Blockchain Papers

Authors unavailable

No abstract is available for this record.

Elizabeth Morton

This paper outlines the key complexities in applying traditional tax principles to proof of stake – or staking – rewards. How staking activities and rewards are characterised is fundamental to determine how a jurisdictions tax rules will ultimately apply. Core issues for taxing staking rewards surround arguments around four key interrelated themes: (i) dilution and realisation (ii) passivity and the performance of services (iii) validators and delegators and (iv) minting new tokens and transaction fees. This paper presents an exploration of some of the key tax principles relevant to staking rewards, drawing on legislation, precedent and guidance across Australia and the United States of America to exemplify the challenges therein. In doing so, this paper examines the role of the staker, the theoretical diluting effect of minting staking rewards, income characterisation and the challenges of residency and source. Such considerations highlight that the bespoke, decentralised nature of staking means that jurisdictional claims and overlaps will challenge taxpayers and tax authorities in the tax compliance function.

Ian Appel, Jillian Grennan

No abstract is available for this record.

Wulf A. Kaal, Josh Bykowski

Decentralized Autonomous Organizations (DAOs) enable unprecedented technology-driven decentralized decision-making tools, transparent governance, and direct participation of stakeholders, making them highly adaptable to the evolving digital age. DAOs disrupt established centralized legacy models across industries. Yet, open questions and challenges for DAOs linger. Among those are the establishment of standardized governance mechanisms to ensure fairness, security, and accountability within DAOs. Additionally, scalability issues, legal frameworks, and interoperability between different DAOs are areas that require further exploration and development. The paper provides a dataset (N=[65]) analysis by assets in DAO treasuries across different industries. Descriptive statistics and data analysis show DAO industry trends and highlight governance and other shortcomings in the evolving DAO industry. The paper provides a normative analysis and outlook.

André Cardoso

Decentralized Autonomous Organizations – DAOs constitute a new form of collective organization in the digital era. They usually relate to the use of blockchain technology, that ensures decentralization. DAOs rely on smart contracts to define their functioning rules and their operation. In general, DAOs are not related to traditional corporate forms and are not necessarily registered or recognized by law as corporates or associations. In any case, DAOs enable a new kind of governance, a governance based on technology and based on the use of smart contracts deployed on a blockchain network. In this sense, they could represent a revolution on collective governance. A revolution that could shape governance in the digital era. For this reason, DAOs could be the governance tool of Web3. The use of tokens as means of participation and voting by the members of a DAO provide a new technology tool that can combine law, governance, game theory, and behavioral economics. DAOs themselves could be viewed as technology tools that could transform governance in general and even democratic participation. The paper examines these issues and try to critically evaluate the potential and possible caveats of using DAOs as a governance tool. It demonstrates that the idea of decentralized governance in DAOs is similar to decentralization of governance of open-source software. The paper also highlights that the notion of modularity present in the open-source scene is also present in the blockchain technology realm and could be transposed to governance in DAOs. This modularity also contributes to the disruptive nature of governance in and by DAOs. As demonstrated in the paper, DAOs are true catalysts of law, governance and technology and represent the future of governance systems. The article refers that DAOs enable the coexistence of multiple democratic governance stacks. In any case, also mentions that some problems could arise from these multiple governance instances, as the fragmentation of the collectivity, the difficulties associated with the choice of the governance modules, the risk to the democratic principles in creating partial democratic instances, and the risks associated with a technocracy. At the end, considering all the benefits and risks related to the use of these new digital collective governance tools, the article concludes that DAOs can be considered the future of governance systems.

Valerie Laturnus

The advent of blockchain, smart contracts, and Web3 has empowered new concepts for equity partnerships with autonomous operating systems and democratic corporate governance. This paper explores 2,377 of such new partnerships and uses detailed transaction data (from 2017 through 2022) to examine the performance of so-called decentralized autonomous organizations (DAOs) on Ethereum. As a result, I find that DAOs with greater participation rates in voting are associated with superior performance. Small members are a prevalent and important class of investors, while the degree of decentralization in DAOs (ownership concentration) plays only a minor role in firm valuation. Overall, DAOs are an effective organizational structure, when members take an active interest in the venture.

