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Cryptocurrency: The Changing Ecosystem

The Power of Cryptocurrency Judy Romano

In the past, Bitcoin and other cryptocurrencies were jeered, sneered and cheered, and mostly ignored by institutional investors and businesses.

A Changing Mindset: CEO Jamie Dimon’s interviews and J.P. Morgan Chase’s business decisions are representative of the evolving institutional mindset.

  • 2017: Quoted as saying, “If you’re stupid enough to buy it [Bitcoin], you’ll pay the price for it one day.”
  • 2019, J.P. Morgan Chase announces they are the first major U.S. bank to create a cryptocurrency.
  • January 2021: Quoted as saying, “[Bitcoin] competes with gold as an “alternative” currency.”

The U.S. has the most blockchain patents filed compared to other countries, and 50% of those patents deal with FinTech, cryptocurrency trade, storage, and business use.

Between the Lines:  Bitcoin and other Cryptocurrencies have continued to gain popularity and are becoming part of daily life and create business opportunities. In 2019, $31.2 billion worth of retail products and services were purchased using cryptocurrencies by Americans. And Bitcoin’s biggest backers are Millennial men who live in cities and make more than $75000 a year.

PayPal looking to move to the front of the eCommerce line, announced they would be the first major company to tap into this growing consumer market. Traditional PayPal users accounted for 74%—$23.1 billion of the $31.2 billion. So far, 26 million merchants in the U.S. will take cryptocurrencies as payment.

The Impact:  Companies need to prepare for the advent of mainstream digital coins. Cryptocurrencies have several benefits for companies, including:

  • More Payment Options for Customers: The e-wallets such as PayPal will do for cryptocurrency what they did for fiat money. They made it easy for people to instantly access their money when they wanted to purchase a product or service.
  • No Intermediaries: Businesses will save on transaction fees.
  • Lightning-fast and Near-instantaneous Transactions: Businesses that integrate cryptocurrency into their payment methods will be able to have access to their asset instantly without having to go through the traditional currency transfer process.
  • Improved Security: Cryptocurrency uses blockchain technology for transactions.
  • Less Credit Card Fraud:  Bitcoin and other cryptocurrency transactions cannot be undone once they are made, preventing most credit card fraud.

The Barriers: Businesses need a stable, regulated system for accepting Bitcoin and other cryptocurrencies.

Cryptocurrency exchanges do not yet have a sophisticated reporting ecosystem. Accurate and transparent reporting of both buy and sell activities is the responsibility of businesses. Without a standardized and accurate exchange reporting system, filing corporate taxes correctly will be difficult.

The required information for tax filing purposes is very similar to those for stock filings. There are two accepted methods of reporting gains/losses:

  • First-In-First-Out (FIFO): The coins the company purchase first are sold first.
  • Specific Identification: The company can choose the specific coins that it will sell in each transaction regardless of when the coins were acquired.

Bitcoin and other cryptocurrencies have been designated as financial investments and have to be reported on annual federal tax returns. Detailed record keeping helps determine the most advantageous method for tax liability calculations. 

Blockchain-based financial networks are attractive to criminals because they do not require users to identify themselves. Governments and businesses do not have insight into the ecosystem. Several regulations have been proposed, including:

  • Regulators are considering starting the tracking at the point the cryptocurrency is converted to U.S. dollars.
  • Transactions amounting to $10,000 or more would have to be reported to the Financial Crimes Enforcement Network (FinCEN).

Customers are not ready for mass adoption. According to a Harris Poll, 9% of American adults own bitcoin. Those between the ages of 18 and 34 had the highest bitcoin awareness, familiarity, perception, conviction, and propensity to purchase and own Bitcoin. Other findings included:

  • Awareness has increased from 77% (Fall 2017) to 89% (Spring 2019)
  • Familiarity has increased from 30% to 43%
  • Perception of ‘Bitcoin as a positive innovation in financial technology’ has increased from 34% to 43%
  • Conviction that most people will be using bitcoin in ten years has increased from 28% to 33%
  • Propensity to purchase bitcoin in the next 5 years has increased from 19% to 27%

The Bottom Line: The promise of cryptocurrency for business use is a few years away before it can be scaled and integrated into everyday business

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