South Korea: A state relies on the blockchain

The South Korean government has yet to find a common denominator. First it prohibits its officials from trading and owning crypto currencies. Later it bans ICOs in its own country, but does not want to punish the investors. Now the government wants to invest heavily in the research of blockchain projects.

With the „Blockchain Technology Development Strategy“ initiative, the Ministry of Information and Communication is strengthening the development and competitiveness of the private sector. Over the next five years, the ministry expects rapid growth in blockchain applications. The government does not want to miss this either. It wants to invest 230 billion won (around 180 million euros) in development and dissemination in order to strengthen South Korea as a business location. The government therefore wants to better understand the technology itself on the one hand and give incentives to the private sector to develop more on the other. The declared goal is to teach this technology to around 10,000 people who are not yet so deeply involved in the matter. The South Korean government expects to see up to 100 new technology companies by 2020.

Bitcoin code to become cashless

South Korea is supporting the Bitcoin code with the equivalent of over half a million euros. Regular competitions are to attract young people to develop creative solutions and implement them on the Bitcoin code Blockchain. In addition, lawyers and scientists in the civil service should understand the blockchain and crypto currencies better so that the government can pass the necessary laws. For many companies, as in many other countries, a concrete legal framework is lacking. In politics and state government, on the other hand, there is usually a lack of specialist knowledge. The South Koreans want to change this quickly.

The project reduces the social costs for the population by eliminating inefficient or superfluous processes, explains the ministry. This will significantly reduce the processing time for official decisions in the future. Both citizens and companies benefit from the time saved in waiting for decisions.

Model projects on the Bitcoin code

Blockchain technology is gaining ground worldwide in two sectors in particular. Logistics and finance companies are relying heavily on the new technology which is not a scam. The many individual transactions and transport routes are predestined for recording on the blockchain. The South Korean government is also relying on blockchain applications for its six model projects. One of these is also intended to improve logistics in the country. In addition, properties are to change owners faster and cheaper via the Bitcoin code Blockchain. Buyers and sellers can digitally sign the documents and send them to their notary and tax consultant. In elections, the technology should ensure fast and transparent counting. The blockchain should also ensure the food quality of meat products. Every step from production through transport to sale is documented on the blockchain. This gives consumers a transparent overview and enables them to better assess the quality of the meat.

In addition, the project also links up with the used car market: Anyone who has ever bought a used car from a stranger knows the unfortunate situation: Is the technology manipulated? Is it an accident car? What is the seller’s driving style? The buyer is not willing to pay the true price because he does not know the actual quality – a classic example of asymmetric information. The seller cannot credibly assure the potential buyer that he has always treated the car with care. A blockchain could record all the values over the life of the car and thus undoubtedly prove them when making a purchase.

The South Korean central bank is also relying heavily on the blockchain for its „cashless population“ project. By 2020, coins and banknotes should have largely disappeared from the economic cycle – an ambitious goal. A crypto currency, or at least a combination of fiat and crypto currency, would be a tried and tested means of getting there faster. To achieve this, it is important to first inform the population about the new technologies and take away any concerns they may have.

So far all this sounds like the classic „blockchain instead of crypto“ story. Meanwhile, however, the government is also considering slowly loosening the regulation, which has recently been strictly interpreted. South Korea is a comparatively small country that can boast rapid and high technological development. Despite its openness to technological innovation, the government has made z

Is a deviation from the wording of the law permissible?

The fact that fundamental deviations from the grammatical – as literal – interpretation of the law are possible is shown by case law and a consecutive letter from the Bavarian State Office for Taxes on Foreign Currency Loans. This letter covers the extension of time limits for fixed-term deposits in foreign currencies. In this context, it was questionable whether interest received, which could be considered income pursuant to § 23 (1) no. 2 sentence 4 EStG, could lead to an extension of the deadline. However, since the interest does not originate from the independent asset foreign currency, but rather from the capital claim denominated in foreign currency, a decision was taken against the application of the said provision.

Master Nodes, Staking, Mining, Bounties etc. – What is the remuneration actually paid for?

The block rewards and transaction costs received are remunerations for the services provided. Using the example of master nodes, the payments received are not justified by the original deposit; the user receives payments for the provision of services and functions. In the case of staking and mining, the income is also not generated by the respective coin; rather, in the case of mining and staking, block determination is the decisive factor for the receipt of the block reward. For this reason, the asset can also be viewed separately from the remunerated service in the case of crypto currencies. The payments which the taxpayer receives for his services in the respective systems are therefore not a result of the private asset crypto currency but rather a payment for the system services provided.

Conclusion – no extension of the deadline for cryptoassets?

Taking into account the arguments set out above, an extension of the speculation period by revenues from cryptoassets should regularly be unfounded. The extension of the deadline is to be understood as an anti-abuse provision, which was also born out of a concrete tax savings model. Since crypto currencies are not subject to a substance-related decline in value, it is impossible to design them as a tax-saving model. In addition, potential returns in many cases are not attributable to the use of the asset, but to system-related service offerings.

With significant investment amounts it is however quite advisable from risk aspects to obtain a legally binding information in accordance with § 89 AO before beginning the activity.

Klaus HimmerKlaus Himmer is managing director and co-founder of 21 Consulting (CryptoTax). He is an expert in the field of taxation of blockchain-based assets. As a consultant for a large auditing company, he advised banks, capital management companies and other financial service providers on product and corporate taxation issues.