AI And Crypto Can Help Each Other Improve

https://www.forbes.com/sites/digital-assets/2023/12/03/ai-and-crypto-can-help-each-other-improve/

AI and crypto complement each other in several ways

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Technology moves in cycles, and while AI might have superseded blockchain and cryptoassets in some circles and market discussions, the reality is that these field are increasingly inter-related. An example of this that has come to market recently is the paper by the Coinbase Institute, laying out the case for how blockchain and AI applications are incredibly well suited for working together. Yet another example, although one that has been controversial since launch – and more recently due to the drama surrounding Sam Altman – is the Worldcoin
WLD
; a token powered and governed by AI. Headlines only tell part of the story, and the connections run deeper than just a few headlines.

As AI becomes integrated within the corporate planning and capital allocation process, with 84% of executives stating plans to leverage AI for competitive advantages, how will these products and services be compensated? It is one thing to develop AI within a larger corporate structure, but for AI firms, how will stand-alone services make money? Especially for transactions and processes that are either 1) bot-to-bot, 2) happen instantaneously or outside of banking hours, or 3) only require fractional or micro payments due to volume, relying on traditional fiat systems might not always make sense.

In addition to these challenges, there are several unique characteristics that both AI and blockchain-based tokens (crypto) possess that make them a good fit for each other.

Crypto Is Money For LLM’s

At this point in time the large language models that form the foundation of the chatbots that have taken the business and wider world by storm are not able to obtain bank accounts nor use traditional payment rails on their own. Conversely, these AI programs can easily access funded wallets that are governed by smart contacts, or utilize the functionality embedded in DeFi protocols. The individuals or firms setting the strategy that the LLM is going to execute or otherwise work with can then be reviewed thanks to the transparency inherent in blockchain transactions.

Given the fact that crypto, especially bitcoin, remains a decentralized global medium of digital exchange, and that AI protocols remain global and operable 24/7, the utilization of crypto by AI actors also makes sense. Lastly, when ChatGPT was prompted to respond as to what type of currency an AI agent would use it responded that it would use digital or crypto currency, and cited the programmability, traceability, and decentralization of cryptocurrencies as positive attributes.

Crypto Can Help Decentralize AI

For all of the benefits that AI is situated to bring to multiple economic areas there are definitive concerns that are already threatening to throttle the continued development and expansion of these tools. While the drama at OpenAI continues to dominate the headlines the reality is that the policy conversation around has shifted toward more regulation and control. The over 100-page Executive Order issued by the White House about AI seemed to focus on the risk and perils of AI as a new and disruptive technology, including creating entirely regulatory agencies to oversee the sector.

The second largest economy in the world, China, has also attempted to draft regulations for AI that balance state oversight and control with private sector innovation. With the government, under the leadership of President Xi, having established a track record of enhancing state control of business and business policy, this balance might prove difficult to achieve. As American policymakers seek insights from Chinese policies on AI the result could be that two largest economies in the world prioritize government oversight versus private sector innovation in the AI space.

As a globally decentralized medium of exchange, crypto can provide a much-needed dose of decentralization in what is increasingly a policy conversation centered around centralized control and oversight.

Web3 Can Use AI To Improve

While the Web3 hype seems to have subsided as the AI market has gained momentum the fact remains that in order to succeed with mainstream adoption, the tokenized transactions and related approvals will need to be smoother and faster. Tokenization and blockchain underpinnings are well understood as fundamental to the success of Web3 applications, and AI can make use of both tools to improve the process. AI is not set to drive nor control the development of Web3, but can rather seek out and deploy efficiency solutions to help improve some of the clunkier parts of using crypto for every transactions that currently exist.

AI might be making most of the headlines now, but by leveraging crypto as well as advances in blockchain functionality, mainstream adoption for all of these tools can accelerate rapidly.

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2 More Reasons Why Crypto Tax Compliance Is Increasingly Difficult

https://www.forbes.com/sites/digital-assets/2023/11/28/two-more-reasons-why-crypto-tax-compliance-is-increasingly-difficult/

Crypto tax reporting is getting more complicated

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With all of the drama that has recently surrounded the crypto sector, most recently the resignation of CZ from Binance and the associated penalties and monitoring measures that will hamstring the firm going forward, tax compliance can seem like a tame concept by comparison. After all the crypto tax conversation has never been terribly straightforward for investors of any sizes, and more recent developments in the crypto sector have only made it more complicated.

Wrapped tokens, decentralized finance options, staked crypto , and the non-fungible token subsets of crypto have only made the tax conversations more complex and time consuming. As the IRS continues to prioritize tax revenues associated with crypto investors, proposed changes are set to amplify these pre-existing issues.

The looming legislative changes to Section 6045 (more on that below) have caused significant debate and conversation since these changes were initially proposed. Even after receiving over 100,000 comment letters during the comment period, the IRS seems set to enact these modifications as initially written. Fueled by convictions (or admissions of guilt at the very least) by two of the highest flying operators in the space, FTX and Binance, the IRS appears set to continue applying existing rules to an ever-expanding and changing asset class.

Let’s take a look at a two of the main things that will make crypto tax compliance more difficult than ever before.

Reporting Requirements Keep Changing

The postponement of regulation might seem like a good thing, but that is only part of the conversation. Specific to the crypto conversation, especially as PayPal continues to increase offerings in the space, the 1099-K reporting requirements have been modified for the second consecutive year, with the 2021 law already having been postponed previously, are worth looking into. Drilling into some of the edits and changes, the reporting requirement for issuing a 1099-K will increase from $600 to $5,000 for the 2024 tax year for 2025 reporting. If no other changes are taken the reporting threshold would drop back to $600 for the 2025 tax year; estimates are that if enacted at the $600 level an additional 44 million 1099-K forms would have been produced this year.

For crypto investors and entrepreneurs, as well as other entrepreneurs that rely on payment apps such as Venmo and PayPal this will result in a less burdensome tax reporting requirement for this year. Notwithstanding this relief, the fact remains that the IRS is seeking more information on payments made via these payment processors. When combined with the much greater information reporting requirements being asked of from crypto exchanges these are set to create a much more complex tax conversation for investors in the future.

Investors should continue to work tax professionals who keep up-to-date on these changes, as well are familiar with the nuances of the peer-to-peer payment ecosystem.

Trading Income Will Be Harder To Track

A large part of what determines taxable income is the income derived from trades and other transactions, and this is an area where the proposed Section 6045 changes are going to increase the complexity of tax reporting going forward. Many investors in crypto are already familiar with the commonly used First-In First-Out basis tracking methodology; this is also the cost basis methodology that often creates the largest tax liabilities, since older investments (normally) have a lower cost basis than more recent ones. The other option is specific identification, which is where the investor tracks the specific assets sold, and therefore can potentially minimize the liability owed for tax purposes.

This sounds like a simple solution, but specific identification tracking for crypto purposes is looking to be nearly impossible. To implement such an approach, the specific asset would need to be identified before the trade itself occurs, and not after the fact. This would seem like a simple process, but centralized crypto exchanges such as Coinbase are not currently equipped to provide such tracking.Even more complicating, if investors have used alternative basis tracking methodologies in the past and also have a FIFO based return from the exchange, the manual reconciliation process will occupy a large amount of time for the investors and tax practitioner.

Stated another way the reporting requirements that are being solidified are going to either create larger tax liabilities than anticipated or at the very least much larger workloads than originally thought.

Tax season is coming, and no matter what aspect of crypto is looked at, it is shaping up to an intense next year or so for investors, practitioners, and entrepreneurs in the space.

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Navigating Crypto Conversations: Thanksgiving And Giving Tuesday

https://www.forbes.com/sites/digital-assets/2023/11/19/navigating-crypto-conversations-thanksgiving-and-giving-tuesday/

Frankfurt, Hesse, Germany – April 17, 2018: Many coins of various cryptocurrencies

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As holiday gatherings and year-end gifting come to the front burner, here are some things crypto investors should keep in mind.

Crypto tax planning and preparation are getting plenty of attention with the IRS comment period just recently having closed on the proposed regulatory changes, but that is only part of the story. As the holiday season looms closer on a daily basis, there are sure to be table-top conversations about all sorts of the topics, and crypto will certainly be among them. In past years, mirroring the dramatic rise and fall in prices and market sentiment, crypto investors and advocates have either been celebrated or derided on such occasions. This year is set to be no different, with multiple crypto related stories playing out in the headlines, which includes how the recovery in crypto prices might impact charitable contributions and other year-end tax planning strategies.

Specifically this past year has a been a tumultuous one for the crypto space and those involved within it, whether as an investor, developer, or entrepreneur. On the one hand the continuation of lower price levels, compounded with the recently concluded drama of the FTX trial, has set a negative pall over the space. Regulatory crackdowns and public statements are sure to reignite questions as to whether the whole space is one giant scam, and investigations into even well-regarded firms like PayPal
PYPL
are not helping the optics of the sector. On the other hand the rapid adoption of blockchain and tokenization tools by various TradFi banking institutions in U.S. and abroad, coupled with the ever-increasing likelihood of both an ETH
ETH
and BTC
BTC
ETF are positive developments by any definition.

Let’s take a look at a topics and trends that crypto investors should be ready to discuss over the upcoming holidays.

Why The SEC Is Suing Everyone

To say that the SEC has taken an active role in enforcement actions during the past year would be a dramatic understatement. Especially confusing to some might be the seemingly rapid change in approach, from a hands-off approach for years, to one of seemingly cracking down on all market actors. Investors and crypto industry veterans are well versed with regards to the specifics driving these actions, but to outsiders it might seem like something of a mystery. Fortunately or not depending on perspective, the reasons underpinning this apparent heel-turn can be summarized by a few statements.

The SEC and other U.S. regulators and policymakers were caught off guard (some would say they were embarrassed) by both the spectacular collapse of FTX and the perception that U.S. policy had been influenced by the firm. Although the timing of these enforcement actions can be categorized as coincidental the reality is that, spurred on by calls from across the marketplace, regulators have taken a much more proactive approach. Another reason why the SEC seems to be involved in every enforcement action is that other regulatory bodies and agencies have taken a back seat to developing authoritative standards. The exception to this is the IRS, which has continuously expanded and refined tax guidance related to crypto.

In the meantime, however, it looks like the SEC will continue to be the leading regulator in this space, so negative headlines may continue to dominate the media.

How Price Recovery Impacts Tax Planning Strategies

Crypto investors have some cause to celebrate as 2023 enters the home stretch, a prices have rallied across the board. Bitcoin specifically is up 60% in 2023, ranking as one of the best performing assets of 2023. On top of the obvious good news that these price increases are for investors, it also has implications for year-end tax planning and charitable giving.

Tax loss harvesting for crypto is a practice where, put simply, investors sell coins, tokens, or NFTs that have fallen below where they were purchased (cost basis) to recognize those losses. For crypto specifically, wash sale rules do not apply (yet), so if investors believe in the project long term, these same cryptoassets can be bought back without further tax complications. These harvested losses can be used to offset other taxable income.

Charitable contributions connected to crypto have continued to increase, and with cryptoassets up significantly from lows earlier in 2023, this might cause an uptick in investors looking to donate/contribute cryptoassets. Investors looking to do so should remember that contributing crypto can raise some extra filing and compliance requirements. For contributions worth in excess of over $500, the taxpayer must complete and file Form 8283. If the taxpayer is seeking to donate in excess of $5,000 of crypto the taxpayer will either need to undergo an appraisal that fulfills IRS requirements or forgo the charitable contribution.

The Coming Year Is Set To Be Action Packed

If investors and market watchers thought that the past year (or several) have been action packed, the conversation is set to become even more intense over the next year or so. Between several pieces of stablecoin legislation that have been put forward in Congress, the IRS ramping up efforts even more as they connect to cryptoassets, the largest banks and asset managers in the world investing heavily in and deploying blockchain based products, and companies like PayPal launching stablecoins the pipeline definitely full.

In addition as the conversations around tokenized assets has evolved to include more everyday uses, and as bad actors such as those at FTX are brought to justice, the trust and market confidence in these assets will only continues to increase.

No matter what happens to a specific project, coin, or token, it seems clear that the trend of blockchain and tokenizing assets is here to stay.

What Crypto Investors Should Watch As The SEC Investigates PayPal

https://www.forbes.com/sites/digital-assets/2023/11/12/what-crypto-investors-should-watch-as-the-sec-investigates-paypal/

PayPal and PYUSD are facing potential legal challenges from the SEC

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Following the launch of the PayPal
PYPL
stablecoin in August 2023 the initial market reaction was seemingly muted versus the reaction to other stablecoins. Tether
USDT
remains the largest stablecoin despite recurring questions about the transparency of operations and composition of reserves. Circle, despite some questionable reserve asset management tactics via Silicon Valley Bank, remains the stablecoin perceived as the most trustworthy and stable by regulators and institutions alike. Meta (formerly Facebook) had its attempt to launch a stablecoin quickly squashed by U.S. lawmakers in 2019, with the former head of the program now focusing on bitcoin based applications.

