Digital currencies and financial taxation
Technological innovation applied to currency and finance must be regulated through rules and taxation; otherwise, there will be trouble. The Great Crisis of 2008 demonstrated this. It is worth bearing this in mind, given the rise of digital currencies. Private currency is justifiable only if it is effective in terms of the absence of systemic risks, on the one hand, and as a lever for economic growth, on the other. Consequently, the regulation and taxation of financial firms engaged in such activities must meet two criteria: the stringency of regulation must increase as systemic risks rise, whilst the taxation of profits must increase as their contribution to economic growth declines.
Consob Chair Chiara Mosca’s address to the market effectively highlighted the issue of the digital resilience of financial infrastructure. However, the focus of Italian and European policymakers, as well as that of supervisors and central banks, must be broader and begin with the following question: what are the macroeconomic effects of a technological innovation, in this case the issuance of a private currency?
The interplay between economic analysis and monetary history provides the answer, starting with those who invented modern private money: namely, our Italian markets. It was they who realised that it is highly advantageous for a private enterprise for its liabilities to be used as money, because this special function increases demand for them. The more citizens – and indeed states – used the merchants’ private currency, the more the merchants, thanks to the increase in their own indebtedness, saw their turnover and profits rise. This advantage – which we now refer to as microeconomic – could have aggregate effects – which we call macroeconomic – on the community within which the merchants operated. These effects could be positive when they served as a driving force for the production and distribution of goods and services.
But beware: if an individual trader made excessive use of debt leverage, sooner or later the toxicity of their excessive risk-taking would affect their counterparties. As excessive leverage grew, so did the risk of systemic consequences, particularly if the trader had engaged in activities that were not only risky but also illegal.
The danger posed by systemic risk becomes apparent when we turn the spotlight on the ‘sooner or later’ aspect – that is, the temporal element of when systemic risk emerges. The risk posed by a merchant – as well as the damage to their counterparties, and by extension to the wider community – only became apparent after a delay, thereby exacerbating both individual and collective costs. Admittedly, some counterparties might have enjoyed competitive advantages, for example for cultural or religious reasons. A study – as yet unpublished – on an 18th-century merchant, Francesco Saminiati, a member of a powerful Florentine family with national and international business interests, whose dangerous nature was first perceived by his Italian counterparties, then by his Catholic counterparties – even those who were not Italian – who downplayed the damage, unlike his Protestant counterparties. Excessive leverage is, however, an economic toxin, the effects of which grow the more that leverage is represented by private money.
