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The “Fapiao” Case: How China Is Fighting Corruption With Blockchain

China has been on the verge of blockchain adoption as of late. The technology, in fact, has become part of the country’s national, president-signed program. The latest advancement in the field relates to the country’s old corruption staple — fake invoices used to embezzle corporate and state funds.

Tax authorities of the city of Shenzhen and a state-owned aerospace firm have recently turned to blockchain for immutable and transparent record-keeping, steadily putting an end to paperback corruption.

China’s complex ‘fapiao’ invoice system

To understand the nature of the latest blockchain solutions for China’s invoicing system, its general context should be explained first. Essentially, it revolves around the concept of the so-called ‘fapiaos’ (the Chinese word for an official invoice), which is a legal receipt that serves as proof of purchase for goods and services.

Fapiaos are issued by the Chinese Tax Bureau — but provided by the seller — for any goods or services purchased within the country. The Chinese government uses these invoices to track tax payments and forestall tax evasion. Individuals need fapiaos to reclaim business expenses, while companies are obliged to record their transactions on a fapiao — failing to do so violates the law.

However, the fapiao system, which was established back in the 1980s, is largely corrupt. As a New York Times article suggests, those tax invoices are openly sold on the streets, which are either original ones that weren’t claimed in the first place or high-quality replicas. Buyers use them to evade taxes and cheat employers: Essentially, a Chinese individual can obtain any kind of fake receipt — from travel receipts to value-added tax (VAT) receipts. Finding them does not necessarily require having deep connections to the black market, as promotions for counterfeit fapiaos are sent via text messages or even advertised on Taobao.com, where sellers offer special discounts and same-day delivery of those documents, as NYT article reveals.

Even the state-run agencies are involved in the grand scheme. In 2010, for instance, the National Audit Office claimed that it detected central government departments embezzling as much as $21 million through the use of fake invoices. Wang Yuhua, an assistant professor of political science at the University of Pennsylvania and the author of a study on corruption in China, told New York Times:

“Their salaries are relatively low. So they supplement a lot of it with reimbursements. This is hard to monitor.”

Tax evasion is a serious crime in China — sometimes punishable by death — but that doesn’t seem to hinder the counterfeit fapiao industry. Although state authorities boast impressive statistics on the matter (in 2009 alone, they reported detaining 5,134 people and closing 1,045 fake receipt production sites), the system is alive, and fapiaos are sold even in hotel gift shops. However, there is a technology that might finally tackle the system with some effect.

Blockchain versus corruption: Tax authorities and Tencent’s collaboration

While Bitcoin and other cryptocurrencies are often blamed for cultivating corruption — this remains to be one of the most commonly used arguments for conservative politicians and businessmen who are skeptical about the prospects of crypto — its underlying technology represents an efficient tool for fighting it. Blockchain, being an immutable, decentralized and encrypted ledger, can provide a clear record of any transaction that took place on it, any time of the day, thereby solving the problems of over-reporting, false-reporting and other true-false inconsistencies in the process of invoice circulation.

Hence, the prospect of applying blockchain to fight the fapioas might seem especially attractive for Chinese authorities. It became possible after the Shenzhen National Taxation Bureau teamed up with local internet titan Tencent — the developer of the one billion-user social media app WeChat — to fight tax evasion back in May. In the vein of their collaboration, they formed an “Intelligent Tax” innovation lab that aims to promote a technological approach to the field of tax, including the use cloud computing, artificial intelligence, blockchain and Big Data, the press release argued.

The release also explicitly outlined the first aim of the collaboration, as Li Wei, deputy director of the Shenzhen Municipal Bureau of State Taxation, claimed that Tencent’s success in the application of blockchain for invoicing would help to fight the issue of fake fapioas and “improve the invoice supervision process.”

First results: “A frictionless link between consumer scenarios and tax services”

On Aug. 10, local news platform EEO reported that China’s first digital invoice on the blockchain was issued in the city of Shenzhen, where the aforementioned collaboration was announced.

Thus, Tencent has created a pilot blockchain ecosystem for invoices designed for comprehensive use by consumers, merchants and tax authorities, according to local publication. The debut invoice was issued by a local restaurant, while several other Shenzhen businesses have already been granted access to the system, including a parking lot, auto repair shop and cafe.

Cai Yunge, the general manager of blockchain at Tencent, was quoted by EEO as saying that the new system achieves “a frictionless link between consumer scenarios and tax services.” Consumer payments are facilitated through Tencent’s WeChat, and an invoice suitable for further inspection and management by tax authorities is reportedly generated in “one click.”