Thomas K. Birrer, Dennis Amstutz, Patrick Wenger

No abstract is available for this record.

Felix Bekemeier

Decentralized Finance (DeFi), a blockchain-based form of alternative financial markets, has been the focus of public attention in recent months. Even though DeFi has a young history, its smart contract ecosystem already offers multiple opportunities for the design and transfer of crypto assets, establishing market structures comparable to traditional financial markets. The landscape of DeFi projects also increasingly includes insurance protocols offering complex risk transfer mechanisms for hedging DeFi risks, above all smart contract risks. In principle, the projects offer the same value proposition as traditional insurance: risk minimization and transfer, and thus an increase in income predictability through the payment of a premium. At the same time, most of those risk transfer protocols are highly dependent on subjective expectations and decentralized governance structures. This article depicts a first taxonomical understanding of DeFi insurance, demarcates DeFi cover products from well-known insurance concepts, and provides an initial assessment of smart contract risk insurability and commercial opportunities for traditional insurers.

Siddharth M. Bhambhwani

The decentralized finance (DeFi) industry hosts billions of dollars in cryptocurrency deposits across protocols that autonomously and independently execute financial transactions. However, little is known about how these protocols raise capital or conduct their governance. This paper examines the token distribution mechanisms of the top-50 DeFi protocols and documents significant variation in how tokens are allocated to users, investors, and developers. We find that several protocols distribute a greater share of tokens to insiders, such as through private sales and developer allocations, rather than to users via incentives and airdrops. We present evidence that protocols with greater insider control exhibit fewer deposits, lower token values, and increased risk. Using an event-study analysis, we find significant increases in protocol deposits post-airdrops. Our results suggest that DeFi users prefer user-centric governance models and are sensitive to the risks of insider control. Lastly, this paper discusses the risks and challenges of DeFi governance.

Daniel Rabetti

The collapse of FTX has underscored the critical importance of auditing, especially in the fast-growing decentralized finance (DeFi) markets. Due to the decentralized nature of DeFi platforms, which facilitate peer-to-peer transactions without intermediaries, and the rapid pace of innovation in the unregulated and highly asymmetric information environment of the DeFi market, traditional financial auditing methods face significant hurdles. This study explores the relevance of auditing in DeFi protocols and highlights its critical role in ensuring transparency, security, and trust within these decentralized systems. Through a comprehensive analysis of the unique characteristics of DeFi, including smart contracts and blockchain technology, we delve into the specific challenges and risks associated with auditing DeFi applications. Furthermore, the article discusses the demand for robust auditing practices, regulatory oversight, and industry standards to enhance resilience and stability in this fast-growing emerging market.

Hidsal Jamil, Candra Fajri Ananda, Ferry Prasetyia

The literature continues to debate the effects of democracy and fiscal capacity on economic growth, both partially and jointly. To remedy the literature puzzle, this study examines the economic growth effects of democracy and fiscal capacity in 34 Indonesian provinces from 2016 to 2021. Using a fixed-effect model, this study documents no evidence of a partial effect; rather, it finds a joint effect of democracy and fiscal capacity on Indonesian economic growth. These findings remain relatively robust even when provincial heterogeneity, COVID-19 pandemic shocks, and sectoral composition are factored into the model. This finding indicates that regions with democracy and strong fiscal capacity possess relatively fast per capita GRDP growth. Based on these findings, the study concludes that democracy and fiscal capacity should exist side by side. Indonesia's sub-national economic growth strategy, like a tango game, requires reforming two types of decentralization: political decentralization to improve the quality of democracy that upholds the merit system and fiscal decentralization to expand local tax capacity to finance public goods productively.

