In its Dec. MicroStrategy has been a vocal advocate of changing the current cryptocurrency accounting rules. Hundreds of other letter writers followed suit. To contact the reporter on this story: Nicola M. White in Washington at nwhite bloombergtax. To contact the editors responsible for this story: Jeff Harrington at jharrington bloombergindustry.
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Recall that how well cryptocurrency serves as money depends on how well it serves as 1 a medium of exchange, 2 a unit of account, and 3 a store of value. Several characteristics of cryptocurrency undermine its ability to serve these three interrelated functions in the United States and elsewhere.
Currently, a relatively small number of businesses or individuals use or accept cryptocurrency for payment. As discussed in the " The Price and Usage of Cryptocurrency " section, there were , transactions involving Bitcoin per day globally out of the billions of financial transactions that take place in , and a portion of those transactions involved people buying Bitcoins for the purposes of holding them as an investment rather than as payment for goods and services.
Unlike the dollar and most other government-backed currencies, cryptocurrencies are not legal tender, meaning creditors are not legally required to accept them to settle debts. As previously mentioned, the recent high volatility in the price of many cryptocurrencies undermines their ability to serve as a unit of account and a store of value. Cryptocurrencies can have significant value fluctuations within short periods of time; as a result, pricing goods and services in units of cryptocurrency would require frequent repricing and likely would cause confusion among buyers and sellers.
In comparison, the annualized inflation of prices in the U. Whether cryptocurrency systems are scalable —meaning their capacity can be increased in a cost-effective way without loss of functionality—is uncertain. As discussed in the " The Price and Usage of Cryptocurrency " section, the platform of the largest by a wide margin cryptocurrency, Bitcoin, processes a small fraction of the overall financial transactions parties engage in per day. The overwhelming majority of such transactions are processed through established payment systems.
As well, Bitcoin's processing speed is still comparatively slow relative to the nearly instant transaction speed many electronic payment methods, such as credit and debit cards, achieve. For example, blocks of transactions are published to the Bitcoin ledger every 10 minutes, but because a limited number of transactions can be added in a block, it may take over an hour before an individual transaction is posted.
Part of the reason for the relatively slow processing speed of certain cryptocurrency transactions is the large computational resources involved with mining—or validating—transactions. When prices for cryptocurrencies were increasing rapidly, many miners were incentivized to participate in validating transactions, seeking to win the rights to publish the next block and collect any reward or fees attached to that block.
This incentive led to an increasing number of miners and to additional investment in faster computers by new and existing miners. The combination of more miners and more energy required to power their computers led to ballooning electricity requirements. However, as the prices of cryptocurrencies have deflated, validating cryptocurrency transactions has become a less rewarding investment for miners; consequently, fewer individuals participate in mining operations.
The energy consumption required to run and cool the computers involved in cryptocurrency mining is substantial. Some estimates indicate the daily energy needs of the Bitcoin network are comparable to the needs of a small country, such as Ireland.
In general, when a buyer of a good or a service provided remotely sends a cryptocurrency to another account, that transaction is irreversible and made to a pseudonymous identity. Although a cryptocurrency platform validates that the currency has been transferred, the platform generally does not validate that a good or service has been delivered.
Unless a transfer is done face-to-face, it will involve some degree of trust between one party and the other or a trusted intermediary. If the buyer transfers the Bitcoin before she has received the item, she takes on the risk that the seller will never ship the item to her; if that happened, the buyer would have little, if any, recourse.
Conversely, if the seller ships the item before the buyer has transferred the Bitcoin, he assumes the risk that the buyer never will transfer the Bitcoin. These risks could act as a disincentive to parties considering using cryptocurrencies in certain transactions and thus could hinder cryptocurrencies' ability to act as a medium of exchange.
As mentioned in the " Banks: Transferring Value Through Intermediaries " section, sending cash to someone in another location presents a similar problem, which historically has been solved by using a trusted intermediary. In response to this problem, several companies offer cryptocurrency escrow services.
Typically, the escrow company holds the buyer's cryptocurrency until delivery is confirmed. Only then will the escrow company pass the cryptocurrency onto the seller. Although an escrow service may enable parties who otherwise do not trust each other to exchange cryptocurrency for goods and services, the use of such services reintroduces the need for a trusted third-party intermediary in cryptocurrency transactions.
