There are often multiple causes for an asset’s sharp decline, but Bitcoin’s (BTC) 10% “nosedive,” which took place on April 22, may be blamed on the Biden Administration’s reported plan to tax capital gains at double the current rate on America’s wealthiest.
Bitcoin is habitually volatile, so one probably shouldn’t read too much into a double-digit swoon in any given week, but this might be as good a place as any to reflect upon the possible impact of the United States capital gains taxes, and taxes in general, upon the future growth of cryptocurrencies and blockchain technology.
Could it hinder long-term adoption? If so, in what ways? Will the Biden plan even reach fruition, given the vagaries of U.S. politics? How, too, does one explain the mini-market eruption in the face of the mere possibility of more taxes in a single nation? What sorts of misperceptions might we be harboring with regard to crypto taxation generally?
“The price drop can probably be attributed to a number of factors and rumors — chiefly, the month-end expiration of future positions, which resulted in a liquidation of positions that triggered a slide,” Markus Veith, a partner in the audit practice at Grant Thornton LLP and leader of the firm’s digital assets practice, told Cointelegraph.
There were also reports, generally thought to be false, that Treasury Secretary Janet Yellen was spearheading an effort to impose an 80% capital gains tax rate on cryptocurrencies, “as well as rumors that the U.S. Treasury was investigating financial institutions for illicit use of cryptocurrencies, which the DoJ would do, not the Treasury,” added Veith, continuing: “Then, there were also comments about a drop in Chinese mining capacity.”
A lot was happening that week
David Trainer, CEO of investment research firm New Constructs, downplayed the BTC price gyrations, stating: “10% volatility is nothing new for BTC and crypto in general.” Meanwhile, Tyler Menzer, a CPA and doctoral student in accounting at the University of Iowa, noted: “While the tax news does coincide with the drop, it may only be one of many contributing factors.”
But taxes do matter. “The [Biden] proposal would put the effective tax rate at above 50% in certain states and would be detrimental to job creation,” Carlos Betancourt, co-founder of BKCoin Capital in Miami, told Newsweek, adding, “and would continue to accelerate the move from states like California and New York to more tax-friendly states like Florida and Texas that have no state income tax.”
This is still an early stage in a new administration, of course, and there is some question whether a doubling of the capital gains on the wealthiest to 39.6% — as proposed — will even make it through Congress intact, or if that rate will eventually be reduced.
“Someone needs to pay for all the stimulus, deficits, and national debt, so very likely you would see a tax increase in the near future — whether on capital gains or something else is still to be decided,” Mazhar Wani, a PricewaterhouseCoopers tax partner in San Francisco, told Cointelegraph.
However, Omri Marian, professor of law at the University of California, Irvine School of Law, said that the proposal will unlikely be accepted in its current form. “The Democratic majority in Congress is just too narrow for this,” Marian informed Cointelegraph. Chris Weston, head of research at the Pepperstone Group — a forex broker — said: “The numbers being proposed at this juncture will unlikely pass the Senate in its current form, and centrist Democrats will not back the touted numbers.”
But casting rumors aside, if a doubling of the capital gains tax does pass through Congress intact, would it necessarily mean stormy weather for cryptocurrencies and blockchain technology?
Maybe not. Nathan Goldman, assistant professor of accounting at North Carolina State University, told Cointelegraph — after consulting with his co-author on BTC taxation matters, Christina Lewellen — that the new capital gains taxes are geared to the wealthiest — those with more than $1 million in annual income — and they would be paid only upon the sale of the digital asset:
“As a result, it is not clear whether the proposed changes would significantly affect most cryptocurrency holders.”
Still, “taxes likely do have an effect on Bitcoin prices,” said Menzer, continuing, “as we have a lot of prior research on a wide variety of outcomes and aspects of life that are affected by tax rates, especially in the financial sector.”
