tag:theconversation.com,2011:/uk/topics/ftt-1560/articlesFTT – The Conversation2022-11-10T13:27:13Ztag:theconversation.com,2011:article/1943132022-11-10T13:27:13Z2022-11-10T13:27:13ZCryptocurrencies: why Binance’s failed FTX rescue deal could mean ‘crypto winter’ is coming<p>Life in the cryptocurrency industry is rarely quiet for long, and after a <a href="https://decrypt.co/collections/2022-crypto-crash">tumultuous summer</a>, it seems the market is now entering a “<a href="https://www.forbes.com/uk/advisor/investing/cryptocurrency/what-is-crypto-winter/">crypto winter</a>”. Over the past week, the founders of two of the largest cryptocurrency exchanges – Binance and FTX – have had a public Twitter spat that triggered the collapse of one exchange and a failed bailout deal from the other. Unsurprisingly, these events have caused widespread panic across a market that has barely recovered from several major failures earlier this year.</p>
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<p>Binance, which is estimated to be worth more than <a href="https://fortune.com/2022/03/31/binance-made-billions-craze-crypto/">US$300 billion</a> (£263 billion), was actually FTX’s first investor in December 2019. Since then, FTX has grown to be worth more than <a href="https://www.barrons.com/articles/crypto-exchange-ftx-valuation-funding-51663854185">US$32 billion as of last January</a>, counting mainstream finance giants such as BlackRock and SoftBank among its many backers. </p>
<p>Binance CEO Changpeng Zhao and FTX founder Sam Bankman-Fried (often referred to as CZ and SBF, respectively) are two of the most influential people in the cryptocurrency exchange world where investors can buy, sell and store digital currencies. While Zhao has been associated with <a href="https://www.cnbc.com/2022/09/01/us-sought-records-on-binance-ceo-for-crypto-money-laundering-probe.html">regulatory concerns</a> around Binance, Bankman-Fried was seen as a relatively stable and ambitious figure in the wild west world of cryptocurrencies. He swooped in to rescue failing companies during last summer’s crypto bust and has made a point of <a href="https://www.theatlantic.com/technology/archive/2022/10/sam-bankman-fried-crypto-ftx-2022-midterms/671823/">speaking with the media</a> and <a href="https://www.expressnews.com/business/business_columnists/michael_taylor/article/Taylor-Sam-Bankman-Fried-billionaire-17255683.php">US policymakers</a>.</p>
<h2>What happened to FTX?</h2>
<p>Bankman-Fried’s empire included the FTX exchange business, as well as Alameda Research, a trading firm that was supposed to be separate from FTX. But a recent story by industry news site <a href="https://www.coindesk.com/business/2022/11/02/divisions-in-sam-bankman-frieds-crypto-empire-blur-on-his-trading-titan-alamedas-balance-sheet/">Coindesk</a> reported that Alameda’s balance sheet was dominated by FTT. This is the crypto token or coin issued by the FTX exchange, which grants holders a discount on trading fees on the marketplace. </p>
<p>FTT is entirely controlled by FTX, Alameda’s sister company and can be “printed” as FTX wishes. Alameda also held US$3.37 billion across a range of other cryptocurrencies, such as Solana and Serum, which means that any cryptocurrency collapse could severely affect the company. </p>
<p>While there is nothing illegal or wrong with these holdings – particularly in the notoriously <a href="https://www.fscs.org.uk/news/protection/cryptocurrencies-risk-cover/#:%7E:text=Unregulated%20Cryptoassets%20are%20largely%20unregulated,FSCS%20can't%20protect%20you.">unregulated crypto industry</a> – the report showed Alameda’s heavy reliance on a coin invented by its sister company and not one issued by an independent backer or as legal tender by a government. If a company in such a position gets into trouble, such assets would be useless in shoring up the business and protecting users because they would also fall in value. This discovery about Alameda’s balance sheet led to liquidity concerns about the entire company. </p>
<p>Indeed, after the Coindesk news story was published, Binance CEO Zhao tweeted plans to liquidate the remaining FTT on Binance’s books. In another post a few hours later he called the move “post-exit risk management, learning from LUNA” (a reference to a roughly <a href="https://www.forbes.com/sites/qai/2022/09/20/what-really-happened-to-luna-crypto/?sh=3f8b5b344ff1">US$60 billion</a> crypto crash that happened earlier this year).</p>