As with the use of intermediaries in traditional electronic transactions discussed above, both a buyer and a seller in a cryptocurrency transaction would have to trust that the escrow company will not abscond with their cryptocurrency and is adequately protected against hacking. For cryptocurrencies to gain widespread acceptance as payment systems and displace existing traditional intermediaries, new procedures and intermediaries such as those described in this section may first need to achieve a sufficient level of trustworthiness and efficiency among the public.
If cryptocurrencies ultimately require their own system of intermediaries to function as money, questions may arise about whether this requirement defeats their original purpose. Policymakers developed most financial laws and regulations before the invention and subsequent growth of cryptocurrencies, which raises questions about whether existing laws and regulations appropriately and efficiently address the risks posed by cryptocurrency.
Some of the more commonly cited risks include the potential that cryptocurrencies will be used to facilitate criminal activity and the lack of consumer protections applicable to parties buying or using cryptocurrency. Each of these risks is discussed below. Criminals and terrorists are more likely to conduct business in cash and to hold cash as an asset than to use financial intermediaries such as banks, in part because cash is anonymous and allows them to avoid establishing relationships with and records at financial institutions that may be subject to anti-money laundering reporting and compliance requirements.
This marketplace and Bitcoin escrow service facilitated more than , illegal drug sales from approximately January to October , at which time the government shut down the website and arrested the individuals running the site. Criminal use of cryptocurrency does not necessarily mean the technology is a net negative for society, because the benefits it provides could exceed the societal costs of the additional crime facilitated by cryptocurrency.
In addition, law enforcement has existing authorities and abilities to mitigate the use of cryptocurrencies for the purposes of evading law enforcement. Recall that cryptocurrency platforms generally function as an immutable, public ledger of accounts and transactions. Thus, every transaction ever made by a member of the network is relatively easy to observe, and this characteristic can be helpful to law enforcement in tracking criminal finances.
Although the accounts may be identified with a pseudonym on the cryptocurrency platform, law enforcement can exercise methods involving analysis of transaction patterns to link those pseudonyms to real-life identities. For example, it may be possible to link a cryptocurrency public key with a cryptocurrency exchange customer. In addition to law enforcement's abilities to investigate crime, the government has authorities to subject cryptocurrency exchanges to regulation related to reporting suspicious activity.
The Department of the Treasury's Financial Crimes Enforcement Network FinCEN has issued guidance explaining how its regulations apply to the use of virtual currencies —a term that refers to a broader class of electronic money that includes cryptocurrencies. FinCEN has indicated that an exchanger "a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency" and an administrator "a person engaged as a business in issuing [putting into circulation] a virtual currency, and who has the authority to redeem [to withdraw from circulation] such virtual currency" generally qualify as money services businesses MSBs subject to federal regulation.
The specific requirements generally vary across different states; 80 a state-by-state analysis is beyond the scope of this report. A number of bills related to the criminal use of cryptocurrencies and ways of improving the ability of government agencies to address this problem have seen action in the th Congress:. As with money laundering, individuals could potentially use a pseudonymous, decentralized platform and thus avoid generating records at traditional financial institutions as a mechanism for hiding income from tax authorities.
The IRS has issued guidance stating that virtual currencies are treated as property as opposed to currency for tax purposes, meaning users owe taxes on any realized gains whenever they dispose of virtual currency, including when they use it to purchase goods and services.
By November , the IRS had come to believe that cryptocurrency gains were being underreported, finding that between and only to tax returns declared such gains. In July , the IRS sent letters to 10, taxpayers with cryptocurrency transactions alerting them that they potentially had not met their reporting requirements although the IRS did not explicitly link the letters to the Coinbase case.
The prevalence of using cryptocurrency to avoid taxes is uncertain at this time. The language in certain variations of the letters the IRS sent indicates the IRS did not think these recipients' failure to pay was intentional. Rather, investors may have been seeking to profit from cryptocurrency, and then not paying taxes on the gains after the fact, rather than primarily seeking to hide assets from tax authorities. Indeed, cryptocurrencies' poor performance as a store of value may make them a poor instrument for this purpose at this time.