Moreover, they could push crypto and blockchain technology in some interesting directions. Wani, for example, would expect to see more “short-term volatility due to certain investors cashing out at the lower rates, but long term, you may see more demand for DeFi applications and other collateralized use cases to create liquidity and avoid triggering gains.”
What about murmurs surrounding Yellen’s so-called 80% capital gains tax — which would be “punitive and unprecedented”? Goldman told Cointelegraph, “I do not believe there is strong merit to the rumors of an 80% capital gains tax on cryptocurrency” — a position echoed elsewhere. But some still believe that Yellen hasn’t really warmed to crypto.
“My own view is Yellen fundamentally doesn’t get Bitcoin,” Weston said, continuing, “and to go after digital assets to protect against criminal activity in an asset that leaves a record is odd” particularly because cash is usually favored in such transactions, given its untraceability. Meanwhile, Trainer added:
“I think Janet Yellen was looking to minimize the speculation in crypto. She believes that rampant speculation, like what we see in crypto, is not healthy for investors or the underlying asset over time.”
With regard to the capital gains issue in general, Menzner commented: “To the extent that higher taxes make it more expensive to use cryptocurrency or adopt it for new uses, it will be a setback.” However, he added: “It could also accelerate the use of stablecoins for certain cryptocurrency projects, as they are designed to minimize price fluctuations and thus minimize any gain or loss from a tax perspective.”
“We don’t often see tax as the controlling decision of whether to exit a position, but it may drive when an exit occurs; for example, if any corresponding losses should be harvested, when long-term/short-term holding periods are met, etc.,” Paul Beecy, tax services partner at Grant Thornton LLP, told Cointelegraph.
Does U.S. tax policy matter globally?
To what extent, though, is this all just a U.S. issue? Does it really even matter in Singapore or France what happens in the U.S. with regard to tax policy — especially for a globally purchased and held asset like Bitcoin?
“Competitive advantage is key here,” according to Wani, who added: “It matters if other countries follow similar policies for taxation.” Also, he believes other countries may try to become more competitive by offering “more incentives — i.e., less taxation — to attract more talent and businesses from this growing industry to their jurisdictions.”
“The only thing I can definitively say on how much U.S. tax policy affects crypto is that we don’t know,” added Menzer, but “U.S. policy can cause real changes in crypto-exchange economics.” Many global exchanges do not allow U.S. residents and citizens to trade, for example, thanks to U.S. policy, “thus effectively separating non-U.S. traders from U.S. traders, which slightly breaks down the idea that Bitcoin or other cryptocurrencies are uniformly global.”
It matters, said Marian, because “if you are a U.S. taxpayer, you owe U.S. taxes on your crypto trades no matter how you make them. It may be more difficult for the IRS to enforce if you hold your assets with a foreign custodian. But if you cheat on purpose, you wouldn’t care very much about a change in tax rates.”
What does seem clear is the lack of clarity with regard to taxes and cryptocurrencies, starting with the common misperception that you do not need to pay taxes on crypto. According to Goldman:
“You still need to pay taxes on the appreciation of your cryptocurrency assets. For example, if you bought a single Bitcoin on Jan. 1, 2016, for $434 and used that Bitcoin to buy a Tesla on April 1, 2021 — value $58,726 — you owe capital gains taxes on the difference.”
No hard and fast rules
More problematic still, there is no standard tax treatment for all cryptocurrency uses. As Beecy told Cointelegraph: “When digital currency is held [in the U.S.] by individual retail investors as a capital asset, the tax rules on buying and selling it are reasonably understood, and the capital gains tax that applies ought to impact digital currency transactions in a manner very similar to other financial capital assets.”
But when, by contrast, digital currency is structured as part of more complex transactions “and mimics other and more esoteric financial instruments — like derivatives, NFTs [nonfungible tokens], and certain security tokens — then the tax rules on those digital currency transactions are not really clear,” said Beecy.
