If you’ve been hiding under a rock, you know nothing of the biggest accounting scandal ever. TFX is a digital currency exchange company that fraudulently lured billions of investors into Crypto currency, something that most of us reluctantly admit they know nothing about. The impact of this bankruptcy and the shady dealings Sam Bankman-Fried (SMF) will have a long reaching effect on governments and regulatory agencies, the most vulnerable being the IRS.

The meteoric rise of FTX has its roots in the reason digital currencies were created in the first place and this scandal will unveil the extreme vulnerabilities of our entire monetary and taxation system. Essentially, the creation or mining of a Bitcoin is analogous counterfeiting legal tender. The only difference is that Bitcoins are not counterfeit and they publicly exist amidst as the standard units of measurement for a given transaction where a hard asset is exchanged for it. They exist and develop a marketable value much the same as a gold coin or anything else perceived to have a tradable value based on the transaction that the Bitcoin was used to trade for, the same as security trades or precious metal trades. The real success of Bitcoin and other tradable digital currencies is the inability of governments to monitor, regulate, tax and control it.  Except for the Bitcoin trades themselves, accounting for the inside of a Bitcoin transaction is nearly impossible and the only way government gets to tax Bitcoins in the profit or loss in Bitcoin trading itself.

Crypto currency intentionally escapes the fiat that supports legal tender.  While legal tender succeeds as a medium of exchange, is the full faith and credit of the government that printed the currency. In the case of bitcoin, the creation it is powered by a decentralized computer network that establishes rules and mathematical processes that award the creation of 6.5 bitcoins on successfully completing of the process. This network has no other authority nor the ability to financially back Bitcoin. Nevertheless, the financial attraction is in the appreciation of the unity itself and the traditional structure that trades these assets. As a result, entities like FTX dance around regulation and taxability of crypto currency in the mainstream economy, erodes the infrastructure of the income tax system.

The FTX collapse shows the rampant ineffectiveness of traditional SEC and governmental control over the crypto currency explosion. It demonstrates that the unbridled subornation of FTX enticed a political party to give way to this calamity. The Enron collapse gave us Sarbanes Oxley, but now we wait for the other shoe to drop to see what the government’s reaction will be.  As this investigation wears on, the flagrant holes in the system will show the helplessness of government has against the technology crypto currency, in particularly the tax system.

Government needs to attack this head on. El Salvador officially made Bitcoin a legal tender in September 2021. The government a digital wallet that lets anyone use cryptocurrency. Essentially, Salvadorian citizens can use bitcoins for any transaction. However, six months into the new law, adoption of bitcoin has several technical and practical problems. While the government under Bukele was intent on transforming El Salvador into a technology giant of the future, but 70% of the country is unbanked and 50% of the country is online. So confident was Bukele, that he issued Bitcoin bonds to back bitcoin currency. The system has growing pains but it is something to watch. It seems likely that bitcoin supporters will help the country struggle through the new law. I have long stated that the lack of governmental support is critical to the success of bitcoin but taxation is still a hurdle that must be leaped.

If the government could tax internal transactions, the revenue steam would justify the backing of crypto currency and allow for moderate regulation. In 1999, we formulated a replacement for the income tax called the Withdrawals Tax. This tax effectively electronically collects a five percent tax on bank withdrawals. This tax would replace the income and vat tax system. Based on our calculations, we estimate that the tax could generate 9 trillion annually and can be regulated by a change in the withholding rate. If the El Salvadorians adopted this tax system, there would be a broad acceptance of the tax. It has been successful in Australia, Pakistan, India and Brazil.