In addition, prominent U. Nevertheless, the difficulty the IRS experienced with the largest and most well-known cryptocurrency exchange may suggest that individuals who seek to evade taxes might look to cryptocurrency as a possible avenue. Although it is outside the scope of this report, another potential reason a person or entity may want to move money or assets while avoiding engagement with traditional financial institutions could be to evade financial sanctions.
For example, the Venezuelan government has launched a digital currency with the stated intention of using it to evade U. Nelson and Liana W. Although there is no overarching regulation or regulatory framework specifically aimed at providing consumer protections in cryptocurrencies markets, numerous consumer protection laws and regulatory authorities at both the federal and state levels are applicable to cryptocurrencies.
Whether these regulations adequately protect consumers and whether existing regulation is unnecessarily burdensome are topics subject to debate. This section will examine some of these consumer protections and present arguments related to these debated issues.
A related concern has to do with whether investors in certain cryptocurrency instruments such as initial coin offerings —wherein companies developing an application or platform issue cryptocurrencies or other digital or virtual currency that are or will be used on the application or platform—or cryptocurrency derivatives contracts are adequately informed of risk and protected from scams.
However, this secondary use of cryptocurrency as investment vehicles is different from the use of cryptocurrencies as money, and it is beyond the scope of this report. No federal consumer protection law specifically targets cryptocurrencies.
However, the way cryptocurrencies are sold, exchanged, or marketed can subject cryptocurrency exchanges or other cryptocurrency-related businesses to generally applicable consumer protection laws. In recent years, the FTC has brought a number of enforcement actions against cryptocurrency promoters and mining operations due to potential violations of Section 5 a. In addition, Title X of the Dodd-Frank Act grants the Consumer Financial Protection Bureau CFPB certain rulemaking, supervisory, and enforcement authorities to implement and enforce certain federal consumer financial laws that protect consumers from "unfair, deceptive, or abusive acts and practices.
Although the CFPB has not actively exercised regulatory authorities in regard to the cryptocurrency industry to date, the agency is accepting cryptocurrency-related complaints and previously has indicated it would enforce consumer financial laws in appropriate cases. Both the FTC and the CFPB have made available informational material, such as consumer advisories, to educate consumers about potential risks associated with transacting in cryptocurrencies.
In addition, all states have laws against deceptive acts and practices, and state regulators have enforcement authorities that could be exercised against cryptocurrency-related businesses. For example, money transmitters generally must maintain some amount of low-risk investments and surety bonds—which are akin to an insurance policy that pays customers who do not receive their money—as safeguards for customers in the event they do not receive money that was to be sent to them. Certain observers assert that consumers may be especially susceptible to being deceived or misinformed when dealing in cryptocurrencies.
Although certain federal laws and regulations intended to protect consumers such as those described in " Applicable Regulation ," above do apply to certain cryptocurrency transactions, others may not. Some of those laws and regulations that do not currently apply are specifically designed to protect consumers engaged in the electronic transfer of money, require certain disclosures about the terms of financial transactions, and require transfers to be reversed under certain circumstances.
The application of state laws and consumer protections to cryptocurrency transactions is not uniform, and the stringency of regulation can vary across states. If Congress decides current consumer protections are inadequate, policy options could include extending the application of certain electronic fund transfer protections to consumers using cryptocurrency exchanges and service providers and granting federal agencies additional authorities to regulate those businesses.
Proponents of cryptocurrencies have asserted that the application of a state-by-state consumer protection regulatory regime to cryptocurrency exchanges is unnecessarily onerous. They note that certain state regulations applicable to these exchanges are designed to address risks presented by traditional money transmission transactions i.
For example, the previously mentioned requirements to maintain low-risk investments and surety bonds are intended to ensure customers will receive transmitted money. Supporters of cryptocurrencies further argue that if the United States does not reduce the regulatory burdens involved in cryptocurrency exchanges, the country will be at a disadvantage relative to others in regard to the development of cryptocurrency systems and platforms.
If Congress decides the current regulatory framework is unnecessarily burdensome, some argue that one policy option would be to enact federal law applicable to cryptocurrency exchanges or virtual currency exchanges more broadly that preempts state-level requirements. As discussed in the " Government Authority: Fiat Money " section, in the United States, the Federal Reserve has the authority to conduct monetary policy with the goals of achieving price stability and low unemployment.