Contrasted with those headlines the launch of PYUSD had seemingly passed under the radar, but that changed with the news that the SEC has launched a legal investigation into both PayPal and the stablecoin itself. Just the latest in a long line of legal actions taken against firms operating in the crypto space, the legal action itself is not the news making event. Rather the implications of this action, when combined with both the guilty verdict in the FTX criminal trial and market uncertainty overall, are set to be felt in various corners of the crypto market for the foreseeable future.

Let’s take a look at a few items investors should keep in mind as this investigation proceeds.

Policymakers Fear Tech In Crypto

One of the largest causes of apprehension in the U.S. policymaking space, setting aside the anti-crypto sentiment at the SEC, is that large technology firms might be making inroads into a fast growing financial space. Stablecoins have grown rapidly, and have recently passed Mastercard and PayPal in transaction volume . Even though PayPal is a well known payment process with hundreds of millions of customers worldwide, the fact that this is the first case of a major U.S. financial institution issuing a token has inflamed a Congress already divided on virtually every issue.

With multiple lawsuits filed against U.S. technology leaders, by both U.S. regulators and international ones, the apprehension around continued expansion of these firms is palpable. Additionally, the fact that the Federal Reserve continues to proceed cautiously with developed of a digital dollar or tokenized dollar might lead policymakers to fear that the private sector will beat them to market.

For investors and potential users this should be a clear sign that increased scrutiny and regulation will continue to be the norm rather than the exception going forward.

PayPal Is Not The Issuer

Although the PYUSD stablecoin is closely, and correctly so, affiliated with PayPal and is intended to be used for transactional purposes via that platform, PayPal is not the issuing entity. Paxos, overseen by the New York Department of Financial Services, is the entity responsible for issuing this stablecoin. With total issuance and circulation of the token currently standing around 159 million this is not an insubstantial amount, but adoption trends have been sluggish; not surprising given the regulatory cloud looming over the space.

Even though Paxos operates under the oversight of the NYDFS and PayPal also has a BitLicense, this two-party situation is no guarantee of future success. The SEC sued Paxos over its issuance of BUSD
BUSD
, alleging it constituted an unregistered security offering, following a previous issuance of a Wells Notice to Paxos in February. Paxos has disputed these accusations, with legal discussions still ongoing.

A takeaway for investors is to remember that even if the firm most closely linked to a stablecoin or token project (PayPal in this case) appears beyond reproach, partnerships and joint ventures with crypto native firms can cause complications and legal difficulties.

Attestation Will Become More Important

One of the most interesting aspects of the PayPal stablecoin is that the reserve mechanism (the underlying assets) that support the 1:1 peg to the U.D. dollar closely mirrors the process at Tether. While Tether is consistently on the hot seat with regards to its governance, reporting, and reserve management processes, PYUSD has managed to assuage concerns on these issues. This is due in large part the trust and reliability that PayPal has established in the marketplace, but this also highlights a critical fact that must be part of the stablecoin conversation; attestation and reporting.

Regardless of the fact that Paxos is the issuer of PYUSD, the coin is still marketed and heavily associated with PayPal, which itself is a publicly traded company with all of the reporting requirements that entails. Real time reporting, attestation standards, and consistent implementation of these rules and standards is an imperative for the crypto sector. Whether these standards emerge from accounting standards setters or policymakers the fact remains the same; investors and regulators alike are going to be asking questions about stablecoins as they enter the marketplace.

Stablecoins are here to stay, and PYUSD is set to play a prominent role going forward, but investors need to watch how policy conversations are evolving.

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Crypto Tax Planning Topics That Investors Should Remember

https://www.forbes.com/sites/digital-assets/2023/11/05/crypto-tax-planning-topics-that-investors-should-remember/

Crypto tax planning should always be a priority

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As 2023 enters the last stretch crypto investors are facing a whirlwind of activity that can be a combination of exciting, exhausting, and financially important. The FTX trial was a publicity packed event, featuring testimony from virtually all of the highest ranking employees, Samuel Bankman-Fried himself, and multiple expert witnesses. Rehashing the spectacular collapse of FTX as well as the multiple allegations leveled against Bankman-Fried has done nothing to reassure investors of the veracity of crypto regulation and legislation. With Bankman-Fried found guilty on all charges, the only remaining speculation is confined to sentencing, set to take place in March 2024.

At the same time the wider cryptoasset landscape has continued to move ahead, with HSBC
HBA
being the latest large TradFi bank to join the tokenization world. Specifically, the bank recently announced an initiative that will allow customers and investors to tokenize physical hold holdings to facilitate trading. In addition, although the AI froth seems to have calmed down since the debut of ChatGPT at the end of 2022, recent announcements have reignited excitement for how blockchain, cryptoassets, and AI firms could work together.

Looming in the background of all this, however, is the upcoming tax season and crypto investors yet again find themselves the topic of conversation and debate. Let’s take a look at a few of the (many) items that crypto investors should keep in mind as tax planning and preparation kick into high gear.

Charitable Gifts

With the recent recovery in the price of bitcoin and other cryptoassets, as well as the fact that 46% of millennials and 21% of Gen-Z own crypto, the reality is that crypto contributions are set to increase. As dozens of institutions adding the ability for individuals to make contributions in cryptoassets, the tax planning of this process will only become more important in the future.

Regarding cryptoassets there is a unique aspect that taxpayers should keep in mind both prior to making the contribution, as well as the tax reporting process. Since cryptoassets are not universally considered to be readily valued property this leaves taxpayers with one other factor to consider. For contributions worth in excess of over $500, the taxpayer must complete and file Form 8283. If the taxpayer is seeking to donate in excess of $5,000 of crypto the taxpayer will either need to undergo an appraisal that fulfills IRS requirements or forgo the charitable contribution.

Reporting Requirements

Setting aside for the moment some of the looming tax reporting changes that are coming in forms of broker reporting and the like, even relatively straight-forward crypto trading and investing can lead to a flurry of tax form requirements. When a taxpayer disposes of crypto holdings by trading, exchanging, or trading these cryptoassets these transactions and the associated profits/losses need to be reported on Form 1040, Schedule D. In addition, if there are discrepancies that need to be reconciled between Form 1099-B (sent to investors from exchanges and trading platforms) and Schedule D, this might require the filing of Form 8949.

This is not to mention the IRS actively seeking more information from taxpayers via asking about crypto activity on page 1 of the 1040, as well as the potential that certain NFTs will be taxed at the higher collectible tax rate versus capital gains or as ordinary income events. In addition, the IRS has made the position it is taking very clear. On top of the projected $28 billion in revenue that will be collected linked to crypto taxes, the IRS continues to highlight the actions being taken to ensure more crypto compliance.

The IRS Is Focused On Crypto

The IRS, as is its purview, seeks to ensure that all U.S. taxpayers comply fully with existing tax laws, but there are certain areas where the IRS prioritizes enforcement and collection actions. Cash-only businesses, high-net work individuals, and numerous other economic areas have traditionally come under greater than normal scrutiny by the IRS. Cryptoassets, it should come as no surprise, continues to occupy a prominent place in the minds of IRS agents and leadership.

Specifically, the recently launched Virtual Currency Compliance Campaign is set to continue and potentially increase enforcement actions after an initial review showed that 75% of U.S. taxpayers were non-compliant with regards to crypto reporting. On top of the efforts aimed at increasing U.S. taxpayer compliance regarding domestic activities, the IRS has also identified hundreds of possible FBAR non-filers with an average balance of $1.4 million.

No matter which way crypto investors look at the situation, the IRS is set to maintain and increase crypto compliance efforts going forward.

Tax preparation and planning might not be thought of as the most exciting part of the crypto space, but it is essential for crypto investors to continue making this a priority.

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What Crypto Investors Should Know About Bankman-Fried Testifying During The FTX Trial

https://www.forbes.com/sites/digital-assets/2023/10/29/what-crypto-investors-should-know-about-bankman-fried-testifying-during-the-ftx-trial/

Will Samuel Bankman-Fried help, or hurt, himself with his testimony?

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Even as the crypto market has experienced a run of positive headlines and price moves, with bitcoin hitting all-time highs for the year around $35,000, the FTX trial continues to loom large over the entire market. The testimony that has been offered by the prosecution so far, while alarming in its own right, has yet to reveal any new or previously undiscovered aspects of the collapse of FTX. Testimony that has been provided has touched on the direct role that Samuel Bankman-Fried played in many of the alleged crimes, his direct oversight of fraudulent programming and accounting decisions, and overall has painted a picture of Bankman-Fried as the mastermind behind what is alleged to be one of the largest frauds in financial history.

That is all well and good, but very few of the testimonials, nor the statements given to the court, have revealed anything new. The collapse of FTX happened in November 2022, and the scrutiny that was brought to bear as to how this could happen was immediate and sustained. Bankman-Fried himself did not help reduce the level of coverage, with multiple interviews provided, various threads on social media, and a live interview with the New York Times
NYT
from the Bahamas adding more energy to this coverage.

With Bankman-Fried offering testimony in his own defense, a move that has been seen as unwise by some court experts, what are the some of the potential insights that came out of this phase of the trial?

A Practice Run Was Necessary

In what might strike some court watchers as an unusual twist of events, especially since the entire rise and collapse of FTX has played out on both traditional and social media, Bankman-Fried had a practice run of his testimony without the jury present. While some of the specifics that Bankman-Fried and his legal team planned to bring up in his defense strategy might simply seek to deflect blame, the fact that this practice run itself was publicized simply played into the media scrutiny surrounding this trial.

Interestingly enough, even though the jury was excused and the testimony was deemed a practice run for the judge only, the results of this practice run were discussed in the media. Specifically the facts that Bankman-Fried was able to provide verbose and clear answers in his prepared responses (to questions asked by his attorney) while seeming flustered and confused when cross-examined, seems to highlight the reasoning behind the practice run. This is especially true after the judge had previously criticized the defense strategy and prosecution for deploying time wasting strategies.

Limited New Information

Even though Bankman-Fried himself has testified and undergone cross-examination, there has seemingly been very little new information and very limited additional context added to previously provided testimony. With direct questioning expected to run through Monday that may change, but the primary allegations and charges against Bankman-Fried remain at the same level of contextualization as had been previously provided. To refresh, and even though the collapse of FTX has given the crypto industry a black eye in Washington D.C., the charges against Bankman-Fried center around commingling of funds, misappropriation of customer funds, and wire fraud. None of these charges, as serious as they are, connect directly with blockchain or the cryptoasset sector.

Bankman-Fried, in his testimony, also seems to be sticking to previously provided comments, albeit in a more concise manner. To that end he claims that code that allowed Alameda to illegally borrow from FTX customers was not written by him nor did he direct its writing, that he simply made mistakes at FTX including lax oversight of internal controls, that he had no knowledge of the wrongdoings he is now accused of, and that while the collapse of FTX hurt people, it was not in any way intentional.

Little Additional On FTT

On the topic of the FTT token, Bankman-Fried reiterated his previous statements that the FTT token had been created for the good of FTX customers, which could be traded if so desired, and whose purpose was to improve the user experience. Based on financial statements that had been previously disclosed and analyzed during the collapse, these statements overlook a large fact; FTT had enormous value on the balance sheet of FTX, when in fact that value should not have existed.

Based on reporting from Bloomberg, the value of FTT on the balance sheet of FTX shortly before its collapse (November 2022), was $5.9 billion. Following generally accepted accounting principles (GAAP) this should have never been allowed. An intangible asset, which is how all crypto is accounted for until updated guidance passes, cannot be created and assigned value if it is created internally by an organization. In other words, FTX had an asset that it made up on its own, valued at nearly $6 billion on its balance sheet, and questions around the FTT token were one of the impetuses that triggered the collapse in the first place. With better accounting rules due to be codified shortly, as well as a shakeup in the crypto audit world, issues such as FTT hopefully will be far less common in the future.

The saga of FTX and the multiple failures and scandals it caused, as well as hopefully the lessons it will teach the crypto sector, will play out for years to come. One must hope that investors, regulators, and developers are paying attention.

How The Bitcoin ETF Approval (Or Not) Process Works At The SEC

https://www.forbes.com/sites/digital-assets/2023/10/22/how-the-bitcoin-etf-approval-or-not-process-works-at-the-sec/

The long awaited bitcoin spot ETF is slowly coming to fruition, but how does this process work?

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The potential of a bitcoin spot ETF hitting the market has been the news that many investors, both individual and institutional are waiting for, but how exactly does that process work?

When news broke that Blackrock had filed an application for the creation of a spot bitcoin ETF with the SEC the crypto market took this, correctly, as an almost universally good thing. Although some might decry the inroads being made by TradFi institutions into the crypto space, the reality is that these are the size and type of institutions that need to be present in the market for crypto to achieve mainstream adoption.

The enthusiasm for this particular spot ETF application has exceeded the hopes for the multiple other similar applications that have been submitted recently. On October 16th, based on news that the Blackrock ETF has been approved, bitcoin jumped briefly over $30,000; when the news had proven to be false, prices quickly retreated back down to previous levels. Clearly the attitude and sentiment around cryptoassets has shifted toward institutional players, and the almost 100% success rate Blackrock has with previous ETFs continues to provide the market with optimism.

That is all well and good, but investors might be wondering just how the ETF process works, who is in charge of it, and why this has proven to be so controversial. Let’s take a look at those exact issues.

