By Jenny Lynton
In the midst of the rolling regulation debate, crypto exchange Bitfinex has investors in an uproar on its recently announced plans to amass sensitive tax data and share it with the government. After the notorious data hacking saga over at Facebook, news of a fresh government data invasion has sent yet another jolt through the already rocky market. Bitfinex is renowned as a ‘tax haven’ for investors, so some users have advocated a fully-fledged Bitfinex boycott, while others agree with a government crackdown on tax evasion. Nevertheless, the move sparks the question: how far can the government push the boundaries with crypto?
What Is Bitfinex?
British Virgin Island (BVI)-based Bitfinex is one of the largest crypto exchanges that trades Bitcoin and other altcoins against the US Dollar. Due to its savvy location in the BVI, which is a recognized tax refuge, Bitfinex gained momentum for being one of the most lenient crypto exchanges with the laxest regulations for traders. For users, this meant that the only requirement was to provide their name and location, instead of an intense Know Your Customer (KYC) identification process like other exchanges.
However, it seems all good things must come to an end, as Bitfinex announced a complete U-turn in policy on May 17th by asking a targeted segment of its users to disclose their tax details and social security numbers. In another blow for data privacy, Bitfinex added that it can potentially harness this data and share it with the government. Bitfinex officially leaked the information on Twitter, by announcing ‘Bitfinex is now requiring users to give their tax information so that it can send it to BVI which will exchange it with your country’s tax authorities’.
Why Does Bitfinex Need Your Tax Details?
As the news sent the crypto-sceptics into overdrive, Bitfinex was quick to justify its new tax policy by tweeting: “We have not sent this message to all users. We have deliberately targeted users that we believe have an obligation to self-disclose. If a user has not received a message from us, she need not self-certify anything to us at this time.”
From one stance, this might sound like a reasonable request as Bitfinex has a duty to comply with BVI governmental regulations and tax laws. Therefore, the company gave users a deadline of May 24th to submit the tax form if they are ‘US person or an entity with at least one 25 percent owner who is a US person’. This is in accordance with the US Foreign Account Tax Compliance Act (FATCA) and the Organization for Economic Co-operation and Development Common Reporting Standard (CRS). Bitfinex has also attempted to put a media band aid on the issue by assuring users that it is only in targeted cases, which suggests it only applies to suspected tax evaders.
In fact, a crucial reason for the new policy, is that Bitfinex was thrust under the spotlight for its questionable practices and policies in April by the New York Attorney General Eric T. Schneiderman. The inquiry was part of the ‘Virtual Markets Integrity Initiative’. Apparently Bitfinex’s tax haven status wasn’t such a big secret after all, and the news travelled fast, even reaching the New York Attorney’s office.
Why Are There Calls for a Bitfinex Boycott?
When news of the new policy spread like wildfire, there was a strong backlash, with many calling for an outright Bitfinex Boycott. The most vocal boycotters were from the popular trading community Whalepool, declaring: “Bitfinex is now requiring users to give their tax information so that it can send it to BVI which will exchange it with your country’s tax authorities. We strongly disavow. If you also disagree with this decision, peacefully protest it by withdrawing your money from Bitfinex.”
One of the crucial reasons for the boycott is that many traders prefer to not submit their tax details because there are extremely large taxes involved in high capital cryptocurrency trades. However, the fact that the BVI government is gripping its reigns on Bitfinex and cracking down on tax evasion means it could now become one of the most regulated exchanges.
What Did This Spell for the Market?
From the CoinWatch platform, we can see that Bitcoin peaked at $8344.78 on May 16, before plummeting to $8,071 on May 17. Incidentally, this was just as the decisive Bitfinex policy was unveiled, signaling the crypto-market went into an initial panic-mode as investors frantically sold their shares. However, the dip didn’t last long, as Bitcoin picked up momentum again on May 18.
What Does the Government Crackdown Mean for the Future of Crypto?
The policy marked a significant milestone, not only for Bitfinex, but for what it could signal for the wider industry as a whole. The inquiry into Bitfinex’s operations, internal controls and issues also signals that though crypto-exchanges have been largely left unchecked, it might usher in a new era of tighter crypto policies and protocols. The landmark policy signals crypto exchanges might not be so invincible and free from government interference in the future. It also brings into question whether Bitfinex will soon roll out the tax policy for all users, and just how far the government data invasion line will become blurred in the future.