All in all, last week’s BTC’s price gyrations might have been an over-reaction to some preliminary tax plans, but this response was probably predictable, given that “regulation is obviously a major grey cloud” that begets anxiety, as Weston noted, “but as we’ve seen many times of late, the market sells first, thinks about it, and calmer heads generally prevail.”
Taxation, of course, is a serious business, and even if doubling of the capital gains tax only directly impacts the wealthiest, history teaches that taxes can have a leveraged impact on long-term growth — so, one needs to pay attention.
Taxation is a form of regulation, and the mere fact that discussions like this are taking place in crypto’s only 12th year of existence may provide some confidence, arguably, that the U.S. is not going to ban or attempt to “shut down” cryptocurrencies. Indeed, the net effect could be an “increase [in] adoption as people feel more confident,” submitted Menzer.
New York bill proposes to ban crypto mining for 3 years over carbon concerns
Crypto miners in New York may be subject to a forced three-year hiatus if the latest environmentally-focused bill passes in the state senate.
The New York Senate Bill 6486 was proposed by Democrat senator Kevin S. Parker, the Chairman of Committee on Energy and Telecommunications, and co-sponsored by fellow Democrat senator Rachel May, the Chair of Committee on Aging, Chair of Legislative Commission on Rural Resources.
The bill is yet to receive widespread backing from other senators, however the Democrats do control the lower house and senate.
The bill seeks to “establish a moratorium on the operation of cryptocurrency mining centers,” to slow the environmental impacts of fossil-fuel-backed crypto mining in particular.
It also aims to enforce stricter regulations for mining centers, such as the requirement to undergo an environmental impact review, which would prevent crypto mining if the facility does not comply with New York’s climate change targets.
The Bill was referred to the Environmental Conservation Committee on May 3 and claims to be acting in accordance with New York’s “Climate Leadership and Community Protection Act,” with that bill stating that:
“A single cryptocurrency transaction uses the same amount of energy that an average American household uses in one month, with an estimated level of global energy usage equivalent to that of the country of Swede.”
“It is reasonable to believe the associated greenhouse gas emissions will irreparably harm compliance with the Climate Leadership and Community Protection Act in contravention of state law. ” the bill adds.
The Climate Leadership and Community Protection Act was passed in 2019 and set targets such as 70% renewable energy by 2030, 100% zero-emission electricity by 2040, and 22 million tons of carbon reduction through energy efficiency and electrification.
Crypto mining is already a hot topic in New York, such as the proposed expansion of Greenbridge’s gas-fired Bitcoin plant on Seneca Lake. The plant reportedly has plans to power up to 27,000 computers that will run 24/7 to mine Bitcoin.
The Environmental Group Seneca Lake Guardian are outraged with the proposal, and stated in a call to action published on Feb. 1 that: “Cuomo can’t lead on climate change, and support Bitcoin expansion on Seneca.”
Speaking in response to the Greenbridge’s potential crypto mining operations, Yvonne Taylor, Vice President of the Environmental Group Seneca Lake Guardian, noted that:
“We’re talking about burning more fossil fuels to make fake money in the middle of climate change, which we view as insane.”
There are moves around the world to regulate crypto mining in light of carbon targets, and especially in China which accounts for an estimated 65% of the world’s Bitcoin hashing power.
On April 27 Beijing sent an “emergency notice” to conduct checks on data centers involved in crypto mining, with the CCP reportedly moving to impose stricter supervision on crypto mining in the nation, amid concerns of failing to meet China’s climate change-focused “five-year plan.”
J. R. Willett launched the first ICO… but still has a day job – Cointelegraph Magazine
ICOs? He held the first one. Stablecoins? He dreamed of them by accident. Vitalik Buterin tried to get him on board to help launch Ethereum, but he was too busy. He is J. R. Willett, one of the most fascinating men in the industry.