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<p>Zhao has 7.4 million followers on Twitter so his tweets affect the market. The value of <a href="https://coinmarketcap.com/currencies/ftx-token/">FTT fell</a> from US$22 on Sunday to US$4 on Tuesday afternoon, while FTX was flooded with a <a href="https://techcrunch.com/2022/11/09/cryptos-biggest-acquisition-binance-ftx-exchanges-sbf-cz-alameda-unlikely-close/#:%7E:text=%246%20billion%20in%20withdrawals">reported</a> US$6 billion in withdrawal requests. <a href="https://t.me/FTX_Official/694212">Some customers</a> were unable to access their cryptocurrency holdings on the exchange due to the number of requests. </p>
<p>Bankman-Fried responded on Monday by saying a “competitor is trying to go after us with false rumours” and adding that “FTX is fine” (he later <a href="https://cointelegraph.com/news/ftx-founder-sam-bankman-fried-removes-assets-are-fine-flood-from-twitter">removed the tweet</a>). But it seems this was too little, too late: <a href="https://coinmarketcap.com/charts/">total cryptocurrency market capitalisation</a> dropped from more than US$1 trillion to around US$830 billion in a matter of days.</p>
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<p>In a surprise move, just days later both Zhao and Bankman-Fried (above) tweeted details of a deal for Binance to acquire FTX. But the <a href="https://www.wsj.com/articles/binance-is-said-to-be-likely-to-walk-away-from-deal-to-buy-ftx-11668020963?mod=tech_lead_pos4">Wall Street Journal</a> reported the following evening that Binance had decided not to proceed with the deal after reviewing FTX’s finances and business structure. </p>
<p>A tweet from Binance (below) said “the issues are beyond our control or ability to help”. Further, <a href="https://www.bloomberg.com/news/articles/2022-11-09/us-probes-ftx-empire-over-handling-of-client-funds-and-lending">Bloomberg</a> reported that US regulators, the Security and Exchange Commission and Commodity Futures Trading Commission, have both been investigating FTX over its handling of customers funds.</p>
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<h2>Crypto winter</h2>
<p>The cryptocurrency industry has struggled in the last year, particularly since the <a href="https://www.ft.com/content/8db7e24b-5a15-4856-b81e-a2027157aaad">failure of Terra and Luna tokens in May</a>, the <a href="https://www.forbes.com/advisor/investing/cryptocurrency/what-is-celsius/#:%7E:text=Celsius%20Network%20(CEL)%20announced%20on,citing%20%E2%80%9Cextreme%20market%20conditions.%E2%80%9D">collapse of lender Celsius Network</a> in June and the subsequent bankruptcy of hedge fund <a href="https://www.coindesk.com/business/2022/08/24/singapore-high-court-recognizes-three-arrows-capital-liquidation-order-report/#:%7E:text=The%20liquidators%20of%20Three%20Arrows,order%20signed%20on%20Wednesday%20says.">Three Arrows Capital</a> in July.</p>
<p>The near-collapse of one of the biggest names in crypto, followed by the will-they-or-won’t-they nature of the Binance bailout has had an effect right across the crypto industry, with Bitcoin falling by more than 18% during these events. The failure of this rescue deal will do little to boost confidence in the sector and could accelerate a crypto winter by stoking fears of price volatility and the need for future bailouts.</p>
<p>The value of the FTT coin is down by nearly 90% and <a href="https://coinmarketcap.com/rankings/exchanges/">trading volumes at FTX</a> fell by more than 70% in the 24 hours around the rescue deal discussions. Much of this lost activity will move elsewhere, meaning the collapse of FTX could make Binance larger. This could encourage regulators to start looking much more closely at the space. </p>
<p>Of course, the ultimate irony is that one of the main characteristics of cryptocurrencies is supposed to be decentralisation, but recent events may well lead to more centralisation as activity consolidates around one exchange. This could discourage some crypto-enthusiasts from using Binance in the future.</p><img src="https://counter.theconversation.com/content/194313/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Urquhart owns some cryptocurrencies.</span></em></p>The latest market chaos is set to continue and could result in more regulatory scrutiny.Andrew Urquhart, Professor of Finance & Financial Technology, ICMA Centre, Henley Business School, University of ReadingLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/261182014-04-30T16:20:21Z2014-04-30T16:20:21ZUK must pick the right time to fight EU financial transaction tax<p>“In capitalist countries, the bank robs <em>you</em>.” Rightly or wrongly, this phrase – a reversal of an internet meme – sums up many Europeans’ reactions to the bank bailouts and austerity of the last few years. The EU responded with a series of populist measures – a restriction on <a href="http://eulawanalysis.blogspot.co.uk/2014/01/the-eus-financial-supervisory.html">short-selling</a>, criminal penalties for <a href="http://eulawanalysis.blogspot.co.uk/2014/02/jailing-bankers-new-eu-directive-on.html">market abuse</a>, and a proposal by 11 member states for a “Robin Hood tax” known as the Financial Transaction Tax (FTT).</p>
