Unregulated Cryptocurrencies Could Pose Potential Risks

While Bitcoin has experienced its share of ups and downs, interest in cryptocurrencies is on the rise. The public has expanded its focus beyond Bitcoin to lesser-known but promising cryptocurrencies such as Litecoin, Ripple, and Ethereum, each of which is witnessing steady gains as people grow more willing to invest in digital currency.

One of the hottest topics surrounding cryptocurrencies is the question of whether or not the governments will place regulations on this innovative technology. Those who wish for cryptocurrencies to remain free of regulations argue that lawmakers’ involvement will stifle growth and diminish the integrity of the market. However, it’s important to consider the potential risks that a market comprised of unregulated cryptocurrencies could pose.

The growth of cryptocurrencies has naturally led to the development of products and services that investors can use to access and store their digital currency in the marketplace. This includes cryptocurrency exchanges—digital marketplaces that act as intermediary platforms where owners can buy, sell, or convert their cryptocurrency, similar to a stock exchange.

The difference between a cryptocurrency exchange and a stock exchange is that the latter is bound by regulations that help to keep investors protected against fraud. A lack of security policies could expose them to the possibility of theft and loss. Without regulations that establish compliance laws as to which companies can call themselves cryptocurrency exchanges, investors could fall victim to thieves who want to advertise themselves as legitimate businesses when they are really no more than criminals who want to steal investors’ cryptocurrencies. The law can also require those exchanges which operate on a legitimate business model to abide by more stringent security measures in order to protect investors from hackers. Consumer protection is a major concern so long as cryptocurrencies remain unregulated.

Cryptocurrencies are vulnerable to criminals for three primary reasons: the inherent anonymity associated with their use makes them difficult for law enforcement to track, they can be easily converted to traditional forms of currency, and there is not much government involvement in the market. This makes cryptocurrency an attractive form of payment for illegal items sold on the black market, and sites such as Silk Road have taken that concern from theory to reality. Beyond contraband such as drugs, cryptocurrency can be used to make purchases that could perpetuate human trafficking and terrorism and make it much more difficult for authorities to put an end to them in order to protect the public.

Ultimately, the law may provide cryptocurrency with its best chance at having a real future in the global economy. Regulations would help to brand cryptocurrencies as a substantial investment worthy of the attention of the government, which could lead the general public to feel more comfortable sinking investments into this form of digital currency. This kind of legitimization is also likely to come with some government-backed guarantees and protections that will make people more likely to embrace the concept.

Without the support of the general public, cryptocurrency cannot become as well established as its proponents hope it will be. Remaining unregulated will make it much more difficult for the technology to shed its reputation as a volatile investment used by criminals and those willing to gamble their investments on an unstable asset.

3 Things that Could Happen if Cryptocurrency Remains Unregulated

The lack of regulation in the cryptocurrency market has contributed to the success of iterations such as Bitcoin, which climbed in value in 2017 from just under $1,000 to a peak of almost $20,000 12 months later. While many who have invested in Bitcoin or alt-coins such as Ripple XRP and LiteCoin on a personal or professional level contend that these digital currencies must remain unregulated in order to reach their potential and thrive, they have become so popular that to leave them unregulated could have adverse consequences. Here are three things that could happen if cryptocurrency continues to grow without a reasonable degree of macro-level regulation.

 

1. Inexperienced investors could fall prey to fraud.

 

One practice that has gained popularity as a result of the unregulated cryptocurrency market is the “initial coin offering,” or ICO. These business transactions bear some resemblance to the conventional IPO used to issue company stocks. However, instead of earning shares in a company, investors involved with ICOs earn a digital asset, known as a “token,” which provides the issuing company with the money that it needs to fund its venture and investors with the promise of a financial stake in the company’s future.

 

Unfortunately, the popularity of ICOs has drawn the attention of scam artists and hackers, who pose a serious threat to inexperienced investors who want to become involved in the cryptocurrency market. While some would argue that the fault lies with investors who fail to perform adequate research, it’s important to consider the fact that regulatory bodies have placed restrictions on IPOs to protect investors from fraud.

 

2. It could diminish the reputation of the industry.

 

The reputation of cryptocurrency has been negatively affected by the dark web and questions about whether it could be linked to activities such as terrorist financing. The U.S. Department of the Treasury is concerned enough about the prospect of terrorists leveraging cryptocurrency to commit crimes that one of its officials recently testified before the Senate Banking, Housing and Urban Affairs Committee in an effort to push for stricter regulations on cryptocurrency exchanges. Several instances of terrorists hosting online Bitcoin fundraisers to support their groups have been identified since cryptocurrency began to grow. The anonymous nature of cryptocurrencies exchanged via blockchain technology makes terrorists’ actions difficult to track, providing them with a secure way to purchase supplies for their efforts and offering them a form of currency that can be easily exchanged on the dark web for commodities. A lack of regulation could diminish the industry’s reputation.

3. It could be the beginning of another global financial crisis.

 

In the wake of the rise of Bitcoin last year, professionals within the finance sector likened the phenomenon to that of “tulip mania” in the early 1600s and the 1987 stock market crash. While most experts agree that cryptocurrencies do not have the economic power to cause a global financial crisis, many are concerned about the effect that they could have on the world economy if they continue to grow quickly in popularity and to be used without any restrictions. Major financial institutions are already trading in Bitcoin, the best-known and most widely used form of cryptocurrency. In the event that this practice becomes widespread among all major financial institutions, a surge in growth without any regulation could destabilize the international market and pose a serious threat to the world economy.

