This past week, U.S. regulators issued a new cryptocurrency ruling and denied the last of the bitcoin ETF proposals.
Pundits say the moves show how much the U.S. government hates cryptocurrency and wants to crush bitcoin.
Commodity Futures Trading Commission (CFTC) said it will allow Ethereum futures and Securities and Exchange Commission (SEC) regularly consults with community leaders. Internal Revenue Service’s tax rules may not make sense, but at least it’s taking crypto seriously.
Step back and take a look at the big picture. Life’s not so terrible.
Cryptocurrency is property. Why so mad?
I used to work for H&R Block.
Granted, I worked in their lobbying, er, I mean, “government relations” department. As a result, I didn’t need to know tax law. I only needed to know how the laws made it harder or easier for H&R Block to make money.
But I did have to learn how the IRS makes decisions. I also needed to understand the general principles behind the tax code.
My takeaways from the IRS ruling:
Some good rules
IRS rules aren’t all bad.
For example, IRS decided you have to pay taxes on hard forks only if you get new tokens.
As a result, you don’t need to report every Steem fork as a taxable event, nor pay taxes when your tokens move from their erc-20 standard to their respective mainnets.
Likewise, you do not pay taxes on soft forks.
While those decisions sound obvious, U.S. regulations never addressed this. Did you know how to handle these events?
IRS created new definitions for some cryptocurrency terms. Not technical definitions, but legal definitions—the kinds of definitions you can only understand if you have an accounting degree.
These definitions may not jive with yours. While you may disagree with the IRS, at least you know what they’re talking about and what you need to do in response.
(And yes, “leave the U.S.” is a certainly an option.)
It’s not the IRS you need to get mad at
I get why people dislike the IRS rules. Personally, I don’t see what the fuss is all about.
IRS has always treated cryptocurrency as property. It really has no choice—it has to base its rules on 80-year-old U.S. laws that never considered the idea of cryptocurrency. Under those laws, property fits best.
What else can it do? Regulators don’t make the laws, they only enforce the laws.
As a result, you get rules that fit the laws, not the technology.
If you want to get sensible cryptocurrency laws, target Congress. Once Congress changes the laws, IRS will have to comply.
Congress has never passed any cryptocurrency legislation. Maybe it’s about time?
Until then, your beef’s with Congress. IRS only has so much leeway.
ETF will still happen
Everybody expected the SEC to deny Bitwise’s ETF.
SEC broadcasted its concerns for many months: no transparency, few investor protections, and way too many independent, unregulated actors.
That’s no reflection on Wall Street’s ETF proposals, just the nature of bitcoin. Transactions are pseudonymous, peer-to-peer, and settled instantly. With no paper involved, you can’t track the movement of bitcoins within a marketplace without forensic technology.
Anybody can set up a node, download a wallet, buy, sell, and use bitcoin.
Great features for cryptocurrency. Not great features for a U.S.-regulated financial product.
On the bright side, nobody needs an ETF to buy bitcoin.
If you have 15 minutes and a computer, you can do it yourself. ETF simply gives Wall Street a way to make money from people who don’t want to do that.
As a result, you can’t expect the SEC to approve a bitcoin ETF until Wall Street resolves its concerns. Absent a law (Congress) or some urgent public need, the SEC will not stretch the rules so Wall Street can collect more fees.
Wall Street remains undeterred. As long as smart, wealthy, well-connected people keep trying, they’ll succeed eventually.
Just not today.
Rich People First, Then You
A lot of people are missing the larger narrative emerging around cryptocurrency in the U.S.
Intentionally or not, our crypto rules increasingly cater to the rich, financially savvy, and well-connected.
A bitcoin ETF would let average investors benefit from bitcoin’s growth without having to worry about wallets, passwords, security, and storage. But U.S. regulators won’t approve it.
Taxing cryptocurrency like money would make it easy for average taxpayers to account for their use of cryptocurrency. But U.S. regulators won’t allow it.
Instead, they green-light options, futures, and trusts—investment products for traders and large institutional investors.
On top of that, they issue tax rules that force you to hire an accountant or buy expensive tax software whenever you do anything with cryptocurrency.
And, they mostly let financial insiders do whatever they want. Bitcoin brokers and cryptocurrency custodians have barely a fraction of the compliance and licensing burdens of exchanges like Coinbase or Gemini. Large investment funds can put their money into custodial accounts and trusts that you and I could never touch.
Bitcoin for the 1 percent?
U.S. citizens should accept a new mantra:
Bitcoin for the wealthy, only.
As with pretty much all financial regulations, well-meaning or not, they protect opportunities for the rich to get richer while making it near-impossible (sometimes illegal) for the poor and middle-class to participate.
Some say this is good—after all, do you want your mother spending her retirement dabbling with leveraged options? Do you want your grandmother to lose her house over a bad private equity deal?
If you believe that, you have to accept the consequence: you shut out everybody except the rich and well-connected.
Wall Street to the rescue?
In the end, this may not matter. Once Wall Street finishes staking its claim to cryptocurrency, everybody will have an opportunity to get involved (for a small fee).
As long as Wall Street smells a chance to make money on crypto, you can bet it will keep pressing the government to ease regulations.
Whether that’s a good thing or not? We shall see.
Internet boomed after the government handed it to telecom companies. Innovation and development exploded, resulting in the infrastructure necessary to bring the internet into the mainstream.
Yet, we remain saddled with all sorts of privacy, security, social, business, and labor problems.
Maybe we end up with the same result once cryptocurrency goes mainstream?
Or maybe Wall Street gives up. Maybe big financial interests move to another country—or simply leave the market totally?
Time will tell.
Fortunately, we already have our own small stake in the future. Until the U.S. government changes its policies, we can still buy, sell, and use cryptocurrency freely, openly, and without conditions.
What’s so bad about that?
Mark Helfman is author of Consensusland, a Readers’ Favorite 5-star book about a country that runs on cryptocurrency. You can also catch him on Medium. He publishes every Friday.