There continues to be a flood of headlines and information in the financial press about digital currencies, with a focus on the continued growth in the price of Bitcoin. When I wrote my last post in February Bitcoin was trading at about $48,000 per coin and as I write this in the middle of April, the price has climbed to over $62,000. In this post, I will highlight some of the key developments that have occurred in the past two months concerning digital currencies.
Coinbase, the largest U.S. cryptocurrency exchange, went public on April 14th with a direct listing of its shares. I think of Coinbase as being similar to the New York Stock Exchange except for crypto instead of shares of stock. Coinbase is the largest exchange for Bitcoin. The company is the first major crypto business to trade publicly in the U.S. The size of its listing likely means that its stock will be held by mainstream index funds, giving average investors (indirect) exposure to the world of crypto. The debut is viewed as a major milestone in the mainstreaming of digital money, but barriers to acceptance will remain as long as there is a regulatory cloud hanging over crypto.
Coinbase says it’s mission is to create an open financial system for the world and to be the leading global brand for helping people convert digital currency into and out of their local currency. They do this by:
Making buying and selling digital currency easy.
Sending or receiving digital currency between online wallets, friends or merchants for no charge.
They handle security and backups.
They advertise a being a "one stop shop" — offering a wallet, an exchange and merchant tools within one simple interface.
This direct listing and the large valuation given to Coinbase is another signal that many investors believe the future of digital currencies is very bright.
Fidelity Investments to Launch a Bitcoin ETF
Fidelity Investments announced that it intends to launch a US Bitcoin ETF attempting to get ahead of the other investment companies. Here are some comments seen in the press:
Fidelity Investments is preparing to launch its own bitcoin fund as the investment giant works to cement its clout in the market for digital assets.
FD Funds Management, a subsidiary of Fidelity, said it plans to provide financial backing for an ETF called the Wise Origin Bitcoin Trust.
The fund will track the performance of bitcoin as measured by the Fidelity Bitcoin Index, which Fidelity created to track the price of the digital currency.
The ETF, if approved by the SEC, will track the performance of bitcoin as measured by the movement of the Fidelity Bitcoin Index, a barometer the investment giant established to track the price of the digital currency.
Whether the SEC approves the plan, however, remains a key question. The regulator has not to date granted any company permission to create a bitcoin ETF, arguing that the market was not ready yet despite a growing number of applications.
Although the Fidelity-backed trust does not intend to sell bitcoin, it will use the cryptocurrency to pay certain expenses, which under current IRS guidance will be treated as a sale of such digital currency.
Bitcoin Bubble Worries
This report recently appeared on the website Seeking Alpha that shows the divergence of thought about the valuation of Bitcoin:
“Bubble worries: Bank of America's latest fund manager survey indicates an overwhelming contention that Bitcoin is in a bubble. 74% of those surveyed say the crypto is now in a bubble, compared with just 7% who see equities in a bubble (most think stocks are in a late-stage bull market). Bitcoin was considered the second-most crowded trade behind long tech according to the respondents.”
Visa Conducts First Settlement Transaction in USD Coin
Visa has become the first major payments network to settle transactions in USD Coin (USDC), a stablecoin backed by the US dollar. Visa plans to offer the USDC settlement capability to additional crypto-native companies later this year as an alternative to traditional fiat currency in treasury and settlement workflows.
PayPal Announces Customers Can Pay in Crypto
PayPal announced it has started allowing U.S. consumers to use their cryptocurrency holdings to pay at millions of its online merchants globally, a move that could significantly boost use of digital assets in everyday commerce.
The Income Tax Implications of Bitcoin
There have been a number of articles highlighting the income tax aspects of digital currency with a focus on Bitcoin. Please remember that the Internal Revenue Service looks at Bitcoin transactions (digital currency) as exchanges involving property. They are not considered cash transactions. Digital currencies are taxed by the federal government and the states as property, or as an investment, when you sell them. And using them to buy something counts as selling because you are getting something of value in return. If you're paid in bitcoin, as at least one NFL player has requested, that will be treated as taxable income to you.
What this means is that almost every transaction may be taxable and should be reported. If you fail to pay the tax you owe, you will be subject to interest and penalties for not paying your taxes. These amounts can be substantial. If you own digital currency you need to keep good records, because you are responsible for preserving documentation for every one of your transactions.
Goldman Sachs Predicts 'Big Evolution' Coming to Cryptocurrency Regulation
David Solomon, the CEO of global investment bank Goldman Sachs, shared his views on cryptocurrency regulation in a recent interview with CNBC. Regarding the regulation for bitcoin and other cryptocurrencies, the Goldman Sachs executive said he thinks that cryptocurrency “is a space that’s evolving,” predicting —“I think there’ll be a big evolution as to how this evolves in the coming years.”
Emphasizing that his company operates within the rules set by regulators, the Goldman Sachs CEO noted: “I’m not going to speculate on where the rules will go for regulated financial institutions, but we’re going to continue to find ways to serve our clients as we move forward.”
Solomon detailed that Goldman Sachs is focused on how to support demand from clients for bitcoin and other cryptocurrencies. “We continue to think about digital currencies and the digitization of money in a very proactive way,” he opined, mentioning specifically that his firm “can help clients facilitate custody positions in digital assets.”
Creation of the Crypto Council for Innovation
The Crypto Council for Innovation (CCI) was recently created. The CCI is a global alliance of crypto industry leaders including Coinbase, Fidelity, Paradigm and Square. The organization has a mission to demonstrate the transformational promise of crypto and communicate its benefits to policymakers, regulators and people around the globe.
CCI states that crypto has immense potential to spur international economic growth and create jobs, improve financial inclusion and access, and enhance privacy and security.
By sharing insights and expertise about the global crypto ecosystem while addressing misperceptions and misinformation, CCI supports governments and institutions worldwide in efforts to shape and encourage the responsible regulation of crypto in a way that unlocks potential and improves lives.
Overall, it continues to be my view that crypto currencies have emerged from the darkness, are a new asset class and are getting serious consideration by knowledgeable parties. I believe the key to owning this new asset class is making sure it matches your risk tolerance and that it is part of a well-diversified portfolio. This means proceed with caution and do your research before parting with your money.