How ETFs Are Submitted

How ETFs are submitted might seem like a confusing process, given the multiple rejections and delays that bitcoin ETFs have faced, but the process is one that has been successfully completed thousands of times. The process can be summarized as follows. First the prospective ETF manager, known as the sponsor, files a plan with the SEC to create an ETF. This is where the bitcoin ETF process has been held up, as the SEC continuously rejects these proposals. In the case of recent applications, such as the one submitted by Blackrock, the sponsor and authorized participant (normally a large institutional investor) would most likely be the same entity. Assuming the application moves forward from this point, the authorized participant begins to acquire the underlying asset, places these assets in a trust, and then uses these assets to form ETF creation units.

This might sound like a complicated process, but there are nearly 3,000 ETFs in the United States that are comprised of assets worth almost $10 trillion, illustrating how unusual the steadfast rejection of bitcoin ETF applications has been.

How Bitcoin Spot ETFs Are Different

In contrast to the trust offerings, namely the Grayscale Bitcoin Trust product, there are a few key differences that exist between these instruments and a spot ETF. First of all, trust products are generally not redeemable for the underlying asset, which helps explain why the price per underlying asset (bitcoin) can differ quite a bit from the trust product itself. A spot ETF, to the contrary, operates as an open-end fund system that has more flexibility to issue new shares, allowing it to better track the spot price of bitcoin as it moves. Additionally, spot ETFs can also deliver improved liquidity and tax treatment for investors, further highlighting the appeal these instruments have for a wide array of investors.

Who Approves ETFs

ETFs are approved by the SEC, and the Commission has approved thousands of such products since they were first introduced, and this is why the frustration regarding the lack of a bitcoin spot ETF has been steadily increasing. Even as other ETFs have been approved featuring relatively exotic underlying assets and business models, the SEC under Gary Gensler has remained steadfastly opposed to approving the creation of a spot bitcoin ETF despite increasing pressure from the industry and lawmakers.

Why There Is No Bitcoin ETF

The answer as to why there is no spot bitcoin ETF in U.S. markets yet is an answer that can vary depending on who is asked. In official comments and statements that SEC has reiterated that because bitcoin is such as volatile asset, the crypto industry is so rife with fraud and abuse, and that other investor protections have yet to be written, that the market is simply not mature enough to serve as the underlying asset for a ETF product.

On the other hand there are many crypto proponents who would argue that the lack of a spot ETF product is proof of the anti-crypto and anti-bitcoin position that some policymakers in the U.S. have seemingly embraced. It should come as little surprise that as the SEC files a flurry of enforcement actions and lawsuits against firms operating in the space that the Commission has also proven reluctant to allow new crypto or bitcoin products to enter the marketplace.

As the potential for a spot bitcoin ETF continues to increase, and frankly looks higher than ever before, investors and entrepreneurs should be informed as to how the ETF process works, who is involved, and why this process has been such a long time coming.

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Bitcoin’s Continued Dominance Highlights Future Trends For Crypto

https://www.forbes.com/sites/digital-assets/2023/10/15/bitcoins-continued-dominance-highlights-future-trends-for-crypto/

Bitcoin continues to lead crypto forward

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Even with multiple challengers to its reign atop the crypto market, and the FTX trial providing daily fodder for crypto skeptics, bitcoin has reached market dominance levels not seen in months.

The cryptoasset market has had a tumultuous time since many tokens reached all time highs during 2021, with the tumult hopefully ending with the ongoing trial of Bankman-Fried and FTX at large. Even with these headlines dominating the media conversation around cryptoassets, there is a very important trend that has surprisingly flown under the collective radar; the return of bitcoin dominance and leadership in the marketplace. To non-expert users and investors this might sound strange, as bitcoin dominates most every conversation connected to crypto, be they driven by either retail investors or institutional investors. The reality, however, has been different with many calls for the end of bitcoin dominance been repeated in various iterations.

Forecasts following the Ethereum
ETH
upgrade tended to center around the seemingly unavoidable rise of the Ethereum community and Ether as the successor to bitcoin as the leader of the crypto community. Decreased power utilization of 99%, being the foundational layer for most Layer 2 applications including stablecoins, NFTs, and smart contracts, and trading at levels that make using ETH for purchases more palatable than spending BTC
BTC
all are strong arguments. In addition to ETH, stablecoins have also been heralded as the next leaders of the cryptoasset space, with recent entrants to this subsector including PayPal
PYPL
, a household name to many potential U.S. crypto users, as well as many international potential users.

Despite that, bitcoin continues its reign as the most influential, largest, and most widely traded cryptoasset. Let’s take a look at what that might mean for crypto development as 2023 wraps up.

Bitcoin Is An Asset Class

The fact remains that even though bitcoin was originally created as a transactional medium the reality is that bitcoin is treated as an asset class, with over 50% of bitcoin having not moved for over a year. Coupled with the institutional desire to see bitcoin products approved and start trading reinforces the fact that bitcoin is increasingly viewed as an asset class, and that bitcoin continues to separate itself from the slew of other tokens projects that have flooded the marketplace in the last several years reinforces this trend.

Implications of this are significant, and will have direct and indirect ramifications for the wider crypto space at large. Firstly, this all but assures that stablecoins will continue to make inroads as both a medium of exchange as well as how most institutions and entrepreneurs gain exposure to cryptoassets. This also means that options such as PYUSD, and the potential of state issued stablecoins (such as the Wyoming stable token project) will continue to play outsized roles in how implementation, perception, and cybersecurity around cryptoassets evolve.

Bitcoin, both in perception and impact as how crypto is used on an everyday basis, will continue to drive headlines, but will take a backseat to TradFi driven projects.

The Number of Tokens Will Drop

Something that has been discussed quite a bit recently in the NFT
NFT
space, that 95% of the current marketplace might be worthless, is also something that can be applied more broadly to the cryptoasset space. Following the initial excitement around bitcoin in 2017, there was a deluge of token projects that were launched, with predictable results; scams of all kinds and other types of unethical activity have dominated headlines for years at this point. With the era of cheaper money coming to an abrupt close during 2022 this has only increased the pressure on marginal projects and tokens.

Despite the nearly endless stream of bad news and negative headlines around crypto, including the detailed revelations around what happened at FTX, bitcoin has been surprisingly steady and increased its share of market dominance. As the crypto market continues to mature has to contend with both higher-for-longer interest rates and more competition from the TradFi space, and the potential of government backed tokens, investors will continue to look for value.

Cryptoassets are financial instruments at the end of the day, and investors of all stripes will continue to look for assets that have fundamental value; bitcoin continues to satisfy that demand.

Transparency Will Rise In Importance

No matter the opinion of certain crypto advocates for a loosely regulated future the reality is that compliance, rules and standards will drive the health and sustainability of crypto going forward. Be it the rise of stablecoins issued by TradFi organizations, the multiple submissions for ETFs by large asset managers, or the launching of tokenized platforms by several of the largest banks in the U.S., the message is clear. Cryptoassets are here to stay, but there is not going to be room for the tens of thousands of tokens that currently exist to stay liquid.

As large institutions of all kinds invest significant capital into developing these projects, and seek to recommend that clients do the same, the transparency and legitimacy of these products and services must beyond reproach. This means that reporting, disclosure, custody practices, and compliance must be at the forefront of cryptoassets moving forward. Bitcoin yet again seems to be fulfilling this role, with spot ETFs filed by trillion dollar asset managers focusing on bitcoin at the exclusion of all others.

Bitcoin has long been the leader of the crypto market, and it’s continued dominance is good for both bitcoin investors and the crypto sector at large.

The FTX Trial Is Already Sending Messages To Crypto Markets

https://www.forbes.com/sites/digital-assets/2023/10/08/the-ftx-trial-is-already-sending-messages-to-crypto-markets/

The FTX trial is already making waves in the crypto policy conversation

CQ-Roll Call, Inc via Getty Images

Even though the FTX trial has just gotten underway, the Department of Justice has already sent a strong message to the global crypto market; lack of crypto-specific standards and laws for every situation is not an excuse. Specifically, the DOJ rebutted an argument put forward by Samuel Bankman-Fried’s legal team. In this argument the position was taken that because 1) FTX was not regulated in the United States, and 2) that all applicable rules were followed concerning FTX U.S., no charges leveled against FTX should be included in this trial.

Unsurprisingly the DOJ took exception to this argument, and stated that even though legislation might be needed to prove a mandatory legal obligation does not effect the reality that customers and invested committed money to FTX, and Bankman-Fried personally. Since there are rules already in place for all organizations connected to how customer funds are treated, and that Bankman-Fried has been charged with 1) stealing customer assets, 2) misappropriating customer funds, and 3) commingling customer funds, the argument presented by the legal team are irrelevant.

So what does all of that legalese mean for the crypto market, including both investors and developers?

Crypto Is Financial And Technological

Proponents of cryptoassets, blockchain, and any number of the emerging technology trends tend to argue that these products and solutions are technology solutions first and foremost. This is all well and good, but if there are customer funds involved this immediately changes the conversation and applicable rules. Fiduciary duty, anti-money laundering rules, and regulations related to who exactly can access what products and services are well established aspects of running a financial services organization. As tempting as it might be for innovators – across industry lines – to think of innovation as entirely new ways of conducting business, existing rules do apply.

Blockchain and cryptoassets might represent new ways of storing, transferring, and accessing data between network members and counterparties, but if an organization is conducting financial transactions there are a bevy of rules that apply, regardless of how these transactions and conducted. The allegations concerning FTX include misusing customer funds, failing to establish an effective internal control environment, and breaching the fiduciary duty and responsibilities trusted to them by customers and investors. A key lesson that should be taken away, both now and going forward, is that the moment financial transactions are launched compliance needs to be a priority.

Reporting And Auditing Need To Catch Up

One of the major issues that accompanied the fallout from FTX is that almost immediately following the spectacular collapse questions were asked about what exactly the external auditors engaged with FTX had done? John J. Ray III is on record stating that in his career he had never seen such a comprehensive failure of internal controls; this from the same individual who was tasked with unwinding Enron during its bankruptcy process. More pointedly, if FTX had audit engagements, how were all of the alleged failures, accounting errors, and misappropriations able to occur? The firms involved in the audits of FTX have both been involved in legal matters, with one currently being sued by the SEC, and the other firm exiting the digital asset auditing business altogether.

The following question needs to be asked; why were accounting standard setters so slow to get started on developing and producing crypto-specific accounting and auditing standards? The U.S. tax and legal systems have proven able to do so, albeit with results that seem to be anti-crypto in nature, but the accounting regulatory apparatus has just started, with the first accounting codification set to pass at the end of 2023. Accounting standard setters and rule-makers seem to have realized crypto accounting and auditing are material items; this realization should not fade with time.

The U.S. Needs To Lead On Policy

With the antagonistic stance taken by the SEC against most iterations of crypto and blockchain firms in the U.S. , a tax code that seems unwilling to acknowledge the unique nature of cryptoassets, and an accounting framework that is just starting to do so, the U.S. lags behind other jurisdictions in terms of crypto regulatory frameworks. The FTX trial, with all of the allegations and sensational stories that will almost surely come out of the trial as it unfolds, with certainly cause numerous headlines. There will be a temptation to focus on these headlines and dwell on the negative externalities that have resulted from the FTX collapse.

Instead, the focus both during and after the FTX trial should be on the opportunity that this case provides U.S. policymakers and regulators. Determining what exactly happened at FTX, how it happened, and how it remained undetected until it caused billions in market damage should be taken as the opportunity to create more robust, transparent, and objective rules. Every market sector needs clear and consistent rules, applied on an objective basis to survive and thrive; crypto is no exception to this rule.

Bankman-Fried may be in the headlines now, but the legacy of FTX should be that it spurred on better, and world-beating marketplace rules for the U.S. and the firms operating therein.

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The FTX Trial Is A Learning Opportunity For Crypto

https://www.forbes.com/sites/digital-assets/2023/10/02/the-ftx-trial-is-a-learning-opportunity-for-crypto/

FTX Founder Sam Bankman-Fried Appears In New York Court For Arraignment Hearing

Getty Images

As the long-awaited FTX trial gets underway, with Samuel Bankman-Fried set to begin his court appearances on October 3rd, there will invariably be quite a bit of conversation around this topic. The allegations and shock waves of the collapse of the FTX are being felt in almost every area of the crypto marketplace. Samuel Bankman-Fried may be the face of the collapse, and be the singular individual garnering most of the attention during the trial, but that is merely the tip of the proverbial iceberg. Several of his former colleagues have plead guilty to charges and are serving as cooperative witnesses, his parents have been implicated in (at least) unethical activities at FTX, payments made to athletes are being sought by the bankruptcy court, and Stanford University has pledged to return millions of dollars in pledges it received from FTX.

To say that FTX made a mess in the crypto space is an understatement, and some have argued that this single collapse has set the crypto lobbying industry years behind in the U.S., even as other jurisdictions assert leadership positions. As the court room drama continues to unfold, possibly augmented by the details to be provided by expert witnesses, it will understandably dominate the headlines in the crypto space. As scintillating as these headlines are, however, it is important to view the FTX saga as the end of an important chapter in crypto, and not a sign of things to come.