M.L. Coimbra

In this article, the author analyses the VAT treatment of non-fungible tokens (NFTs), which is an innovative service within the e-commerce industry. VAT faces different challenges when it comes to taxing e-commerce transactions, and in order to have certainty on the tax implications it is important first to understand the business itself. The sale of NFTs might trigger additional payments, such as gas fees, royalties and marketplaces fees, which is addressed by the author in this article.

Julien Chaisse, Kehinde Folake Olaoye

International investment law (IIL) functions at a crossroads with other branches of international law.1 One area which has not received sufficient scholarly inquiry is international finance and banking.2 This may be because historically, more disputes between foreign investors and host states have occurred in the natural resources sector, which continues to bear the lion’s share of arbitration disputes.3 Even though some of the earliest and most notable foreign investment disputes centred around loans and financial instruments,4 by the 1970s and 1980s, disputes in the natural resources sectors set the stage for the emergence of IIL as a distinct field of international economic law.5 In the last decade, non-primary sectors like healthcare, technology and finance have been identified as crucial sectors where more investment disputes will occur in the future.6 Like these sectors, international finance and banking is a highly decentralized area of law,7 which is gaining traction in IIL. For leading international financial hubs where the economy essentially depends on financial services, a rise in finance-related disputes has important implications for law-making internationally and regionally.8

Roger Shotton

The fiscal dimension of decentralization covers the assignment of public spending responsibilities to subnational governments (SNGs), and how these are financed through local taxes, transfers, and borrowing. Revenues from local tax powers are inadequate and the scope for borrowing is limited for most SNGs outside wealthy urban areas. Consequently, the main source of financing for the local spending responsibilities of most SNGs is, and will remain, fiscal transfers (i.e., revenue-sharing and unconditional and conditional grant mechanisms). These show a wide variety of types and features around Asia. The challenge is to design such mechanisms in ways that promote equity in public spending across the national territory, and impart the right degree of local flexibility and the right incentives for SNGs.

Yaroslav A. Komarentsev

The article examines existing legal approaches to general regulation of cryptocurrencies as well as their taxation in some foreign states (the USA, the Netherlands,, Germany, Portugal, Singapore). A comparative analysis based on international standards of fiscal policy (e.g. OECD tax classification) was conducted to assess differences and similarities across multiple jurisdictions. As a result, some generalized legal approaches to the taxation of cryptocurrencies are derived.

Jeffrey Owens, Nathalia Araujo Lage E Oliveira Costa

In this article, Owens and Costa consider how the development of the metaverse,<br/>cryptocurrencies, and non-fungible tokens could fundamentally change established tax concepts and the way tax compliance functions.

S. Parsons

Decentralized finance (DeFi) represents a specific application of crypto-asset technology that has made significant advancements in adoption. While academic tax literature has focused on basic crypto-asset transactions, the tax consequences of DeFi transactions have been much less frequently explored. This study considers whether income or expenditure arising in specific DeFi transactions might be classified as interest in terms of South African income tax legislation as well as within the international tax context. Classification as interest has significant implications. Within South African domestic legislation, it impacts the determination of source, quantification of amounts, timing of recognition, application of exemptions, and imposition of withholding tax. Internationally, it has implications for the determination of jurisdictional taxing rights under double tax agreements. This study proposes that, while historically, interest may have been thought of exclusively as arising in the context of monetary debt, this is not a definitive characteristic of interest. Rather, interest represents remuneration for the provision of capital in the form of a loan principal with a contractual right to repayment. Whether each of these elements is present in the cases of the identified DeFi transactions is inconclusive. The study therefore recommends the provision of guidance to taxpayers by South Africa and other jurisdictions, and supports a coordinated approach among jurisdictions in the determination of income tax outcomes.

