Blockchain: The Real Game Changer of Finance

Mikhail Golomb is a financial executive who has spurred growth at firms in a number of sectors ranging from technology to digital health. Over the course of his career, Mikhail Golomb has become well versed in emerging fintech, including cryptocurrency.

                       Source: Tech in Asia

Since its first major period of growth in the wake of the 2008 financial crisis, the fintech industry has been considered at odds with traditional finance. Big banks and other financial firms have often been painted as “at war” with Fintech in the ensuing 10 years, with many articles outlining the ways in which fintech was disrupting—and thereby set to destroy—the finance industry.

However, as much as the spread of fintech is forcing banks and other major types of financial firms to change the way that they conduct business, some pundits balk at the term “disrupt,” suggesting that it is not an entirely accurate description of what fintech is doing. In an increasingly modern world with a large number of tech-savvy citizens, some experts argue that Fintech is merely driving necessary, pioneering development—encouraging firms with outdated operational models to rethink how they facilitate value exchange services via healthy competition.

Perhaps nowhere is the benefit of fintech and the competitive pressure it has put on the banking sector more obvious than when one considers the immense potential of blockchain technology on value exchange. Blockchain has stirred the interest of some of the largest banks in existence, including J.P. Morgan Chase, Citigroup, Goldman Sachs, Wells Fargo, BBVA, and Barclays, many of which are experimenting with or participating in investigative consortiums focused on exploring the uses of the groundbreaking technology. While many aspects of fintech have worried big banks, blockchain has proved to be a source of motivation for financial institutions to invest in and acquire fintech firms themselves. Many in the industry believe that these investments on behalf of banks are positive, as blockchain has every potential to be the next big game-changer in the value exchange market. Acquiring new, high-energy fintech firms for in-house collaboration may be the only thing that can help big traditional brands stay on the right side of the coming change, which some experts believe is imminent.

They believe in this possibility because blockchain may be the technology that completely changes the landscape of the finance sector as a whole. The idea is to find the “Uber” of the banking sector—a fintech unicorn that goes beyond moderately refining existing services and instead entirely changes the way that people bank. The major tech unicorn companies to accomplish this feat in various industries over the last decade (a list that includes Uber, Facebook, Airbnb, and Amazon) have done so by acting as technology-based intermediaries between the professionals providing a service and customers who want to purchase that service. The companies have served as processing centers that mediate the interactions between sellers and buyers, rather than acting as a company that invests in the services they provide themselves (for example, Airbnb does not own any accommodations, and Uber does not own a fleet of cars).

Blockchain by its very nature offers users many of the necessary capabilities to serve as an intermediary between people who need to use banking services and those who are on the receiving end of the banking services—all at a much higher speed and much lower operating cost than the same services provided by banks. Blockchain could completely replace some of banking’s most outdated processes by operating as a decentralized processing engine that enables global, peer-to-peer value exchanges. Exchanges could be completed on the blockchain faster, more affordably, and safely through a universal ledger, rendering much of the oversight provided by banks obsolete.

Although blockchain is a type of technology, rather than a unicorn company, it could fill the same role for finance as Uber did for transportation or that Airbnb did for travel accommodations. In these rare instances of great change and development within a business sector, the old brands that survive are only those which can warmly embrace and work to further the new norms in the industry.

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.