Conversely, processing a traditional invoice takes multiple steps and requires a lot of time: When a consumer completes a transaction, they must wait for the merchant to generate the invoice, file it away safely, complete a returns form in the Finance Department, wait for the documents to be processed and then finally receive their returns.

As EEO explains, a blockchain-backed e-invoice only requires the customer to perform one click on the WeChat app during the checkout. After that, they just have to wait and track their reimbursement status in real time via the app. The process leaves no room for forging or over-reporting. Moreover, the technology also has the advantage of improving data privacy through encryption and of providing an overall cost-effective streamlining of processes, as multiple reviewing parties have been excluded from the process. 

More blocks on the chain: State-owned aerospace firm joins the new scheme

The next player to adapt blockchain for fighting invoices-induced corruption is the state-owned China Aerospace Science and Industry Corporation Ltd.

According to an article in the official state newspaper, People’s Daily, that was republished by the State Administration of Science, Technology and Industry for National Defence, blockchain will help innovate the supervision of invoices for tax purposes nationwide.

As the article suggests, electronic invoices are on the rise in China: In 2017, there were around 1.31 billion electronic invoices in circulation, and by 2022, the number is expected to hit 54.55 billion, as the projected average annual growth rate constitutes over 100 percent.

China Aerospace, in turn, uses electronic invoice services that are end-to-end, covering issuance, delivery, filing, inspection and reimbursement for the country’s taxpayers and authorities. It has already issued some 2.5 billion invoices to date, as per the People’s Daily article.

However, such an e-invoice system, like the traditional one, is not safe from over-reporting, false-reporting and traceability issues. Hence, China Aerospace has now created a blockchain system to allow for authenticated and “credible” invoice issuance, traceable circulation, and efficient and cost-effective oversight by tax authorities — just like in Shenzhen.

China Aerospace’s representatives are confident about fighting the fapiao corruption at its root with blockchain technology. As a company representative told People’s Daily, the technology will finally resolve the industry’s “pain points.”

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Brazil’s Operação Lava Jato Paves The Way To Blockchain Implementation: Expert Take

In our Expert Takes, opinion leaders from inside and outside the crypto industry express their views, share their experience and give professional advice. Expert Takes cover everything from Blockchain technology and ICO funding to taxation, regulation, and cryptocurrency adoption by different sectors of the economy.

If you would like to contribute an Expert Take, please email your ideas and CV to george@cointelegraph.com.

On April 7, the former 35th President of Brazil Lula da Silva, was the nation’s first president ever to be jailed, for charges stemming from Brazil’s Operação Lava Jato (Operation Car Wash) corruption investigation. Lula’s incarceration followed after police in Rio de Janeiro uncovered a first-of-its kind Bitcoin-based money laundering scheme in which state officials misstated the budget spent on food for state-run prisons to the tune of $22.4 mln. Luíz Henrique Casemiro, superintendent of the Internal Revenue Service (IRS) in Rio, said “this was the first-time cryptocurrencies were used in such an operation to fly below the radar of the Central Bank and the IRS.”

Operation Car Wash began as an investigation into money laundering four years ago, which quickly turned into something much greater, uncovering a vast intricate web of political and corporate racketeering involving the heads of states of Brazil, Peru, Guatemala, Ecuador, Mexico, Argentina, Venezuela, Colombia and Panama.  It is the biggest corruption scandal in global history that exposed a culture of systemic graft in Brazilian politics and provoked a backlash from the establishment fierce enough to bring down the 36th President of Brazil Dilma Rousseff’s government and leave the 37th President Michel Temer’s administration on the brink of collapse.   

Govtech

As the country prepares for the upcoming elections this year, citizens deeply upset by Lula’s incarceration have initiated a petition “Election without Lula is fraud” which is promoted by intellectuals and artists like Noam Chomsky and Chico Buarque, that has garnered over 292,000 signatures so far. In Brazil, popular petition is a form of electoral initiative with its essence in people selecting and signing petitions on relevant issues. If the petition has the necessary 1 percent of the country’s voting population behind it, it is submitted to Congress and the government is bound to review it.

To bring transparency to the popular petition process, the Brazilian government is supporting an innovative Ethereum Blockchain solution with a mobile app that will allow people to register to the system via their smartphones online and place their signatures on petitions they support or submit a petition.  The system will allow anyone to view the actual number of signatures for a certain petition, ensuring that no signature is lost or forged.