Let’s take a look at some takeaways and trends that crypto investors and regulators would be better served watching versus courtroom highlights.

Crypto Matters, But So Does Compliance

Even with just the testimony that has been provided during the ongoing bankruptcy and attempted re-launch of FTX it has became readily apparent that some, if not the majority, of issues at the exchange were not unique to the cryptoassets. A lack of effective internal controls over financial reporting and customer assets, not having a CFO or an external board of directors, and commingling of funds read more like a laundry list of accounting failures than crypto failures. Combined this with the sporadic way in which Bankman-Fried attempted to defend himself against these accusations, and possibly looks set to blame former colleagues and legal representatives, and the image is clear.

For crypto entrepreneurs the message is important. If a firm is to succeed in the cryptoasset space there needs to be as much focus on business fundamentals as there is on the crypto product itself. In the aftermath of FTX the scrutiny on crypto exchanges, stablecoin issues, and every other aspect of the crypto market has increased. Investors and regulators have made it abundantly clear that going forward, in order to attract financial capital and be able to operate successfully, that firms must put compliance and transparency front and center versus other areas of focus.

Boring Might Be Better

Coinbase was long thought of as a staid and (some would say) boring player in the crypto exchange space, overshadowed by the splashy marketing of FTX and the online personality of CZ at Binance. With FTX working through bankruptcy and Bankman-Fried on trial facing multiple charges, and Binance fending off legal challenges as well as mass resignations amongst key leadership positions, being a so-called boring crypto exchange looks more and more appealing. Granted, even the conservatively managed and proactive Coinbase could not escape the SEC’s enforcement arm, but it would be safe to say it is in a stronger position that it’s primary competitors.

In the tokenized asset world, high-flying and volatile applications such as NFTs have crashed down to earth, with as much as 95% of the NFT market having zero value according to recent research. That, unfortunate as it may be for some investors, should not strike too many as a surprise; the frothy and bubbly nature of the NFT space was obvious even as many cashed in on the hype. Stablecoins, long considered a boring compromise, continue to make inroads amongst mainstream individual and institutional adoption, and are set to surpass PayPal
PYPL
and Mastercard
MA
in total volume in 2023.

Going forward, conservative management and sound business models look set to trump excitement and high-flying founders.

TradFi Is A Partner, Finally

After years of slinging insults back and forth it is refreshing to see that TradFi continues to invest in, partner with, and develop products and other solutions linked to the blockchain and tokenized asset spaces. This should be celebrated by the crypto community for a few important reasons. First, bringing in TradFi institutions will almost assuredly make it simpler and more straight-forward to have regulatory and compliance conversations. Secondly, by integrating and working with TradFi institutions, the likelihood of mainstream adoption and onboarding of cryptoassets will continue to increase.

Lastly, the very fact that TradFi is investing in the cryptoasset sector should be seen as a positive sign. If the largest asset managers and financial institutions in the world are allocating intellectual and financial capital to these products and services this would seem to indicate that this sector is here for the long term, despite some of the regulatory and reputational issues that have arisen.

FTX will keep making headlines, but even though it does not represent the future of crypto all market participants should take note of the lessons learned from its collapse.

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Crypto Regulation Need To Evolve: Regulators And Innovators Both Need To Compromise

https://www.forbes.com/sites/digital-assets/2023/09/24/crypto-regulation-need-to-evolve-regulators-and-innovators-both-need-to-compromise/

Crypto entrepreneurs and regulators need to compromise to keep the sector growing sustainably

Getty Images

It is no secret that the SEC, under the leadership of Gary Gensler, has seemingly been on a crusade to regulate the crypto industry in the courtroom rather than via policy. During his tenure, the Commission has filed lawsuits and other enforcement actions against firms involved in initial coin offerings, stablecoin issuance, governance tokens, non-fungible token minting, and trading of what have been labeled as unregistered securities. This does not even touch on the decidedly combative approach taken against crypto exchanges and other market makers, even including Coinbase, the only registered and publicly traded crypto broker-dealer in the United States. Even stablecoins, thought of by some crypto advocates as both boring and too much of a compromise to begin with, have found themselves under increasing scrutiny.

On the other hand, there has been an interesting barbell effect taking shape in the crypto marketplace. On the one hand, entrepreneurs and innovators continue to state that job growth and economic growth will need to redomicile overseas, with Ripple CEO Brad Garlinghouse stating that 80% of new hires will be located outside of the United States serving as an example. In addition there is growing evidence that other jurisdictions are capitalizing on the slow pace of U.S. federal lawmaking to 1) pass more comprehensive regulation, and 2) market themselves are friendlier jurisdictions for aspiring crypto-firms. At the same time, however, there has seemingly been a stampede of efforts by TradFi institutions and even some state governments to create, issue, and capture economic benefits directly connected to the crypto space.

Given the apparent contradiction, the following reality becomes clear; U.S. crypto regulation needs to evolve.

Crypto Firms Need To Overcompensate

As much as aspiring entrepreneurs are not going to like this news, the marketplace regulatory outlook has soured on crypto innovation for logical reasons. The spectacular collapse of FTX, driven back to the virtual front page as Samuel Bankman-Fried’s trial is set to begin on October 3, attracts the majority of headlines and conversation, but that masks a larger problem. Virtually every year since crypto has achieved mainstream awareness and understanding there have been hundreds of hacks and breaches that have caused losses in the billions of dollars for U.S. as well as other investors.

Given that, and the understandable response from the regulatory apparatus in the U.S., crypto firms need to emphasize transparency, objectivity, and business use cases more than ever. Neither investors nor regulators are going to blindly trust that innovation or creativity by itself can compensate for unclear business models, questionable control environments, or management teams that lack the financial markets expertise to handle customer funds and market volatility.

Mirroring the rise of stablecoins, it is looking like the next wave of crypto leaders will be characterized less by moving-fast-and-breaking-things, and more by planning and executing the business fundamentals essential for long-term success.

Regulation Needs To Be Flexible

Not all regulation and rule-making needs to come from the federal level, and in many cases the partisanship that dominates many of the issues facing the U.S. rears it’s head in the most unproductive manner in federal conversations. No-action letters, a fall back approach implemented by the SEC, are at best a stop gap solution that has unfortunately turned into a poor substitute for substantive policy discussions. Fortunately there have been several positive developments that can be viewed as early steps toward the U.S. developing a more hospitable regulatory environment. One specific example that comes to mind is the recent court cases that have delivered several (if only partial) victories to the crypto sector versus the SEC. When combined with more transparency in the form crypto-specific accounting standards, and comments encouraging a CFTC sandbox, there do seem to be signs that the regulatory outlook might be shifting.

There are also other signs that this regulatory winter might be starting to thaw. The state of Wyoming has recently formed a new commission to build on the previous efforts undertaken in the state to codify blockchain and tokenized assets into the business landscape. This newly formed commission, led by executive director Anthony Apollo, is tasked with the development, creation, and distribution of a stable token that is backed on a 1:1 by the U.S. dollar. With states continuing to take the lead, this will also help to create a more flexible and robust regulatory environment.

Bigger Pictures Issues Should Take Priority

With all of the debate, discourse, and conversation that has continued to surround the cryptoasset sector, it is easy to miss the broader issues that continue to drive much of innovation and investment in the sector. Money, framed in the context of the 21st and 22nd century, is less connected to physical currencies and/or virtual iterations of currency, and instead should be thought of as the digital medium of the future. A digital medium that is widely accepted, understood, transparent, and trusted will take a leadership position in the global economy forward.

Investments and interest in cryptoassets have recently attracted the focus of the largest TradFi institutions in the world, the largest governments in the world, and every major player in the financial markets. This is due to the objective benefits associated with tokenized transactions, as well as the following reality. Current financial systems and processes are in need of an update, which has been a major driving force behind the development of the somewhat controversial launch of FedNow. Specific projects aside, the race for the global reserve currency of the 21st and 22nd century is well underway; crypto will play a major role in this conversation.

Crypto needs innovation, smart regulation, and sustainable business plans, all of which should be productive places to start having future-looking conversations for the sector.

Crypto Should Prioritize Privacy, But That Should Not Stop Innovation

https://www.forbes.com/sites/digital-assets/2023/09/17/crypto-should-prioritize-privacy-but-that-should-not-stop-innovation/

Privacy needs to be balanced with innovation

getty

Privacy and privacy debates have long been at the center of the crypto sector, and this reaches back to the libertarian origins of crypto itself. More recently, however, it is increasingly looking like these conversations around privacy are less focused on ensuring consumer protection, and instead are set on preventing some of the much needed innovation and maturation of the crypto space. For all of the enthusiasm that TradFi entering the sector has created via ETF applications, stablecoins, and other products and services, there are those in the marketplace who decry all of this positive momentum. Centralization, loss of privacy, and more control exercised over investors and developers in the sector are listed time and again as reasons to push back against these types of products, services, and innovations.

These positions absolutely have merit; large organizations and governments do not have a great track record when it comes to safeguarding and protecting consumer data. Hacks, breaches, and abuses of this information continue to occur, with research from IBM
IBM
putting the cost per breach at an average of $4.5 million per incident. Additionally, there is a growing sentiment that between the increase in biometric data being collected via smart devices, real time tracking via various applications, and the rise of AI, the need for privacy is greater than ever before.

This is 100% correct. Every effort should be made to not only ensure that consumers, investors, and developers can collaborate and innovate freely, but that these thoughts and actions be protected.

Let’s take a look at why at the end of the day, privacy and innovation and going to need to co-exist for crypto to continue innovating, expanding, and gaining more mainstream acceptance and understanding.

Crypto Winters Remove Weak Projects

One of the side effects of a crypto winter, such as the one that is dominating the cryptoasset sector currently, is that many of the weaker projects are eliminated. This includes a number of projects that touted either 1) an innovative attribute or idea without understanding whether there was a market demand for said innovation, and 2) whether some of the core fundamentals of the projects (including emphasizing privacy above all) actually operated as advertised. In other words, when free money dries up and interest rate increases put a squeeze on costs across the board, priorities can – and do – shift.

An example of this is the launch of WorldCoin, a non-U.S. based token project that is an almost perfect example of the overlap that tokenization and AI can deliver. Even though the upsides and opportunities still certainly exist, and the connection to leveraging the token to spread economic benefits generated from AI via a form of UBI should be wildly popular, privacy concerns almost immediately surfaced.

These are absolutely valid concerns, and any organization seeking to gather and possibly record personally identifiable information (including iris scans) should be held to the highest level of privacy possible. On the other hand, innovation often requires compromise, and this is just one example of such as development.

Stablecoins Are Not Privacy Driven

The reality is, and always has been, that the simplest and most straightforward way to encourage non-expert investors, entrepreneurs, and institutions to get into crypto and tokenized assets at large was going to rely on stablecoins. While some coins, such as Tether
USDT
are still beset by legitimate questions surrounding reserves, redeemability, and transparency of operations, stablecoins such as USDC
USDC
(by Circle) and PYUSD (by PayPal
PYPL
) are continuing to make waves in the sector. By nature, these centrally issued and managed stablecoins are managed, governed, and monitored by the issuing entity; that has not stopped stablecoins from growing in importance for both the DeFi space and institutional settlement use cases.

Profitability remains an issue for standalone issuers such as Circle, but that overlooks an important fact. Combining the real-time settlement, lower costs of transactions, and dissatisfaction with both the current ACH settlement infrastructure alongside doubts regarding FedNow continue to push adoption of stablecoin. The recent announcement by Deutsche Bank expanding crypto and crypto custody offerings is just the latest sign of this adoption.

The Market Selects The Best Options

Time and again, crypto advocates across the spectrum have proclaimed that the rise of bitcoin and other cryptoassets is a market driven event. Dissatisfaction with the way that monetary supplies have been handled by central banks and a desire to see the next stage of money enter the marketplace spurred the creation and evolution of the entire sector. This is how markets work, and should be applauded, but the market does not move to the whims of any particular project, no matter how much supporters of that one option would wish it to be so.

Bitcoin
BTC
as a medium of exchange, at least at this point, has not caught on, and even recent positive headlines are clear signs of that. All of the enthusiasm that bitcoin products and services, submitted for approval and/or launched by TradFi institutions, tend to view bitcoin as an asset class or diversification tool versus a medium of exchange. This may change with time, but the fact remains that bitcoin continues to separate itself from the rest of the crypto sector, serving as an investment option for most, rather than a global medium of exchange.

Sentiment and use cases may change with time, but that will be driven by market demand and interest, and not the desires of bitcoin maximalists.

Privacy is important, and will remain critically so, but should not stand in the way of new, market-driven, and user-friendly innovation and creativity.

Decentralizing Regulation Will Help Crypto Innovate

https://www.forbes.com/sites/digital-assets/2023/09/10/decentralizing-regulation-will-help-crypto-innovate/

Decentralized crypto regulation can help unlock new innovations

getty

Regulation and enforcement actions have been generating headlines in the blockchain and cryptoasset space, and there has been significant debate over the causes and implications of these actions. Comprehensive as these conversations might be, collectively they overlook a pressing question that seems worthy of further consideration; does every aspect crypto need to be regulated at the federal level? This is not to say federal agencies should abdicate all responsibility for such matters, as much as some libertarian-crypto advocates would enjoy such an approach.

