11 Pages Posted: 5 Aug 2013 Last revised: 5 Jul 2015

Date Written: October 1, 2013

Abstract

I describe the mechanisms by which cryptocurrencies — a subcategory of virtual currencies — could replace tax havens as the weapon-of-choice for tax-evaders. I argue such outcome is reasonably expected in the foreseeable future due to the contemporary convergence of two processes. The first process is the increasing popularity of cryptocurrencies, of which Bitcoin is the most widely recognized example. The second process is the transformation of financial intermediaries to agents in the service of tax authorities, as part of the fight against offshore tax evasion. Financial institutions are faced with increased governmental pressure to deliver information about account holders, to withhold taxes from earnings accumulating in financial accounts, and to remit such taxes to taxing authorities around the world. Significantly, cryptocurrencies possess all the traditional characteristics that tax haves do; Earnings are not subject to taxation, and taxpayers’ anonymity is maintained. The operation of cryptocurrencies, however, is not dependent on the existence of financial intermediaries. Thus, cryptocurrencies have the potential of defeating the recent successes of governments in battling offshore tax evasion. I further suggest that while governments have paid some attention to this issue, they have so far failed to identify the acuteness of the potential problem.