Back in 2012, Willett, now 41, felt he could improve Bitcoin by making it possible for anyone to create interoperable tokens backed by the protocol. He released a white paper that described the new model and invented a way to fund the project with a token sale. He procrastinated for the next 18 months, hoping someone else would take the bait. Eventually, he gave in and announced the Mastercoin initial coin offering, which went on to inspire Ethereum and every subsequent ICO.
“It felt like I was just putting into words what was obviously going to happen — people were already talking about it, and I thought, ‘Why hasn’t someone formalized this at least a little bit?’ I just got tired of waiting for someone else.”
In the early days, he was worried that cryptocurrency would bring about a dystopia where either the late adopters became penniless or a one-world government would form to regulate everyone’s transactions. He’s still worried, but things are going better than he’d feared.
In the sea of exceptional and charismatic people who rise to the top of the cryptocurrency world, Willett stands out. Not in his absolutist conviction to a set of principles, not in his journey from rags to riches, not in his “maniac drive“ to stick with a project, not in his outsized charitable pursuits, and not even in his artistic endeavors or grand visions for the future. No. Willett stands out because despite the incredible things he has set in motion, he remains a humble family man who never forgot what was most important.
The first ICO
When the world rang in the year 2012, Bitcoin was pretty much the only game in town. Bitcoin, blockchain and cryptocurrency were one and the same, save for the newly birthed Litecoin fork that was not yet three months old (LTC was created via mining, just like Bitcoin). It’s here that Willett arrived to stir the pot, publishing what he called “The Second Bitcoin Whitepaper.”
the mastercoin prospectus is fascinating. it was the 1st ICO, and as far as white papers go, it is really good. it even has risk disclosures! it describes a lot of ideas that would be implemented years later – DEXes, stablecoins, tokenization, onchain govhttps://t.co/noFt1PKzUD
— nic carter (@nic__carter) December 8, 2020
“We claim that the existing Bitcoin network can be used as a protocol layer, on top of which new currency layers with new rules can be built without changing the foundation,” he wrote. The idea was to make it possible to create new, functional tokens on top of Bitcoin in such a way that smart contracts could regulate their interactions. “Mastercoin supports creating property tokens to be used for titles, deeds, user- backed currencies and even shares in a company,” the white paper explained.
This sounds much like Ethereum today, complete with interoperable ERC-20 tokens and smart contracts. That is no coincidence, considering that Ethereum was partly inspired by Willett’s ideas.
“Vitalik came to us initially with his ideas, and we told him, ‘We’ve got some other things we want to do first.’ He didn’t want to wait, and it’s good for him that he didn’t. Ethereum was the result of that.”
Willett even brought up the idea of stablecoins, writing that “If you think Bitcoin has a reputation problem for money laundering now, just wait until you can store ‘USDCoins’ in the block chain!” This was a new idea — he invented the concept.
Mastercoin’s launch — and token sale — was announced in July 2013. It was the first-ever ICO, and coins could be purchased at an exchange rate of 100 MSC per 1 BTC. These first coins were received from the “Exodus Address,” which served as Mastercoin’s equivalent to the genesis block — while Bitcoin was the beginning, Mastercoin was imagined as the next era.
When Willett announced Mastercoin on the Bitcointalk forum, he thought of it as a one-time shortcut to get around the “proper way” of raising money. “It didn’t feel like an innovation at the time,” he says.
“I thought I had found a bit of a shortcut — I just didn’t have time to go flying to California, putting together a pitch deck and talking to venture capitalists, most of whom hadn’t heard of Bitcoin.”
Eventually, Mastercoin evolved into the Mastercoin Foundation, itself evolving into the Omni Foundation, which Willett founded and where he still serves as chief architect. Willett says that transparency was very important to him while creating the nonprofit, and explains how he used a public spreadsheet to record all expenses.
“The problem with that was that as we started running out of money, everybody knew we were running out of money, and that took some of the wind from our sails,” he recalls with a laugh. Today, Omni Layer is an “open source, fully decentralized asset platform” that allows for “creating and trading custom digital assets and currencies.”
