Taxing a decentralised world
Digital currencies have unique characteristics. Governments should plan to take advantage of these, rather than lean on existing taxation rules.

Before I get going…
I use some terminology that you may not be familiar with:
Peer-to-peer
Two or more entities (businesses, people etc) transacting directly with no middleman.
Decentralisation / the “Decentralised Web”
The next era of the internet.
Today most services we use are provided or controlled by companies. Like Google, Apple, Amazon, banks etc. These are “middlemen” of sorts. They are at the centre of everything we do online.
But the internet is changing.
It is becoming peer-to-peer, or “decentralised”. We will no longer need to use middlemen to exchange value.
I will be able to transact directly with you, as though with cash or bartering. And you can be anyone, anywhere in the world.
I could pay you to park my car on your drive whilst you are at work. Automatically paying you “digital cash” without even needing to meet you.
Blockchain
The technology on which the decentralised web is built. There are others, but blockchain is the main one right now.
Smart contracts
A smart contract is computer code that runs on the decentralised web. Smart contracts enable us to “codify” (automate) more complex services like those provided by accountants and lawyers.
Summary
Short on time? This is for you.
Everyone is talking about Web 3.0 — the decentralised web.
But it’s not just the web that will get decentralised. The world financial system is going peer-to-peer.
- National tax authorities will struggle to apply existing tax rules in a decentralised world.
- Codifying compliance legislation into smart contracts is a sticking plaster.
- Any new legislation to enforce the old rules will fail.
- “Fedcoin” style ideas will also fail, because they are built on existing paradigms. These rules cannot be enforced in a decentralised, peer-to-peer world.
- Governments need to completely rethink their approach to tax.
- Transactions on many blockchains are public.
- Smart contracts mean tax collection could be automated.
- Combining these two would mean that governments could begin collecting tax now whilst buying time to understand the wider impact of the technology.
- Theoretically, all they need to know is the tax residencies of the sender and recipient in a transaction.
- The concept of tax residency might need to be extended to machine location, as the Internet of Things (IoT) becomes tokenised.
The full idea…
This is a thought piece. I am not an economist, and I am sure there are plenty of arguments with the ideas I present here. Discussion is welcome!
How do governments raise tax in a world without borders?
Cryptocurrencies are borderless by nature — owned by everyone and no one.
Where is the need for a national currency if the global economy is peer-to-peer?
If borderless digital currencies replace traditional money, how do governments raise funds? How do they pay for the services they provide to their citizens?
How these thoughts started
Before I joined Argent, I had been working at Her Majesty’s Revenue and Customs (HMRC — the UK tax service) for almost three years.
I led the research for and design of HMRC’s real-time Transaction Monitoring service. Every transaction from every taxpayer, business and accountant goes through the service.
I spent weeks sitting with people from all over the organisation learning about the tax system. I learned about the methods, the successes, the failures, the holes, the frauds, the mitigations.
Digitisation has enabled fraud on an unprecedented, unimaginable scale. By the time I left HMRC, our Transaction Monitoring system had enabled the cyberfraud teams to prevent the theft of more than £100 Million of tax revenue.
And when I left, I had two thoughts:
- How much more fraud and error is there? My sense was that £100M was a drop in the ocean. And I believe the official tax gap is wildly off.
- One reason we have a tax gap is because the rules for collecting tax are SO complex. It is well known that complexity weakens security. We need to simplify tax.
So it won’t surprise you that following my work at HMRC, I decided to join a blockchain startup. I joined because I believe the technology will be the catalyst to solving some key issues in economics and privacy.
Much has been said about the anonymity potential of digital currencies. This is cause for concern for governments trying to protect tax revenues and stop money laundering.
Why does the government need to know who I am to collect the tax I owe?
Know Your Customer
Though you may not recognise these words, you will have experienced them. You “do KYC” when you open a bank account or apply for a loan. Whenever you show your passport, driving licence and a utility bill, this is KYC.
KYC is necessary for tax authorities to do their job. Plain and simple.
And sharing personal data for KYC is risky. The prevalence of hacks, thefts and data abuse in general makes that abundantly clear.
Why does the government need to know who I am to collect the tax I owe? Because the tax system is too complex. There are so many rules to determine what we owe and under what circumstances. To establish how these rules apply to an individual or business, government needs to know a great deal about us.
What if we could collect the same amount of tax (or more), without needing to know anything about the taxpayer? What if we could do this in a fair way, reflective of someone’s ability to pay?
If governments knew about every transaction of value that every resident citizen engages in, they could deduct tax at source.
If I buy goods from China, the UK government could tax a tiny percentage of the transaction value on my outbound payment. And the Chinese government could do the same on the inbound payment.
All they need to know is the tax residencies of the sender and recipient in a transaction. Not who they are, nor the goods/services traded.
People or companies who spend or receive less, because they have less, would pay less. Those who spend or receive more, would pay more.
It would be much fairer. Yet the money raised could even exceed what governments receive today.
The decentralised web makes this possible
A blockchain/smart-contract powered world economy makes all this possible. Governments have an incredible opportunity to do something world-changing.
My work for the UK tax service tells me that they won’t take the opportunity whilst they have the advantage.
But in the end, events may force their hands anyway.
Challenges and questions
In the comments, please! There are a few already. Feel free to add more!