Another state run Blockchain initiative is a platform for property registration – for the world’s fifth largest country occupying half of South America’s land mass – to protect millions of trees in the Amazon rainforest “Selva”. The aim of the initiative is to spare illicit development of the biggest, most bio-diverse nature reserve in the world. The southern city of Pelotas is among the first in Brazil to experiment with a fully computer-based Blockchain-based land-titling system.

Fintech & national cryptocurrency

Several large Brazilian banks that have been caught up in the cross hairs of the Operation Car Wash investigation for money-laundering and tax evasion have begun exploring implementing Blockchain technology in their banks. This includes Banco Santander, SA which on the one hand, due to the lack of cryptocurrency regulation has shut down or refused to open some cryptocurrency exchange brokers’ accounts, while on the other hand recently has launched the first Blockchain-based cross border payment service for end consumers in Brazil.  

Brazil’s Central Bank governor, Ilan Goldfajn explained that cryptocurrencies are not “electronic currency” under Brazilian law as “Cryptocurrencies lack the stability needed to be a safe and legitimate exchange of value.”  He prefers to think of them as “crypto-assets” along with the rest of the G20. Goldfajn serves as a Director of the Bank for International Settlements which in a report examined some of the possible implications of central bank issued digital currencies (CBDC). He indicated that the Brazilian Central Bank and the Brazilian Banks’ Federation (FEBRABAN) have already conducted different tests on the use of Blockchain technology.

So far, the Brazilian National Bank for Economic and Social Development (BNDES) wants to prove that documenting government funding through a visible public ledger based on Ethereum’s Blockchain will prove an efficient way to ensure transparency, as well as a deterrent to fraud and corruption. BNDES is tokenizing the Brazilian real for these purposes. Brazil is also involved in the BRICS – Brazil, Russia, India, China and South Africa – a multinational cryptocurrency initiative lead by the Central Bank of Russia which recently indicated that it could eventually be deployed atop an Ethereum-based platform as well.

Cryptocurrency regulation under securities laws

Cryptocurrency exchanges escape regulations in Brazil because cryptocurrency is not a currency nor a security. As a result, cryptocurrency exchanges are forced to take legal action against banks’ account closures and seek legal injunctions to keep their accounts open. After a recent wave of extreme volatility, crypto-fever in Brazil has hardly subsided. At the height of it, late last December when Bitcoin’s price peaked at $20,000, FoxBit, one of Brazil’s leading specialized brokerages, said it had to suspend the registration of new clients because it was unable to cope with demand.

“At the end of November, the number of applications increased 10-fold. At some point, we had a backlog of 10,000 applicants,” said FoxBit advisor and partner Marcos Henrique.  Brokerage firms that specialize in cryptocurrencies report that they have more than 1 million individual clients, some 0.5 percent of the population, the largest investor base in the continent, as measured by their identification numbers with twice as many cryptocurrency traders in Brazil compared to stock traders.

The lack of regulation has prompted Brazil’s largest cryptocurrency exchanges to create two separate cryptocurrency associations – the Associação Brasileira de Criptoeconomia (ABCripto) and the Associação Brasileira de Criptomoedas e Blockchain (ABCB) with seemingly different approaches to potential cryptocurrency regulations.

Brazil’s Securities and Exchange Commission (CVM) in Jan. 2018 announced that local investment funds are prohibited from purchasing cryptocurrencies – owing to a CVM determination that cryptocurrencies are not legally considered financial assets. The CVM also recently suspended the operations of a cryptocurrency mining investment scheme, Hashbrasil for violating securities laws by conducting an unregistered public offering. However, the CVM is set to give the green light in early May for fund managers to “indirectly” invest in cryptocurrencies, according to local news reports.

The next big move is expected to come from Brazil’s congress, where some legislators have proposed turning cryptocurrency mining and transactions into a crime.

Cryptocurrency taxation

There was intense debate on digital taxation at G20, with Brazil holding out that it might not follow the G20’s recommendations concerning cryptocurrency regulations. The Brazilian IRS has created a working group on electronic transactions to assess further action and possible changes in the tax legislation.

Walter Stuber partner at Stuberlaw explained that currently the Brazilian IRS classifies cryptocurrency as a financial asset subject to capital gains taxation like any other security at a tax rate of 15 percent to gains of 35,000 reals or more. (article, 153 III and in Brazilian Tax Code, article 43).

Foreign investors’, whether individuals or legal entities, income, capital gains, and other proceeds paid, credited, delivered, employed, or remitted by a source located in Brazil are subject to withholding tax at 15 percent or at 25 percent for tax havens. (articles 682 and 685 of the Income Tax Regulation). 

