One of the prime reasons why embedding Bitcoin in our daily life has become very difficult is owing to the fact that we are not equipped with the technology to monitor the transactions. Even if we do, taxation on these transactions will be complicated and would require more than just mapping the profits/exchanges between individual persons. With Bitcoin ecosystem still in its nascent state and governments still finding a way to put in place the perfect regulatory framework, the privacy of the network will be an aid for money laundering. Owing to this, Florida lawmakers are considering a new legislation that aims to stop virtual currency dealers who indulge in money laundering activities. The bill, sponsored by Miami-Dade Representative Jose Diaz, has already passed through the state’s House Appropriations Committee. Let’s dive deep into the details of the bill and its implications:
The bill for virtual currency money laundering:
Monetary concealment has been a major problem for many states across US, that has called for severe measures to stop the illicit activity. For Florida, the need for such a measure arose with the case of Michel Espinoza, a man charged for selling $1,500 worth of illegally transmitted bitcoins to undercover police. However, Espinoza’s case was dismissed because the judge considered bitcoins as a form of property. The officials weren’t pleased with the result of the Espinoza trial and are appealing the judge’s decision. Hence the bill that is being supported by the Miami-Dade Cybercrime unit will describe Bitcoin as a “Monetary Instrument” which allows them to prosecute criminals using virtual currencies for money laundering.
Miami-Dade State Attorney Katherine Fernandez Rundle said:
“This legislation makes sure that traffickers and fraudsters can no longer try to use internet-based currencies to hide and move their ill-gotten gains”
Bitcoin statuses differ across US:
The current Florida law defines “monetary instruments” as coin, US or foreign currency and checks. If the bill passes, it will mean that Bitcoin would be added to the definitions of “monetary instruments” under Florida’s money laundering act. Each state of US has different definitions for Bitcoin and that is due to lack of better resources for monitoring. The lack of general consensus amongst the states has made legal issues very painful to handle. One such ambiguity is the Anthony Murgio lawsuit where the judge declared Bitcoin as money. The Federal Judge Alison Nathan stated:
“Bitcoins are funds within the plain meaning of that term — Bitcoins can be accepted as a payment for goods and services or bought directly from an exchange with a bank account. They therefore function as pecuniary resources and are used as a medium of exchange and a means of payment”
Would this prove out to be detrimental to Bitcoin:
While recognizing Bitcoin as a monetary instrument is a big positive for the cryptocurrency as it means the currency has indeed achieved mainstream adoption, the step might have negative implications. The move comes out of necessity to regulate the cryptocurrency in cases of money laundering. This might paint a general opinion that the currency has been used too much for money laundering which is actually not the case. Reports suggest that terrorist funding and money laundering are more prevalent through actual cash than any cryptocurrency. However, this is would be one of the first steps to diligently regulate the cryptocurrency and hopefully promote adopting it on an institutional scale.
The greatest hindrance to the development of innovation into a full-fledged functioning concept is the chain of regulation that hampers it. Blockchain enthusiasts and major tech giants have heralded ledger based technology as path breaking and something that holds great potentiality in terms of applications. This has resulted in a host of Fintech startups taking interest in Blockchain and developing applications that can replace the existing legacy modules. Europe has been one of the central hubs of such innovation and the growing turmoil involving various Geo-political-economic issues has only helped the cause. Recently, Bitcoin.com reported on European Securities and Markets Authority (ESMA) opinion to ban blockchain platforms. However on Feb 7th, ESMA released a report contradicting the post. Let’s dive into further details of the report:
ESMA considers Blockchain regulation premature:
The European market regulatory agency has revealed that Blockchain Technology is in its nascent stages and regulating it would be premature. This could be deduced owing to the news that EU itself is thinking of launching crytpotcurrency wallets based on ledger technology. With Blockchain Technology facilitating for transactions in quick time and easing the way transactions can be verified across borders, EU considers regulation at such an early stage might hurt the innovation.
Building the framework for later stages of Regulation:
The Distributed Ledger based technology is currently being used for rewriting financial transactions in the most simple and efficient way. Apart from transactions, many firms have already employed Blockchain in post trade processing as it offers reduced costs. Since financial transactions and trade processing do require good amount of compliance, monitoring such support framework has to be made easy. Hence major efforts would be directed towards building a framework that supports Blockchain technology and also ensures regulation in financial transactions.
Why regulation would be important in the future:
It is true that regulation cannot understand or catch up with the speed of innovation but at the same time, it is very important to respect the safeguards that are put in place for every system in the form of regulations. Looking forward it is evident that Blockchain would play a major role in Transactional economics, post trade processing, identity verification and tracking of resources on a broader scale. With good amount of disruption to come, it is imperative that regulation that will monitor the technology is to be in place. Hence ESMA believes that the industry should work towards solutions to address the challenges posed by technology for keeping in mind the future consequences.
The problem with disruptive technology is that many a times, it affects the legacy systems rooted deeply into the ecosystem. The existing systems can’t catch up with the developments and end up tainting the innovation. Over a period of time, eventually the system accommodates the technology; but the real fear is in not letting it hamper further innovation. This is exactly what is happening with Bitcoin and IRS in USA. Bitcoin is all set to transform the existing monetary system and IRS is struggling to still acknowledge Bitcoin as a currency or as an asset. Instead it has attacked major Bitcoin exchanges and indirectly accused Bitcoin Users of Tax Avoidance. Let’s look into what exactly happened and how IRS should probably go about monitoring cryptocurrencies:
Coinbase fights IRS summons:
IRS issued guidance in March 2014 concerning income from bitcoin and “virtual currencies”. However, there has been no enforcement mechanism to ensure that bitcoin income is actually reported to the IRS. Having failed to create an enforcement mechanism, the IRS is taking a brute-force approach. The John Doe summons authorized on 30th November demands that Coinbase provide complete transaction records for all users between 1st January, 2013 and 31th December 2015. If the IRS succeeds in forcing Coinbase to turn over their records, this would be a massive invasion of privacy and guilt by association. Coinbase has filed to fight against these summons and the proceedings are underway.
Core of the problem:
Most of the experts feel that the problem lies in reporting Bitcoin transactions. There is no exact mechanism to monitor the filings and hence the problem arises. The reporting requirements aren’t exactly clear and compliance is very complicated. Buying and selling of a Bitcoin will result in a profitable or loss transaction. For bitcoin that was purchased or received on different dates, the value of each input comprising a transaction is subject to a gain or a loss. Reporting numerous transactions of this type requires upgraded technological framework. This framework has to accurately calculate the values necessary for reporting to the IRS adhering to compliance.
Possible solution for the problem:
Experts believe that to counter this problem, IRS needs to first update its tax guidelines. Secondly, a software system or computer protocol needs to be developed so that any user or investor of cryptocurrency can compile a report at the end of the fiscal year. The report shows unrealized gains and losses from their entire virtual currency portfolio. This can be handed to accountants in a format that is easily understood and accurate. This can in due course of time evolve to become a national standard.