Blockchain
On Tuesday, March 28, French authorities raided the Paris offices of five major banks – including HSBC, BNP Paribas and Société Générale – in connection with an ongoing investigation into fraud and money laundering, with authorities reportedly seeking to at least €1 billion.
The research focuses on dividend payments; custody of assets; centralized, opaque filing systems; and tax avoidance strategies.
When a dividend is paid to a shareholder, the shareholder must pay the associated taxes on the dividend. But… who is the actual shareholder receiving the dividend? In the old world of opaque, closed, centralized databases, it can often be difficult to determine. The shareholder paying the dividend is recorded before the “ex-dividend” date. If you are a shareholder before the ex-dividend date, you are entitled to the dividend and must therefore pay the taxes.
The French fraud agency Parquet National Financier (PNF) alleges that the French banks provided a service to their favorite and largest foreign clients, temporarily transferring shares in foreign clients’ accounts to separate French (i.e. non-foreign) accounts to avoid the taxation of their reduce customer burden.
Because a bank with a closed, opaque, centralized database is able to keep track of inconsistent records, they can know that their foreign customer really owns a share in a company, while temporarily pretending to own that share in a company for tax purposes .
This is how it works: The foreign customer has a share. The French bank instead pretends to own the stock 1 day before the ex-dividend date. The French bank receives the dividend payment instead of the customer. The French bank pays the reduced (non-foreign) taxes. The French bank sends the dividend to their foreign customer. The foreign customer is now the owner of the share again (until next time). Everyone is happy… except, of course, the tax collector.
This type of fraud is very easy to carry out in old financial markets. There is no single golden source of truth for determining who owns a stock at any given time – and many of these systems are based on trust, as in the case when Dole was sued by more shareholders than it actually had.
But – to use a well-known expression – blockchain solves this.
With a single source of truth in the form of a public, verifiable, write-only database, shareholders, capital markets intermediaries and regulators can always have real-time access to financial markets, including ownership information, custodial relationships and tax liabilities.
For example, with a blockchain built specifically for capital markets, user 0x123abc clearly and transparently owns a share on-chain, its custodian 0x456def receives a dividend on behalf of 0x123abc on-chain, and 0x456def automatically pays taxes on behalf of 0x123abc on-chain. chain. Blockchain eliminates the “double-own” problem, streamlines back-office processes, eliminates ownership data inconsistencies, increases tax collection, and combats fraud.
People in crypto like to talk about “The Flippening”. This stemmed from the belief that Ethereum’s market cap will eventually grow larger than Bitcoin’s and “flip” it. But there are also other flippings: the market cap of Bitcoin versus gold, transactions on blockchains versus banks and credit card networks, and tier 2 volumes versus tier 1 volumes.
But one of the less talked about but more interesting flippings is when regulators and governments stop fearing blockchain technology because of its disruptive, unfamiliar nature, and start using it to improve markets, build trust, and better enforce regulations.
Soon all financial securities will be needed to operate on blockchains. And that’s because blockchain really solves this.