To create and sustain liquid and transparent capital markets for cryptoassets of all kinds, and to encourage said capital market structures to remain located in the United States, federal regulators need to play a significant role in this process. Recent comments by CFTC Commissioner Caroline Pham, advocating for a federal level sandbox, should be viewed as movement in the right direction.

That said there is an opportunity for the United States, especially on a state-by-state basis, to advance new ways of creating, developing, and sustaining blockchain and cryptoasset platforms, products, and services. There is even precedent for a decentralized approach to products and services, such as various aspects of insurance, electrical production and distribution, water and waste water management, and multiple others. While the wheels of federal policymaking continue to grind along, albeit slowly and with controversy around certain actions, states can take advantage of this gap.

Let’s take a look at a few of the market opportunities that will be created from a more decentralized approach to crypto regulation and policymaking in the U.S.

Fail Fast And Iterate

It is no secret that the cryptoasset sector is not only a fast-moving space, but an asset class that has experienced quite a bit of volatility since it achieved mainstream awareness and understanding. Contrasted against that, the bureaucracy of federal policy making and regulation simply cannot keep pace with the rapid speed of innovation and new products and services in the sector. While not the only cause, or even a leading cause of unethical activity, this persistent lack of federal level policy making helps create an environment where uncertainty reigns.

At the state level, and fully acknowledging that states operate with different priorities and at different rates of speed, there is more potential to allow firms to create, experiment, and potentially even fail in a much faster manner. As competition continues to grow in terms of both cryptoassets and firms not located in the U.S., and jurisdictions actively seeking to market themselves, it looks increasingly up to the states to take the lead in flexible and entrepreneurially-friendly policy.

Create New Economic Hubs

Although over the last several decades much has been written about the importance of attracting a critical mass of knowledge workers and employers, the pace at which new hubs and areas of excellence have been created has seemingly stymied. Whether it takes the form of lower socio-economic mobility for American taxpayers when contrasted with previous eras or some other metric, the reality is that economic, political, and cultural influence continues to be concentrated in a small number of metro areas. Blockchain and cryptoassets, decentralized by nature, represent an almost ideal industry and asset class to serve as the foundation for new centers of excellence and hubs of economic activity.

Illustrated by the recent relocation of financial services firms from traditional locations such as New York City to other locales, the reality is that financial work of virtually every kind can be done from almost anywhere. Allowing different states to experiment and tweak the regulatory environment to a certain extent can add an extra dimension to the competitive positioning that is already well underway. There is no reason, for instance, to assume that the centers of TradFi banking and finance will evolve to be centers of blockchain, tokenization, and DeFi operations; allowing this innovation to occur in hospitable environments is an important part of this process.

Better Development Going Forward

The cryptoasset sector has evolved rapidly since bitcoin came to the attention of mainstream investors, and these changes have also led to high levels of volatility. On the one hand, blockchain and crypto at a broad lever have attracted billions in investment, created entirely new organizations, and launched new markets, on top of the societal conversations these instruments have fueled. On the other hand, the space remains beset by frauds, unethical actors, regulatory issues, and prices remain depressed when compared to all-time-highs.

Yet again, these recent setbacks have led to calls proclaiming the “end of crypto”, and while that seems hyperbolic, there is a kernel of truth to that sentiment. Crypto has existed for nearly 15 years, and continues to face many of the same issues that have existed from the beginning; scale, security, compliance, and trust. Enabling states to encourage new ideas and concepts will not only allow solutions to come to market faster, but also creates a proving ground where bad actors will hopefully be exposed quickly.

Blockchain and tokenized assets are decentralized by nature, and it makes sense for regulation to follow suit; it’s a win-win for innovators, investors, and policymakers alike.

How The New (Proposed) IRS Crypto Tax Rules Will Impact DeFi

https://www.forbes.com/sites/digital-assets/2023/09/03/how-the-new-proposed-irs-crypto-tax-rules-will-impact-defi/

Crypto tax changes are positioned to have a large effect on DeFi

Getty Images

New proposed tax changes have the potential to shake up the DeFi space for U.S. investors.

The U.S. has achieved a (unfortunately accurate) reputation as a legal and regulatory landscape that is not particularly open and receptive to cryptoassets and crypto innovation. Antagonistic relationships have taken the form of lawsuits, lack of authoritative reporting and accounting standards, and a general stand-offish position toward the sector. Tax authorities are no exception to this rule, and the IRS has made no secret of the fact that it is actively pursuing tax revenues connected to cryptoassets and crypto transactions. Since 2019 the IRS has sent out thousands of letters to taxpayers, with varying levels of forcefulness, requesting that taxes associated with the crypto sector be paid. These actions are in addition to the multiple requests and legal actions taken against centralized U.S. exchanges such as Coinbase, Kraken, Binance U.S., and others.

It is also worth noting that even though the current debate and conversation around proposed crypto tax reporting changes began in August 2023, the issue itself was actually introduced back in 2021 with the Bipartisan Infrastructure Plan. In August 2023, however, the Biden Administration released a new proposed tax framework that would implement these proposed rule changes into a reality, with major changes centering around 1) which entities would qualify as a broker going forward, and 2) what the reporting requirements of these brokers would be. Specifics that distinguish this proposed rule from other iterations are that this rule mentions and includes NFTs, requires a new tax document (1099-DA), specifies which entities will now be considered brokers (including decentralized service providers), and changes reporting requirements for transactions over $10,000. While public comment and feedback periods yet remain, the rule is scheduled to be effective in 2025 for the 2026 tax season.

That is a lot of potential changes impacting large swaths of the crypto sector, so let’s take a look and some items investors should watch as this rule moves forward.

DeFi Is On The Hot Seat

One of the most controversial aspects of this proposed rule is the expanded classification as to which entities are considered brokers. Since the idea was first introduced there has been pushback from the industry, including lobbying groups, to limit the expansion of this definition, as well as the obligations that would be placed on these entities. Since 2021 the crypto sector has not improved its reputation, at least in the eye of some policymakers and regulators, and DeFi is a prime example of this. Decentralized exchanges (DEXs) strike many in the TradFi space as inherently risky and prone to fraudulent activity, even with the dismissal of a class action lawsuit against Uniswap
UNI

One of the biggest changes in this proposed rule is that DEXs will fall under the broker umbrella, necessitating a wholesale re-thinking of not only DEX operations, but re-evaluating the risk for U.S. investors that have any funds pass through these entities.

Audits And Collections Will Rise

The IRS has already publicly stated that audit levels will be returning to historic rates for some taxpayers versus the lower rates that have been commonplace over the last several years. When combined with the estimates that taxes on crypto are proposed to bring in ($28 billion according to most estimates), it stands to reason that the frequency of audits for crypto investors and entrepreneurs is set to rise. Additionally, with the increased prioritization that the IRS has placed on crypto transactions and taxes, most notably in prioritizing data collection via Form 1040, the picture becomes clear; audits and expected revenues generated from crypto investors will only increase moving forward.

Framed in the context of seeking new revenue streams, the expansion of the broker classification, and the increasing amount of compliance and reporting set to be expected of these organizations also has tax collection benefit; better and more comprehensive audit trails.

Crypto Continues To Be Legitimized

Although the proposed rules changes have faced pushback from the industry virtually from the minute they were introduced, the reality is that these conversations and potential changes continue to legitimize the sector at large. Put simply, if the IRS is estimating that $28 billion in tax revenue will be generated from an economic area, those activities look less likely to be banned or otherwise rendered impossible to conduct. As some of the largest TradFi institutions invest in crypto, accounting firms and software providers incorporate crypto into product offerings, and nation-states embrace tokenization, it is evident that crypto is here to stay.

It is a positive development that crypto is increasingly viewed and treated as a legitimate asset class, which is undoubtedly positive long-term, but this also brings challenges for investors and entrepreneurs. Specifically as larger institutions are drawn to the space, there will be increasing expectations around transparency, compliance, and real-time attestation practices in the space.

Crypto tax changes might not be popular in many corners, but are a true sign of the continued growth and maturation of the sector.

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Coinbase Investing Directly In Circle Will Further Strengthen The Stablecoin Space

https://www.forbes.com/sites/digital-assets/2023/08/27/coinbase-investing-directly-in-circle-will-further-strengthen-the-stablecoin-space/

Coinbase continues to play a major role in developing the U.S. crypto space

AFP via Getty Images

Coinbase and Circle remain two of the most well-known and trusted organizations in the crypto space, as well as leaders for the U.S. crypto sector as regulators continue cracking down. This is why the changing nature of the partnership between the two firms is worth examining, with Coinbase investing directly in Circle for an as-of-yet ownership stake.

What some investors might not have been familiar with is that the widely traded and high profile stablecoin USDC
USDC
was not entirely managed by Circle, the issuing institution. Rather, the Centre Consortium governed the USDC stablecoin, which can be an overlooked aspect of the stablecoin sector. Especially following the revelation that over $3 billion of reserves underpinning USDC were kept in what was in essence an uninsured account at Silicon Valley Bank, governance, compliance, and internal controls have returned to the forefront of crypto project conversations.

The specifics of this announcement, while not fully disclosed, have revealed two significant changes for these crypto leaders. As alluded to above, Coinbase will receive a non-controlling stake (specific percentage has not yet been disclosed) in Circle Internet Financial. As a result of the dissolution of the Centre Consortium, Circle will bring both the issuance and governance of USDC entirely in-house. Lastly, six more blockchains will gain native support for USDC, increasing the total number of supported blockchains to 15. There have been several significant changes in the crypto landscape, with stablecoins leading the way in many sectors, and these trends do not seem set to abate any time soon.

Let’s take a look at a few of the changes that the new Coinbase and Circle arrangement might have on the crypto sector.

Stablecoins Are Here To Stay

Despite detractors stating that stablecoins serve limited economic purpose and are no different from money market funds, the reality is shaping up to be far different. With major players such as PayPal
PYPL
joining the stablecoin ecosystem, and the growing prominence of Circle, the fact is that stablecoins have a critical role to play in the crypto sector. Mainstream entrepreneurs, individuals, and organizations are simply not going to want to take on the financial and legal risk that can arise from leveraging bitcoin as a payment system, at least under current U.S. policy. Stablecoins have long been discussed as an essential on-ramp to 1) educate and 2) show the mainstream business community the benefits of tokenized payments and other transactions.

Circle, in addition to the recent announcement with Coinbase, has also recently attracted investments from TradFi titans such as Blackrock and Fidelity. Stablecoins might have been categorized as a boring subset of crypto, but apparently boring is the new best way to attract capital.

Stablecoin Profits Can Get Tricky

One aspect that can get lost in the stablecoin conversation, and the crypto one at large, is that stablecoins are one of the few use cases that has a concise and relevant straight forward business case. Issuers of stablecoins track these tokens (assuming correct accounting of course) as liabilities, and hold assets in reserve to maintain whatever the advertised peg is (1:1 to USD for example), as well as for liquidity purposes. These reserve assets include a mix of dollar-denominated assets such as cash, short-term treasury bills, and other equivalently low risk and list financial instruments. Up until 2020-2021, with interest rates near all time lows, this business model did not create especially lucrative outcomes, but with the recent hikes in rates, this conversation has changed.

With speculation that interest rates will be higher for longer, profits on these reserve assets are set to increase significantly compared to past levels.

Questions that investors should be keeping in mind related to these higher stablecoin incomes can be summarized as follows. First, are there going to be plans or announcements connected to potentially distributing these profits? Secondly, as these profits are distributed at some point to stablecoins holders, will this potentially trigger securities laws for stablecoin issuers? Minimal evidence suggests this will happen any time soon, but as stablecoins and issuer profits rise in profile, it is reasonable to expect these types of questions to follow.

Stablecoin Reporting Will Improve

Crypto accounting and reporting has long been a weak spot for the sector, and the litany of failures connected to stablecoins has done nothing to improve this reception. Even as the Financial Accounting Standards Board (FASB) is set to issue the first-ever crypto specific accounting guidance by the end of 2023, there remain many accounting issues that remain unaddressed. One particular area that will become more obvious in the lack of authoritative and consistent rules is around the attestation and reporting of underlying assets either held by stablecoin issuers and crypto exchanges.

Multiple private sector options have arisen quickly and fallen out of failure, including proof of reserves, but that should be seen as part of the stablecoin maturation process versus and indictment of the products at large. With an increasing number of stablecoins issued and managed by TradFi institutions, and the stablecoin market forecasted by Bernstein to approach $3 trillion by 2028, the necessity for better and more comparable reporting rules is readily apparent. The accounting and audit profession should capitalize on these trends to advance the development of crypto-specific attestation, audit, and reporting standards. More transparency will only help the sector in the long-term.

Coinbase and Circle are making headlines, and this new partnership will only strengthen the stablecoin sector moving forward.

