Digital Currencies And Global Economy

By Oyetola Muyiwa Atoyebi, SAN

DIGITAL CURRENCIES AND GLOBAL ECONOMY

SNIPPET

For decades, paper money, also called physical money, has been a mainstay of global economics. When physical money is transferred, financial obligations cease immediately, so businesses can continue as usual. It is for this reason that physical money became so popular.

A cash transaction cannot be completed at a distance. The interconnectedness of various economies around the world made this a problem. Digital currencies provided a solution.

INTRODUCTION

I believe it is no news that the world has undergone several evolutions and is currently in the technological era. This evolution of disruptive technology in the 21^st century is eminent in different facets of life ranging from science, economy, law, and so on. However, this technological evolution has also reached the financial system – and even the design of money itself. For instance, the evolution of money from the coin to leather money, then to paper money, and now digital currency. Digital currencies, and especially those which have an embedded decentralized payment mechanism based on the use of a distributed ledger, are innovations that could have a range of impacts on various aspects of financial markets and the wider economy. This article purports to critically analyze the concept of Digital currency in the global economy while examining the possibility of its revenue generation.

MEANING

Digital currency is any form of money or payment system that exists only in electronic form. It lacks a tangible form such as a bill, checks, or coins and it is accounted for and transferred using electronic codes in computers.[1] Digital currencies are also known as Digital Money or Cyber-cash can only be owned and spent using electronic wallets or designated connected networks. It is pertinent to note that this is a blanket term used to describe all electronic money, that includes both virtual currency and cryptocurrency.

Virtual Currency which is a subset of digital currencies simply means a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to fiat currencies but is used as a means of exchange and can be transferred, stored, or traded electronically.[2] Virtual currencies are either centralized or decentralized. Centralized virtual currencies have a centralized repository and are typically issued and controlled by a single organization, while decentralized virtual currencies have no central repository and are issued and operated in a decentralized manner.[3]

Going further, cryptocurrency is a subset of virtual currency that implements cryptography technology to secure and authenticate currency transactions. Cryptocurrencies depend on blockchain networks. Hence, cryptocurrencies are decentralized virtual currencies. Some of the examples are Bitcoin, Litecoin, Ethereum, etc.

Central bank digital currencies (CBDCs) are digital tokens issued by central banks[4]. The nature of the CBDCs already issued by countries that have adopted them is similar to a class of cryptocurrency known as stablecoins. However, CBDCs value is fixed to the value of the issuing country’s fiat currency and they are solely issued by the central bank of that country, thus assuming the legal tender role in the issuing country’s financial system.[5]

ECONOMIC IMPACTS OF DIGITAL CURRENCIES

Digital currencies are a new direction in the development of modern financial systems. The first digital currency was Bitcoin, which was introduced by Satoshi Nakamoto in November 2008. Ever since then, digital currencies have continued to leave their footprints in the global economy. For instance, Bitcoin which some people thought would only be an obscure hobby or a pipe dream that will die out in the next few years suddenly became a real investment opportunity. This type of cryptocurrency gained a lot of attention when its price hiked from around 572.3 USD in August 2016 to approximately 4,764.8 USD in August 2017. It makes up about 64.01% of the total value of all cryptocurrencies as of 9 March 2019 with more than 7.1 million active users.[6]

Currently, some of the major and developing economies of the world are starting to take a U-turn on their stance against the adoption of digital currencies within their economies. In 2021, El Salvador under President Nayibb Bukele adopted Bitcoin as an alternative legal tender, even though this may raise certain economic questions flowing from the extant volatility nature of Bitcoin. The government of El-Salvador believes that the growth of Bitcoin universally outweighs the issues that may come with it, and for them, it will be a great economic recovery system[7].  More recently, it was reported that instead of banning cryptocurrencies, Russia, the world’s 11th-largest economy has decided to regulate them, legitimizing a $2 trillion asset class.[8]

TAXATION OF DIGITAL CURRENCIES

It need not be emphasized further that in modern economies, taxes are the most important source of governmental revenue. In the United Kingdom, the government raises around £800 billion a year in receipts – income from taxes and other sources – equivalent to around 37% of the size of the UK economy, as measured by GDP.[9] China on the other hand was reported to have generated about 129.386 USD Billion in Dec 2021. Nigeria as of 2021 generated about N3.93 trillion, being 73 per cent of its targeted N7.9 trillion. However, these taxes as recorded by various countries did not include any proceeds from digital currencies which based on statistics, have contributed to over billions of dollars in the status of the global economy.

