Facebook’s plans to roll out the cryptocurrency Libra around the world could be halted in their tracks by tax and legal rules.
Lawyers have pointed out that Libra would not become a global currency but an investment that could create capital gains tax liabilities when traded or exchanged.
Governments do not recognise other cryptocurrencies, such as Bitcoin, Ethereum and XRP Ripple, which leaves them outside of the control of regulators and central banks.
Traders who invest in cryptocurrencies must keep detailed records of their trades and declare any gains on tax returns, unlike hard cash, which is exempt from tax.
“Each time they transact, they’ll be making a currency gain or loss. In most countries gains will be taxable, meaning consumers will have to file a detailed tax return showing all their transactions and the exchange rate at the time, and pay any tax due,” says a briefing note from lawyers Clifford Chance.
Tools to manage your finances
“This seems to us to be a significant barrier to wide adoption.”
Facebook acknowledges the obstructions that Libra will face in becoming a currency.
“People will be responsible for filing their taxes in accordance with local laws in the jurisdictions in which they operate. We expect that many wallets and financial services built on the Libra blockchain will provide people with tools to help manage this,” said a spokesman.
“We look forward to working with policymakers as they clarify the application of existing tax laws to cryptocurrencies, or in some cases to update those laws.”
Libra is backed by a consortium of financial, social media and online corporations, including Uber, Spotify, MasterCard and Visa.
Unbanked target in sights
The intention is for Libra to offer almost 2 billion ‘unbanked’ people around the world with an instant payment platform.
Besides the tax issue, the lawyers argue that Libra another factor that could affect the take up of the cryptocurrencies is if token holders have a claim against the assets backing the value should they suffer a loss and what happens if their Libra tokens are stolen.
The briefing note says: “The legal nature of Libra will determine how ownership can be transferred, whether security may be granted over Libra (and, if so, how), whether Libra can be stolen and how it may be retrieved (and who has the better claim in any dispute).
“It may also affect whether acquisitions of goods and services made using Libra are protected under, for example, consumer protection measures (perhaps they will if it is a sale but not if it is a barter). It is a fundamental question with far-reaching consequences.”
