In its nearly 12-year history, bitcoin — the world’s oldest and largest cryptocurrency — may finally be seeing all its stars in alignment.
As the historically unpleasant 2020 ends with bitcoin blowing past its all-time highs, skyrocketing into the stratosphere of $23,000 and beyond, bitcoin and its many blockchain descendants that make up the cryptocurrency sector are set to start the new year on their strongest footing yet. Just as bitcoin turns 12 years old on Jan. 3.
As Forkast.News has been reporting throughout 2020, regulators in the United States are creating a legal framework for cryptocurrencies to operate in — crypto-friendly faces could be found at the Office of the Comptroller of Currency, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). Traditional banks and other financial institutions are now buying up bitcoin by the hundreds of millions as assets to invest in. Even PayPal — formerly an arch nemesis of cryptocurrency infamous for shutting down accounts with the slightest hint that they were engaged in crypto trading — now lets its clients trade crypto.
Extraordinary times indeed. But the 2020 bull run for bitcoin and other cryptos does not mean they will run free.
Bring on 2021. Here are three Forkast.News predictions on what the new year will hold.
1. The tax man cometh for your crypto coins
As crypto hits record highs, many people are going to look to cash out and realize their capital gains. And that’s when the tax man will want a piece of the action.
Where do whales go to get tax advice? Just like any high-net worth individual, one of the Big Four accounting firms. And as PwC notes in its recent Global Crypto Tax Report, tax authorities around the world have begun issuing very granular guidance on what constitutes a taxable event. Tax authorities are interested in everything from crypto staking and DAOs to crypto loans as they know there could be big money involved and they want a cut. Watch out whales and crypto influencers.
But PwC says there’s still plenty of work to do, as many tax authorities still have gaps in their guidance.
“As this is such a new industry there is still a bit of a blank slate when it comes to tax policy,” Peter Brewin, Tax Partner at PwC in Hong Kong, said in a statement on the report. “By highlighting what different jurisdictions are doing we can start conversations that can lead to better laws being developed in this area.”
And the countries with the best defined crypto tax laws? Malta, Australia, Switzerland, Singapore and Hong Kong. Coincidently, or not, jurisdictions where the industry already clusters.
2. Crypto derivatives exchanges get professional
Where exactly is Binance? Somewhere not even known to Carmen Sandiego. Where is Huobi? You might say China, but actually it flies its corporate flag in Seychelles. And Sam Reed, CTO of BitMEX? Arrested.
Crypto derivatives exchanges like to fly corporate flags as colorful as that of Seychelles’ five bands. Blue, yellow, red, white, and green — just anywhere but home.
This isn’t going to work for big, institutional investors. They need to know where clients’ money is heading. Down the rabbit hole, or into a corporation with a structure like a Russian nesting doll just isn’t going to work. Open interest, total number of outstanding derivative contracts, on bitcoin futures via derivatives marketplace CME has recently been at record highs as institutional money pours in.
But it’s not like regulators haven’t signaled that they are all for regulated crypto derivative exchanges. CFTC Chair Heath Tarbert has said that crypto derivatives aid in “price discovery, hedging and risk management.” All the while, the CFTC’s strategic plan highlights regulators’ need to address the risks and opportunities arising from what they call “21st century commodities.”
What exactly is the holdup? Institutional money wants to invest, regulators are giving the tentative green light. So why aren’t the biggest crypto derivatives exchanges getting into this game? There’s obviously money to be made. Crypto margin trading.
Margin trading is common at any retail equities broker. The ability to give credit-worthy traders low interest loans to buy and sell equities and commodities creates extra liquidity in the market. But the unregulated world of crypto derivatives trading, where 100x margin is the norm, has been targeted and called out by regulators. In the U.K., and other jurisdictions, it’s outright banned. But whom does that stop? Very few people. All that’s needed is a VPN to hop over these pesky prohibitions. But this really doesn’t impress regulators, and goading them by establishing shop offshore and encouraging VPN use will only make the government agencies come down harder — while discouraging institutional money from coming in.
So 2021 will likely bring a new era of crypto exchanges cooperating with regulators, because they are realizing they might be better off and richer for it.
3. Stablecoin growth, but with heightened regulatory scrutiny
The rise and rise of stablecoins, especially stablecoins not denominated in U.S. dollars, is something we’ve covered extensively this year at Forkast.News. What began the year as a $5 billion market cap industry will likely end it just shy of $25 billion. Forget about the former Libra, now Diem’s failure to launch. Stablecoins are here right now and being used today. No need to wait for Facebook.
Growth of non-USD denominated stablecoins has been an interesting chapter of this story. If there’s no nexus to the U.S. why denominate the transaction in that currency — potentially needlessly exposing the party and counterparty to U.S. regulation. This was one of the ideas behind central bank digital currencies (CBDCs) as a tool of more liquid remittances, a re-ordering of the money supply, a shift to digital money as opposed to digitized money. But that’s a long way off. Stablecoins are already being used for remittances in Latin America, according to analysis by Chainalysis, as an alternative to USD-denominated payment corridors.
But with this growth comes the need for regulation. Forkast.News has explored the proposed STABLE Act which proposes to replace the regulatory framework that governs stablecoin issuance swapping money transmitter laws with requirements for bank licenses. Naturally, many prominent stakeholders in the industry aren’t happy with the proposal and some states might clap back pointing out that their existing money transmitter framework is good enough. After all, many stablecoin issuers try to go above and beyond to be compliant. The fact that this bill comes from three left-leaning Democrats and a law professor is going to make an easy target for Republicans.
But some form of regulation is going to happen, and 2021 may not be too soon. There’s a growing bi-partisan consensus that the industry needs to be regulated for it to grow and attract capital to the U.S. This proposed bill might not see the light of day, but something surely will. After all, nobody is quite sure how Bitfinex mints all those stablecoin tokens from what could well be thin air. And it’s probably no accident that the T in the “STABLE” Act — which stands for “Tethering” — contains the name of the controversial stablecoin Tether.
Stablecoins aren’t going away any time soon as they have significant utility. It’s just that a $20-billion-plus industry with potentially catastrophic excesses invites government scrutiny and regulation.