There are no specific corporate cryptocurrency taxation rules. Cryptocurrency capital gains are subject to the corporate tax rules applicable to companies in general and added to the taxable profits.

Tax returns are due by the end of April for individuals and end of July for corporations for the tax year ending on Dec. 31, 2017.

The views expressed here are the author’s own and do not necessarily represent the views of Cointelegraph.com

 

Selva Ozelli, Esq., CPA is an international tax attorney and CPA who frequently writes about tax, legal and accounting issues for Tax Notes, Bloomberg BNA, other publications and the OECD.

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Mexico Tests Blockchain to Track Public Contract Bids

The government of Mexico has been quietly working on a project to track bids for public contracts using blockchain, a government official revealed Tuesday.

Speaking at a tech conference in Jalisco, Mexico’s national digital strategy coordinator Yolanda Martinez detailed Blockchain HACKMX, a project she said has been in production since last September. The system was initially developed by a team of university graduates whose design won a contest calling for blockchain solutions that can help improve public services.

“With blockchain applied to public contracts we’ll be able to know whether a company that provides services to the government is trustworthy,” Martinez tweeted.

According to Mexican news outlet Debate, Martinez told attendees that the technology would eliminate the “easily corruptible” human element and introduce transparency to the public tender process. Martinez also pointed out that the blockchain would store records of the bidding process, allowing for audits after the fact.

Technical details about the project are not available, but Debate’s report suggests the project will eventually be rolled out to the public, with the government eyeing it as a solution for state and local governments in particular.

A presentation entitled Blockchain HACKMX, which is available on the UN’s website and appears to date from July, weighs the benefits of various platforms that could potentially host the network: Hyperledger Fabric, bitcoin, ethereum, Chain and NEM. The presentation suggests that computers participating in the network would be run by a mix of government offices, universities, civil society groups and private companies.

The issue of public contract corruption is a sensitive one in Mexico, given a recent high-profile scandal that involved a major South American construction firm and allegations that bribes were funneled to the political campaign of President Enrique Pena Nieto.

Transparency International, an anti-corruption non-governmental organization (NGO), rates the country 135th out of 180 in its Corruption Perceptions Index.

Image Credit: Suriel Ramzal / Shutterstock.com

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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South Korea Wants to Set a Desirable Cryptocurrency and Blockchain Policy: Expert Take

In our Expert Takes, opinion leaders from inside and outside the crypto industry express their views, share their experience and give professional advice. Expert Takes cover everything from Blockchain technology and ICO funding to taxation, regulation, and cryptocurrency adoption by different sectors of the economy.

If you would like to contribute an Expert Take, please email your ideas and CV to a.mcqueen@cointelegraph.com

South Korea, known as Geumsu gangsan or the “Land of Embroidered Rivers and Mountains”, has come to be known as world’s global-innovation gold medalist during the past five years. With a lightning-fast internet, the country is emerging as one of the world’s biggest market for trades in cryptocurrencies as well as its underlying Blockchain technology. Behind South Korea’s high-tech developments are 45 large chaebols – a term that combines the Korean words chae (wealth) and bol (clan) – family-run large industrial conglomerates that are incriminated with governance transgressions.

Five Biggest Chaebol = Half Korean Stock Index

Samsung Electronics Co. is the most-valuable multinational tech company by market capitalization and is at the heart of Blockchain innovation in South Korea. The Samsung Group is a member of the Enterprise Ethereum Alliance, as well as the Korean Blockchain Association (KBA) which was established at the end of January with 66 member companies to self-regulate the cryptocurrency market. KBA is headed by Chin Dae-je, a former executive of Samsung Electronics and former Minister of Information and Communication. Dae-je explained KBA’s role as “fostering communication and coordination between the government and the Blockchain community to set a desirable policy direction for the future of the industry.”

The Samsung Group has launched various integrated Blockchain platforms which can be deployed across all industries, including Fintech and Govtech. Its permissioned Blockchain system called NexLedger is jointly developed with Amazon Web Services and a Korean startup Blockchain company Blocko.

The ICO ban & it’s possible repeal

At the end of last September, the Financial Supervisory Commission (FSC) placed a regulatory ban on Initial Coin Offerings (ICO) in order to protect the investing public, who saw nearly 50 percent of their ICO investments evaporate in 2017.

