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Banks Should Pay Interest on CBDCs to Reduce Tax Avoidance – Report

Tim Alper
Last updated: | 1 min read

Too much stick and not enough carrot might be the wrong approach for those wishing to impose taxes on digital currencies: This was the surprising conclusion of a new report commissioned by the South Korean central bank, the Bank of Korea (BOK).

Source: Adobe/cherezoff

Per EDaily, the report was co-authored by Jaevin Park, an assistant professor at the Department of Economics at the University of Mississippi, along with Kwon Oh-ik, an associate researcher at the BOK’s Financial and Monetary Research division, Lee Seung-deok, a professor at Seoul’s Sungkyunkwan University.

The report considered the impact of a possible central bank digital currency issuance (CBDC) on the phenomenon of tax avoidance.

And its authors suggested that mechanisms that would allow digital currency holders to accrue interest on their holdings may help incentivize above-board and transparent activities using digital tokens – minimizing incentives for would-be tax dodgers.

Although the report focused almost exclusively on CBDC issuance, its timing coincides with the launch of crypto tax rules that will see trading profits taxed at a flat rate of 20% starting in 2022.

Lee Jong-cheol, a South Korean blockchain business consultant, told,

“The same theory could well be applied to cryptoassets. If tax authorities gave people a clear reason not to seek out ways to avoid declaring their earnings – rather than just threatening them with punishments – that would help develop this very promising section of the economy and bring it out of the shadows.”

In the case of CBDC issuance, the report’s authors noted, citizens would be aware that their token-powered transactions were always traceable – so would simply resort to making cash transactions wherever possible in order to stay beneath the radar, decreasing the true value of a CBDC issuance.

Introducing a mechanism of interest, on the other hand, would see citizens rewarded financially for using their CBDC holdings – driving up adoption.

The BOK is set to begin testing its digital KRW next year.
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