Around the world authorities are worried that virtual currencies could be turned into tools for tax evasion. Among those who have expressed alarm include the Prime Minister of India, Narendra Modi and his British counterpart, Theresa May. And earlier this month Steven Mnuchin, the U.S. Treasury Secretary, made a plea to the 20 biggest economies in the world to collaborate in finding ways of ensuring that digital currencies do not turn out to be the next Swiss bank accounts.
These concerns have arisen following a largely successful global crackdown on various tax havens with regards to traditional banking. What has made it successful is the enforcement of anti-money laundering and know-your-client rules. As a result a lot of mainstream financial firms took the action of limiting the access of their customers to the secretive banking system of Switzerland. Consequently it has become harder to hide assets from courts or the government.
Initially criminals were the earliest adopters per a study conducted over a three-year period by a Washington think tank known as the Foundation for Defense of Democracies. The demand for new ways of hiding assets following the crackdown on tax havens is however growing. While virtual currency exchanges are covered by the anti-money laundering and know-your-client rules, there has not been consistency with regards to enforcement especially in jurisdictions outside the United States.
The use of digital coins in tax evasion is undergoing a rapid evolution especially with the unveiling of privacy coins that include Monero (XMR) and ZCash (ZEC). These virtual currencies use encryption which makes them untraceable. Per Grayscale Investments the amount of money held offshore is approximately $10 trillion. The New York-based firm estimates that Zcash could be used to hide as much as 10% of those offshore assets by 2025.
Anonymous but traceable
With Bitcoin (BTC) on the other hand, while it may be anonymous it is still traceable since it is based on a distributed ledger technology known as blockchain which tracks each and every transaction. Despite the fact that the only information that gets revealed concerning sellers and buyers are numbers and letters, authorities have developed ways of tracking and seizing illicit Bitcoins. This includes a special software which is capable of detecting patterns and tracing the owner.
Under the current laws financial institutions are required to report all suspicious activities and this includes withdrawals that exceed $9,999. Cryptocurrency exchanges on the other hand are mandated to ensure they keep records of customers and take similar measures as well.
According to the money-laundering study conducted by the Foundation for Defense of Democracies, governments are encouraged to act against the illegal uses of virtual currencies while at the same ensuring that they don?t stifle financial innovation. However the study warns that it will be impossible for governments to completely stomp out illegal uses of virtual currencies.
In the study the Foundation for Defense of Democracies focused on money laundering that was conducted via cryptocurrency mixers, gambling sites digital coin exchanges and Bitcoin ATMs. According to the study illegal uses of virtual currencies was five times higher in Europe compared to North America.
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