Crypto Journey

With taxes due soon, it occurred to me that the grand vision of cryptocurrencies one day replacing credit card payments is probably unlikely to happen in the near future. Each time someone pays using crypto, a taxable event is triggered (assuming the value of the crypto exceeds its cost basis). Why would someone want to incur an additional expense and headache just to pay for a coffee?

The IRS has setup a really simple to understand FAQ:

Q14.  Will I recognize a gain or loss if I pay someone with virtual currency for providing me with a service?

 A14.  Yes.  If you pay for a service using virtual currency that you hold as a capital asset, then you have exchanged a capital asset for that service and will have a capital gain or loss.  For more information on capital gains and capital losses, see Publication 544, Sales and Other Dispositions of Assets.

I had a recent conversation with my parents about sending money to help pay for my sister's wedding, which they agreed to split evenly with the groom's parents. The issue was that my parents don't live in the U.S., so transferring funds from a local bank to an American bank is quite troublesome; e.g., filling out wire forms, or even sending a USD denominated check to my sister who then needs to go to a physical branch to deposit, etc.

Then it suddenly clicked to me that if my parents and sister had access to Bitcoin (or a similar cryptocurrency) they could easily complete the transfer. I explained to my parents that Bitcoin's concept is very similar to that of say, gold or diamonds, in which one could purchase these assets, then physically transfer them to the recipient who then sells it to an exchange like one of these shops in NYC:

Bitcoin simply removes the burdensome layers and allows the two parties to quickly and efficiently transfer an asset. I couldn't believe that there was a real world use case right in front of me. For all this time, I had considered Bitcoin, at best, a risky investment asset with high risk and (hopefully) high returns. For this reason, I think with clearer regulation the crypto industry has plenty of room for growth. With more regulation, it will bring more investors, who will provide more liquidity, ultimately leading to greater price stability. The biggest obstacle that I see is price volatility. Look no further than this chart showing Bitcoin's price in the past 24 hours:

I don't think there is a future for Bitcoin until the issue of price stability / volatility is addressed. According to Kitco.com, gold's performance has been relatively uneventful when compared to the stock market return for the same period:

Gold's market cap is $11 trillion versus Bitcoin's $1 trillion. There is a lot of room for Bitcoin to grow but we need stronger regulation to help improve investor confidence.

Hester Peirce, aka Crypto Mom, recently did an interview with Forbes. You can read it here. 

I've repasted Q&A below (emphasis mine) that I think were the most important ones. My takeaway is that Ms. Peirce is all for regulation so that retail investors and institutional investors can bring capital and structure to the crypto universe. With greater capital inflow, there is bound to have more interest, and with more interest, then more regulation is needed to ensure conformity and standard setting. I think this is good for crypto. It prevents people from getting burned and it legitimizes the industry. It seems the SEC knows that with nearly $2 trillion in market cap across all crypto, there's no stopping the capital -- might as well provide some guardrails so that investors have some protection vs. none.

Forbes: There are new bitcoin ETF applications in front of the Commission. There's a lot of excitement about it, especially with the rally: bitcoin and the broader crypto market have been performing exceptionally well over the last six months or so. Has this impacted the likelihood of an ETF potentially being approved or has this frothiness caused the commission to potentially be a bit more cautious?

Peirce: We look at each application on its facts and circumstances, and that will drive where the decisions go. However, people are looking at these past rejections to try to figure out what it is they need to answer. My view has been that we're overdue on approving one of these things. I also think we've dug ourselves into a bit of a difficult hole by setting standards for approval that are difficult to figure out how to satisfy. So I really don't know where we're going to go. I think that a new chairman with a fresh perspective can be helpful in rethinking the approach to approving exchange-traded products. What the price of bitcoin is doing is really not the business of the SEC. That's not what we look at when we're looking at other underlying markets. But I think the bigger driver is that there are a lot of avenues now or other ways to access bitcoin and ether. And I guess the question will be at what point do we start to say: “Wait a minute, retail investors are accessing this stuff in other ways. Would it be better for us just to allow them to access it through these more standard exchange-traded products that are more familiar?” We just saw Canada approve one or more ETFs. I think those kinds of things can have a real effect. But again, the standard we’ve applied is different from what we've applied to other types of products, so it's hard for me to predict.

Forbes: A bunch of publicly traded crypto and blockchain-related stocks have taken off. MicroStrategy has returned about 600% to investors over the last nine months. There are several mining stocks, including Riot and Marathon, which have gained more than 1,000% over the last six months, and a lot of people are investing in these stocks because they're easily accessible. The stocks have almost become de facto ETFs. Do you think this is healthy? Can this level of activity have an impact on any ETF being approved? 

Peirce: The fact that retail investors are looking for other ways—at companies that have some kind of connection with crypto to get access to it—I think that's another arrow in my quiver for saying: “Look, why don't we open up an avenue that is, again, more standard for getting access through our securities markets?” And that would be an exchange-traded product. We have strong and time-tested rules on what public companies need to disclose about what they're doing. I would look to our corporate disclosure rules and the review process that we have for making sure that investors are getting the information they need to make good decisions about whether to invest in a particular public company.

Forbes: I want to talk a little bit about Coinbase. I'm just going to assume you can’t discuss whether or not you think its direct listing will be approved. But I'm more interested in your thoughts on what that might mean for the perception of the crypto industry as a whole if it does get approved? And if you think that could potentially be another arrow in your quiver for an ETF?

Peirce: That’s correct, I can't talk about any particular company's IPO. The fact that there's a lot of economic activity going on in the crypto space means that you're going to see more touchpoints with our markets through public companies becoming involved somehow with crypto: through investment advisors and broker-dealers wanting to interact with crypto on behalf of their clients, hedge funds, others wanting to be involved. I think all that leads to a push for stricter standards in the industry, which then invites in more institutions. So it becomes a bit of a cycle: as institutions come in, they ask for higher standards, and once those higher standards are put in place, more institutions come in. That kind of cycle is helpful in demonstrating that there are a lot of protections in place in the market that might then make the staff and my colleagues more comfortable with an exchange-traded product.