Virtual Currency: Looking Forward

 Preface: If you don’t believe it or don’t get it, I don’t have the time to try to convince you, sorry. – Satoshi Nakamoto

Virtual Currency: Looking Forward

Credit: Donald J. Sauder, CPA | CVA

The virtual currency ideal began conceptually in the early 1980s when David Chaum, while studying at Berkley, wrote a research paper on online advancement possibilities for economic payments and transactions with a system called eCash. In the early 1990s, he developed a second system called DigiCash that used virtual processes to make economical transactions.

As the forerunner of the virtual currencies, DigiCash was unable to scale successfully as the company lacked cohesive direction, partnerships with large financial institutions, and the fact that the internet and smartphone technology had not yet fully integrated with e-commerce. The archetype DigiCash disappeared from the virtual currency space after a Y2K coding glitch, and the intellectual property was sold, with an interesting footnote, to the ubiquitous online virtual payment space PayPal.

One defining feature of a virtual currency is that it is not issued by a central authority and backed by a central bank or authoritative organization. The United States government assigns responsibility for counterfeit money and other currency-related regulation to the United States Secret Service. Therefore the faith to transact in US dollar currency is maintained confidently without substantial fear of counterfeits.

On the contrary, virtual currencies are consequently effectively immunized from authoritative regulations, have no governing group to prevent loss of confidence, and are the Chief Shehaka’s developing western frontier of speculative virtual contrarians. Financial regulators are increasingly opposed to virtual currencies since they facilitate cross-border transfers, money laundering, tax avoidance, and other fraudulent financial practices.

With the omission of an authoritative security framework with virtual currencies lacking such inherent and government umbrella protections, certain risks are inherent in any virtual currency transactions, as outlined as follows.

Hackers can drain virtual currency wallets, and users and investors are entirely reliant on computer security systems and third-party systems. This lack of substantial internal control can lead to stolen passwords or compromised passwords with the same or similar effect as being denied access to an impenetrable vault with valuables. If a virtual currency wallet key is lost from operational risks with cryptography or stolen perhaps, the original account owner’s virtual assets will be lost forever, devoid of remedial measures. There are no safety nets or reversible transactions in the virtual currency system.

Market risks are also present with virtual currencies, and a lack of transactional liquidity and market manipulation can result in speculative volatility to the virtual asset value. Tax risks with Foreign Bank Account Reporting with virtual currencies stored abroad are also applicable and necessitate compound tax compliance factors.

While the Federal Reserve doesn’t have the authority to supervise or regulate virtual currencies, such as Bitcoin, Ethereum, Ripple, Litecoin, Tether, and EOS, it has not stopped virtual currencies from progressing and creating wealth for miners and speculative currency investors. Interestingly, the true legend of Bitcoin is the person credited with developing it, Satoshi Nakamoto may not be a real person, as no one has every met them. The name is likely a pseudonym for the creator or creators of Bitcoin who wish to remain anonymous.

Virtual currencies are here to stay. Legendary investor Jim Rogers has stated that virtual currencies will likely meet government defense departments’ force one day in the future. At that time, economies will experience a currency transformation, unlike any in human history.

Instituting appropriate compliance with relevant tax laws on pertinent virtual currency transactions, and being wary of the risk(s) is therefore advised. Please contact your tax advisor if you own virtual currency.

This article is general in nature, and it does not contain legal advice. Please contact your accountant to see what applies in your specific situation.

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