In 2020 Cryptocurrency is No Longer a “Bit” Player

Cryptocurrency, Finance, U.S. Economic System

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

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The inevitability of Cryptocurrency in Mainstream Finance 

The Financial Crimes Enforcement Network, aka FinCEN, a unit within the United States Treasury Department, has seen no downtime during the pandemic. Tasked with investigating and combatting a whole host of financial crimes, including money laundering and the funding of terrorism, the “suspicious reports” roll in. “Dirty money” flows into the nation’s and the world’s largest banks, and despite employee whistleblowers, the majority of it goes through the legitimizing rinse cycle and gets washed squeaky clean.  Given the current set of U.S. laws, as long as the bank-in-question files a suspicious activity alert, they have effectively inoculated themselves against prosecution

So, what does international financial crime have to do with cryptocurrency?  

Cryptocurrency is built on the blockchain. Skipping the complexities for a moment, here are two key takeaways for an instrument created by blockchain technology: 1) It is impenetrable to hackers and fraudsters and 2) It is 100% traceable. For a thorough education on blockchain read Investopedia’s Guide to Blockchain.

While Bitcoin got a bad rap in its early days as being associated with dark web activities, the truth is it is much easier to track activities on public block chains, while private banking activities remain largely hidden from scrutiny. According to the United Nations, 90% of money laundering goes undetected.

Forbes’ recent interview with Chanpeng Zhao, Founder & CEO of Binance, largest cryptocurrency exchange in the world by volume, is highly informative in explaining the business of Bitcoin and the blockchain.

Is Crypto the New Gold?

Financial analysts have been reporting a gold buying frenzy as the result of current global economic uncertainty. This is no surprise and has plenty of historic precedence, but what is surprising is that the current run on cryptocurrency mirrors the 2020 gold trading chart to an eerie degree.

In a Bloomberg article dated May 7, 2020 and entitled “Paul Tudor Jones Buys Bitcoin as a Hedge Against Inflation”, Bloomberg reports Jones telling client that Bitcoin today is playing the role that gold played in the 1970’s. Says Jones: “I am not a hard-money nor a crypto nut. The most compelling argument for owning Bitcoin is the coming digitization of currency everywhere, accelerated by Covid-19.”

The Fed Plays Chess: The First Move to Reframe Cryptocurrency from Commodity to Real Currency

In an announcement devoid of fanfare, on July 22, 2020, the Office of the Comptroller of the Currency, officially announced that “banks and thrifts may provide custody services for crypto assets.” The OCC’s opinion applies to banks and federal savings associations of all sizes. How long before banks go from asset guardians to transactional accounts?

The OCC states, “…as the financial markets are increasingly digitized, the need will increase for banks and other service providers to leverage new technology and innovative ways to serve their customers’ needs. By doing so, banks can continue to fulfill the financial intermediation function they have historically played in providing payment, lending, and deposit services.”

DeFi VS CeFi: Moving to a Fiat Hybrid?

Facebook is still planning to roll out Libra, its cryptocurrency offering, the European Central Bank and China’s Central Bank are discussing digital currencies and J.P. Morgan Chase is planning on using stablecoin, which means the coin is tied to an actual asset. In fact, the asset could be money itself.

Here are just a few news items and announcements in September 2020:

  1. The government of the Bahamas Central Bank has announced the October 2020 launch of its CBDC, Central Bank of Digital Currency, the world’s first.

“The intended outcome of Project Sand Dollar is that all residents in The Bahamas would have use of a central bank digital currency, on a modernized technology platform, with an experience and convenience – legally and otherwise – that resembles cash. It is expected that this will allow for reduced service delivery costs, increased transactional efficiency, and an improved overall level of financial inclusion.”

  1. On September 22, 2020, Israeli lawmakers presented the Income Tax Ordinance (Taxation of the Sale of Digital Currencies) bill to the Knesset. The bill exempts digital currencies from capital gains tax. Israeli lawmakers see the free flow and flourishment of cryptocurrencies as key to their economy, which is largely technology-driven.
  1.  Although as recent as May 2020, Goldman Sachs declared on an investment call that “cryptocurrencies are not an asset class”, by August 2020 the new global head of digital assets advised, “We are exploring the commercial viability of creating our own fiat digital token.”

Even if you Gained or Lost a Few Coins, the IRS Wants to Know

  1. As originally reported on September 25th by the Wall Street Journal, the U.S. Treasury has decided in what some call a “tricky move”, to add a simple did-you-or-did-you-not-use-crypto checkbox to Form 1040. The article is behind a paywall, but you can read Fortune’s account here.

Says industry journal be(in)crypto:

“Does the IRS treat interest made form DeFi the same as interest made from CeFi or a traditional bank account? Are utility tokens “virtual currencies?” Are PoS block rewards treated the same as Bitcoin, or should they be treated like dividend re-investments?

 The answers are not entirely clear, but one thing is for sure: Traders and investors should think about what they are doing now when planning for how they will pay taxes next year.

Slapping questions related to virtual currencies on page one of the form shows just how important the issue is becoming to regulators.”

  1. Last October, the IRS issued updated guidelines on virtual currency including a downloadable FAQ. Despite the fact that 98% of dirty money crimes involve regular-old-money, the IRS is hard-at-work finding the crypto bandits, as a simple search on their website reveals.
  1. In August 2020, users of Reddit and other forums reported receiving cryptocurrency “warning” letters from the IRS. The letters were soon confirmed by mainstream media and discussed at length on tax law blogs. Some argue that these “soft letters” are of “disputable legality”, and violate taxpayers’ rights, but nevertheless, the warning shots are being fired.

This is an Evolving Story

As we “go to press”, more breaking news: Bitcoin prices surge to their highest since 2018 on the announcement that Paypal will accept the use of cryptocurrency for merchant payments. Read the Marketwatch article here.

It is evident that the Covid economy has only intensified the thirst of investors, entrepreneurs and increasingly, average citizens, for an economic model that more seamlessly marries with life-in-the-digital-lane. We promise to keep you updated on the shifting landscape of cryptocurrency, banking and finance and taxes. The future is here and it’s a wild ride!

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