Three months after South Korea’s ICO ban, Minister for Science and ICT Yu Yeong-min pledged 4.2 bln won ($3.9 mln) of the ministry’s budget to support the fostering of Blockchain technology. Importantly, the healthcare sector was most suitable for Blockchain technology transformation – interoperability, security, and accountability of electronic health records and health information technology, medical supply chains, payment methodologies, research capabilities, and data ownership. The result of the ICO ban is that several startup healthcare Blockchain companies, including Mediblock, Zikto and My23  launched their ICOs abroad.

“Talent and innovation will always find a way to attract capital, if not in South Korea then in Switzerland” explained US hedge fund manager Timothy Enneking of Crypto Asset Management (CAM), which invested in the ICO token of ICON Blockchain platform post South Korea’s ICO ban. “[Although] the media reports that Kakao and Kakao Pay are planning to raise funds through ICOs abroad and issue their own Kakao coin, financial authorities have not confirmed this fact. This ICO could violate current cryptocurrency regulations” revealed Choi Jong-ku, the chairman of the FSC. The Startup Trend Report further affirmed that Korean startups that remained in the country received funding the old-fashioned way, from Softbank Ventures.

After consulting with the tax agency, justice ministry and other relevant government departments, the FSC in a sharp U-turn of policy direction, stated that it was considering reversing the ICO ban.

Cryptocurrency regulation & taxation

“The government lacks a synchronized regulatory approach to ICOs, cryptocurrencies and Blockchain” the minister of the Office for Government Policy Coordination, Hong Nam-ki explained. This became all the more evident during January.

The Bank of Korea (BOK) – after stating that it did not consider cryptocurrency as legal tender “began evaluating it alongside the Bank of International Settlements” according to governor ‎Lee Ju-yeol. BOK’s legal characterization of cryptocurrencies was in line with many countries around the world, including the US where “a cryptocurrency does not have legal tender status in any jurisdiction.”

After the Ministry of Strategy and Finance identified 41.2 bln won ($39 mln) invested in the cryptocurrency market by sixteen venture investment firms, including the South Korean National Pension Service, the head of tax department Choi Young-rak stated that “Cryptocurrencies are not taxable under the current Income Tax Act, but corporate taxation is possible.”

The Korea Financial Intelligence Unit and FSS created a task force and began carrying out joint inspections of commercial banks and crypto-exchanges for anti-money laundering (AML), Know Your Customer (KYC) and tax evasion violations. So far, they have flagged three crypto-exchanges for potential AML violations. The FSC also banned the use of anonymous bank accounts in cryptocurrency transactions by banks and crypto-exchanges to strengthen AML/KYC compliance, parallel to G-20’s cryptocurrency AML/KYC policy.

Justice minister Park Sang-ki warned that the ministry was preparing a bill banning cryptocurrency trading.

Following governments’ divergent pronouncements regarding cryptocurrencies during January, its value plummeted 70 percent according to a report prepared by Chainalysis. This stirred 280,000 South Korean citizens to sign a petition demanding that the government adopt investor friendly ICO and crypto-trading regulations. In response the FSS indicated that it was considering implementing a cryptocurrency-exchange licensing system similar to the New York State Bitlicense model.

The corrupt use of cryptocurrencies & administering criminal laws via Blockchain

While the Korean government appears to be still searching for a synchronized voice concerning ICO/cryptocurrency and Blockchain regulatory policy, it is firmly in-step when it comes to blocking corrupt use of cryptocurrencies.

The Korean Anti-Corruption & Civil Rights Commission issued the “Code of Conduct Guide to Cryptocurrency” applicable to all government departments and public agencies prohibiting public officials from using “the information learned during their duties to assist in trading or investing” in cryptocurrency. On March 6 the Ministry of Personnel Affairs imposed a de facto ban on all government officials from holding and trading cryptocurrencies after officials from the FSC were caught insider trading cryptocurrencies, before forthcoming announcements were made about cryptocurrency regulations – which was tantamount to corruption.

South Korean prosecutors, judges, law enforcement officials are highly experienced when it comes to investigating and prosecuting corruption at the highest political levels with a current caseload involving two former presidents. Lee Myung-bak is the fifth president to be arrested for taking chaebol bribes and abusing his power while in office. Lee’s replacement former President Park Geun-hye is on trial facing a thirty-year jail term and a 118.5 bln won ($110 mln) fine for similar criminal infractions. They tackle these corruption cases with a “tell me something new, not the same old, generational chaebol/political corruption suits please” attitude.