Bitcoin’s Low(ish) Volatility Is Good News For Crypto

https://www.forbes.com/sites/digital-assets/2023/08/20/bitcoins-lowish-volatility-is-good-news-for-crypto/

Bitcoin is evolving, and is bringing the entire crypto sector along for the ride

Getty Images

Given the tumultuous news cycle that has dominated airwaves, both within the United States and internationally, investors would be reasonable to expect that this volatility would carry over to the crypto sector. Bitcoin
BTC
specifically, long associated with higher-than-normal volatility, seems like an asset that would mirror this higher volatility. Instead, and to the surprise of some market watchers and investors, the price of bitcoin has continued to hold steady for the last several months. This price stability has existed even as 1) Blackrock and multiple other large TradFi institutions has submitted applications for ETFs, 2) the SEC suffered a partial setback in its legal campaign against crypto, and 3) the Federal Reserve continues to actively discuss both the potential of a U.S. CBDC as well as more regulations for banks involved with the crypto space.

In a recent Bloomberg article, rapidly circulated elsewhere following initial publication, there have been statements that this recent price stability is due to investor apathy and exhaustion. On the surface this sounds like a reasonable assessment; prices are still significantly off of all-time highs, Coinbase has become embroiled in legal action against the SEC, and the aftermath of FTX continues to cast a long shadow over the entire space.

Apathy and exhaustion, however, are not words that seem accurate to describe institutional interest in crypto and tokenized asset applications. One need to just look at the recent announcement by PayPal
PYPL
, launching a robust native stablecoin, for evidence of this.

Price stability does not mean apathy and exhaustion, far from it; let’s take a look at why this period of stability is healthy for bitcoin and the crypto space at large.

Stability Does Not Mean Weaker

One common argument that has been made during times of price stability, including the current run, is that this price stability is reflective of a weaker appetite for bitcoin and lower interest in crypto at large. This is a simplistic response that misses several important drivers that power the ecosystem forward. From research presented on BTC.com, both the hash rate and network growth have shown signs of improvement during this period, indicating that under a calm surface that is strong activity underneath.

One other note that is worth highlighting is that according to Glassnode research the number of addresses holding 10 or more bitcoin (including whales) have hit a three-year peak in excess of 157,000. These pieces of information seem to show an ecosystem that is both healthy, and continues to attract investors with confidence in its future.

TradFi Is Interested

TradFi has continued to make significant investments into the cryptoasset sector, and the move toward the creation and marketing of an increasing number of products and services recently (such as the multiple ETF applications recently submitted), indicates that this is just the beginning of a changing landscape. Lower price volatility around bitcoin, and cryptoassets more broadly, should be seem as both a cause and effect of the uptick in the interest and investment of TradFi into cryptoassets. This trend is also important for the sustainable and long-term health of the cryptoasset sector; major investment trends are driven either by automated investing algorithms and by passive investors, neither or which tend to like wildly flucuating valuations.

Redditors and trading threads on social media tend to lead the conversation in terms of the crypto sector, large passive investors such as pension funds and asset managers tend to shape market direction and trends. Wild swings in valuation are not conducive to either the long-term decisions fund managers to need make, nor the steady returns expected by stakeholders. Lower volatility is both a cause and effect of growing TradFi interest.

Crypto Is More Than Bitcoin

Something worth repeating is that the cryptoasset sector is much larger than just bitcoin. Although its continues to dominate business headlines and policy conversations, it is just one cryptoasset in a rapidly expanding ecosystem for tokenized asset products and services. For example, the vast majority of Layer 2 and more advanced tokenization projects do not run on the bitcoin blockchain. Rather the bulk of these innovative use cases are built on the Ethereum
ETH
blockchain, rekindling discussions of when torch of leadership might passed from BTC to ETH. The recent approval of a ETH futures contract offering is further evidence of this trend.

In addition, other projects such as decentralized autonomous organizations (DAOs) along with the associated governance tokens, provide a readily understandable business use case for entrepreneurs seeking to capture the benefits of tokenization. Other subsets of the crypto space, such as stablecoins and non-fungible tokens (those not focused exclusively on price appreciation), continue to expand, develop, and play a more prominent role in the crypto space.

Price stability is a positive trend for the crypto sector, and should be treated as a sign of a maturing and expanding ecosystem.

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How The PayPal Stablecoin Will Change The Crypto Conversation

https://www.forbes.com/sites/digital-assets/2023/08/13/how-the-paypal-stablecoin-will-change-the-crypto-conversation/

PayPal is making waves in the crypto space with the launch of a stablecoin

getty

Given the ongoing lack of clarity as to how stablecoins should be audited, not to mention the disclosures and reporting that should accompany these instruments, launching a brand-new coin might seem risky. That might be true, but it is also exactly what PayPal
PYPL
has done. On August 7th Paypal announced it would be launching its own native stablecoin (PYUSD) to be used in transactions between both merchants and customers. On the surface this might appear to be an unusual move for a company whose core business is processing fiat transactions, but that overlooks the reality that PayPal has long been involved in the crypto sector. Beginning with partnerships with the crypto sector going back to 2014, PayPal allowed customers to buy and sell certain select cryptoassets on the platform, which then evolved into allowing certain payments to be made in these select cryptoassets.

Cryptoassets and the tokenization of financial instruments, after all, are less about one specific coin (sorry bitcoin maximalists), but are instead about the fundamental shift in how data (financial and non-financial) is transmitted between two or more parties.

With total stablecoin transaction capitalization hitting $130 billion in 2023 via research by Codex, and the increasing interest in asset-backed tokens by institutions and nation-states alike, it certainly appears like the future of mainstream crypto payments will be driven by these instruments. That said, every cryptoasset is unique and deserves to be examined on its own merits. Let’s take a look at PYUSD, and what investors should keep in mind as this story develops.

PYUSD Might Force Regulators To Act

One of the most powerful effects of PYUSD might not have anything to do with the token itself, but the ripple effects that the token will have on the crypto regulatory landscape at large. In the context of institutional crypto, the launch of PYUSD – by one of the most recognizable and commonly used financial payment processors in the world – could be the impetus regulators need to move on stablecoin regulation.

With dozens of bills proposed over the last several years, yet no legislation to show for it, and a focus on stablecoins, this event might present policymakers with a project that is too big to ignore.

How Can It Be Used

In the press releases and other information that has disseminated by the firm, it seems like PYUSD addresses many of the concerns and issues that have previously dominated other stablecoins, specifically a narrow range of use cases. With PYUSD, users can make person-to-person payments, fund purchases with the token at PayPal checkout, and transfer PYUSD between PayPal and other wallet providers. PayPal will also enable users to convert other currencies supported by PayPal to and from PYUSD.

Lastly, PYUSD is fully backed and redeemable on a 1:1 basis with the U.S. dollar. All these traits combined 1) make sense considering the pivotal role PayPal plays in digital payments, and 2) showcases the robust nature of the product.

PYUSD Highlights Continued Ethereum
ETH
Dominance

In addition to pushing PayPal to the forefront of the stablecoin and crypto conversation, at least in the content of major financial firms, this launch also highlights the continued dominance of Ethereum in the crypto-product space. Accelerated by the operational improvements resulting from the Merge and Shapella upgrade, the Ethereum blockchain continues to dominate the crypto landscape in terms of new product and services. Price action related to the ETH was muted following the announcement of PYUSD, but investors would be well served to watch how the increasing number of offerings on Ethereum influences prices moving forward.

Bitcoin
BTC
still reigns supreme in terms of market capitalization, market coverage, and general awareness but the “boring” stablecoin world is slowly chipping away at this leadership.

PYUSD Emphasizes Transparency

Clearly any centrally controlled and managed cryptoasset will raise the eyebrows of investors, regulators, and users alike, especially after the spate of failures connected to both stablecoin issuers and exchanges in 2021, 2022, and 2023. Specifically, the lack of authoritative auditing or attestation standards has led to a range of service providers looking to fill the void, but these efforts lack the consistency, comparability, and reliability of existing financial auditing and attestation rules. It is worth noting that even in the preliminary launch information discussing the upside and potential of this product that PayPal management thought it necessary to highlight the focus that will be placed on transparency.

To that end, both PayPal and Paxos will be issuing reserve attestation statements to hopefully assure regulators and investors that the token is backed by appropriate assets safeguarded by appropriate counterparty reviews.

Stablecoins and the launching of stablecoins by TradFi institutions are – increasingly – looking like the next phase of crypto development. PYUSD might not represent a unique innovation, nor a perfect iteration of stablecoins, but it certainly lays the groundwork for future development and innovation. Regulators and investors would be well positioned to take note.

5 Tips For Crypto Taxes When Being Paid In Bitcoin

https://www.forbes.com/sites/digital-assets/2023/08/06/5-tips-for-crypto-taxes-when-being-paid-in-bitcoin/

Bitcoin tax rules apply to bitcoin income as well as trading activity

Getty Images

It is an interesting time for the crypto sector, with increased adoption and product launches by institutions alongside an ongoing regulatory crackdown in both the United States and abroad. Even with all of that controversy and regulatory noise swirling around however, it is worth pointing out that the appeal of being paid in crypto – and bitcoin specifically – continues to increase. According to research by NYDIG, 36% of employees under the age of 30 would be interested in allocating a portion of total pay to bitcoin. Additionally, approximately 1 in 3 of that cohort, when choosing between two identical jobs, would choose an employer that helped them get paid in bitcoin.

Further research by global hiring firm Deel, analyzing over 100,000 employee contracts, indicates that the desire for crypto payroll is on the rise, especially for remote workers and those located in certain high-inflation regions. These surveys highlight the reality that certain high-profile bitcoin-as-salary examples, such as Miami mayor Francis Suarez who has pledged to turn bitcoin into a crypto-hub and has led by example taking his salary in bitcoin, which has led to an increase in both net-worth and name recognition, are not flash-in-the-pan events.

There is clearly an interest in, and appetite for, receiving compensation in the form of bitcoin, but doing so does present some challenges connected to taxes. Let’s take a look at some things investors should keep in mind when being paid in bitcoin.

Bitcoin
BTC
Payroll Is Income

This should go without saying, but no matter what form or timing compensation takes, it is compensation and creates a taxable event. Even if the employee in question chooses to not sell the bitcoin received during the year, the fair market value at the time of payment is used to determine how much taxable income exists.

Tip. Ignore the redditors and other self-titled experts and work with a tax professional familiar with taxes and the crypto sector.

Bitcoin Rich And Cash Poor

Building on the above point, receiving some of (or all) of a salary in bitcoin will result in a tax liability, but under current IRS guidance it is not possible to pay tax obligations using anything but U.S. dollars. This can quickly result in a situation where a taxpayer, seeking to avoid additional capital gains taxes (more on that below), might have to take on debt to have cash funds to pay taxes.

Tip. Even for taxpayers looking to ditch fiat money, taxes are – for now – only able to paid using them, so cash still has a major use case.

Tax Rates Can Differ

While bitcoin that is received as part of salary or other compensation agreement will be assessed at the ordinary income tax rate, if that recipient chooses to hold on to these bitcoin, the tax rates can start to vary. For example, a taxpayer can have and ordinary income tax rate between 10% and 37% , be subject to short-term capital gains rates that also range between 10% and 37%, or incur long-term capital gains rate of between 0% and 20% if the 12-month holding period requirement is satisfied.

Tip. Tax rates and income brackets might seem strike some taxpayers as dull, but play a major role in how much is owed in taxes.

Cost Basis Tracking Is Critical

One of the trickiest aspects of receiving bitcoin for payroll purposes is the necessity of tracking cost basis, an idea completely unconnected to fiat-based payroll. Especially for bitcoin, which is well known (somewhat unfairly) for having high volatility, tracking and recording the cost basis of every partial bitcoin received during every pay period can represent an unexpected and unforeseen cost and inconvenience. Simply put, the larger the difference between initial cost basis (when received) and date of sale might lead to a larger tax liability.

Tip. Tracking, recording, and maintaining documenting of the cost basis for bitcoin payroll is something every taxpayer needs to be aware of, and not simply trust that information is being recorded elsewhere.

Bitcoin Bonuses Are Still Income

Despite the array of tax implications that being paid in bitcoin can create that are different from being in fiat, one aspect is relatively straight forward. For employees whose base pay consists of fiat currency, with a bitcoin bonus at the end of the year or at some other period, this creates a simple tax scenario; the fair market on the day of payment is added to income and taxed at the appropriate ordinary income rate.

Tip: No matter what a bitcoin payment is labeled as, the IRS will continue to treat it as compensation, and tax it accordingly.

Crypto continues to make inroads into TradFi, and bitcoin for payroll is just one example. Taxpayers looking to receive some compensation in this form, however, need to be aware of the tax implications and keep informed as to these changes moving forward.

What Crypto Investors Need To Know About Worldcoin

https://www.forbes.com/sites/digital-assets/2023/07/30/what-crypto-investors-need-to-know-about-worldcoin/

Sam Altman, Co-Founder of Worldcoin

Getty Images for TechCrunch

As AI continues to dominate media debates, and capture the attention of venture capitalists, the CEO of Open AI – the company that introduced the world to ChatGPT – has launched an ambitious new project; Worldcoin
WLD
. Following an unfortunate pattern that has begun to emerge, this cryptoasset is not available in the U.S. due to the regulatory environment, but is still making waves in the marketplace. With the price of the Worldcoin token jumping 20% on exchanges following its launch, there is clearly investor appetite and interest for this product, but that also raises the following question; how is this project different from the slew of other tokenized products that have launched recently?