The central banks of other countries generally have similar authorities and goals. Some central bankers and other experts and observers have speculated that the widespread adoption of cryptocurrencies could affect the ability of the Federal Reserve and other central banks to implement and transmit monetary policy, and some have suggested that these institutions should issue their own digital, fiat currencies.
The mechanisms through which central banks implement monetary policy can be technical, but at the most fundamental level these banks conduct monetary policy by regulating how much money is in circulation in an economy. Currently, the vast majority of money circulating in most economies is government-issued fiat money, and so governments particularly credible governments in countries with relatively strong, stable economies have effective control over how much is in circulation.
However, if one or more additional currencies that the government did not control such as cryptocurrencies were also prevalent and viable payment options, their prevalence could have a number of implications. The widespread adoption of such payment options would limit central banks' ability to control inflation, as they do now, because actors in the economy would be buying, selling, lending, and settling in cryptocurrency.
Central banks would have to make larger adjustments to the fiat currency to have the same effect as previous adjustments, or they would have to start buying and selling the cryptocurrencies themselves in an effort to affect the availability of these currencies in the economy. Because cryptocurrency circulates on a global network, the actions of one country that buys and sells cryptocurrency to control its availability could have a destabilizing effect on other economies that also widely use that cryptocurrency; in this way, one country's approach to cryptocurrency could undermine price stability or exacerbate recessions or overheating in another country.
For example, as economic conditions in one country changed, that country would respond by attempting to alter its monetary conditions, including the amount of cryptocurrency in circulation. However, the prescribed change for that economy would not necessarily be appropriate in a country that was experiencing different economic conditions. The supply of cryptocurrency in this second country nevertheless could be affected by the first country's actions.
Another challenge in an economy with multiple currencies—as would be the case in an economy with a fiat currency and cryptocurrencies—is that the existence of multiple currencies adds difficulty to buyers and sellers making exchanges; all buyers and sellers must be aware of and continually monitor the value of different currencies relative to each other. As an example, such a system existed in the United States for periods before the Civil War when banks issued their own private currencies.
The inefficiency and costs of tracking the exchange rates and multiple prices in multiple currencies eventually led to calls for and the establishment of a uniform currency. On June 18, , Facebook announced that, with 28 other members, it had founded the Libra Association , which planned to launch a new cryptocurrency, called Libra.
President Trump and Treasury Secretary Mnuchin raised concerns about the Libra project, as did several Members of Congress during Senate Banking Committee and House Financial Services Committee hearings, although some Members were more welcoming of efforts to advance financial innovation. As Congress considers its policy options regarding Libra, the proposal's future is uncertain.
The Libra Association still has to develop the systems necessary to create, distribute, and allow payment in Libra. Furthermore, it has stated it will not make Libra available until regulators' concerns are addressed. To date, governments Venezuela excepted generally have not been directly involved in the creation of cryptocurrencies; one of the central goals in developing the technology was to eliminate the need for government involvement in money creation and payment systems.
However, cryptocurrency's decentralized nature is at the root of certain risks and challenges related to its lack of widespread adoption by the public and its use by criminals. These risks and challenges have led some observers to suggest that perhaps central banks could use the technologies underlying cryptocurrencies to issue their own central bank digital currencies CBDCs to realize certain hoped-for efficiencies in the payment system in a way that would be "safe, robust, and convenient.
Much of the discussion related to CBDCs is speculative at this point. The extent to which a central bank could or would want to create a blockchain-enabled payment system likely would be weighed against the consideration that these government institutions already have trusted digital payment systems in place.
Because of such considerations, the exact form that CBDCs would take is not clear; such currencies could vary across a number of features and characteristics. Nevertheless, some central banks are examining the idea of CBDCs and the possible benefits and issues they may present. Numerous observers assert that CBDCs could provide certain benefits. For example, some proponents extend the arguments related to cryptocurrencies providing efficiency gains over traditional legacy systems to CBCDs; they contend that central banks could use the technologies underlying cryptocurrencies to deploy a faster, less costly government-supported payment system.
