Crypto Currency Mainstreaming

In conversation with several crypto experts, the crypto investors are all looking for the same thing - volatility, not value. The currency is not used for commerce or making payments. The investors see the currencies as a roulette wheel painted to look like a carousel. Around and round it goes.  The investor just needs to guess when to get on and when to get off. None are imbued with perpetual motion. All roulette wheels and carousels rides come to a stop.

The carnage of fiat cryptocurrencies far exceeds the few successes. Of the 10,955 currencies all but a few hundred have ceased trading.[i] The earlier investors and promoters made money. The investors and users are left holding a wallet filled with useless electrons. A vast majority of these currencies are nothing but crypto pump and dump.

Yet the experiments continue and presence of crypto in investing and commerce has been growing steadily.

There are 10,955 cryptocurrencies.

As of March 29, 2021 there is US$1.83 trillion in cryptocurrencies.

The 24-hour trading volume 101 Billion. 

On a total of 198 exchanges.[ii]

A sector of the investing public believes (an act of faith) that these are the future currencies of commerce and investing. The size of the crypto market, no matter my insight, continues to grow. Many merchants are now accepting the major cryptocurrencies for transactions including Microsoft, AT&T Overstock, Wikipedia, Norwegian Air, Alza, One Shot Hotels, Home Depot, and Virgin Galactic.

Mind you, most businesses immediately convert the crypto to a stable currency. With Bitcoin increasing in value 10 fold in one year then dropping from US$58,000 to US$47,700 in 19 hours,  that volatility, for commercial transactions purposes, must be hedged or eliminated.

Nonetheless, as crypto is going mainstream the regulators have now told the world they intend to treat crypto as an adult currency. 

As such, the US in January of 2021 expressed its very clear intention to require US residents to file an FBAR (Foreign Bank Account Report).[iii]  Why? Well, who knows on what server your electronic wallet might exist? It could be in Estonia, Morocco, Belarus, or behind a convenience store in New Jersey.

It is widely expected that as soon as guidance is given by the IRS and FinCEN on the applicability and enforcement of the FBAR rules on crypto, all foreign exchanges will be required to file under The Foreign Account Tax Compliance Act (FATCA).[iv]

In January 2020, the EU’s Fifth Anti-Money Laundering Directive (5AMLD) came into effect. 5AMLD brings cryptocurrency-fiat currency exchanges under the scope of EU anti-money laundering legislation, requiring crypto exchanges to perform Know Your Customer/Customer Due Diligence (KYC/CDD) on customers and to fulfil standard reporting requirements. On September 24th, 2020, the EU Commission published a proposal for the regulation of crypto-assets: the “Markets in Crypto-Assets Regulation” (MiCA). Once adopted and in force, the MiCA will be directly applicable law in all EU member states and regulate all issuers and service providers dealing with crypto-assets. In December 2020, 6AMLD came into effect: this directive made cryptocurrency compliance more stringent by adding cybercrime to the list of money laundering predicate offences.

The nations of Algeria, Bangladesh, Bolivia, Ecuador, Iceland, Morocco, Nepal, North Macedonia, Pakistan, Saudi Arabia, and Vietnam have banned cryptocurrency for one of three reasons: capital flight, corruption/fraud or incompatibility with Sharia Law. Beijing, since 2017, has abolished initial coin offerings and clamped down on virtual currency trading within its borders, forcing many exchanges overseas. More recently, China's Inner Mongolia region plans to ban cryptocurrency mining projects and shut down existing activity in a bid to cut down on the energy-consuming operation. Bitcoin mining consumes an estimated 128.84 terawatt-hour per year of energy, more than entire countries such as Ukraine and Argentina. For the same reason, Venezuela has banned mining bitcoins in any location where the electricity is subsidised.

As crypto has been regulated or banned, the base of operations for offerings and exchanges  has moved to less regulated jurisdictions. Clearly, the inclination of the operators and users is  to avoid the expenses required to comply.

As crypto is forced into the financial mainstream by the regulators, the cost of operations for the crypto offerings and exchanges is going to increase. The requirements of compliance will be little different than current commercial banks and money transfer organisations.

Will the increased cost of mainstreaming crypto impact desirability and values of crypto?  The actions of industry participants project the desirability of crypto will erode. Will crypto still be popular with some willing to pay higher transaction fees to avoid taxes, participate in the underground economy, and evade currency controls? Absolutely. 

As cryptocurrencies become an acceptable currency in the adult world of finance, they have to play by the rules of the adult world of finance. What was once a disruptive force has become a mature currency choice. While asset backed crypto has a future, fiat based crypto future is, at best, unsettled.

Footnotes:

[i] List of nearly all cryptocurrencies - https://coinranking.com/

[ii] Coin Market Cap - https://coinmarketcap.com/all/views/all/

[iii] An FBAR is the US Foreign Bank Account Report, also known as FinCEN Form 114. A United States citizen or entity that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds US$10,000 at any time during the calendar year. The penalties for failure to file are substantial.

[iv] The Foreign Account Tax Compliance Act (FATCA), requires that foreign financial Institutions and certain other non-financial foreign entities report on the foreign assets held by their US account holders or be subject to withholding on withholdable payments.

L. Burke Files DDP CACM
Mr. Files is an international financial investigator and due diligence expert who has run cases in over 130 countries and has visited over 100 countries. Mr. Files has tackled investigations running from a few hundred thousand dollars to over 20 billion. Along the way, he became familiar with the knowledge of what people need to do, for due diligence, preventing corruption, and to avoid helping criminals launder money. He brings this experience of hands-on investigating and problem-solving experience to his lectures on Due Diligence, AML, and Anti-Corruption. Prior to founding FE&E, Inc., he served as the Director of Corporate Finance for American National an investment bank focused on development stage venture capital. He was also employed by Oppenheimer/Rouse as a commodities specialist trading customer accounts in Agri-Business, 24-hour gold and silver, and foreign currencies. Mr. Files has authored six books, and many white papers and articles. He has been quoted in major publications including The Guardian, The Financial Times, Forbes, US Newsweek, and more. He is the author of the award-winning book Due Diligence For The Financial Professional 2nd Edition. Mr. Files serves on the board of directors for several private companies, funds, and non-profits. The companies include Unicus Research a specialty advisory service for fund managers and family offices, SGS Glazing a specialty glazing design and estimating firm, and NSI a premium spirits company.