Constance J. Crawford, Corinne Crawford, Glenn C. Vallach

Subtitle A, of the Internal Revenue Code (IRC), contains regulatory provisions regarding the federal taxes imposed on the income of both individuals and corporations. The IRC guidance is intended to provide a determination of all income that must be reported on tax returns and potentially could become subject to an income tax. A new form of currency, known as cryptocurrency appeared on mainstream trading platforms beginning in 2009. Bitcoin initially was the most widely recognized digital currency but other virtual currency versions soon followed. Initially, taxpayers mistakenly believed that cryptocurrency transactions were not subject to Subtitle A of the IRC. Therefore, crypto transactions were assumed to be non-taxable and non-reportable for tax purposes. However, within a few years of the introduction of Bitcoin into the US economic system, the Internal Revenue Service (IRS) introduced tax guidance pertaining to cryptocurrency transactions. In 2014, the IRS responded with Notice 2014-21 as the popularity of Bitcoin grew exponentially. The IRC guidance stated that cryptocurrency must be treated as property for federal tax purposes. The tax implication of the IRS guidance was that cryptocurrency transactions would result in either a gain or loss for tax purposes on Schedule D. This guidance resulted in a recognition that all cryptocurrency transactions would be subject to federal income tax.

Zoran Šinković, Luka Pribisalić

Cryptocurrencies are a completely new concept that changes not only the way we pay but also the way we experience money. Currently, different member states of the European Union define cryptocurrencies differently and tax the income from cryptocurrency trading differently. Most of the European Union’s member states income from cryptocurrency trading is taxed as capital gains. Therefore, this paper will analyze the legal issues of taxation of cryptocurrencies with income tax and corporate income tax. The de lege ferenda will also analyze the introduction of universal rules for the whole European Union to protect all investors, equal rules within the European Union for all cryptocurrency issuers and all service providers, remove legislative barriers to innovation and cover technological development and future types of cryptocurrencies.

Violeta Vulovic

Due to widespread decentralization of spending responsibilities, increasing revenue power and borrowing capacity of sub-national governments, sub-national borrowing has become an increasingly important source of sub-national finance. While there are arguments for and against giving sub-national authorities room for raising their own financial resources, appropriate sub-national borrowing regulatory framework can reduce chances of defaults and fiscal crises. This dissertation investigates the effectiveness of sub-national borrowing regulations in maintaining fiscal sustainability. More precisely, it tests the hypothesis that is sub-national borrowing is restricted to financing capital investments (the “golden rule”), and if the sub-national governments are provided with some measure of revenue autonomy, then the sub-national borrowing should not endanger fiscal sustainability. Based on the sub-national government panel data for 57 countries between 1990 and 2008 and applying the system GMM estimator and the survival analysis, this dissertation provides support for this hypothesis. The results suggest that the “golden rule” is effective in maintaining fiscal sustainability at both general and sub-national government level. Sub-national tax autonomy, however, seems to have positive but very small marginal effect on fiscal sustainability. The obtained results also emphasize the risk of the soft budget constraint and the moral hazard. Significant central government financing may give encouraging signs to the sub-national governments to over-borrow and to expect being bailed out by the central government. The results obtained in this dissertation imply following policy recommendations. First, sub-national government borrowing does not have to endanger fiscal sustainability if the borrowing regulation framework is well designed and according to specific country circumstances. Second, reducing fiscal dependence on central government financing reduces the risk of moral hazard and improves the effectiveness of borrowing control in maintaining fiscal balance at the sustainable level.

Jasper L. Cummings

The author argues that commentary on the Second Circuit's 1989 Lessinger decision involving section 357(c) has not clearly identified the tax logic issues that are at stake in the case. He agrees that the controlling shareholder's obligation is not section 351 "property" and should not be accorded basis in the shareholder's hands. Instead, the obligation should be treated as a purchase money obligation that affords basis in the shareholder's stock unless it is properly viewed as contingent. In any event, proper structuring of section 351 exchanges of property subject to debt in excess of the property's basis for stock in order to reflect an actual retention of liability on that debt by the shareholder should prevent shareholder gain recognition under section 357(c).

Michael Schaden, Alper-Benjamin Wagner, Florian S. Zawodsky

No abstract is available for this record.

