Crypto: What's the Big Deal?

Crypto

What's the Big Deal?

By TAURUS BAILEY

What is cryptocurrency? It’s really a misnomer, and may be confusing to the public. The use of the word “currency” leaves the connotation of the necessity of governmental intervention and control from the rogue hackers and anarchists. This is not what cryptocurrency is. a better illustration is the true marriage of decentralized technology by public monetization – a new asset class. While there are both advantages and disadvantages, legal challenges grow foreseeably. To simplify this, Bitcoin is the best example.

Again, a better description than “cryptocurrency” is “digital asset” or “digital property,” and the best-known example is Bitcoin. Bitcoin is the fastest growing asset the world has ever seen. At 196.7% annual growth rate, Bitcoin’s 10-year climb is simply unmatched. Bitcoin was the gateway to what is now over 9000 “cryptocurrencies” now in existence in the cryptocurrency asset class. Is it volatile? It absolutely is, but volatility is the price one pays to outperform the S&P 500 by a factor of 10 and for 10 years straight. It is competing with commodities such as gold, silver and bonds as a “store of value,” and currently, the oversight regulatory framework on Bitcoin is also similar to gold or silver.

How is it created? Ultimately, Bitcoin is an accounting system and a public ledger represented in monetary form by units called “coins” that anyone can purchase on an exchange like Coinbase. This system is with unmatched security, fluidity and mobilization is a store of value, and the underlying digital ledger of code or “blockchain” represents all activity ever made and that is continuously made. It is recorded by tens of thousands of computers or “nodes” working globally to solve extraordinary computation problems, but all sharing the same data or ledgers in “blocks,” hence the word “blockchain.”

SECURITY

Hacking one node is useless. Tens of thousands of nodes would have to be hacked individually and all over the world. This is why it is referred to as decentralized. This is the nature of most crypto, also referred to as “Web 3.0.” For the first time this is an asset class that is monetized by the general public and can be bought in fractions of its whole value unlike stocks, and opening investment opportunity for everyone regardless of socioeconomic status, nationality, government, race or gender. These are barriers that historically served to keep out all but the upper middle class or wealthy from meaningful investing.

EASE OF USE

Imagine the hard-working immigrant that wants to bypass an institution like Western Union to send money to his home country. He can use his phone and send crypto in seconds and for pennies on the dollar rather than lose 20% or more after driving across town to the Western Union.

Imagine if a client wants to move her expensive assets quickly, perhaps for retirement or even illicit purposes. $2 million in real estate is immovable but $2 million or 2 billion in Bitcoin can move in seconds – and for almost no costs. If an unfriendly tax state decides to tax her billion dollars in Bitcoin, she can simply move to a friendlier state and carry it with her. Crypto evades jurisdictional issues because of its decentralized nature.

Imagine your client in a divorce with large wealth in crypto all hidden in a cold wallet (a secured device taking the crypto from any online exchange) who refuses to disclose that asset, or who maintains multiple cold wallets? Even upon an asset seizure this creates a problem.

JURISDICTIONAL CHALLENGES

Where would you claim jurisdiction for litigation? Blockchain technology by nature allows no way to pinpoint a node’s actual location. This poses a multifaceted jurisdictional challenge. Can a “principal place of business” even be pinpointed? The technology’s

cross-jurisdictional reach is a regulatory and litigation nightmare. Furthermore, because nodes are scattered, conflicts of laws will grow.

PROBLEM: If a case-related seizure was declared, how are online or cold wallet storages to be located absent the honesty of the owner? Even if a seizure was declared by an executive-order, government takings require some compensation to the owners. Further, with the volatile upside nature of crypto like Bitcoin, the value could catapult extraordinarily quickly, thus creating additional compensation problems.

THE SECURITIES AND EXCHANGE COMMISSION (SEC)

Again for now, Bitcoin, or “digital gold,” is basically conceded as a store of value like precious metals. This however, does not lend as easily to the entire crypto world. For instance, other crypto assets operate largely like software or web operating systems with utility of purpose. To buy their tokens is to monetize the software creating ownership of that token as it is recorded in its own blockchain ledger.

PROBLEM: If a client creates a company by raising money for a tokenized blockchain platform that has not been created yet, the SEC could consider it a security from investment and causing it to be subject to SEC regulation - basically no different than an investor receiving of stock.

TAX ISSUES

Yes, taxpayers are obligated to report transactions involving cryptocurrencies in U.S. dollars on their annual tax returns, therefore, taxpayers should determine their cryptocurrencies’ fair market value (by converting the virtual currency into US dollars) on each transaction date. As a result, properly reporting cryptocurrencies to the IRS is burdensome for individual taxpayers because they must diligently record the price at which their cryptocurrencies were bought and sold. While it is safe to assume mistakes shall incur, regardless individual investors are liable to pay capital gains taxes on any profits they realize via cryptocurrency. This tax obligation applies whether or not investors purchased their cryptocurrency from the United States or elsewhere.

CRIME AND MONEY LAUNDERING

A fear of the general public, is that crypto is for criminals. This criticism stems from cryptocurrency traders’ ability to remain totally anonymous (yes, it can be done). The online drug marketplace Silk Road did not help the stigma of this useful and evolving asset class that includes online gaming, voting security, financial overhaul, ease of payment transactions, NFT technology to invest in art and music, etc.

In conclusion, the cryptocurrency and decentralized technology world has exploded and is here to stay. As attorneys, it is important to understand how these technologies and monetary assets will affect our client’s and our personal lives. Meanwhile, download an app and try it out! Buy $10 of Bitcoin, or check out investing in an NFT. Paypal, Venmo, Coinbase, Cashapp have all made it easy to own a little crypto. Oh, and the next time you watch the Lakers play, the Staples Center is now Crypto.com Stadium. 