Are Cryptocurrency Exchanges Regulated? And 4 More Questions

Last week was so much fun answering 15 Common Cryptocurrency Questions, that I thought I'd do it again. Here are 5 more common questions with my answers.

Which Cryptocurrency to Buy?

There are 2 answers to this, the objective and the subjective. One is what you should think about before you buy and then what I buy myself.

  • The objective answer: The first thing to think about is why you want to buy cryptocurrencies. The fad aspect has mostly worn away during the bear market but there are still great things going on in the world of cryptocurrency.

Crypto Privacy Coins List? Or Crypto Remittance?

So do you have an area of crypto that interests you? For instance, if you like crypto as an answer to the constant invasion of our privacy, then privacy based projects like Monero, ZCash, Grin, or DASH with its PrivateSend feature are projects for you to consider.

Or maybe you have to move money overseas like for remittances to family and friends in another country where you'd want to look at Bitcoin, Litecoin, Stellar Lumens or DASH.

Perhaps you want to move money but bigger amounts of it and you think SWIFT is a terrible mess. Then you'd want to look at Bitcoin or XRP.

Possibly, you like decentralized applications so you want to buy in those building a platform for them like Ethereum, EOS, or Blockstack

I think you get the idea here, which is find what it is about cryptocurrency that speaks to you, research it and then buy the best project(s) that fit those goals.

  • Now for the subjective answer or Stu's answer to this question. In my view, everyone who wants to buy cryptocurrency should have some Bitcoin.

To me, having an aspect of cryptocurrency that acts as a medium of exchange or to pay for goods and services is important for adoption. So aside from Bitcoin, I think the best medium of exchange (MoE) currencies for smaller transactions like paying for your coffee are Litecoin and DASH, so I own those too. Then I speculate (truly it's only with money I can afford to lose) on 2 smaller projects.

Develop your own philosophy about where you think crypto can do the most good, research that area and follow it. Then buy, but remember all cryptocurrencies are high-risk investments with a chance for a total loss. And remember too, I'm not your investment advisor but this is how you should decide what to buy.

Can Cryptocurrency Replace Banks?

This is one of my favorite common questions. I wish the answer was Yes but I don't think so. Yet, cryptocurrency can do quite a few things to make banking better than it currently is.

Banks are doing a terrible job (mostly) at a very important role in our economy. Even Bill Gates once famously said that 'banking is necessary, but banks are not.'

There's a concept that's been around since the very beginning of Bitcoin when it was brought up by Hal Finney, recipient of the first Bitcoin transaction and one of the people many believe either is Satoshi or part of the group of programmers who called themselves Satoshi when they started Bitcoin. Hal passed away from Lou Gehrig's disease so we will never know but his idea of the 'Bitcoin bank' lives on.

Here is the beginning of that conversation from a very old Reddit post from 2015 that references 2010.

The big idea here is that Bitcoin will be the backing for banking like how banking worked before national currencies. It would be a medium of 'large scale' value transfer (not paying for your coffee like MoE cryptos like Litecoin). Banks will use it for cross-border settlement which is what SWIFT does now and/or for net transfers between banks that FedWire does now.

And it's not just Bitcoin either. Ripple, whose XRP is among the most controversial of all cryptocurrencies, is trying to replace SWIFT altogether.

As money itself becomes more digital, digital currencies and cryptocurrencies will become more important.

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Can Cryptocurrency Be Considered a Form of Money?

For something to be money, it needs to have 3 things:

  1. Be a unit of account
  2. Be a medium of exchange
  3. Be a store of value

Unit of account means that it's universally known what 1 dollar or peso or franc or Bitcoin is and it's used by people to account for good and services. People know what 1 BTC is or 1 ETH but it is not often used to account for goods and services, yet. It could be someday

Medium of exchange means you can trade it for goods and services. I had a client pay me for writing work in Bitcoin. I hope to get another someday......Some cryptocurrencies have MoE as their primary mission like Litecoin and DASH. Bitcoin is not really a medium of exchange in this way although it is (or will be) for higher value items.

Store of Value is most commonly identified with gold. Gold retains its value regardless of what its price in USD is at any given time and its value holds up over time. While volatile, Bitcoin is the best store of value of all the cryptocurrencies so far and it holds up pretty well.

So now that you know the 3 aspects of money? What do you think? Do you think they can be considered money? I think some of them can be and some of them aren't.

Are Cryptocurrency Exchanges Regulated?

Exchanges fall into one of 2 categories: Centralized Exchanges or Decentralized Exchanges. The difference is with a centralized exchange like Coinbase, there is a single point of failure. Their site can go down or get hacked and you can't get into your account or get your Bitcoin, buy more or sell any. Decentralized exchanges (Dex) have no single point of failure as they are mostly a peer to peer network trading digital assets so the holders have their own assets instead of the exchange. The most popular Dex is Shapeshift. Changelly, Waves, and IDex are also popular.

Most decentralized exchanges are not regulated but they are more like a p2p trading network and you are not holding your coins there. For centralized exchanges, some regulation is important and Bitwise did a detailed analysis of this and came up with the 'Real 10' exchanges. At the Real 10, all of whom are regulated, you have real volume numbers and 9 of them (not Binance) are registered with FinCEN as a money services business or MSB, an additional level of compliance.

If your exchange is part of the Real 10 like Coinbase, Kraken or Bitstamp, then your exchange is regulated. Other centralized exchanges and decentralized exchanges are NOT regulated so be sure you understand how they operate and always, always move your coins to a wallet you control after the transaction. This is the #1 rule for the security of your cryptocurrency.

Are Cryptocurrency Losses Tax Deductible?

Now as with all tax questions you have to ask your tax advisor. However, the guidance we've been given so far from the IRS is the following (and the IRS guidance with some questions and answers are in this link):

  • When you sell a cryptocurrency, for tax purposes it's treated the same as the selling of stock. This means you must take a capital gain or capital loss based on your purchase price. So YES, losses are deductible if you can document your purchase and sale prices on the Schedule D form used for Capital Gains/Losses.

  • If you mine the cryptocurrency yourself or participate in a mining pool for Bitcoin or Ethereum, then you must treat that as self-employment income.

So imagine if you are a part of a mining pool and you get 1/10 of 1 BTC or 0.1 BTC and it comes into your wallet when the price is $8,000 per BTC. This means the value of your mined portion is $800 (1/10 * Price), right? But then BTC drops from $8,000 to $6,000 where you sell (which it did and more during the 2018 bear market).

What happens now?

According to the IRS, you have 2 transactions: the mining and the sale.

The mining created $800 of self-employment income (Schedule C), while the sale created a capital loss of -$200 ($600-$800) for your Schedule D. Don't worry if you are confused, we all are. This is new ground for us as investors and for the IRS too. One of the best companies at helping with your crypto tax liability is TokenTax. Check them out if you have questions, friends tell me they are excellent but I have not used them myself.

 

 

About the author

Stu Stu Lustman, the author of this post, is a Credit Analyst by trade trying to bring Commercial Credit Analysis techniques to the world of Peer to Peer Lending. Check me out on Twitter, LinkedIn and Google+

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