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Bitcoin Could Strengthen The World Economy If Washington Doesn’t Destroy It

You can avoid reality, but you cannot avoid the consequences of avoiding reality.
- Ayn Rand

Sometimes our greatest strengths are also our greatest weaknesses.  In the case of Bitcoin, the decentralized nature of the network plays to both sides, creating great freedoms, which in turn create great opportunities for rogue players.  If you’re one of the “76 percenters” who don’t have a clue what Bitcoin is, you can read my introduction to Bitcoin Basics here.

In short, Bitcoin is a disruptive technology that has the potential to transform the global financial services industry and raise the standard of living for all. Through decentralized cryptography, Bitcoin eliminates the need for banking intermediaries, significantly lowering transaction costs and could liberate poverty stricken economies around the globe by providing access to capital to the one-third of humanity that is excluded from the financial world.

However, some of the most transformational innovations of Bitcoin have been exploited by bad actors. These nefarious players give Bitcoin a negative reputation.  This reputation leads to perception and perception becomes reality, especially in the nation’s capital and among regulators. With decentralization at the core of the Bitcoin culture, there are few leaders in the industry providing any explanation to the regulators or the public about the scandals that have plagued Bitcoin, how Bitcoin works, and how it can benefit consumers.

Additionally, Bitcoin faces a highly uncertain regulatory environment in the U.S., with multiple government departments and agencies working in an uncoordinated fashion. The regulatory risk Washington could impose on Bitcoin threatens the seamless payment system of those it could benefit most, people who don’t have access to banks and small businesses. The recent guidelines published by the IRS on digital currencies that contradict the FinCEN guidelines on virtual exchanges are a perfect case in point.

IRS Says Bitcoin Is Property
According to the IRS, bitcoin is considered “property,” therefore capital gains must be recorded and reported.  Since the IRS doesn’t recognize bitcoin as a currency, although it operates as such, bitcoin owners are responsible for recording the market price in USD of their bitcoins the day they are obtained, then reporting the difference in the market price the day the bitcoins are used.  The gain is considered capital gains and is taxed.

When you take a look at how the IRS treats foreign currency, bitcoin doesn’t have the same taxation regime.  Foreign currency gains and losses generally are taxed as ordinary income.  Gains or losses from the sale of “property,” such as bitcoin, are taxed as capital.  Capital losses can only be used to offset capital gains, so bitcoin losses take a greater hit than foreign currency losses.  There is also a de minimis provision for foreign currency.

Andreas Antonopoulos, the Chief Security Officer of and one of the few leaders in the Bitcoin community, says in an interview with Money & Tech that:

reporting capital gains is ridiculous and it’s going to cause a mountain of paperwork.

FinCEN Treats Bitcoin As Currency
Conversely, the U.S. Treasury Financial Crimes Enforcement Network or “FinCEN,” says that although bitcoin is not legal tender, bitcoin exchangers are money transmitters, thus subject to the Bank Secrecy Act, which was first passed in 1970 before the internet existed, and a global digital currency was decades into the future.  Unlike a traditional money transmitter like PayPal or Western Union WU -0.67%, transmitting bitcoin is a two-party transaction that doesn’t require an intermediary.

The money service regulations bitcoin exchanges must comply with, even though the IRS doesn’t recognize bitcoin as “money,” are not practical and are contributing to the closing of dozens of exchanges.

This dual and competing regulation of bitcoin is confusing, and has a negative effect on the growth of bitcoin as a world currency, thus taking away from the promising services Bitcoin has to offer some of the most disenfranchised members of financial society.  This is just the beginning of the regulatory challenges for Bitcoin, as multiple regulatory agencies are looking to oversee digital currencies including the Department of Justice, FINRA, CFTC, and the SEC.  Although Bitcoiners don’t like the idea of concentration, a clear voice from the Bitcoin community is needed to unify regulatory goals.

The Bitcoin Community Must Stand To Meet The Challenges Of Affirming The Legitimacy Of This Global Currency

BitGo and BitPay are two industry leaders that are ahead of the curve in innovation and regulatory compliance.  Despite the IRS classifying Bitcoin as “property” and not currency, Will O’Brien, the CEO of BitGo, the company that pioneered multi-signature wallet security says they were complying all along with the IRS guidelines.

Our tax accountants had recommended the “property” method as that was the most logical first step the IRS would take in providing guidance. Sure, it does come with its share of accounting headaches but it’s nothing more than is required of any other business.

BitPay, a Bitcoin leading payment processor, also said their

merchants accepting bitcoin through BitPay are fully prepared to meet their tax obligations as outlined in the IRS Notice.

While these industry leaders are eager to contribute to the U.S. regulatory regime, Bitcoin can regulate itself, as Will O’Brien points out, 

the nice thing about the Blockchain is that you can easily get a record of every transaction you’ve ever made.

Bitcoin was created with security in mind. The Blockchain is Bitcoin’s public ledger that records EVERY transaction in the Bitcoin economy. Analog channels, such as cash, provide greater anonymity for criminals to route illicit activity than Bitcoin. Additionally, the industry already created a self-regulating organization, Digital Asset Transfer Authority or “DATA,” which establishes best practices and consumer protection initiatives for digital asset companies.

Bad Actors Have Defamed Bitcoin’s Reputation
Bitcoin has the potential to globally raise the standard of living if Washington doesn’t over regulate it.  Criminals that have used Bitcoin for illegal activities in conjunction with a lack of industry representation in the media and Washington, have caused a failure in recognizing the benefits of Bitcoin.

One misconception about Bitcoin is that it is anonymous. Technically it’s pseudonymous. While every transaction is recorded on the Blockchain, Bitcoin user’s identities are private. As Jerry Brito and Andrea Castillo points out in a primer published by the Center for Independent Studies, the level of privacy in using Bitcoin protects individuals against capital controls and censorship, and ensures financial privacy for oppressed groups.

At the same time the pseudonymous nature of Bitcoin has attracted drug dealers, money launderers, and other criminals. However, these bad actors are quickly being weeded out, and going down in a highly publicized fashion. As Silk Road, Liberty Reserve and Mt. GOX all created a stir in the media, the Bitcoin community was put on defense, leaving another misconception that bitcoin ‘is dead as we know it.’

The central banking system has excluded nearly 3.5 billion people from the financial industry around the world.  A decentralized monetary system, such as Bitcoin, could bring financial services to these currently unreachable people.  It’s shameful that Bitcoin has been exploited by criminals, but this doesn’t represent a failure of Bitcoin.

As the Bitcoin community continues to build and improve the Bitcoin infrastructure, security loopholes are being patched.  While some regulation may be necessary to ensure the safety and soundness of digital commerce, the power of self-regulating organizations, such as DATA shouldn’t be overlooked.  In addition, the Bitcoin network would be wise to proactively foster confidence in Bitcoin by engaging in meaningful dialogue with Washington and all stakeholders.