Here is something new – a startup company LegalThings aims to bring a Blockchain technology based solution to the easy and transparent administration of criminal laws by reducing the criminal caseload of judges, prosecutors and law enforcement officers for often recurring criminal offenses – like traffic violations – that clutter the justice system.

The platform is designed to make the law accessible to individuals, while making judicial record-keeping more open and secure. LegalThings’ one Blockchain solution splits criminal laws into parts that are understandable for both computers and humans: those parts considered simple and safe executed on the Blockchain for legal relationships that can be reduced neatly into code via smart contracts  and other parts that involve human interpretation.

Instead of complicated laws being explained by the police, the accused gets an explanation of the relevant law executed on the Blockchain, choose whether to be represented by counsel, and agree to pay the relevant fine – all on their smartphone. Every step of the exchange is recorded, time-stamped, and made unchangeable using cryptography to ensure records can’t be altered. By making the law understandable to everyone, millions of dollars are saved by governments which increases satisfaction level for all parties involved.

Undoubtedly ICOs, cryptocurrencies and Blockchain technology are seeping into the existing global legal and financial system and transforming them all at the same time. History shows that the way in which a country embraces and regulates new technology can make an enormous difference in the development of the country.

The views and interpretations in this article are those of the author and do not necessarily represent the views of Cointelegraph.

 

Selva Ozelli, Esq., CPA is an international tax attorney and CPA who frequently writes about tax, legal and accounting issues for Tax Notes, Bloomberg BNA, other publications and the OECD.
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South African President Steps Down as Banks Embrace Blockchain Technology

In our Expert Takes, opinion leaders from inside and outside the crypto industry express their views, share their experience and give professional advice. Expert Takes cover everything from Blockchain technology and ICO funding to taxation, regulation, and cryptocurrency adoption by different sectors of the economy.

If you would like to contribute an Expert Take, please email your ideas and CV to a.mcqueen@cointelegraph.com.

South Africa’s president Jacob Zuma announced that he was stepping down Feb. 14 after leaders of African National Congress vowed to force him from office. On the same day the police raided the home of South Africa’s wealthiest Gupta family.  Zuma became president in 2009. His controversial corruption scandal linked to the Gupta brothers; Atul, Rajesh and Ajay, was labeled “Zupta”, and was one of the reasons he was forced to resign, as it inflicted severe damage on one of Africa’s biggest economies.

Zupta is reported to have drained-off billions of Rands from government institutions by orchestrating the awarding of government contracts into offshore shell companies. Said companies funneled these funds into various concealed bank accounts around the world. Zupta’s squandering of public funds and property eventually caught the attention of world regulators triggering a wave of multijurisdictional corruption investigations of individuals, multinational companies, and banks with suspicious cash flows from banks in South Africa, UAE, China, India, the US, and Canada.

These banks; including ABSA, Bank of Baroda’s South African Branch, followed by the State Bank of India, were forced to shutdown Zupta linked bank accounts, in domino effect, to mitigate money laundering related legal problems.   

South African Banks Adopt Blockchain Technology

As a result of the Zupta scandal, several South African financial institutions have embraced blockchain technology called Springblock, which they hope to adopt for all financial transactions, explained Farzam Ehsani, chair of the South African Financial Blockchain Consortium. The State Bank of India, which is India’s largest bank also implicated in the Zupta scandal, announced that it would be implementing Bankchain’s blockchain in collaboration with Primechain Technologies in several areas of the bank including Know Your Customer /Anti-Money Laundering (KYC/AML), syndication of loans/consortium lending, trade finance, asset registry & asset re-hypothecation, secure documents, cross border payments, peer-to-peer payments, and blockchain security controls.

“Primechain Technologies is a blockchain startup in India. Bankchain is a member driven — thirty-two banks— the community with no separate legal existence. All member fees are collected by Primechain Technologies to develop blockchain technologies for member banks to lower overhead costs, process transactions more quickly, provide the security of the banking system, use specialized and highly optimized permissioned blockchains to facilitate information sharing among the banking institutions that are members of the network” explained Rohas Nagpal, Chief Blockchain Architect at Primechain Technologies.

Ron Quaranta, Chairman of the Wall Street Blockchain Alliance, foresees blockchain technology being widely used in the global financial industry. “In the future, virtually every function in global financial markets will be impacted by the advent of blockchain technology”, he believes.

