline took place across all age and income groups, with people in rural locations more likely to be using cash than those in major cities.

While some countries have embraced mostly electronic forms of payment, this does not mean that others still using banknotes and coins are less efficient or backward as some might seem to think. Differences between countries and between rich and poor within them remain partly due to custom, culture and regulation. But also because new technology has failed to make its case to users.

There is more innovative technology looking for a market than consumers looking for alternative ways to pay. And there is nothing wrong with existing forms of payment – they, and cash in particular, work well in most countries, for most consumers, 99% of the time. Of course, people change their habits and financial technology start-ups may one day disrupt the status quo.

Authors: Bernardo Batiz-Laz, Professor of Business History and Bank Management, Bangor University;  Leonidas Efthymio, Lecturer in Management and Strategy, Intercollege Larnaca;  Sophia Michael, Languages Department Coordinator/Lecturer of English, Intercollege Larnaca.

Bitcoin enthusiasts have recently been roiled by claims that an Australian named Craig Wright and his deceased partner are the mysterious founders behind the cryptocurrency.

Of course, we’ve been down this path before. The New York Times, Fast Company, The New Yorker and Newsweek have all made similar claims about different people, only to be proved wrong. And last month, Wired – the magazine behind the most recent claim – said there are reasons to believe Wright is actually a hoaxer and not “Satoshi Nakamoto,” as the currency’s creator is known.

Regardless of whether the new claims are correct, it has resurrected a worry that has long plagued bitcoin users. Around one million bitcoins were mined early in the currency’s history and have never been transferred. Were they to be sold en masse, bitcoin’s value could drop precipitously, wiping out a lot of wealth and threatening its status as a reliable alternate currency, independent of banks and governments.

However, the reporting about Wright and the bitcoin businesses and trusts he has established – presumably for tax and secrecy purposes – reveals an even bigger threat to bitcoin users and other supporters of virtual currency: how will such currencies be treated for tax purposes?

This is a question I have been exploring for the last decade, both with regard to virtual currencies designed to be used solely online, such as for World of Warcraft, and those designed for use in the real world, such as bitcoin.

Currency or investment?

Bitcoins are created by a computer algorithm and are initially allocated through a process colloquially referred to as “mining.” Miners collect bitcoins by solving complex mathematical equations used to authenticate transfers and in so doing both bring more of the currency into the world and maintain the system.

Bitcoin users have a public key and a private key associated with the bitcoins they own. To effect a transfer, one must use the private key. However, transfers are recorded on a public “block chain,” which uses the associated public key.

This secure public record-keeping obviates the need for third-party intermediaries, like banks. While the world can see the public key and how many bitcoins are associated with it, the owner of the bitcoin can remain anonymous if he keeps his association with that key secret.

Approximately 15 million bitcoins have been issued to date, and they are currently valued at about US$430 each, for a total of approximately $6.5 billion. The algorithm is designed to generate 21 million bitcoins, and experts anticipate that the last bitcoin will be issued sometime between 2110 and 2140.

Bitcoin is designed to be used as a currency, though some hold it as an investment. The difficulty is that governments have taken a variety of positions on the nature of bitcoin for tax purposes.

For instance, some countries, including those in Europe, have classified bitcoin as a currency for consumption tax purposes, meaning that the various value-added taxes do not apply to bitcoin exchanges, while others, such as Australia, have not. Similarly, the U.K. treats bitcoin as foreign currency for income tax purposes, while the U.S. regards it as property.

Those who “mine” bitcoins will likely be subject to income tax on the value they receive under the theory that they are being compensated for validating bitcoin transactions and maintaining the block chain that records all transfers. But this is true regardless of whether bitcoin is recognized as a currency. In other words, they are not really mining and not subject to the complex rules governing mining operations. Instead, they are being compensated for services.

The difficulty arises when people try to spend their bitcoins, however acquired.

