A lot of the appeal, and most of the perceived value, of Bitcoin comes from its outlaw status. Bitcoin and its fellow digital currencies exist beyond the borders of central banks, government debt levels and trade policies.
But the cops are coming.
The two top financial market regulators are due in front of the Senate Banking Committee on Tuesday. The chairs of the Securities Exchange Commission and the Commodity Futures Trading Commission have taken increasing interest in virtual currencies and associated markets, as well as the underlying blockchain technology that poses a disruptive threat to finance. As Bitcoin has entered the lexicon of small investors, scrutiny has followed.
While there are no approved mutual funds or exchange traded funds in the U.S. for virtual currencies, the financial industry has been trying. A dozen cryptocurrency ETFs and two mutual funds withdrew their applications to the SEC for regulatory approval, according to Bloomberg. In one case, the agency “expressed concerns regarding the liquidity and valuation of the underlying instruments.”
In other words, the investment police are not convinced virtual currencies have real world qualities.
The IRS does. It taxes incomes paid in cryptocurrencies. Any gains or losses from buying or selling virtual currencies are reportable to the tax agency. And successfully mining a virtual currency is income that is supposed to wind up on tax forms.
Where the IRS has been definitive, the market police have been more skeptical, which is their job after all.
The SEC has moved to rein in companies from issuing their own digital currencies, called initial coin offerings, by deeming some of them securities and thus subject to its rules. And while the CFTC has OK’d the trading of Bitcoin, doing so has given the agency “access to data that can facilitate the detection and pursuit of bad actors,” according to a Wall Street Journal article co-authored by the CFTC chairman.
Policing cryptocurrencies may make them seem less appealing, but doing so will help legitimize their disruptive nature.
Tom Hudson hosts ‘The Sunshine Economy’ on WLRN-FM; @HudsonsView.