South African Reserve Bank is testing blockchain

The South African Reserve Bank (SARB) has established the Financial Technology Program, whose primary goals are to track and analyze developments and to assist policymakers in formulating frameworks in response to these emerging innovations. The program also intends to review the SARB’s position on private cryptocurrencies to inform an appropriate policy framework and regulatory regime. Additionally, it will launch Project Khokha, which will experiment with Ethereum based distributed ledger technologies in partnership with ConsenSys to replicate interbank transfers on Quorum, a platform built by JP Morgan.

South Africa has been relatively progressive on the subject of cryptocurrencies. The SARB issued a 2014 position paper on cryptocurrencies and in July of 2017 began to work with Bankymoon, a blockchain-based solutions provider, on creating a “balanced” approach to cryptocurrency regulation. There are currently no specific laws or regulations that deal with the use of crypto-currencies, which are not recognized as legal tender.

“The lack of AML/CFT regulation of virtual currency providers worldwide greatly exacerbates virtual currency’s illicit financing risks,” said U.S. Department of the Treasury Under Secretary Sigal Mandelker at the Securities Industry and Financial Markets Association Anti-Money Laundering and Financial Crimes Conference. “Currently, we are one of the only major countries in the world, along with Japan and Australia that regulate these activities for AML/CFT purposes. But we need many more countries to follow suit, and have made this a priority in our international outreach,” he added.

Although the South African Revenue Service (SARS) has indicated it intends track and tax cryptocurrency trades, without any court ruling or directives that focus on the tax treatment of cryptocurrency transactions, it will be difficult for the taxman to hold individuals accountable.

The views expressed here are the author’s own and do not necessarily represent the views of Cointelegraph.com.

Selva Ozelli, Esq., CPA is an international tax attorney and CPA who frequently writes about tax, legal and accounting issues for TaxNotes, Bloomberg BNA, the OECD, and other publications.
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US Government Implements Blockchain Programs to Improve Transparency and Efficiency: Expert Blog

Expert Blog is Cointelegraph’s new series of articles by crypto industry leaders. It covers everything from Blockchain technology and cryptocurrencies to ICO regulation and investment analysis. If you want to become our guest author and get published on Cointelegraph, please send us an email at mike@cointelegraph.com.

Cryptocurrencies and the Blockchain will be front and center at this year’s World Economic Forum in Davos with several cryptocurrency and Blockchain-related panels on the agenda.

The US government have been evaluating Blockchain technology since they have funded, collaborated and partnered with business, other countries as well as educational institutions in fostering and continuously developing innovative technologies and science. Contracts, transactions and the records of intellectual property (IP) are among the defining structures of the US economic, legal and political system. And the government agencies formed to manage them need to keep up with the economy’s digital transformation. Accordingly, Blockchain technology is under evaluation or is being implemented by several US government agencies to improve transparency, efficiency and trust in information sharing in:

  •       Financial management
  •       Procurement
  •       IT asset and supply chain management
  •       Smart contracts
  •       Patents, Trademarks Copyrights, Royalties
  •       Government-issued credentials like visas, passports, SSN and birth certificates
  •       Federal personnel workforce data
  •       Appropriated funds
  •       Federal assistance and foreign aid delivery

The General Services Administration (GSA)

GSA’s Emerging Citizen Technology Office launched the US Federal Blockchain program for federal agencies and US businesses that are interested in exploring Blockchain technology and its implementation within the US government. So far, GSA has used Blockchain to automate and speed up contracts review for its FASt Lane program.

Department of Treasury

The Treasury Department is running a pilot program to determine whether Blockchain technology can be utilized for supply chain management, which has accelerated, processing times, created efficiencies and strengthened financial controls in the private sector.

The Treasury Secretary Steven Mnuchin, who sits on a Davos Blockchain panel, believes that forming public-private partnerships (PPP) with foreign investors to fund Trump’s public infrastructure plan without incurring additional debt will be key to fulfilling the promise to upgrade US roads, bridges, airports and other public works. It will stimulate the economic growth with the aim of passing on substantial risk of funding to the private sector.

PPPs typically involve a government agency identifying a potential project, determining that there is sufficient revenue potential from the project to attract investor interest, soliciting competitive bids, and then selecting one or more private sector entities to design, finance, build, operate and maintain the project. In a PPP, the government generally owns the project but grants the private sector significant authority over its development and operation.

“Working with foreign investors is going to be a critical part of any plan we put forward and public-private partnerships are crucial to ensuring that the American taxpayer does not bear the full cost of any proposed program,” Mnuchin explained.

The Treasury Department has also undertaken initiatives to improve the “anti-money laundering/combating the financing of terrorism (AML/CFT)” laws for Blockchain based cryptocurrencies and formed PPPs with financial institutions, to share information.