<p>The UK challenged the FTT in the European Court of Justice, fearing it could <a href="http://www.cityoflondon.gov.uk/business/economic-research-and-information/research-publications/Pages/The-effects-of-a-financial-transaction-tax-on-European-households'-savings.aspx">significantly damage</a> the City. But now, as widely expected, European judges have <a href="http://www.bbc.co.uk/news/business-27218615">ruled against</a> the UK. So at first sight the news looks like a big blow for the City, and indeed the whole country. </p>
<p>But in reality it is no such thing. The UK will still be able to bring a separate legal challenge to the FTT, if and when it is finally adopted, and, for the reasons set out below, such a challenge would have a much better chance of success. </p>
<p>The first thing to point out is that EU law is not “one size fits all”. Indeed, there are a number of different possibilities for some states to go ahead and adopt measures without all the others joining in. This is known in EU jargon as “differentiated integration”. The single currency is the most obvious example of such differentiation.</p>
<p>But there is also a lesser-known option for some member states to go ahead without the others in any area of EU law. This procedure, known as “enhanced cooperation”, has been used only twice before: in <a href="http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2010:189:0012:0013:en:PDF">divorce law</a>; and to create a “<a href="http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:076:0053:0055:en:PDF">unitary patent</a>”, applicable across various member states. The third usage was to authorise a group of member states <a href="http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:022:0011:0012:EN:PDF">to adopt an FTT</a>. </p>
<p>Enhanced cooperation works in two stages. First of all, the EU Council authorises a group of member states to go ahead in a particular area – divorces, patents, taxes. These authorisation decisions do not go into any detail about the law concerned. The EU institutions then negotiate the details of the legislation itself. This is known as the measure “implementing” enhanced cooperation.</p>
<p>When the enhanced cooperation procedure was used for the first time (in divorce law), the Council very quickly agreed on the implementation measure. However, on the second occasion when this procedure was used (the unitary patent), arguments over a <a href="http://www.unified-patent-court.org/">Unified Patent Court</a> meant it took nearly two years for the EU to adopt the implementing legislation. </p>
<p>Similar delays have occurred over the FTT. Legislation to set up the transaction tax was first proposed back in 2011. Enhanced cooperation has been authorised, but participating members each have a veto and they are struggling to reach agreement on rules of the tax itself.</p>
<p>It is easy to see why the UK objects to the proposal. It would not only tax transactions which take place in the financial markets of the participating member states (reasonably enough), but also those which take place in the financial markets of non-participating states – as long as one of the parties to the transaction is located in a participating state. To this end, the proposal would deem a British bank to be a French bank (for instance) in certain circumstances.</p>
<p>There is a very good argument that this proposal violates the EU’s rules on free trade in the internal market, and interferes with taxation sovereignty. EU treaties require any enhanced cooperation to be consistent with those rules. Indeed, it is widely known that the EU Council legal service believes that, for these reasons, the Commission’s proposal <a href="http://blogs.ft.com/brusselsblog/2013/09/10/eu-legal-opinion-against-the-ftt-full-text/">would be illegal</a> – if it were in fact adopted. </p>
