Taxing Axie: A necessary thorn

We now live at the forefront of innovation. It would be unwise to remain blind to it.

Last August, the Department of Finance (DOF) said that players of the emergent game Axie Infinity must pay income taxes on their earnings from the game. Since then, this has become a topic for debate for many of the players of the game and has caught the attention of those unfamiliar. Axie Infinity, a game developed by the company Sky Mavis, uses a play-to-earn model whereby users are incentivized when they create value, in this case “breeding or trading of virtual monsters”, and by spending time playing. It operates on the concept of a decentralized or open economy, common to the crypto industry. To date, approximately 40% of the active player base hail from the Philippines, which may be one reason it has been the topic of government regulation. To some, it may seem like a mere gimmick, and to others, it is a matter of whether they would be able to put food on the table as millions of Filipinos have lost their jobs to the pandemic. Whatever one’s perception of it may be, it seems to be gaining enough traction enough for the government to step in. It is this act of government intervening that is a point of interest.

On the topic of taxation, the law dictates that resident citizens of the country are taxable on their income derived from worldwide sources. Merely changing its form from traditional jobs to play-to-earn gaming models does not necessarily exclude it from regulatory expectations. At first, regulation may seem detrimental, but exploring further shows that it is necessary for mainstream adoption of the technology. Taxation represents government interest. By imposing the rules and guidelines of the regulatory infrastructure of the country, they are assimilated into what we consider as the ‘norm’. Fortunately for players of Axie Infinity, the company behind it has since expressed its willingness to work with governments on a ‘path forward that encourages innovation and empowers gamers’, as published in a tweet last August. For the whole of society, how the public perceives it dictates how many opportunities are presented.

The country continues to move forward with crypto. Last July, the Philippine Stock Exchange (PSE) showed its willingness to offer crypto trading services. In an interview with CNN Philippines, President and Chief Executive Officer Ramon Morzon said that the PSE is equipped to handle such services given its already established infrastructure. This comes as they wait for more regulatory rulings and guidelines for crypto from the Securities and Exchange Commission (SEC) and other regulators. As of January 2021, there have been 16 approved crypto exchanges in the country as reported by the Banko Sentral ng Pilipinas (BSP). What do these all mean for the public? More and more access to innovative finance and technology. 

Nations around the world are in a race to adopt crypto and the technologies powering it. Last September 7, Bitcoin officially became legal tender in El Salvador. This comes as the country seeks to improve its financial economy by offering lower transaction fees and providing liquidity to citizens without bank accounts. In Ethiopia, the government is working with IOHK, one of the companies behind the Cardano cryptocurrency, to build a blockchain-based national student and teacher ID recording system. This comes as an effort to improve the country’s educational system by implementing an immutable and verifiable system for evaluating student performance. In Afghanistan, amid the chaos and cash shortage, people are turning to crypto to safeguard their wealth and assets. Here in the Philippines, UnionBank has launched bonds.ph, an app that leverages blockchain technology and allows users to purchase retail treasury bonds with ease. This seems well and good, but we are not in the clear yet as we await our own regulators.

We are at a crossroads as our government prepares to draft regulations for the whole of the crypto industry within the country. Last June, China banned cryptocurrency mining, or the act of acquiring crypto through the use of complex equations and computers, and has ordered major banks not to transact with crypto-related businesses. One of the possible reasons for this is that the country views bitcoin and other cryptocurrencies as a ‘threat to the nation’s economic and financial stability. Another reason may come as the country continues to develop its own central bank digital currency (CBDC), a virtual currency backed and issued by their own central bank. Other countries have also been wary of their citizens dealing in crypto such as in Turkey, India, Nigeria, Bolivia, Russia, and several others. Since then, many of the key players, developers, and innovators of the technology in these countries have been driven away to others more accepting of the technology. In my opinion, this puts these countries at a disadvantage in what I describe as a ‘rebalancing of technological power’ as hubs of innovation relocate elsewhere. This is a path that one would hope the Philippines do not follow.

As with emerging industries, there will always be risks. Apart from the typical volatility of these assets, several cases have been presented that oppose the emergence of this industry. One of the biggest scams being Bitconnect’s initial coin offering (ICO) where it turned out to be a grand Ponzi scheme that cost investors $3.45 billion. Luring in people with its promise of 40% monthly returns and leveraging the novelty of crypto technologies, it presents an example of how cautious one should be when threading through unfamiliar territory. There will always be those who prey on newcomers to the world of crypto and there may not be a way to eliminate such risk. Another concern is the environmental impact of crypto-related technologies. Some argue that these blockchain-based technologies have been contributing to the degradation of the environment. This comes given the increasing worldwide adoption and the yearly emissions brought about by activities such as crypto mining. Thus, it becomes all the more important for the government to impose regulatory compliance.

The whole crypto industry represents a new frontier. Operating on the idea of a decentralized economy by giving financial power and control back to the people, it is no doubt a grand revolution. It would require the cooperation of both proponents of the technology as well as the governing bodies of nations for society as a whole to benefit. One need not fear of regulation or government interference, so long as it is aimed towards the ‘common good’, that of the public’s interest. Maybe only then can we attain true, mainstream adoption? As the late John McAfee has said, “You can’t stop things like bitcoin. It will be everywhere, and the world will have to readjust. World governments will have to readjust.”

We now live at the forefront of innovation. It would be unwise to remain blind to it.

LAYOUT BY: Sigrid Deryll Q. Dy