Information Technology Reference
In-Depth Information
10.4 Conclusions
If the use of bitcoin, or any other virtual currency, becomes widespread, government
agencies will also need to rethink the way they conduct business with citizens, with
companies, and with other agencies, both national and international. The changes that
it might bring about will create challenges that are not too early to address. Some of the
questions it raises for government agencies are addressed in the following discussion. In
addition to the new laws and regulations that will have to be written, there will have to
be major work by professionals in information technology to respond to the challenges.
The first issue we raise concerns taxes. Should sales and excise taxes apply to bitcoin
transactions the way they do to usual currency transactions? If so, how should taxes be
calculated? What reporting mechanism will be utilized to record bitcoin transactions?
With regard to income, how should the income tax on transactions that involve bitcoin
be calculated, assessed, and paid? For example, if a company agrees to pay its employees
their salary in bitcoin, how will the withholding taxes be taken and sent to the Internal
Revenue Service? Not reporting transactions in bitcoins to the appropriate government
agencies will be tantamount to sanctioning more of the underground economy.
The second issue concerns what methods of payment will be accepted by gov-
ernment agencies. For example, if a municipality charges its resident for water use,
will it be possible to pay in bitcoin? If the answer is yes, this will have ramifications
in keeping records, as accounting entries will have to be done in bitcoin as well as
in the local currency. As a result, there will also be a need to develop procedures for
converting bitcoins to local currency and vice versa.
The anonymity of the parties involved in bitcoin transactions poses major chal-
lenges to government agencies as well. Regulations and processes will have to be
developed to allow the relevant information to be collected. This will necessitate
even more government gathering of cyber data even as many around the world
have deplored the massive collection of telephone and email data by the National
Security Agency of the United States.
Cross-border transactions will also pose challenges if virtual currencies become
widely accepted for international transactions. Virtual currency use by criminals
for criminal activity can be expected to rise. However, even for legitimate inter-
national transactions using virtual currencies, processes will need to be developed
to track the flow of bitcoin for data collection purposes, for taxation, and for the
development of appropriate public policies that address cross-border transactions.
Bitcoin's most ardent friends and foes have predicted that it might one day
replace the dollar and other traditional currencies. Bitcoin's strength is predicated
on three supposed qualities: It is anonymous, or at least pseudonymous (transac-
tions are recorded but the identities of the parties are encrypted); it is difficult to
hack; and it cuts out financial middlemen like banks.
That is the crucial question. To thrive, bitcoin has to be more useful than
current payment systems. Two possible applications could embed virtual curren-
cies into the financial infrastructure in a way that is complementary to existing
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