<p>Though these arguments have been rejected by today’s judgment at this stage of the process, this was simply because the final shape of the transaction tax has not yet been decided. It is entirely possible that those countries who do want the tax might never reach agreement on the details, or that they might agree on an arrangement which doesn’t violate EU law.</p>
<p>Even if they do agree to adopt the current proposal, the UK will be able to challenge the relevant directive when the time comes. </p>
<p>If the UK’s challenge had succeeded, it would have ended any prospect of a European FTT for the time being. Its failure keeps the prospect alive. But because the courts rightly did not rule on the merits of the UK’s case against the Commission proposal – simply because that proposal has not yet been adopted – the UK has only lost a minor skirmish, not the war.</p>
<p>The mere fact the tax was challenged at all has made it clear to the participating states that the UK will vigorously defend its legal position, and may therefore have contributed to their difficulties in agreeing to the Commission proposal. The government’s legal action, although unsuccessful, may yet play some role in ensuring that a transaction tax, if one is finally agreed, does not hurt British banks.</p>
<p>An FTT limited to transactions within participating countries would of course not raise as much money. Then again, the UK could also reduce its budget deficit if it could (for instance) collect a toll from drivers on German motorways, or tax all the cheese bought in France. The absurdity of these scenarios shows why a future British legal challenge to the final FTT, if such a challenge is necessary, would have a much greater chance of success.</p><img src="https://counter.theconversation.com/content/26118/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steve Peers does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>“In capitalist countries, the bank robs you.” Rightly or wrongly, this phrase – a reversal of an internet meme – sums up many Europeans’ reactions to the bank bailouts and austerity of the last few years…Steve Peers, Professor of Law, University of EssexLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/238522014-03-05T06:10:40Z2014-03-05T06:10:40ZIMF’s win-win scenario: when redistribution equals growth<figure><img src="https://images.theconversation.com/files/43082/original/s6p2b7g2-1393925002.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C1022%2C685&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Sharing the wealth</span> <span class="attribution"><a class="source" href="http://www.flickr.com/photos/11091467@N00/450982322/in/photolist-FRpkh-H1DNS-HeJd3-Hjpiv-J51cx-KjryY-KjrAh-L35tQ-Lw94b-LWiBA-LWj31-LWjmw-LWjr7-LWjuW-LWjFU-LWjQG-LWjV5-LWkfd-LWkiJ-LWrWP-LWs8e-LWsbT-LWsu4-LWsy6-LWsXR-LWt6R-LWtjF-LWtnT-LWtrK-LWtvk-M4N6f-Mrh5E-MDDho-MJtVX-MULwP-N2EeC-RGdzr-V1iPi-V2RTU-2gs1Zr-2hVjv9-2hVkPm-2kaKFy-2q9gGB-2DAKLk-2MV3e7-3bHHJh-3e26TJ-3eTAuQ-3jF8RD-3Nb9h5">John Wright</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>Since the 1970s, economic orthodoxy has suggested that inequality might be the price worth paying for economic growth. Following a <a href="http://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf">new report</a> from the International Monetary Fund (IMF), the evidence is mounting to the contrary.</p>
<p>Previous studies have found that inequality is linked to lower levels of growth, but the argument has been that the treatment, rather than the disease, was to blame. In other words, countries suffering social inequity are more likely to follow redistributive policies and these policies are more harmful to growth than inequality itself. </p>
<p>It remains a persuasive argument. The coalition government in 2013 cut taxes on income over £150,000 from 50% to 45% following claims that this might create disincentives for entrepreneurs to create wealth.</p>
<p>However, Joseph Stiglitz, among others, has argued that inequality may cause greater economic volatility and, in fact, drag down economic growth. The IMF report provides further evidence to support the Stiglitz view while also providing a clear guide to the complex relationships between inequality, redistribution and growth.</p>
<p>One of the key points is that not all redistributive policies were created equal. They vary in type and effectiveness, and some prove very positive, directly, for economic growth. For example, taxes on activities which have negative consequences – such as excessive financial risk-taking by the rich – can prove very beneficial, as can measures such as cash transfers which support social investment.</p>
