TAXING CRYPTO ASSETS AND DECENTRALIZED FINANCE (DeFi): DESIGNING EFFECTIVE POLICY FRAMEWORKS FOR EMERGING MARKETS

Abstract

The emerging markets are fast gaining relevance in the revolution of digital finance. With the continued growth of cryptocurrency and decentralized finance (DeFi) technologies, governments in these jurisdictions are confronted by a reality crisis, namely, how they can implement tax regimes that are both revenue-generating and innovation-friendly without toxicizing the regulatory landscape. In the paper, the complex issues of taxation of crypto assets and DeFi activity in emerging economies are discussed, structural, technological, and institutional barriers to the conventional tax framework are presented and complicate the taxation of cryptocurrency and related activities. A mixed methods strategy (applying qualitative stakeholder information to quantitative modelling and comparative policy research) helps to reveal how current tax regimes, in most cases, fall behind market development, which results in loss of revenue, enforcement gaps as well as non-intended incentives to informal economic responses. We suggest that effective policy frameworks should strike the right balance between revenue collection and fairness, enforceability and respect of decentralized spirit of DeFi. We identify practical solutions, including adaptive regulatory sandboxes, blockchain-based reporting solutions, and collaborative international standards that can all help build a resilient but adaptable tax regime by reviewing country case studies and the best practices of other countries. The results of our findings indicate that the emerging markets can use technology and cross sector partnership to make their tax systems engines of compliance and innovation. Finally, the study offers a roadmap to policymakers in an attempt to have fair, efficient, and progressive cryptocurrency taxation of crypto assets and decentralized finance.