The crypto cheat sheet: what you need to know about currency
Bitcoin is a decentralized payments system. It is the first distributed ledger network of its kind. The descriptive word ‘distributed’ necessitates the decentralized character of this innovation. This necessarily disrupts centralized–traditionally institutional–actors’ presence in society. It is unclear how effective institutional authority’s regulation will be during a time when authoritative pressure across the globe has just begun. News of governments and institutions around the world looking into or acting to regulate or otherwise intermediate the crypto space is matched by the idea that the crypto-space “is not governed by any central authority and is free from such influences,” according to the header for the “Regulation News” section of CoinTelegraph. This optimistic view of crypto’s essential ability is shared amongst the crypto-development communities around the world.
The nature of (establishment) cryptocurrency-criticism: While the crypto market has continued to exist, even grow and innovate, traditional political and corporate leaders have focused on the role of state power and simple conceptions of worth and potential. For example, Ajay Banga, Chief Executive Officer (CEO) of MasterCard, dismissed all non-government mandated cryptocurrency as “junk” last year. “The government mandated digital currencies are interesting. Non-government mandated currency is junk,” Banga said according to CCN, a Norwegian cryptocurrency news website. Likewise Jamie Dimon, CEO of JPMorgan Chase opened his public discourse on crypto by called non-government mandated payments systems like Bitcoin a “fraud” in September 2017, but later reiterated that blockchain technology will reduce financial transaction costs and fees, according to CNBC. In October 2017, JPMorgan Chase publicly announced that it was coming out with a blockchain-based system with two other banks. Regardless of all hasty predictions, it remains unclear what will be considered “junk” in the future, mandated-centralized payments systems or opt-in decentralized payments systems.
By nature of being opt-in systems not mandatory systems, distributed ledger networks should nurture greater “market” influence in the economy. Unlike centralized economic systems–like both capitalism and communism–that are formed by the will of a few well-connected technocrats, market based systems with distributed networks theoretically take all users’ current conditions and expectations into account because authority is decentralized and the public ledger ensures that there are reduced asymmetries of information. Markets made up of crypto-users are already seen as flexible, and future progress in this space has continued to rely on assessing what needs to be overcome. For example, greater distribution of hashing power could be increasingly needed due to centralization of mining influence, or greater privacy could be needed if states move further to track and/or censor citizen-users of cryptocurrencies.
Scalability–or the ability to operate as a larger, more comprehensive network–will come from current and future development between local, national and international communities of software and hardware engineers. Should some future scalability-development come with significantly increased centralization of protocol authority or otherwise reduced security, then other crypto projects and networks that do find a way to scale without detriments to decentralization and security will supercede the former in popular use through market influence. Why would a cryptocurrency user opt-in to a system that is more centralized–more insecure–than others that they could join?
Crypto-forks happen when users are split on the protocol that is satisfactory to operate with–a debate which has been predominantly centered around scalability. The forking users will essentially create an almost exact same blockchain with the same ledger history as the original–barring the favored protocol changes–creating a “doubling” of similar but not identical coins for those users who choose to use the new protocol.
The size of each “block” processed by crypto-miners has been made larger by Bitcoin Cash (BCH) for the sake of efficiency but limited the distribution of mining power. Some proponents of the original Bitcoin (BTC) claim this centralization of mining by the BCH fork, that started on Aug. 1 2017, is antithetical to the concept of security through decentralization.
What’s with all the coin names? There are currently 1,559 different cryptocurrency coin names, according to coinmarketcap, and 191 cryptocoin exchanges where cryptocurrency can be traded for one another and sometimes national currencies, according to cryptocoincharts. The explosion of coins or tokens are a key window into the “mania” of this new market, because it illustrates the capriciousness of “what appears to be realistic.” There is a small dynamic selection of cryptocurrencies which have quality and realistic application. While these are by no means satisfactory networks yet, their evolution and competition with future-projects will fuel use and application.
A broad regulatory net has already been cast over cryptocurrencies by multiple state regulatory authority structures. “In 2014, after many years of speculation, the Internal Revenue Service (IRS) issued guidance in Notice 2014-21 that classified cryptocurrency as property, not currency, for federal income tax purposes…. [However] the Foreign Account Tax Compliance Act (FATCA), which requires foreign financial institutions to provide the IRS with information about accounts held by U.S. taxpayers or foreign entities controlled by U.S. taxpayers, cryptocurrency exchanges, in the ordinary course of doing business, are considered financial institutions,” cpapracticeadvisor.com reported on their website. There is contradiction in classifying cryptocurrency as property, not currency, while also saying cryptocurrency exchanges are financial institutions–that is, institutions that are in the business of money itself.
But there is more contradiction outside the IRS.
“The U.S. Securities and Exchange Commission (SEC) says Initial Coin Offerings (ICO) tokens are securities, the Commodity Futures Trading Commission (CFTC) says cryptos are commodities, the IRS says its property and the Financial Crimes Enforcement Network (FinCEN) says its money,” Max Keiser said on the Keiser Report on Mar. 13. Washington D.C. Lawyer, Adella Toulon-Foerster noted on the Keiser Report that regulators are trying to throw out a wide net to establish presence and motivate comprehensive reporting by crypto-holders. Total U.S. tax liabilities of this years crypto gains were estimated to be $25 billion, by the Associated Press (AP) citing Fundstrat Global Advisors research on Apr. 4.
“To meet these tax liabilities, [crypto] exchanges need to sell bitcoin and ether,” Reuters reported Apr. 5, while citing research suggesting the current decline in coin values is in response to taxes. There has already been some evidence to suggest crypto-users are ambivalent when it comes to paying taxes for them.
“Less than 100 people out of the 250,000 individuals who have already filed federal taxes this year through company Credit Karma reported a cryptocurrency transaction to U.S. tax authorities,” Reuters reported on Feb. 18.
While governments are acting to regulate and tax crypto transactions involving centralized firms like crypto-exchanges, it remains unclear whether traditional authority can regulate and tax transactions on blockchains completely out of their control.
Some states have begun experimenting with crypto-law. Nevada became the first state to ban local governments from taxing blockchain use on June 7, 2017 in an attempt to buttress their economy with the budding crypto industry. The law specifically bans state governments from taxing crypto as property, which is completely contrasted with IRS ruling.
“Paul Anderson, the former Republican Assembly leader recently turned head of the Governor’s Office of Economic Development, said that the bill created a ripple effect with blockchain-related businesses looking to come to the state,” Megan Messerly wrote in a story for The Nevada Independent published Jan. 28.
Wyoming took a parallel stance with Nevada in passing the Wyoming Money Transmitter Act-virtual currency exemption” on Mar. 5, 2018, according to cryptocurrencynews.
Many governments around the world are more-or-less hostile to the crypto-space, including India, China, Russia, Kazakhstan and Chile–who have banned the use and operation of crypto all exchanges. China, who banned exchanges last year are continuing to fight “an uptick in activity on alternate venues,” according to Bloomberg Press.
The United States and Japan are some of the most significant nations that have written cryptocurrency and Bitcoin into law. South Korea also legalized Bitcoin service providers in July 2017, but began to regulate along stricter lines. “In order to avoid money laundering and related crimes, plans to ban anonymous trading on domestic exchanges were reported in December 2017 and plan to tax Korean cryptocurrency exchanges at 24.2 percent,” according to CoinTelegraph.
Information gathered by The Associated Press, Reuters, CNBC, The Nevada Independent, The Keiser Report, CryptocCoincCharts, CoinMarketCap, CoinTelegraph and CryptoCurrencyNews