Magomed Tashtamirov

The subject of this article is the set of economic and financial relations that develop in the process of inter-budgetary regulation and equalization of budgetary provision and balance of heavily subsidized budgets at the subnational level. The purpose of the study is to identify the degree of influence and effectiveness of the existing system of inter-budgetary regulation and fiscal decentralization in Russia in relation to heavily subsidized budgets at the subnational level in the context of their socio-economic, budgetary and financial condition and development. The methodological basis of the study is based on the Russian budgetary legislation, as well as domestic and foreign scientific studies devoted to the theory of fiscal decentralization (federalism), mechanisms for equalizing budgetary provision at the subnational level, approaches to assessing the degree of influence of fiscal decentralization on stimulating economic growth in regions and states. In the course of the study, the author applies a systematic approach, as well as general scientific and special methods: coefficient method, comparative, structural dynamic retrospective analysis. The analysis of the relationship and dispersion of the financial parameters of subnational budgets using the Pearson pair correlation coefficient, as well as the coefficients of variation and oscillation. The study reveals the problematic aspects of the effectiveness of the existing system of inter-budgetary regulation and the convergence of the socio-economic state of heavily subsidized regions in recent years. This result contradicts most budgetary practices and the theory of fiscal decentralization, which justifies the need for a qualitative change in the existing system of inter-budgetary regulation. The main conclusion of the study is that the existing mechanism of inter-budgetary regulation and the existing instruments for equalizing budgetary provision do not contribute to a significant change in the fiscal and socio-economic parameters of the development of heavily subsidized budgets at the subnational level. The nature of the use of the gratuitous aid received for this category of subjects of the country is reduced to short-term coverage of the gap in financing expenditure obligations but does not change the model of either the organization of budget regulation or the regional economy. Soft budget constraints create weak incentives and lead to financial and economic problems — increased dependency and subsidies.

Andrew Rutto, David Minja, George Kosimbei

Intergovernmental fiscal transfer is a pillar of fiscal decentralization initiatives in developing and transition economies. These transfers serve several functions that include: correcting the vertical and the horizontal fiscal balances, compensating or offsetting for the spill-overs or externalities between different jurisdictions, funding national priorities and administrative priorities and capacities of the national. However, SNGs in developing countries particularly in Sub-saharan Africa is struggling with fiscal decentralization initiatives due to the lowered potential of local revenue generation. Due to these gaps in studies on Intergovernmental Fiscal Transfers (IGFT) in devolved government structures, the study evaluated how IGFT is organized and structured in Kenya. The study adopted a descriptive design and undertook a review of publicly available data which was supported by interviews of selected directors from the budget, finance and planning departments in three county governments of Baringo, Kiambu and Vihiga. The study established that intergovernmental fiscal transfers make up 87 per cent of SNG revenues, equalization fund is about 2 per cent while own source revenues make up 10 per cent. Other revenue sources are conditional transfers in form of ad hoc and cost-reimbursement approaches from both the national government and development partners. Regarding intergovernmental fiscal transfers, the national government should disburse funds in a timely and efficient manner to enable county governments to fulfil their mandates. The study makes the following conclusions; there is an overreliance on intergovernmental fiscal transfers by SNGs and this might constrain their capacity to provide services and impede devolution initiatives; the formula-based unconditional grant in Kenya offers great prospects for devolution and the rise in unconditional transfers portends well for SNGs. The study recommends that SNGs speed up the legal mechanism for identifying and classifying and assigning local revenues, the national government should consider introducing or substituting fiscal transfers with the tax-sharing arrangement to incentivize revenue diversification among SNGs and lastly, SNGs should consider pooling of resources to incorporate special purpose vehicles for sub-national government borrowing. The study contributes to the existing knowledge by delving more into the elements of fiscal decentralization and in particular intergovernmental fiscal transfers. Recommendations for further studies include studies on how other elements of decentralization impact the performance of the counties, how decentralization is improving governance at the local level and how the East African Community may affect governance and service delivery at the sub-national levels.