It is pertinent to state that Crypto-assets, and virtual currencies, in particular, are in rapid development and tax policymakers are still at an early stage in considering their implications. This has resulted in the different reactions and approaches deployed in dealing with this disruptive technology by various nations. According to a 2021 summary report by the Law Library of Congress, countries like China, Egypt, Qatar, Nigeria, and so on, have implicitly banned digital currencies by putting restrictions on the ability of banks to deal with crypto or prohibiting cryptocurrency exchanges. They observed that cryptocurrencies are being used to funnel money to illegal sources and argued that the rise of crypto could destabilize their financial systems.[10] On the other hand, countries like the US, Canada, Australia, and so on have welcomed digital currencies with open arms while introducing regulations under their country’s anti-money laundering and counter-financing of terrorism laws (AML/CFT) in attempts to reduce its use for these purposes. It is their opinion that decentralized digital currencies like Bitcoin should be viewed as a commodity for income tax purposes. This means any income from a transaction using Bitcoin is viewed as business income or a capital gain and must be reported as such.

In the United States, the Internal Revenue Service addressed the taxation of cryptocurrency transactions in Notice 2014-21[11] which provided that general tax principles applicable to property transactions apply to transactions using digital currency. Therefore, a taxpayer who receives virtual currency as a payment for goods or services must include in its gross income the fair market value of the digital currency measured in U.S. dollars, as of the date that virtual currency was received.[12] For coin-to-coin trades, given the IRS’s treatment of cryptocurrency as property – cryptocurrency  trades are subject to the same capital gains and losses rules as all other property exchanges. According to Notice 2014-21, where cryptocurrencies are used as a means of payment for goods and services, such payments are subject to income tax and self-employment tax and must be reported on Form 1099; and the fair market value of the cryptocurrency establishes the taxable amount.[13]

India on its path has embraced the taxation of digital currency by including provisions on it in the Finance Bill 2022. It is the law that Virtual Digital Assets (VDAs) will be taxed at 30%. VDAs mainly include cryptocurrencies, non-fungible tokens (NFT), and so on.[14]

CONCLUSION AND RECOMMENDATIONS

It is pertinent to note that the ban on cryptocurrency earlier made by the apex financial regulator of Nigeria in 2021 was the best call at that particular regime owing to the impact of same on the economic value, volatility rate, and the fact that the cryptocurrency aids in illicit transfer and/or storage of funds due to its inherent nature of anonymity. However, seeing trends and steps taken by countries like the United States and India in setting out rules for the regulation and taxation of digital currencies, it is suggested that the Nigerian government can consider revaluating a number of its rules on digital taxation particularly as it relates to revenue earnings for the country.

According to Statista, Nigeria was recorded to have been the third-highest country dealing in cryptocurrency, Nigeria leads Africa peer-to-peer (P2P) lending in 2020, posting weekly P2P volumes of between $8million[15]. Data also has it that Nigeria is the No. 1 country worldwide in terms of numbers of people searching for ‘Bitcoin’ and ‘Crypto’ keywords on Google search engine[16].

On the whole a reconsideration however must only be entertained after due considerations are giving to economic factors and associated risks involved. In all the overall interest of the Nigerian state must be priorotised.

AUTHOR PROFILE

AUTHOR: Oyetola Muyiwa Atoyebi, SAN.

Mr. Oyetola Muyiwa Atoyebi, SAN is the Managing Partner of O. M. Atoyebi, S.A.N & Partners (OMAPLEX Law Firm) where he also doubles as the Team Lead of the Firm’s Emerging Areas of Law Practice.

Mr. Atoyebi has expertise in and a vast knowledge of Telecommunications, Media and Technology Law and this has seen him advise and represent his vast clientele in a myriad of high level transactions.  He holds the honour of being the youngest lawyer in Nigeria’s history to be conferred with the rank of a Senior Advocate of Nigeria.