US State Department

The US State Department underscores the importance of innovation in world economic development and encourages dialogue with the private sector partners currently using Blockchain technology.

“The State Department supports public-private-partnerships. For example, in maximizing the impact and accountability of foreign development/assistance, Blockchain technology by bringing transparency, may address corruption, fraud or misappropriation of funds and inefficiencies within the public procurement funding process itself,” explained Deputy Secretary John J. Sullivan.

Government procurement accounts for a substantial part of the global economy 20 percent of GDP or around $9.5 tln of public money. According to an OECD study, corruption drains off between 20 and 25 percent or around $2 tln annually.  It accounts for a substantial portion of the taxpayers’ money and remains the government activity most vulnerable to waste, fraud and corruption due to the size of the financial flows involved. Corruption distorts the fair awarding of contracts, reduces the quality of basic public services, limits opportunities to develop a competitive private sector and undermines trust in public institutions.

Countries around the world are putting technological innovation at the heart of public procurement, to reshape procurement into a strategic tool for income growth, national competitiveness and improvements in the health, economic well-being and overall quality of life.  More than four-dozen countries have created national innovation strategies and/or launched national innovation foundations. These countries are relaxing foreign direct investment constraints, providing funding, financing, using public-private collaborations, tax breaks and asking the private sector from outside their borders for commitments to their countries. In maximizing the impact and accountability of foreign development/assistance, Blockchain technology may address corruption, fraud or misappropriation of funds and inefficiencies within the funding process.

Department of Defense (DoD)

As reflected in the 2018 National Defense Authorization Act (H.R. 2810) as signed into law on Dec. 12, 2017, the US federal government and its agencies are exploring the adoption of Blockchain technology in various areas, after carefully studying the risks posed by this new distributed ledger technology. This evaluation will shed light on the Blockchain technology capabilities to both the Federal Government and Department of Defense IT environments.   

Department of Homeland Security (DHS)

DHS is awarding Small Business Innovation Research grants to develop a use case for Blockchain technology’s role in border security.

National Aeronautics and Space Administration (NASA)

Efficient communications systems and effective computing techniques are crucial to ensure the success of each NASA mission. Greater accessibility of digital information and cost-effective technologies of manned and unmanned space flights are expected to become much better integrated via Blockchain technology. A new grant from NASA to the University of Akron in Ohio will fund research to use deep-learning artificial intelligence that works over an Ethereum Blockchain network to develop a resilient networking and computing paradigm in various space communication environments.

Conclusion

Blockchain is not a silver bullet for digital government, but as this technology is more widely implemented, it could represent the future of smart, legal contracts and how entire industries in partnership with the US government conduct themselves in a transparent and streamlined manner.

Selva Ozelli, Esq., CPA is an international tax attorney and CPA who frequently writes about tax, legal and accounting issues for TaxNotes, Bloomberg BNA, other publications and the OECD.

Selva Ozelli, Esq., CPA is an international tax attorney and CPA who frequently writes about tax, legal and accounting issues for TaxNotes, Bloomberg BNA, other publications and the OECD.

Disclaimer. The views and interpretations in this article are those of the author and do not necessarily represent the views of Cointelegraph.

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Devcon3 Attendees’ Blockchain Insurance Can’t Stop Mexico Police Corruption

Travellers attending the Devcon3 Conference in Cancun, Mexico are among the first in the world to get licensed Blockchain insurance cover.

As part of a rollout from Blockchain startup Etherisc, those flying to Mexico can get automatic refunds for delayed flights via smart contract.

The trial is underwritten by Atlas Insurance and allows conference-goers to “share the risk of a delayed or canceled flight with fellow travelers,” a press release explains.

“Passengers can choose their preferred premium, view their estimated payout, and make their purchase in ETH or major fiat currencies.”

Devcon3 is an Ethereum-focused gathering of top developers from the cryptocurrency development and business space, running from Nov. 1 through Nov. 4.

The core Ethereum team will be in attendance, with co-creator Vitalik Buterin among others presenting on the cryptocurrency.

While the Blockchain insurance offer is pertinent, the increased security jars with reports that attendees are being sought out for bribes by local police.

Entrepreneur and Ethereum developer Julien Bouteloup, who was himself a victim, reported on Twitter Monday that “at least four” Devcon3 members had been arrested on bribe demands up to $5,000.

“We have now an accidents spreadsheet to record Devcon 3 Arrests and Crime Incidents,” Bouteloup added in a blog post about his experience, requesting any further victims to get in touch.