3 Things You Need to Know About the Taxation of Cryptocurrency

In 2017, the dramatic rise in the worth of the popular cryptocurrency Bitcoin dominated the news cycle for good reason: the price of a single Bitcoin on New Year’s Day in 2017 totaled just under $1,000. By mid-December in that same year, its value had exponentially increased to almost $20,000, leading to an international conversation about the long-term stability of Bitcoin and generating great interest in many lesser-known cryptocurrencies, such as Ripple XRP, LiteCoin, and Ethereum. While Bitcoin’s value has declined since December to its current worth of around $11,000, a general public interest in cryptocurrency remains, particularly among younger Americans. According to an article published by Markets Insider, investments firms have witnessed significant interest in investments in cryptocurrencies from the millennial generation, while Google reports that the number of searches for the phrase “buy bitcoin” have surpassed the number of searches for “buy gold.”

 

While this technologically advanced form of currency possesses the allure of modernity to draw in young Americans, it’s important to note that novelty does not absolve any cryptocurrency from the regulations to which traditional forms of money are subjected. Below are three things that anyone who is thinking about investing in or using cryptocurrency should know about how they are used and taxed.

 

1. Cryptocurrency is treated as property, rather than as currency, for tax purposes. This decision, which was handed down by the Internal Revenue Service (IRS) in 2014, means that cryptocurrencies are subject to the rules that apply to intangible forms of property such as stocks, bonds, and other capital assets. Due to this classification, lower capital gains tax rates are applied to cryptocurrencies instead of the higher income tax rates applied to traditional forms of currency.

 

2. While tax rates on cryptocurrencies are lower, the fact that the IRS has labeled them as property makes purchases more difficult. If you choose to make a purchase with a digital form of currency—even something as miniscule as a meal from a crypto-friendly restaurant—you must keep thorough records of these “taxable events.” The taxes applied to the transaction are on par with those of deals like stock transactions. Buying goods and services through cryptocurrency will require users to translate the digital currency into the fair market value of the U.S. dollar at the time they make a purchase, and they may also owe sales taxes depending on the location and nature of the transaction. While exchanges like Coinbase will typically keep a record of a user’s cryptocurrency transactions within their database, experts still suggest that users maintain their own records.

 

3. The purchase of cryptocurrencies using traditional currency is not considered a taxable event. A buyer will not pay taxes during the initial transaction, wherein standard currency like the dollar is converted into digital currency like Bitcoin. Capital gains taxes generally apply to cryptocurrency transactions only if they are the result of a purchase, trade, or sale. Some people choose to purchase cryptocurrencies and hold on to them indefinitely in the hopes that they will grow in value, never using them in transactions. In those cases, when cryptocurrencies are held by a person for over a year without using them, a long-term capital gains tax will then be applied to the digital currency.

How Blockchain Can Dramatically Improve these 3 Major Industries

In a January 2018 article published on the Forbes magazine website, blockchain was named as one of 11 industries poised to become among the most significant digital disruptors of the future. While the experts believe that all industries will be affected by blockchain in the next several years, the following will have particularly significant gains to make if they choose to fully embrace the technology.

 

1. Real Estate

 

The real estate sector could benefit most from blockchain in an important way: the ability to abandon paper-based records in favor of a highly secure digital approach. Even the simplest real estate transaction is rife with paperwork. Every step—from opening escrow and obtaining insurance to securing mortgage approval and negotiating closing services and costs—requires hours of paperwork sent back and forth between the buyer, seller, and all involved intermediaries. In addition to unnecessarily prolonging the property-buying process, all paperwork is susceptible to human error, creating the possibility for mistakes that could later become public record. Paper-based records also have a greater potential for fraud, which can result in higher operating costs. Since the blockchain can automate the process of tracking documents, confirming their accuracy, and seamlessly transferring property deeds, real estate transactions can be conducted quickly, cleanly, and more precisely. Additionally, blockchain could completely eliminate the need to involve escrow companies, as funds within a real estate transaction could be released to the appropriate parties once the conditions of a smart contract on the blockchain are met.

 

2. Health Care

 

The field of health care has a lot to gain from the implementation of blockchain technology because it has the potential to restructure the entire health care system in a way that can help patients to obtain more accurate information and more comprehensive care. One of the foremost problems that health care providers struggle with is the inability to access the full picture of a patient’s medical history. This is due to the fact that patient data is not always easy to track down from past medical providers and because sensitive information is difficult to share with new doctors due to security threats posed by cyberattacks. Blockchain presents medical providers with the option of storing their patients’ medical history within a secure hub where they can safely and easily be shared with other professionals. Ultimately, this leads to a reduced likelihood that records will become lost, which can cause an individual to encounter issues with continuity of care. The more accurate of a picture that members of the medical community have of their patients’ entire medical history, the more likely they will be to correctly diagnose illnesses and prescribe treatments that save lives.

 

3. Crowdfunding

 

The impact that blockchain can have on the crowdfunding industry has everything to do with its affordability. Crowdfunding is a relatively modern concept that many in the business world see as a more accessible, small-scale alternative to venture capital funding. However, what these two forms of raising capital have in common are the high fees that entrepreneurs encounter when attempting to fund their creative ventures. Centralized crowdfunding sites such as Indiegogo and Kickstarter serve as an intermediary between individual online investors and the entrepreneurs who are trying to gather financial support for their ideas. They retain investors’ donations in escrow until the contract between an entrepreneur and his or her investors has been fulfilled. While this is in the best interests of donors, the fees for using these services are surprisingly high, and they reduce donations that could otherwise be put directly toward the entrepreneurial venture that donors intended to support. To retain these donations in full, entrepreneurs can use the blockchain to issue their own cryptocurrencies, which investors later have the option to trade in for services, products, or cash from the entrepreneur’s company. These investments are secured by smart contracts in which rewards and equity in exchange for contributions to a venture are distributed automatically once the terms of the blockchain-based contract are met.