When asked if he harbors any regrets in not becoming a billionaire CEO, he lets out a hearty guffaw. “I’m sure there would have been things that were fun about it,” he says giddily, but goes on to explain that he is a minimalist who barely owns anything that his kids do not need. “What do you get from being super-wealthy, if you kind of have a minimalist state of mind? You just get a bunch of problems,” he contemplates. Is there perhaps a tinge of regret there?
“Maybe the regret there is that I could have done a lot of good — but hopefully, those people that do become billionaires will do a lot of good.”
Willett led what he calls an idyllic childhood with a father who “always had a knack for money and investments” and began teaching him coding on the family’s Apple II-GS computer when Willett was only 10 years old.
While still in high school in Oregon, Willett spent summers working as a shop assistant doing unglamorous work like sweeping and cleaning toilets. One time, he wrote a mock virus and made his employers believe that they had been hacked. “They had an old IBM computer — I think I wrote it at home and then brought it in on a floppy disk,” he recounts with laughter.
When Willett later learned that he could make a living doing “this thing I’d been doing for fun,” a degree in computer science at Seattle Pacific University was a “no-brainer.” He graduated in 2002.
After two years as a software developer at “dot-com startup” Alerio in Oregon, he joined Dynon Avionics, where he was promoted to a senior role. Over his 11-year career there, he created flight planning software and calibrated instruments that went on to be used in applications as exotic as the SpaceShipOne spaceplane, which completed the first crewed private spaceflight in 2004.
In 2012, he joined his present employer, Cozi, as software developer lead, where he designs mobile calendar apps that help families stay organized. It seems a good fit. He says, “I’ve always considered myself a family man — even before I had kids.”
That’s right — Willett, the inventor of both the ICO and algorithmic stablecoin, still works a day job. “You can’t have all of your money tied up in cryptocurrencies,” he said, referring to the responsibilities of parenthood.
It was around 2010 while working at Dynon Avionics that Willett “kind of fell in that [cryptocurrency] hole and never got out.” He watched the Bitcoin price rise up to $0.25, and remembers setting up a beige computer tower, which successfully mined a block of 50 BTC on its own over a few weeks with only a central processing unit, or CPU.
CPU mining soon became impossible, as GPUs (graphic processing units) and later ASIC miners (specialized software chips for mining) connected to mining pools came to dominate the landscape. “Even then, it was unusual to get a block from a CPU, but it wasn’t unheard of,” Willett recalls.
Unlike some others from his time, Willett did not come to view cryptocurrencies as a universal savior or liberator of humanity. Instead, he foresaw a dystopian future, which worried him deeply. He never wanted to metaphorically burn the banks or upend the system, because that sort of thing is bound to hurt many, many people who rely on the existing structures.
“It looked to me like something that could, if it got big enough, damage the entire world’s financial systems. I thought, this is the sort of thing you better own just defensively, as an insurance policy.”
Willett admits that the idea of Bitcoin damaging the global financial infrastructure “sounded pretty crazy back in 2010–2011, when very few people had heard of Bitcoin, but I have always taken the opinion that the government-issued monies are much more fragile than they appear.” He adds that a bank run could happen if people lose confidence in fiat, and now, there is a valid alternative for it.
For Willett, money is a “shared hallucination” that works well if everyone plays along, but can fall apart quickly if people choose to “opt out.”
This is not necessarily what Willett desires, as such a situation would leave those without cryptocurrency in a desperate situation. Not everyone knows about cryptocurrency, and not everyone has the money to invest or the confidence to risk their capital. It would be a tragedy for them to be left behind. But, “Thinking about that potential possible outcome, it would be foolish not to own at least some cryptocurrency,” he reasons.
“If there comes a tipping point where everyone tries to get out of government money and into cryptocurrencies… it’d be on the scale of global war in the amount of human suffering.”