One point worth highlighting is that Worldcoin has been developed with an explicit goal of helping humanity contend with the possibility that an Advanced General Intelligence (AGI) will enter the marketplace sooner than many experts might think. With the possibility of mass job displacement, real-time analytics available on all digital information, and the societal strife that could cause, planning for an AI-driven future makes sense.

An additional thing to note is that this AI-driven crypto project has been frank about the reality that – as of initial launch – the tokenomics are still somewhat murky. Altman has commented that at least at the beginning the idea is that individuals will choose to become part of the project out of interest in the concept. The team at Worldcoin is predicting that as financial benefits accrue from AI developments these benefits will be reflected in the price of token itself.

Let’s take a look at a few other aspects that potential investors should know about Worldcoin, and how it impacts the broader crypto conversation.

Worldcoin Is Hardware Driven

One aspect of the Worldcoin project that can unsettle some potential users is that the project is dependent on a hardware device that has been dubbed “The Orb.” This sleek and futuristic device is where the iris scan – the aspect of Worldcoin that caused the most controversy – takes place. Building on this concern, privacy questions continue to be asked about 1) what is done with this information, 2) how the deletion of this information is performed by the Worldcoin team, and 3) what this data will be used for as the ecosystem expands.

For instance, even if the data is immediately deleted currently, as the financial stakes become higher, the incentive to monetize user data will increase accordingly.

Worldcoin Needs AI To Work

In public commentary around the launch of Worldcoin, Sam Altman (co-founder) and Alex Blania (CEO) specifically attributed the integration of AI throughout the Worldcoin process as a critical component of its operation. While users have the option to enable Worldcoin to retain iris and other biometric information, the default setting is to prohibit this. The algorithms and AI tools employed by the firm allow the Orb to verify the location, iris information, and connection to existing Worldcoins (if applicable) in real-time without the need of maintain a standing record of this information.

Worldcoin seems to represent one the first, if not the first, crypto project that is almost entirely reliant on AI for its business model to operate as advertised while maintaining the levels of privacy it claims.

Worldcoin Is Connected To UBI

The concept of universal business income (UBI) has been a topic of increasing discussion, accelerated by the short-lived candidacy of Andrew Yang during the 2020 U.S. Presidential Election. Politics aside, the idea of UBI is that as automation and AI continue to take over increasing swaths of the economy and job market there is going to be a need for an enhanced social safety net for displaced individuals. Framed in a more optimistic framework, as AI and other automation tools take over large amounts of tasks and roles that are not popular amongst most employees, some of the wealth created should be widely distributed to the population.

Worldcoin and its operational charter algin directly with this vision, with the idea of UBI and distribution of tokens underpinning a significant part of the initial marketing and optimism for the idea. UBI as a political and economic tool is increasingly looking like something coming sooner rather than later; cryptoassets and technologies will need to be prepared.

Implications for Other Tokens

No singular token project is going to transform the cryptoasset space, but there are several implications that should be noted by investors and developers alike. These include but are not limited to the following. First, cryptoassets may have originated in the virtual space but the rapid rise of smart-hardware (such as virtual reality headsets) seems to point toward a future where tokens will need to be interoperable across a wide number of platforms. Second, AI will invariably go through the hype cycle that accompanies all emerging technologies, but the trend toward more widespread adoption of AI is inevitable.

To remain relevant, and capitalize on the synergies possible between AI and crypto projects, token developers will need to embed AI where possible. Lastly, to combat both the regulatory scrutiny that cryptoassets remain under, and the (justifiable) fears that some have associated with AI, developers will to proceed in a well paced manner that balances privacy, innovation, and functionality.

AI and crypto are changing the financial world every day, and Worldcoin provides an example (albeit imperfect) as how these dual forces can work together to accelerate these changes.

The IRS Pursuit For Crypto Taxes Extends To Puerto Rico: What Investors Need To Know

https://www.forbes.com/sites/digital-assets/2023/07/23/the-irs-pursuit-for-crypto-taxes-extends-to-puerto-rico-what-investors-need-to-know/

Puerto Rico finds itself in the crosshairs of tax agenices due to tax incentives that have attracted … [+] crypto investors and entrepreneurs

AFP via Getty Images

The IRS has made no secret of the priority that the Service has placed on crypto tax assessment and collection since Bitcoin
BTC
first made many mainstream investors aware of the sector. Going back to the early days of mass-market crypto, the IRS filed legal action against U.S. based exchanges and U.S. branches of international exchanges, seeking more information on certain traders and customers from firms including Coinbase and Kraken. Following up on that the IRS has sent thousands of letters to taxpayers requesting (or demanding) more information and payments connected to crypto transactions. More recently, the “crypto question” has moved from other places on the 1040 to a prominent place on the individual tax return; this, in turn, has made crypto tax planning a priority for accounting professionals in recent years.

Even as the regulatory winds seem to be shifting ever so slightly, with a partial win by Ripple in the XRP
XRP
case, and positive sentiment around multiple ETF filings that have recently been put forward, the tax outlooks remains relatively unchanged. Under current tax laws, guidance, and interpretations every crypto transaction – including mining, staking, and trades – are taxed either as ordinary income or capital gains depending on the holding period involved. For every tax or financial problem, however, there is almost always a related tax-based solution.

Puerto Rico, seeking to attract and retain high net worth individuals and taxpayers, passed a slew of tax incentives, with over 5,000 individuals and 3,600 businesses having taken advantage of these measures. The program initially began with the Puerto Rican Export Services Act (Act 20), and the Individuals Investors Act (Act 22). In 2022 these two Acts were consolidated through Act 60. To quality, businesses would need to generate $3 million in revenue and employ at least one Puerto Rican resident. Individuals must purchase a home on the island and donate at least $10,000 to charities.

On the surface these sound like straight-forward policies, so why is this becoming controversial? Let’s take a look at what is going and how it connects to cryptoassets.

What Are The Issues

While the headlines are centering around the crypto traders and asset managers that have relocated to Puerto Rico, the real issues are explicitly connected to tax guidance, and how the existing rules are being interpreted. The exemptions that have been on table for investors and entrepreneurs include a 100% exemption on dividends, a 60% exemption on municipal taxes, and 0% federal taxes on income that is sourced within the region. From a business perspective, these entities can avoid paying taxes on dividends from earnings and profits, with only a 4% tax rate charged on exports.

One of the more stringent qualifications to obtain these benefits is that 1) the taxpayers must be able to prove they list on the island for 183 days, and that the territory is their “tax home.” According to the IRS, the tax home for a taxpayer is the entire city or general area of the workplace of the taxpayer. For investors and entrepreneurs seeking to minimize tax liabilities while remaining relatively local to U.S. markets this has unsurprisingly proven to be an attractive offer.

As appealing as these tax incentives are for attracting new residents, there are issues that have arisen alongside investor interest in thes tax incentives.

Why Crypto Is In The Crosshairs

It is no secret that the cryptoasset sector, as well as the firms and investors operating in the space, have found themselves as the target of regulation and governmental agencies the world over. By its very nature, the blockchain and cryptoasset sector is a global business that is not tethered to any one particular marketplace. Additionally, Puerto Rico is not the only locale that has sought to attract some of this capital – both intellectual and financial – via tax and other incentives. These other locations include, but are not limited to Malaysia, Portugal and more traditional financial hubs such as the Cayman Islands.

Specific to the issues connected to Act 22, however, there are two points that seem to be driving this current crackdown. First is the fact that Puerto Rico has endured several natural disasters in the last several years, and that the island is still very much in the process of rebuilding and reinforcing infrastructure and the broader economy. Granting tax breaks to wealthy international residents has caused protests and legal challenges. Second is that these wealthy individuals and enterprises have, by the nature of having more disposable income and much lower taxes, driven up the cost of living for residents, many of whom are not eligible for these tax incentives.

Layered with the doubt and suspicion that the crypto sector is still combating, and the recipe for a crackdown is complete.

What Investors Should Consider

Crypto investors should always keep a watch on the changing regulatory landscape and outlook for both specific cryptoassets (such as in the Ripple case), and the attitude toward the sector at large. What the recent discussion around the tax incentives provided in Puerto Rico prove is that regulators and tax agencies are actively seeking sources of new revenue. For investors and entrepreneurs, be they located in Puerto Rico or in other jurisdictions the following advice continues to apply. Recommendations include, but are not limited to the following – 1) always work with a tax professional familiar with the crypto space and the specific tax situation in question, 2) retain records and documentation for any major tax exclusions that are sought, and 3) allocate time on a periodic basis to keep abreast of these (sometimes) rapidly changing changes.

Crypto taxes are always a hot topic, but well prepared investors can continue to navigate theses sometimes tumultuous waters successfully.

The FedNow Payment System Will Not Make Crypto Obsolete

https://www.forbes.com/sites/digital-assets/2023/07/16/the-fednow-payment-system-will-not-make-crypto-obsolete/

FedNow has recently launched, framed by some as competition for crypto payments

Getty Images

Crypto advocates and supporters, including the bitcoin maximalist community, have long predicted a future where cryptoassets supplant fiat currencies as the global standard for exchange. Given these beliefs, the launching of the FedNow payment system (scheduled for a July go-live and already being implemented by early adopters), has sent shock waves through the marketplace. Decried by some as simply the first step toward a surveillance currency following in the footsteps of some authoritarian regimes, and by others as the final nail in the coffin of most crypto use cases, the reality is more nuanced.

The FedNow system is the Federal Reserve answer to the litany of issues and pain points that exist in the global payment infrastructure. It is an interbank real-time gross settlement that has been developed by the Fed to support faster payments. This project has been developed in part to the challenges put forward by tokenized crypto payments as well as the rise of fintech options such as Venmo, Zelle, and others. Different from existing options such as those previously listed, FedNow represents a new settlement mechanism that enables real-time payments between U.S. banks. These services will operate 24/7/365, will provide final settlement, and represent an upgrade of U.S. payment rails to catch up to similar services offered in the Euro zone and elsewhere.

So if the Fed has created an instantaneous, globally interconnected, and final (immutable) payment that never closes, does this eliminate the need for crypto? Let’s take a look at a few reasons why crypto payments certainly have a role to play in a FedNow payment landscape.

FedNow Does Not Expand Dollar Dominance

One fear that has bubbled to the surface over the last several years, and has accelerated in the post-COVID economic landscape, is the specter of de-dollarization. Specifically, international transactions that are being denominated settled in yuan and Euros have both been increasingly significantly. This is due to a number of geo-political reasons, in addition to the economic arguments underpinning these shifts, but this has also provided an in-road for stablecoins to increase marketplace. In many markets, considering that over 90% of stablecoins are reserved 1:1 with the U.S. dollar, these instruments serve as an effective proxy for the USD in markets that are otherwise off-limits.

The FedNow system, operating on existing payment rails and frameworks, does not expand the reach of the U.S. dollar, nor expand the potential number of dollar-based transactions that are possible.

FedNow Ignores On-Chain Opportunities

While the FedNow payment structure might seem like a stablecoin replacement, it ignores one fo the fastest growing applications of stablecoins; on-chain transactions and applications. To add some context, the total supply of stablecoins from 2017-2023 has increased 8,750% to a total of $123.9 billion according to research from Coin Metrics and The Block. Much of this increase in volume can be attributed to the role that stablecoins play in the DeFi sector, both as a medium of exchange and hedges against more volatile cryptoassets. The FedNow protocol ignores these opportunities, since it does not allow dollars to exist on-chain or participate in on-chain transactions.

With tokenization of assets increasingly a topic of conversation at TradFi institutions, including statements made by Blackrock CEO Larry Fink that the market opportunity is $10 trillion, ignoring on-chain transactions seems to be working against market direction and sentiment.

FedNow Does Not Improve Cross-Border Payments

Noted in the Economic Report of the President, the FedNow protocol as currently designed and launched focuses almost exclusively on domestic payments, with limited improvements to international payments. Any governmental tool seeking to create a borderless international payments system clearly faces a difficult task, but stablecoin payments represent an existing solution to this friction. Regulators and policymakers might ask, reasonably so, how significant are stablecoin payments and transfers in the global context; the lack of materiality had been cited as to why financial accounting standards have been so long in coming.

Stablecoin payments and transfers reached $2 trillion in Q1 2023, which is more than the total volume processed by PayPal
PYPL
in all of 2022.

This is not to say that the FedNow system will have no impact on payments, crypto or fiat; that would be short-sighted perspective. Rather, as the platform moves from development through pre-launch to mainstream acceptance, some of these issues (including the current $500,000 limit) will surely be addressed. Instead it is worth pointing out that many of the innovations and improvements that FedNow delivers to the current payment rails mirror some of those available via blockchain-based transactions.

FedNow is not the end of crypto, and might actually open the door for more stablecoin transactions moving forward.