Observers have speculated that a CBDC could take the form of a central bank allowing individuals to hold accounts directly at the central bank. Advocates argue that a CBDC created in this way could increase systemic stability by imposing additional discipline on commercial banks. Because consumers would have the alternative of safe deposits made directly with the central bank, commercial banks would likely have to offer interest rates and security at a level necessary to attract deposits above any deposit insurance limit.
One of the main arguments against CBDCs made by critics, including various central bank officials, is that there is no "compelling demonstrated need" for such a currency, as central banks and private banks already operate trusted electronic payment systems that generally offer fast, easy, and inexpensive transfers of value. A portion of consumers likely would shift their deposits away from private banks toward central bank digital money, which would be a safe, government-backed liquid asset.
Deprived of this funding, private banks likely would have to reduce their lending, leaving central banks to decide whether or how they should support lending markets to avoid a reduction in credit availability. In addition, skeptics of CBDCs object to the assertion that these currencies would increase systemic stability, arguing that CBDCs would create a less stable system because they would facilitate runs on private banks.
These critics argue that at the first signs of distress at an individual institution or the bank industry, depositors would transfer their funds to this alternative liquid, government-backed asset. Observers also disagree over whether CBDCs would have a desirable effect on central banks' ability to carry out monetary policy. Proponents argue that, if individuals held a CBDC on which the central bank set interest rates, the central bank could directly transmit a policy rate to the macroeconomy, rather than achieving transmission through the rates the central bank charged banks and the indirect influence of rates in particular markets.
Critics argue that taking on such a direct and influential role in private financial markets is an inappropriately expansive role for a central bank. They assert that if CBDCs were to displace cash and private bank deposits, central banks would have to increase asset holdings, support lending markets, and otherwise provide a number of credit intermediation activities that private institutions currently perform in response to market conditions. The future role and value of cryptocurrencies remain highly uncertain, due mainly to unanswered questions about these currencies' ability to effectively and efficiently serve the functions of money and displace existing money and payment systems.
Proponents of the technology assert cryptocurrencies will become a widely used payment method and provide increased economic efficiency, privacy, and independence from centralized institutions and authorities. Skeptics—citing technological challenges and obstacles to widespread adoption—assert cryptocurrencies do not effectively perform the functions of money and will not be a valuable, widely used form of money in the future. As technological advancements and economic conditions play out, policymakers likely will be faced with various issues related to cryptocurrency, including concerns about its alleged facilitation of crime, the adequacy of consumer protections for those engaged in cryptocurrency transactions, the level of appropriate regulation of the industry, and cryptocurrency's potential effect on monetary policy.
Table 1. Nelson, and David W. This report will use the term cryptocurrencies to refer to a specific type of digital or virtual currencies—currencies that only exist electronically—for which transfers of real value are validated using cryptographic protocols that do not require a trusted, centralized authority.
The report will use the more general terms digital currencies and virtual currencies where appropriate to refer to these broader classes of currencies that are digital representations of value but do not necessarily use cryptographic protocols. William J. Detailed examination of the blockchain technology underlying most cryptocurrencies; their secondary uses in investment products, such as in securities offerings and as the underlying assets in derivatives contracts; and certain international implications, such as their potential use to evade financial sanctions, are beyond the scope of this report.
Instead, where questions related to these issues may arise, this report will provide references to other CRS products. In addition, a general list of CRS products related to cryptocurrencies is included at the end of the report see Table 1.
Scott A. Clower, Money and Markets , ed. Walker, 4 th ed. Cambridge: Cambridge University Press, , pp. Throughout history, governments in various countries have failed at times to keep money sufficiently scarce. This failure generally results in high or volatile inflation wherein the country's money experiences large losses in value, leading to disruptions in economic activity.
Louis Review , vol. An Overview of the U. Financial Regulatory Framework , by Marc Labonte. Gerald P. Richard J. Susan Burhouse et al. In its report, the FDIC defines unbanked as meaning "no one in the household had a checking or savings account," and it defines underbanked as meaning "the household had an account at an insured institution but also obtained financial services and products outside of the banking system.
Aaron Schwartz et al. David Mills et al. The term wallet is also sometimes used to mean a user's public key or public and private key combination. Dylan Yaga et al. Hereinafter Yaga, Blockchain. Note on terminology: When discussing the exchange of one type of money for another, the term exchange rate is arguably more appropriate than the term price.