Willett admits that back in 2012, he “vastly overestimated” the speed at which cryptocurrency adoption would happen. Some of his writings from the time came with a particularly dystopian bent, such as predicting governments “attempting to destroy all decentralized computer networks (including the internet)” in order to bring about a “strong, centralized, [blockchain powered] one-world government which gets its revenues by tightly reigning in freedom of commerce in order to collect taxes.”
“When I wrote that, I expected it could be a year or two away,” he thinks back. He does not come across as much of a doomsayer anymore. “The longer it takes to get there, the less disruptive it’ll be,” he says referring to the view that a larger base of cryptocurrency owners will result in a less turbulent transition toward cryptocurrency.
Willett is confident that there will only be more crypto billionaires, as he expects the bull market to continue for some time. “Usually, there’s a roughly hundredfold run-up, followed by a roughly tenfold drop. It happens over the course of months or even years, and then it happens again.” He considers Ether the best bet today, and recently predicted an ETH top of around $9,500 for this cycle.
“I’m optimistic that our crypto billionaires, whoever they are, will eventually become crypto philanthropists, especially if this world that we’re building ends up causing a lot of pain and suffering for people that are late adopters.”
Crypto.com to use CipherTrace tool to comply with FATF’s travel rule
Crypto.com, the creator of a cryptocurrency exchange, wallet, debit card program and crypto app, is strengthening its compliance toolkit by implementing a commercial solution developed by crypto intelligence firm CipherTrace.
CipherTrace’s tool, called Traveler, takes its name from being designed to meet the complex requirements of the Financial Action Task Force’s so-called “travel rule,” which came into force for Virtual Asset Service Providers, or VASPs, in 2020.
The FATF’s travel rule requires regulators and VASPs — including crypto exchanges, custody providers and OTC trading desks — to gather and share customer data during transactions. This approach broadly follows the requirements already in place for money transmitters in jurisdictions like the United States, which requires money transmitters to record identifying information on all parties involved in fund transfers made between financial institutions.
What makes the travel rule particularly challenging for various VASPs is the different local transpositions of the FATF’s guidelines in various jurisdictions across the world. Prior to adopting Traveler, Crypto.com had already been admitted into the International Digital Asset Exchange Association and Global Digital Finance, two associations that aim to establish consistent standards and regulatory practices for the global digital asset economy.
Traveler, which continues CipherTrace’s longer-term work on an open-source Travel Rule Information Architecture, or Trisa, is designed to specifically address the counterparty VASP due diligence that is demanded by the FATF guidelines.
The solution, therefore, helps VASPs to share sensitive personal identifiable information to confirm crypto transactions and automatically identifies VASP-to-VASP transfers as well as the recipient VASP. The tool also scans addresses associated with incoming crypto transactions and verifies the originating VASP. In addition, it issues Know Your VASP digital certificates. All this forms the basis of an encrypted and mutually authenticated infrastructure for the secure sharing of sensitive data.
Crypto.com’s Chief Compliance Officer Antonio Alvarez told Cointelegraph why the company had chosen the CipherTrace tool in particular:
“For a travel rule tool to be useful, it needs broad acceptance, common standards and interoperability (with other tools). CipherTrace’s Traveler is based on Trisa’s Alliance which aims to address several points including interoperability. We are proud to be the first platform to implement Traveler and look forward to working with CipherTrace and our industry more broadly to standardize how compliance is handled.”
At the beginning of 2020, CipherTrace’s chief financial analyst John Jefferies said, “Travel Rule enforcement is simultaneously the biggest milestone and the biggest setback for crypto. It has and will continue to force a level of maturity that will enable the industry to grow into an institutionally accepted asset class […] It also presents an existential threat for many exchanges and poses potential privacy issues for users. The Travel Rule compliance operations will be costly even with open-source software like Trisa.”
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