He can be reached at atoyebi@omaplex.com.ng

CONTRIBUTOR: Ezinne Nnadi

Ezinne is a member of the Litigation and Dispute Resolution Team at OMAPLEX Law Firm. She also holds commendable legal expertise in Technology Law.

He can be reached at ezinne.nnadi@omaplex.com.ng

CONTRIBUTOR: John Oladipo

John is the head of the Technology Law Team at OMAPLEX Law Firm. He also holds commendable legal expertise in cybersecurity.

He can be reached at john.oladipo@omaplex.com.ng

[1]Corporate Finance Institute, ‘ Digital Money’, https://corporatefinanceinstitute.com/resources/knowledge/other/digital-money/ <accessed 11^th February, 2022>

[2] European Central Bank,.’Virtual Currency Schemes’, 2012, pp 11-14., http://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf

<accessed 11^th  February, 2022>

[3]  FinCEN, ‘Statement of Jennifer Shasky Calvery, Director Financial Crimes Enforcement Network United States Department of the Treasury’, United States Financial Crimes Enforcement Network, 2013

[4] John O. Oladipo, ‘ Central Bank Digital Currencies: Growth and Relevance’, https://omaplex.com.ng/wp-content/uploads/2021/08/Central-Bank-Digital-Currency-Growth-Relevance_Thought-Leadership.pdf , date accessed 27^th February, 2022

[5] Shobhit Seth, ‘Central Bank Digital Currency (CBDC)’  https://www.investopedia.com/terms/c/central-bank-digital-currency-cbdc.asp <accessed 10th February, 2022>

John O. Oladipo, ‘ Central Bank Digital Currencies: Growth and Relevance’, https://omaplex.com.ng/wp-content/uploads/2021/08/Central-Bank-Digital-Currency-Growth-Relevance_Thought-Leadership.pdf , date accessed 27^th February, 2022

[6] Andre Oentoro ‘The Impact of Bitcoin on The Global Economy’, https://blockgeeks.com/the-impact-of-bitcoin-on-the-global-economy/ <accessed 16^th February, 2022>

[7] The New york Times ‘In Global First, El Salvador Adopts Bitcoin as Currency’ https://www.nytimes.com/2021/09/07/world/americas/el-salvador-bitcoin.html date accessed 19/02/2022

[8] Anna Baydakova, Tracy Wang, ‘ Russia to Regulate Crypto, Dispelling Fears of Ban’, https://www.coindesk.com/policy/2022/02/09/russia-to-license-crypto-exchanges-tax-large-transactions/ Date accessed: 19/02/2022

[9] https://commonslibrary.parliament.uk/research-briefings/cbp-8513/ <accessed 19^th February, 2022>

[10]  Marco Quiroz-Gutierrez  ‘Crypto is fully banned in China and 8 other countries’, https://fortune.com/2022/01/04/crypto-banned-china-other-countries/#:~:text=Egypt%2C%20Iraq%2C%20Qatar%2C%20Oman,China%20have%20all%20banned%20cryptocurrency. <accessed 19^th February, 2022>

[11]Internal Revenue Service(IRS)  https://www.irs.gov/pub/irs-drop/n-14-21.pdf <accessed 19th February, 2022>

[12] Bloomberg Tax ‘ Taxation of Cryptocurrency ‘, https://pro.bloombergtax.com/brief/cryptocurrency-taxation-regulations/ <accessed 19^th February, 2022>

[13] Mordecai Lerer, CPA, ‘Taxation of Cryptocurrency’, https://www.cpajournal.com/2019/01/24/the-taxation-of-cryptocurrency/ <accessed 19^th February, 2022>

[14] Nitesh Buddhadev, ‘Decoding Crypto taxation as per budget 2022-2023’ https://www.livemint.com/money/personal-finance/decoding-crypto-taxation-as-per-budget-202223-11644166917586.html <accessed 19th February, 2022>

[15] Olumide Adesina, ‘Nigeria is Africa’s leader on Bitcoin transfers, transacts $8 million weekly’, https://nairametrics.com/2020/09/23/nigeria-is-africas-leader-in-bitcoin-transfers-transacts-8-million-weekly/

[16] https://trends.google.com/trends/explore?q=bitcoin  & https://trends.google.com/trends/explore?q=crypto