<h2>Selling redistribution</h2>
<p>The Financial Transactions Tax (FTT), partly designed to rein in the more speculative and risky activities of investment banks, highlights how divisive the redistribution debate can become. </p>
<p>The FTT was <a href="http://www.theguardian.com/business/2013/jan/22/eu-approves-financial-transaction-tax-eurozone">approved by EU finance ministers last year</a> – albeit with the UK, Luxembourg and the Czech Republic abstaining. It is estimated that the levy could raise as much as €35 billion (£29 billion) a year for the 11 countries that have signed up to it. However, opponents warn that investment banks might leave the countries where the tax exists – and <a href="https://www.cityoflondon.gov.uk/business/economic-research-and-information/research-publications/Documents/Research-2014/Effects-of-a-financial-transaction-tax-on-european-households-savings.pdf">research by London Economics</a> published in February suggested that household savings will lose value in countries where they are invested in financial assets such as shares or bonds (Germany in particular). Anti-poverty campaigners who support the tax argue that most transactions do not benefit savers but, instead, generate commission and charges for the banks.</p>
<p>One clear example of “good” redistribution, the IMF report argues, is social investment in education and health. The authors say that such investment helps to provide strong and productive workers for the economy. Investment in training can also help improve the skills-base of the economy and so drive up wages and growth. The idea of a “social investment state” to replace a welfare state based on “handouts” rather than “hand-ups” has been popular on all sides of the political spectrum since the 1990s. </p>
<p>It has also re-emerged in the UK with Labour Party leader <a href="http://www.bbc.co.uk/news/uk-politics-19503451">Ed Miliband’s support for “pre-distribution”</a> rather than (or alongside) redistribution. Spending on education, training and health is also more politically popular than spending on social security benefits. But when cuts to benefit levels for those out of work lead to longer and longer queues at food banks in countries such as the UK, we need to stop and consider people’s current needs, not just their potential as workers in the future.</p>
<p>Perhaps the crucial finding in the IMF report is that redistributive policies had generally positive impacts on economic growth, with only a very few examples of negative impacts. Of course, you can have bad redistributive policies much as you can any other kind. But redistribution is, overall, good for growth. The best available macroeconomic evidence suggests that there is no trade-off between equality and growth or between redistribution and growth.</p>
<h2>Where’s the wealth?</h2>
<p>The IMF research is extremely helpful and authoritative but it is surprising that the report focuses solely on income inequality. No mention is made of wealth inequality, for example, even though we know that wealth inequality is far more pervasive than income inequality. </p>
<p>In the UK in 2008/10, whereas those at the (top) 90th percentile for income or earnings received four times as much as those at the (bottom) 10th percentile, <a href="http://ukcatalogue.oup.com/product/9780199678303.do">the ratio for wealth was 77 times</a>. Issues of wealth inequality have received far less attention than income inequality, partly due to lack of robust data, but wealth inequality, although closely related to income inequality, may also cause <a href="http://www.birmingham.ac.uk/Documents/research/policycommission/BPCIV-Distribution-of-wealthexec-summary.pdf">social, political and economic problems</a>, independent of income inequality. One way of addressing wealth inequality could be through wealth taxation, particularly wealth transfer taxes such as inheritance tax. These would certainly fall within the scope of “good” redistributive policies as they tax unearned income. Revenue raised from such taxes could be used to support social investment policies and/or reduce taxes on earned income for those on low and middle incomes.</p>