However, in this instance, this report will follow popular convention and use the term price , as the notion that a Bitcoin or any other currency is purchased by dollars during an exchange is essentially correct. Data retrieved from Federal Reserve Bank of St. Data retrieved from blockchain. Note on terminology: Sometimes media or even cryptocurrency industry groups and participants will refer to this value as market capitalization.
This is a potentially confusing and misleading use of a term that refers specifically to the value of a private company. In this instance, the report uses the term value in circulation , but the reader should be aware that other sources may use market capitalization to refer to this concept. The problem with this measure it that it is a count of how many times two parties have exchanged Bitcoin, not a count of how many times Bitcoin has been used to buy something. Some portion of those exchanges, possibly a significantly large portion, is driven by investors giving fiat currency to an exchange to buy and hold the Bitcoin as an investment.
In those transfers, Bitcoin is not acting as money i. Data retrieved from bitcoin. Visa, Annual Report 9 , p. Specifically, financial institutions offer an array of services, and the fees they charge are not always expressly linked to individual transactions. In addition, payment systems themselves differ in terms of services provided and costs incurred. Furthermore, analyzing the costs of this system in a way that is comparable to the cost structures of the cryptocurrency industry creates additional challenges.
For example, see Fumiko Hayashi and William R. In the United States, banks and nonbank financial institutions are subject to robust regulatory frameworks that mitigate but may not wholly eliminate these risks. Eric Weiss and Rena S. John O. McGinnis and Kyle W. Willliam J. Kyle Croman et al. Karl J. Steven Goldfeder et al. Hereinafter Goldfeder et al. Richard Wright et al. The U.
Jennifer Moffit, "The Fifty U. Hereinafter Moffit, "The Fifty U. Note: The guidance further indicates that when an employee is paid in virtual currency, the payment will be taxed as wages. CRS was unable to find evidence that any substantive number of workers are being paid wages in cryptocurrencies; thus, this report focuses on the capital gains tax obligations.
United States v Coinbase, Inc. Christian Borek and Allen Sullivan Jr. This report will focus on consumer protection laws. Potentially applicable federal or state civil and criminal fraud statutes are beyond the scope of this report. Matthew E. Kohen and Justin S. Murphy and M. Maureen Murphy. Federal Reserve Bank of St. Louis, "St. Hence the more general nomenclature of central bank digital currencies, as opposed to cryptocurrencies.
Hereinafter Prasad, Central Banking. Topic Areas About Donate. Cryptocurrency: The Economics of Money and Selected Policy Issues December 7, — April 9, R Cryptocurrencies are digital money in electronic payment systems that generally do not require government backing or the involvement of an intermediary, such as a bank. Download PDF. Download EPUB. Tables Table 1. Summary Cryptocurrencies are digital money in electronic payment systems that generally do not require government backing or the involvement of an intermediary, such as a bank.
Introduction In , an unknown computer programmer or group of programmers using the pseudonym Satoshi Nakamoto created a computer platform that would allow users to make valid transfers of digital representations of value. The Functions of Money Money exists because it serves a useful economic purpose: it facilitates the exchange of goods and services.
Traditional Money Money has been in existence throughout history. No or Limited Role for a Central Authority: Intrinsic Value Early forms of money were often things that had intrinsic value, such as precious metals e. Government Authority: Fiat Money In contrast to money with intrinsic value, fiat m oney has no intrinsic value but instead derives its value by government decree. Banks: Transferring Value Through Intermediaries Banks have played a role in another evolution of money: providing an alternative to the physical exchange of tangible currency between two parties.
The Electronic Exchange of Money Today, money is widely exchanged electronically, but electronic payments systems can be subject to certain difficulties related to lack of scarcity a digital file can be copied many times over, retaining the exact information as its predecessor and lack of trust between parties. Cryptocurrency: A New Money? HTML client has certain restrictions related to the access to the local files.
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Bitcoin advanced for a third session on Wednesday, edging closer to its record highs of that spurred a global mania among investors and. +Follow. December 8, , AM PST Holders of large amounts of bitcoin are often known as whales. And they're becoming a worry for. Bitcoin's surging price has driven private-investor demand for derivatives tracking the virtual currency. December 27, , PM PST.