The North-South Institute



A Feasible Foreign Exchange Transactions Tax

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A Feasible Foreign Exchange Transactions Tax

Published: March 5, 1999

There is virtually no formal infrastructure for trading foreign exchange. Traders in major banks around the world communicate directly with each other or through a broker. By comparison, the infrastructure for settling foreign exchange trades is becoming increasingly formal, centralized, and regulated. This is due to new technology, subject to increasing returns to scale, and to cooperation between trading and central banks to reduce and eliminate settlement risk. Settling a foreign exchange trade requires at least two payments, one for each of the currencies traded. Settlement risk is eliminated when these two payments are matched, traced to the original trade, and made simultaneously. The technology and institutions now in place to support this make it possible to identify and tax gross foreign exchange payments, whichever financial instrument is used to define the trade, wherever the parties to the trade are located, and wherever the ensuing payments are made.

Author: Rodney Schmidt

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