<p>The IMF report also discusses economic growth in an entirely positive way. This is not surprising given where most countries’ economies are at the moment. The UK’s recent return to growth has been greeted with almost unanimous relief, if also with some debate about what the real cause has been, how sustainable it is and who will really benefit from it. This last point is important because over the last few decades, the share of growth accounted for by wages <a href="http://www.tuc.org.uk/sites/default/files/tucfiles/How%20to%20Boost%20the%20Wage%20Share.pdf">has dropped relative to the capital</a>, and the wage share has <a href="http://theconversation.com/lowest-paid-face-biggest-decline-in-living-standards-since-1850s-21537">gone to the top rather than workers in the middle</a>. </p>
<p>Thus the growth that we have experienced has fuelled inequality and this may be part of the reason why the economy went into freefall in 2007/8 and growth was reversed. Governments need to promote growth which benefits the majority rather than the few. And the consequences of growth for environmental sustainability also need to be considered, alongside a renewed focus on well-being as opposed to simple economic outcomes.</p><img src="https://counter.theconversation.com/content/23852/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Karen Rowlingson does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Since the 1970s, economic orthodoxy has suggested that inequality might be the price worth paying for economic growth. Following a new report from the International Monetary Fund (IMF), the evidence is…Karen Rowlingson, Professor of Social Policy, University of BirminghamLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/35332011-09-29T04:18:56Z2011-09-29T04:18:56ZThe EU’s adopting a financial transactions tax, so why don’t the rest of us?<figure><img src="https://images.theconversation.com/files/3946/original/barroso.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">European Commission President Jose Manuel Barroso says the FTT could raise 55 billion euros a year.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Momentum is building behind the <a href="http://robinhoodtax.org/">global campaign</a> to impose a tax on transactions in financial markets, with European Commission President Jose Manuel Barroso <a href="http://www.theage.com.au/business/world-business/europe-eyes-controversial-financial-tax-20110929-1kxvh.html">announcing plans</a> to introduce the measure as way of overcoming the Eurozone’s economic woes.</p>
<p>In his annual “state of the union” address in Stasbourg on Wednesday, Barroso said the tax could raise up to 55 billion euros ($76.6 billion). “It is time for the financial sector to make a contribution back to society,” he said.</p>
<p>His proposal comes after German Chancellor Angela Merkel and French President Nicolas Sarkozy announced their support for the measure after a meeting in August. Leaders in the United States, United Kingdom and Australia have rejected proposals to introduce the tax in their own countries.</p>
<p>At a time when there is a financial malaise on both sides of the Atlantic, it may seem strange to be talking about a new tax. </p>
<p>But a financial transaction tax (FTT) is a long-term policy which would ease several aspects of the crises. </p>
<p>High budget deficits and debts can be addressed by increasing revenue, and a tax on financial transactions is likely to cause less opposition than any other.</p>
<h2>A taxing challenge</h2>
<p>So what is a FTT, and what are the potential benefits and costs?</p>
<p>Economist John Maynard Keynes suggested in 1936 that a substantial transfer tax on securities transactions could reduce speculation in financial markets.</p>
<p>Nobel laureate economist James Tobin proposed a currency transaction tax (CTT) in 1972, and reiterated that suggestion in the mid-1990s. </p>
<p>Since then, the idea has gradually gained support among scholars as well as development and environmental NGOs. Recently political support for the idea has grown strongly. </p>
<p>It was brought up during a Special Session of the United Nations General Assembly on Social Development, held in Geneva in June 2000, when Canada officially proposed that a study into the FTT be authorised. </p>
<p>There was opposition from the United States and some other countries, so a compromise was negotiated, calling for a study of “innovative sources of funding for development”. </p>
<p>The UN University’s World Institute for Development Economic Research was commissioned to conduct the study and eminent econometrician <a href="http://word.world-citizenship.org/wp-archive/2460">Professor Sir Anthony Barnes Atkinson</a> agreed to lead the project. The papers were published as “New Sources of Development Finance” in 2005. </p>
