Italy PM: Digital payments a solution to ‘shadow economy’

Italy’s Prime Minister Giuseppe Conte believes that the transparency provided by digital payments can do a lot of good for the country.

Local finance news outlet Il Sole24Ore reported on Sept. 8 that Conte believes that digital payments would result in the financial system being “faster, more transparent and traceable which in perspective means … recovering the shadow economy.” He explained that all this could result in lower taxes for all of Italy:

“[This plan will] disincentivize undeclared payments. As a consequence, we’re building the basis for the objective of the entire government, which is to have everyone pay [taxes], but have them pay less.”

Not everyone is convinced

White hat hacker and co-founder of crypto-focused digital rights nonprofit Paralelni Polis Pavol Luptak pointed out that traceable digital payments “can decrease tax evasion if the government forces most people to use them.” Still, he believes that this is not as easy as it sounds:

“Italy’s Prime Minister is probably not aware of untraceable crypto payments (e.g. anonymous crypto-currencies, ‘digital cash’). In this situation, governments or banks cannot track anonymous crypto payments, and they will be used for tax evasion.”

Luptak explained that he believes the government will force traceable digital payments on most people. But, he believes that people who want to avoid transaction tracking “will prefer anonymous or pseudonymous cryptocurrencies instead of traceable payments.” 

Still, he does not expect this to push crypto adoption among people who do not care about their financial privacy.

Financial regulators are well aware that pseudonymous and anonymous cryptocurrencies can facilitate tax evasion. In fact, Modern Consensus reported that five nations including Australia, Canada, the Netherlands, the United Kingdom, and the United States started collaborating in July 2018 to combat crypto-enabled tax evasion.

The Cashless Plan

Conte said that on Sept. 7 he had a meeting with the stakeholders of the Italian finance industry, the firms behind the payment cards and payment systems, and bank representatives. He claims that during the conversation it was really clear that “everyone realizes how important [this plan] is.”

The entire conversation revolves around the “Cashless Plan” promoted by the government, as reported by local news outlet il Fatto Quodiano. As part of the initiative, 30% of the fees that merchants pay for card transactions are granted back as a tax credit.

An agreement with Visa, Mastercard and Bancomat also increased the cap on contactless card transactions that do not need a pin confirmation to €50 from €25, starting in 2021. Lastly, consumers who spend at least €3,000 ($3,538) through electronic transactions in a year will get €300 ($354) as “cashback” from the government.

Italian banks like digital payments

Italian banks would go a lot further. They are eager to see the European Union bring in a central bank digital currency, with the national banking association saying in June:

“A programmable digital currency represents an innovation in the financial field capable of profoundly revolutionizing currency and exchange.”

In that statement detailing 10 criteria for a CBDC, the Italian Banking Association, or ABI, pointed out that its members were already using a back-end infrastructure built on distributed ledger technology—the Spunta project.

A CBDC, it added, would “reduce the attractiveness of instruments of comparable use but issued by private entities,” clearly referring to Facebook’s Libra stablecoin project. 

It would also reduce the attractiveness of completely decentralized cryptocurrencies in which users are “not identifiable,” according to the ABI. 

These are “characterized by an inherently higher risk profile,” the ABI said.

Italians do not like digital payments

Italians, however, are not convinced.

Data indicates that in Italy 85.9% of transactions are made by cash, while only 12.9% are made by cards, and 1.2% in other ways. When it comes to transaction value, 68.4% of the transaction monetary value moves as cash, 28.6% with card transactions, and 3% by other means.

The data above indicates that cash alternatives are mostly viewed as a safer way to move big sums, or as the only way to pay where using cash is not permitted because of anti-money laundering laws.

Preference for cash—if Conte is right—is at least partially caused by the will to avoid declaring payments transactions. Reuters reported in December 2011 that Italy is the No. 3 country in the world when it comes to the total value of tax evasion, right after Brazil and the United States. 

Still, while in the U.S.—the largest tax evader in the world—the shadow economy accounts for only 8.6% of the total GDP. In Italy it is a staggering 27%.