How cash transactions are taxed

Those who spend local currency, such as dollars (U.S. or Australian) or euros, do not report a gain or loss when they do so. For instance, if I buy a hamburger, I don’t have a gain or loss on the currency used, regardless of whether it has changed value relative to other currencies.

As the baseline currency, a dollar is worth a dollar, even though it may fluctuate against other currencies or be affected by inflation.

Foreign currency is different. If I buy a euro for $1 and spend it later, when it is worth $1.10, theoretically I have a $0.10 gain that I should be taxed on. Different countries have different rules, but in the U.S., taxpayers need not pay taxes on such gains if they are under $200 in a given year.

By refusing to classify bitcoin as a currency for income tax purposes (local or otherwise), tax authorities effectively treat bitcoins as any other property, meaning that those who buy items with bitcoins must report any gain on the transaction associated with a change in its value. That is, it is treated like an investment, regardless of how the owner actually uses it.

It is as if they sold their bitcoins for cash and then used that cash to make a purchase. Worse yet, if the bitcoin has gone down in value, taxpayers might not be able to deduct the losses, because they could be considered personal. Thus, anyone using bitcoin as a currency has to keep track of each bitcoin’s cost so that he can accurately calculate gain or loss.

This administrative task, combined with the potential need to pay income taxes, could make bitcoin too difficult to use as an alternate currency.

Wright’s woes

Wright’s tale of woe with the Australia Tax Authority (ATA) (revealed in a transcript made public as part of the effort to prove that he is Satoshi Nakamoto) shows how the decision not to classify bitcoin as a currency creates problems with a tax on goods and services (GST).

Among other things, Wright sought to create an exchange to buy and sell bitcoin. If bitcoin were considered a currency, such exchanges would be exempt from the GST, and the exchange could operate economically. However, if the GST applied to such transactions, as the ATA claimed, the exchange would be forced to purchase $1 of bitcoin for $1.10 (assuming a 10% rate).

In other words, if you use normal currency, it would cost you $1, but if you use bitcoin, it would cost $1.10. Bitcoin becomes a lot less attractive under those conditions.

To avoid this result, Wright and his lawyers established a number of offshore trusts and argued that, for many of the transactions the ATA was investigating, no bitcoin was actually transferred. Instead, the beneficial interests in the trusts, which were not subject to the GST, were transferred. The bitcoin itself was purportedly held offshore, and any transfer of the bitcoin or rights to it were outside the reach of the ATA.

The problem for tax authorities

It’s not clear whether such arguments would actually succeed, but they illustrate a real problem that intangible assets raise for both consumption and income taxes, especially for countries that use a territorial tax system (that is, one that doesn’t tax foreign income).

If assets are considered to be outside a given country, they will not be subject to that country’s GST or equivalent tax. Moreover, if the asset can be “wrapped” in a trust or other entity whose ownership interests are exempt from the GST, it can potentially escape tax even if it is held locally.

Similarly, if such assets generate income, for instance when they are bought or sold, under a territorial system, that income will be taxed in the country where the sale occurred.

It is not surprising that Wright established at least some of his trusts in known tax havens, such as the Seychelles. Even if his efforts to shield bitcoin from tax through these efforts succeed, they are far too complicated for the average user and will likely further impede bitcoin’s adoption as an alternate currency.

Bitcoin’s challenge

Much of the recent focus has been on whether Wright really created bitcoin and whether he is sitting on a hoard worth close to a half billion dollars, which could potentially destabilize the market.

However, the real threat to bitcoin and other similar products may come from a far more mundane source: the world’s tax authorities. Absent favorable rulings, every bitcoin transaction could generate both income and consumption tax liability, rendering bitcoin impractical as an alternate currency.

Sophisticated tax planning to avoid such outcomes might succeed but would make bitcoin harder to use.

Thus, while bitcoin was developed as a means to free individuals from the need to interact with third parties, including the government, it nonetheless needs governmental cooperation if it is to move from the fringes to the mainstream.

Author: Adam Chodorow, Professor of Law, Arizona State University