<p>Around the same time, <a href="http://www.nsi-ins.ca/english/contact_us/profiles/rschmidt.asp">Rodney Schmidt of the Canadian North-South Institute</a> studied whether a tax on currency transactions would cause increased exchange rate volatility as a result of the expected fall in trading volume. </p>
<p>Schmidt found that “a currency transaction tax of 0.5 basis points (0.005%) in the major currency markets would reduce transaction volume by 14% … A 0.5 basis point CTT would raise at least $US33 billion every year, probably more.” </p>
<p>A CTT could be imposed almost universally on transactions, as long as it had the cooperation of the four or five monetary authorities of the countries with the principal reserve currencies – especially the US dollar, the pound and the euro.</p>
<p>The small direct costs would be concentrated in financial sectors of the countries where most transactions occur – the wealthy countries.</p>
<h2>Growing momentum</h2>
<p>Political momentum for introduction of a FTT was nurtured through the formation in 2006 of the Leading Group on Innovative Finance for Development, of which about 55 countries are now members including Belgium, Chile, Finland, France, Germany, India, Italy, Japan, Mexico, Norway, United Kingdom, South Africa and Spain. </p>
<p>In mid-2009 the Leading Group appointed a committee of experts to report on a CTT. The committee reported in June 2010, and recommended introduction of a global CTT at the point of settlement. </p>
<p>The committee recommends collecting a tiny tax of 0.005% through a “Global Solidarity Levy” collected through the increasingly centralised foreign-exchange trading system’s settlement bank. </p>
<p>The committee recommended establishing a “Global Solidarity Fund”, with a representative governing body to allocate funds for global public goods, such as the achievement of the Millennium Development Goals and climate change mitigation and adaptation. </p>
<p>The global financial crisis has strengthened support for this proposal. The Bush and Obama administrations, and many European governments, were compelled to launch massive rescue strategies for financial institutions. </p>
<p>Citizens are therefore demanding ways of making financial institutions return the favour. </p>
<p>Nobel economics laureate Paul Krugman argues that such a tax “would be a trivial expense for people engaged in foreign trade or long term investment; but it would be a major disincentive for people trying to make a fast buck (or euro, or yen) by outguessing the markets over the course of a few days or weeks. What’s not to like?” </p>
<p>The centralisation of such transactions makes them relatively easy to monitor.</p>
<h2>Political will</h2>
<p>Governments have significantly different views about how to tax financial sectors: the US and UK want a levy on bank liabilities. But Merkel and Sarkozy are now publicly advocating that the G20 recommends that countries introduce a financial transaction tax.</p>
<p>The European Commission supports global introduction of the tax but if this is not agreed by the G20, legislation will be passed to introduce financial transaction taxes at the European level. </p>
<p>The IMF has previously argued for alternative levies on banks, but their most recent <a href="http://www.imf.org/external/pubs/ft/wp/2011/wp11185.pdf">paper</a> on the administrative feasibility of a FTT concludes that “in principle, an FTT is no more difficult and, in some respects easier, to administer than other taxes”. </p>
<p>It would be timely for the Australian Government to review its knee-jerk agreement with the US in opposing the proposal.</p>
<p>If Treasurer Wayne Swan would like to generate additional revenue in the least controversial way, he would do well to join Germany, France and the rest of the European Community – as well as many countries in the developing world – in supporting a global FTT.</p><img src="https://counter.theconversation.com/content/3533/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Langmore does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Momentum is building behind the global campaign to impose a tax on transactions in financial markets, with European Commission President Jose Manuel Barroso announcing plans to introduce the measure as…John Langmore, Professor, School of Social and Political Sciences, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.