Governments do not react well to threats to their center of control. As of November 2017 there are roughly 1340 cryptocurrencies with a market capitalisation of roughly $450 Billion (when we first published this piece in June it was $114 Billion) of which Bitcoin makes up about 62%. So, it is no surprise that governments are becoming more vocal and putting together tasks forces on how to deal with it.
The bankers seem to be even more worried. They don’t take kindly to non centralised competitors moving in on their turf. After all, they wield an enormous amount of influence and make staggering amounts of profits.
As cryptocurrencies are now gaining more exposure and interest among the general public, bankers are now becoming more fond of government regulators. It is the hope of the bankers that the government will try and regulate the cryptocurrencies out of existence should they become too menacing.
So, should the US government, or any other government attempt to take on Bitcoin, Monero, Steemit or any of the large number of cryptocurrencies, what could they actually do?
- Any cryptocurrency is at risk of being made illegal by any government. Owning and operating a money transmitter service in the U.S. is “illegal” unless it is registered with State agencies. This is also true if one uses Bitcoin or any other cryptocurrency to exchange for fiat currency. Bitcoin is not immune from State or Federal laws regulating the flow of money, and agents can track bitcoin transfers over the blockchain.
- Regulation to date has been minimal, but history tells us that governments rarely preference light regulation — it just takes them a while to catch up with technology. There are a large number of issues that any government could regulate when it comes to cryptocurrency use among the public. In 2013, the U.S. Senate held the first hearings on Bitcoin. In that same year, FinCEN released the first announcement by any government agency related to the technology. The IRS was also the first tax agency in the world to clarify the tax treatment of Bitcoin and other digital currencies. Additionally, BitLicense in New York was the first licensing regime in the world directed at digital currencies.
- Cryptocurrencies do work with an exchange rate, therefore, governments could manipulate the exchange rate of bitcoin, ethereum or other. This is by no means unfamiliar territory for most.
- It’s not difficult to imagine the US or the European Union coming up with a new definition for cryptocurrencies as, say, an investment, with all net gains taxed at 30 per cent. For example, the U.S. tax authority, the IRS, has classified cryptocurrencies as “property” for the purpose of federal taxation, whereas the Treasury Department’s FinCEN has classified cryptocurrencies as “value” for the purpose of AML/CFT (Anti-Money Laundering and Countering Financing of Terrorism Act) obligations.Other jurisdictions have taken a different approach, avoiding a formal classification and focusing instead on the nature or type of transaction being conducted.
- Governments could exploit the transparency of the blockchain and punish people for holding cryptocurrencies at all. This has been seen in the past as in the case of Gold.
- The NSA or some other entity with both the budget and experience create a VLSI (Very Large Scale Integration) project to both develop and deploy an ASIC (application-specific integrated circuit) design that would result in a 51% attack.
- International regulation could be developed that significantly inhibits one’s ability to exchange Bitcoins, or other, for local currencies. Essentially forcing the cryptocurrencies underground like a drug cartel thereby adding to de-legitimisation.
- It is possible for a mathematician to gain government support in finding a way to break ECDSA (Elliptic Curve Digital Signature Algorithm or ECDSA is a cryptographic algorithm used by Bitcoin to ensure that funds can only be spent by their rightful owners). However, it is very unlikely that this would happen.
- The media alongside a covert multi-government effort could conduct several propaganda campaigns to sway public opinion that the cryptocurrencies are either a massive scam or somehow bad. This has already been seen in the example of IMF, government and banking representatives conditioning the public to equate cryptocurrencies with fraud, terrorism financing, money laundering etc.
- Regulations could be adopted to monitor and control the crypto exchanges. A government has the purchasing power to buy up large quantities, drive the price up then sell and collapse it, thereby massively increasing volatility. These market fluctuations could be aggravated by a covert government programme of destructive funding and public disinformation. This would make doing business in any cryptocurrency more difficult.
The Treasury Inspector General for Tax Administration commissioned a report last year to study their options. The overall objective of the review was to evaluate the IRS’s strategy for addressing income produced through virtual currencies. It included the following recommendations:
- IRS management needs to develop an overall strategy to address taxpayer use of virtual currencies as property and as currency.
- The Deputy Commissioner for Services and Enforcement should request the Large Business and International Division, the Small Business/Self-Employed Division, and Criminal Investigation to develop a coordinated virtual currency strategy that includes outcome goals, a description of how the agency intends to achieve those goals, and an action plan with a timeline for implementation. In addition, the strategy should use the tools available to the IRS and identify how the IRS is going to meet its BSA, criminal investigation, and tax enforcement obligations as related to virtual currencies as well as identify how actions will be monitored and the methodologies used to measure the actions taken.
- The Deputy Commissioner for Services and Enforcement should take action to provide updated guidance to reflect the documentation requirements and tax treatments needed for the various uses of virtual currencies.
- The Deputy Commissioner for Services and Enforcement should revise third-party information reporting documents to identify the amounts of virtual currency used in taxable transactions.
So the US IRS is now on the prowl, as I imagine many other international government bodies. Nobody should forget that Bitcoin and all cryptocurrencies are still an experiment. Nobody really knows how this will play out in the future. Stay tuned!
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