(Not) throwing the baby out with the bathwater


Digitalization changes everything. Disruptive technologies, such as blockchain do not only change the way financial transactions are made between individuals, but also affect taxation and especially money laundering. Trying to adapt legislation to the new challenges, on Thursday June 7th the TAX3 committee held a workshop on the effects of digitalization on taxes and financial crimes.


In the first panel members were trying to find ways to prevent blockchain technology from being misused to favour financial crimes, especially for money laundering. The Commission, in collaboration with the Parliament, amended the current Anti-Money Laundering Directive (AMLD4), to include cryptocurrencies into its scope. The adopted amendments provide authorities with a framework to combat money laundering, tax evasion and financing of terrorism using cryptocurrencies. However there are serious doubts concerning the effectiveness of the directive, as it seems like the main problem is one can hardly be solved by regulation. Anonymity (in some cases pseudo-anonymity, in others full anonymity) is an issue that is particularly hard to address. Legislation cannot be attached to unknown actors and it is impossible for Financial Intelligence Units to identify illegal transactions when they cannot trace transactions back to senders or receivers.

The remaining pseudo-anonymity is the loophole of AMLD5, according to Professor Houben from Antwerp University, lead author of a study commissioned by the TAX3 committee on cryptocurrencies and their links to financial crimes. Legislation is only attached custodial wallet providers taking online custody of a cryptocurrency user’s cryptographic keys. Thus it is still possible that cash gained from trafficking drugs can be traded for a cryptocurrency – for example Bitcoins – on marketplaces. On a virtual currency exchange platform these Bitcoins could be traded for another cryptocurrency – adding another layer of disguise. In the end the cryptocurrency can be traded back into clean cash. Measures like voluntary registrations will not change this, as the user registering voluntarily will definitely not be those engaged in criminal activity.

Nevertheless, approaches like an overall ban on cryptocurrencies or the introduction of a single centralized state-owned cryptocurrency would be like throwing the baby out with the bathwater, said Houben. The technology itself should not be criminalized, only its misuse. The overall objective should be the prevention of use of these technologies for criminal purposes, while allowing innovation to unfold. As John Vella, Associate Professor of Taxation at Oxford University, pointed out later in the discussion, digitalization itself is not the problem, it only exacerbates problems that already exist.

Thus generally digitalization should not be seen only as a challenge, but rather as a chance. Our legislation has to adapt to the reality we are living in. For instance to counter profit shifting, which has been facilitated through digitalization, profits could be taxed where the value is created, instead of where the corporation claims to be located. Companies can decide where they settle, however it is harder to control where their products are being consumed. Ways must be found to regulate innovation in a way that benefits all of society.


This Workshop – a reaction to the rapid changes – was a call for regulation, but even more it was an acknowledgment of the recent developments of the digital era.