If cryptocurrencies like Bitcoin truly take off, they can kill the traditional banking system and change the current tax system – where the state relies mainly on transaction tax.
This is according to Dawie Roodt, chief economist at the Efficient Group, who recently shared his views on the impact of cryptocurrencies.
Roodt said cryptocurrencies allow for anonymous, fast, and cheap transactions between individuals – without the need for a bank.
When two individuals currently transact in digital money, they must go via at least one financial intermediary, where the transactions can be tracked.
This changes with cryptocurrencies, where all transactions are known and recorded, but are encrypted and anonymous.
“If I do not need a bank, why should there be banks?” said Roodt.
Roodt predicted that if cryptocurrencies gain widespread adoption, it will result in a dramatic change in the financial and banking system.
“It may even lead to the disappearance of banks – at least the way we know banks.”
He said central banks, like the South African Reserve Bank, will also lose their relevance in a decentralised, private currency environment.
If central banks disappear, monetary policy will also lose its relevance, because of its close relation to informing the actions of a central bank.
“I don’t know what it will look like in the future, but I do know that it will look completely different from the current financial system,” said Roodt.
Big shake-up in taxes
The widespread use of cryptocurrencies will also break the current tax system, where 95% of all taxes are financial transaction taxes.
“Paying or receiving a salary, for example, is a financial transaction, and there is a tax on that,” said Roodt.
Cryptocurrencies remove the state’s ability to track financial transactions between individuals or businesses, which causes a serious tax headache for the state.
“If the minister of finance wants to tax me on my salary which I received in my cryptocurrency wallet, I am going to tell him I forgot my password,” said Roodt.
“He will not be able to tax me on financial transactions because he can’t see them. That means only the visible taxes will remain, like toll roads and property tax,” he said.
This will result in fewer taxes being collected, which will necessitate a smaller state and less state spending.
Cryptocurrencies may become regulated
Wayne McCurrie, a senior portfolio manager at Ashburton Investments, said cryptocurrencies may be a victim of their own success, however.
McCurrie said if Bitcoin becomes truly successful, it will become legislated.
“Governments will never tolerate a separate monetary system outside of the formal banking system, so it will almost become illegal if it truly becomes big,” said McCurrie.
Roodt’s full speech is available on TechCentral.