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How Spot Bitcoin ETFs Will Change Crypto Trading

https://www.forbes.com/sites/digital-assets/2023/07/09/how-spot-bitcoin-etfs-will-change-crypto-trading/

Bitcoin ETFs are set to shake up crypto markets

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Even as bitcoin holds around $30,000, and other cryptoassets seem to be trading in cautiously optimistic ranges, the real change is still on the horizon. In late June there were multiple applications filed with the Securities and Exchange Commission to launch spot bitcoin exchange traded funds; this is not the big news in and of itself. With similar applications having been filed (and rejected) previously, the real difference is which institutions have submitted these applications. These include some of the largest financial firms in the world, with Blackrock and Fidelity serving as the headliners of this current crop of application.

The market need for more comprehensive crypto trading solutions is simultaneously obvious to most market participants and difficult to achieve following the litany of failures in the sector. The world’s largest crypto exchange, Binance, continues to face significant headwinds when seeking to establish new offices across the globe. Even Coinbase, the only U.S. publicly traded crypto exchange, is facing down lawsuits from the SEC; the path forward does not seem to be driven from the crypto-native sector. Rather, and evidenced by both these recent ETF applications and continued investment in tokenized asset applications, TradFi is seemingly coming around to the market appetite and opportunities to be founds in cryptoassets.

Speculation aside, there are several concrete ways that a spot bitcoin ETF will change crypto trading; let’s take a look at a few of them.

Lower Commissions

The first and most obvious way that spot ETF products will change the marketplace, especially those supported by firms such as Blackrock, is that this will cause downward pressure on trading fees and commissions. Coinbase, the leading U.S. crypto exchange, has a tiered trading fee structure that can vary significantly, but can be as high as 3% for retail traders. Contrasted with the average fee of 0.01% for ETF trading, and the impact on profits could be significant. For example, a trader would pay $300 (3%) on a $10,000 trade versus paying $1 at the average 0.01% fee for ETF trades.

Sticking with Coinbase specifically for the time being, it is important to note that Blackrock has enlisted the firm to operate as its custody partner for this proposed product.

More Automation And AI

As a direct result of lower fees and trading commissions it is almost a given that more automation, and potentially AI-based trading, will be coming to the crypto sector sooner rather than later. In fact the former President of FTX U.S., Brett Harrison, has founded a new crypto exchange that will be infused with AI to facilitate trading, market making, and other operations. Architect, borrowing from the playbook embraced by many TradFi institutions, will make use of ChatGPT to enhance AI offerings. Regardless of whether it is generative AI, or more mundane automation of back office tasks, the lower fees that will begin to permeate the marketplace will lead to greater adoption of automation across the crypto sector.

Less Currency Use

A reality that is set to irritate members of the bitcoin maximalist community is that the submission and approval of a bitcoin ETF, and the inflows of capital that will follow as portfolio managers and asset managers rebalance accordingly, will further diminish the likelihood of bitcoin being used as a currency. As the appeal of bitcoin as an asset class continues to move into the mainstream and be leveraged by individuals and institutions alike, i.e., forecasting higher prices, entrepreneurs and other businesses are less like to take and make payments in this token.

Notably, according to 2023 analytics from research firm Glassnode, over 50% of bitcoin have not moved in over two (2) years, indicating that the holding for the long term was – and continues to be – a leading strategy in the bitcoin market.

Less Self-Custody

Another fundamental change that will be accelerated as the result of major institutions achieving ETF approval is that custody will also change in a major way. As a bearer asset, bitcoin and other crypto advocates have emphasized the importance of self-custody and key management for years. Scandals and centralized exchanges and operators have highlighted the importance of this topic; cold wallet manufacturers such as Tezor saw dramatic jumps in sales following the failure of multiple centralized and decentralized exchanges in 2022.

Assuming a spot ETF is approved, this means that the custody over both the bitcoin and cash component of this product will be handled by an external third-party. Even more telling is that the proposal submitted by Blackrock, itself the largest asset manager in the world, involves Coinbase for bitcoin custody and shares cash custody responsibilities amongst the largest banks in the U.S. All of this might help this ETF obtain approval from the SEC, and assuage investor concerns, but means that self-custody is off the table.

Whichever way the applications for a spot ETF submitted by Blackrock (and others) are analyzed, it looks positioned to dramatically change the crypto trading landscape going forward; investors should keep a close eye our for future developments.

AI Will Help Crypto Get To The Next Level

https://www.forbes.com/sites/digital-assets/2023/07/02/ai-will-help-crypto-get-to-the-next-level/

Getty

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Even as blockchain and cryptoasset firms find themselves facing a barrage of legal and regulatory actions, and a much-discussed crypto winter, they are also facing down the ever-present conversation around AI. Spurred on by the rapid adoption and implementation of ChatGPT (and ChatGPT-like solutions), venture capitalists and other investors have begun to shift interest and funds toward AI projects at an accelerating rate. According to CB Insights, AI start-ups attracted over $5 billion in venture capital in Q1 2023 alone, after raising over $40 billion in 2022. While tokenization, Web3, and other blockchain-related projects are certainly being developed and built out, AI and crypto are being framed by some as adversaries.

This misses the broader point.

The reality is the mega trends of blockchain-based transactions, tokenized financial assets, and the integration of AI into virtually every business are not going away. Rather, and evidenced by recent moves and actions to further promote bitcoin and/or crypto investing options as well as the fervor around AI projects (and constructive policy), these trends are only set to accelerate moving forward. Equally as real, however, are the concerns and problems that have arisen in the cryptoasset space. A lack of trust, past-collapses, legal action taken against alleged fraudsters, and a general lack of transparency continue to prove difficult obstacles for firms in the space to overcome.

AI is not a cure-all for the ills of the crypto space, but there are some ways that AI-based tools can – and will – improve the understandability, transparency, and comfort with which firms and investors can utilize crypto where effective.

Real Time Transparency

One major issue and problem that continues to exist and that has attracted the ire of regulators and investors is the ongoing lack of transparency, real-time reporting, and comparable reporting standards in the crypto sector. Various models have been put forward, with proof of reserves briefly rising to prominence before being dragged down due to issues with the lack of standardization in how these accounting engagements were performed.

AI in its various forms, be it a large language model, neural network, or other form of advanced AI, can be leveraged to assist with these processes. Audits and other attestation engagements primarily focus on collecting, confirming, and reporting out information about the firm in question to the external marketplace. Framed in that context, AI applications appear well situated to enhance current efforts underway in the space to reduce fraud. Mastercard
MA
, recently having launched Mastercard Crypto Credential, is a clear example of how the push by TradFi institutions into the crypto space is being accompanied by a renewed focus on transparency and fraud detection. AI applications, trained and built through analysis of incredibly large data sets, seem a good fit to help improve current fraud detection options and help create new ones.

Smart Contract Review

Moving up the value chain in the cryptoasset sector, smart contracts play a critical role in the successful operation of most blockchain-based and cryptoasset applications. Decentralized finance applications and non-fungible tokens, for example, must be able to interoperate with other cryptoassets and counterparties, as well as with established financial institutions. These essential communications and interactions tend to be powered by smart contracts, which are programable tools that allow blockchain-based tools to automate certain tasks, interoperate with other technology tools, and ultimately provide much of the value promised by blockchain applications.

For all the promise that smart contracts hold, however, there are issues that continue to arise with implementation. Lack of widespread standards, the inability of quick changes to be make to blockchain records, and the specificity that can be required can all limit the applicability of smart contracts for many businesses.

AI, be it in the form of large language model or some other form of AI, can help firms analyze, review, and revise smart contracts – in addition to demo testing them – on an on-demand basis to streamline how these applications are implemented at the firm in question.

Bot Payments

Blockchain and cryptoassets have long been in search for a “must have” application and use case, and the spectacular rise of AI in the general market consciousness has highlighted this fact. ChatGPT, for all its imperfections, has delivered an intuitive, easy to use, no-code-required application that conveys a readily understandable value proposition to individuals and institutions. The rise of AI and the rapid increase in interest and investment in the space can also indirectly lead more payment-based applications for cryptoassets.

For example, as chat bots and other bot-augmented processes and tasks become more commonplace at firms, this creates an increasing likelihood of bots interacting, transacting, and paying each other to render services or deliver products. This is an almost ideal opportunity for blockchain-based payments – via tokenized assets – to play a pivotal role going forward. AI bots and applications have the ability to analyze and transact information on a continuous basis, outside of working hours. When layered on top of smart contracts, allowing these bots and other applications to operate across a wide range of applications and tools, presents an almost ideal testing ground for bot-to-bot payments and confirmations.

AI is attracting a lot of attention and investment, and also has the ability to help crypto find its must-have use cases sooner rather than later.

TradFi Will Push The Next Leg Of Crypto Adoption

https://www.forbes.com/sites/digital-assets/2023/06/25/tradfi-will-push-the-next-leg-of-crypto-adoption/

A silver lining for crypto adoption has emerged.

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Even as the Securities and Exchange Commission continues to fine, sue and crackdown on crypto exchanges, stablecoin issuers and many crypto-native firms, a silver lining for crypto adoption has emerged. With bitcoin (BTC) cracking $30,000 for the first time since April, and although this is still significantly down from all time highs, market sentiment and interest in crypto assets continues to shift in a positive manner. Something that might be overlooked, however, is that a cause for this recent rally is not connected to crypto firms or crypto-native firms.

Ironically enough this recent rally in the price of bitcoin and other crypto assets is being caused in large part by the traditional financial institutions that crypto was originally designed to disrupt. Recent efforts include the filing for a bitcoin ETF by Wall Street heavyweights such as Blackrock, Invesco and WisdomTree, and the continuing rollout of enterprise blockchain solutions and deposit tokens by the largest U.S. bank, J.P. Morgan.

Outside of the bitcoin maximalists, whose vision for a bitcoin-only world looks less likely for the time being, this news should be celebrated by investors, developers and entrepreneurs in the crypto assets. Even while under the barrage of near constant regulatory pressures from U.S. regulators and a negative environment from U.S. policymakers, the adoption and integration of crypto assets into financial markets continues to move ahead. Specifics of these endeavors vary from institution to institution, but the underlying trend is same; traditional finance is embracing crypto in a big way.

Let’s take a look at a few of the reasons why, despite the ongoing regulatory crackdowns, TradFi holds the key to the next leg up for crypto assets.

Institutional Access And Clients

Financial markets, especially traditional equity and debt but increasingly including crypto, are dominated by institutional traders, large pools of capital and the products and services that are developed by these firms. For example, Larry Fink, the CEO of Blackrock, has long been a proponent and supporter of the tokenization of financial assets, calling them a trillion-dollar opportunity going forward. Admittedly, the total number of clients anticipated to invest in these initial products—assuming they are successfully approved—is limited. The institutional investment and expertise brought to these conversations will only assist in these efforts.

Building on this last point, the long list of proposed bitcoin and crypto ETFs that have been denied by the SEC have one thing in common—they were all proposed by crypto-native firms. Given the ongoing crackdown by the SEC on these crypto-native exchanges and organizations, it seems like the best approach for the sector would be to embrace this TradFi interest in crypto. Even though these organizations might have been perceived as the enemy of crypto innovation by some, the access and experience such institutions bring to the table will prove invaluable.

Better Centralized Exchanges

Centralized exchanges in the crypto space do not have a good track record, to put it mildly; the collapse of FTX continues to 1) cast a long shadow over the crypto sector at large and 2) influence the regulatory decision making process in both the United States and abroad. Addressing these concerns will be a multi-year process, and launching a new centralized crypto exchange would most likely only lead to new questions and scrutiny from regulators. Yet again, this has provided an opportunity for traditional financial institutions to get into the crypto asset sector in a major way.

In addition seeing the submission of application for bitcoin ETFs by some of the largest financial firms in the world, also saw the launch a new centralized crypto trading exchange. EDX Markets, backed by Fidelity Digital Assets, Charles Schwab and Citadel Securities. A question that is reasonable to ask is how such a centralized exchange would operate differently from exchanges that have failed (like FTX), or are actively being sued by the SEC (like Coinbase).

Addressing these concerns, EDX Markets CEO Jamil Nazarali has stated that the company will be different from other crypto exchanges by not offering custody services for customer assets. Instead, reflecting the TradFi influence over this exchange, users will have to go through other financial intermediaries to buy and sell crypto assets. Separating the exchange and broker dealer function—the thinking seems to be—will lead to a more receptive regulatory environment.

More Transparency And Consistency

Perhaps the biggest benefit and upside of increasing the interest and investment of TradFi in the crypto space is the benefits that will come from working with large incumbent institutions in a collaborative manner. Even though incumbent banks and other financial institutions are routinely fined for any number of activities, the reality is that bringing these firms into the crypto space will bring transparency and consistency to how data is reported and managed.

Regulation and more compliance requirements might not be in complete alignment with the original idea of crypto, nor align directly with the idea of moving fast and breaking things, but when handling customer hands, safeguards are difficult to overdo. Especially in the aftermath of FTX—and the issues that other exchanges are having—looping in established and entrenched firms will most likely prove a stabilizing presence in the market.

TradFi is coming for crypto and that might be the best thing for long-term market development.

The Securities Clarity Act Is A Good First Step Toward Crypto Legislation

https://www.forbes.com/sites/digital-assets/2023/06/18/the-securities-clarity-act-is-a-good-first-step-toward-crypto-legislation/

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With crypto advocates and legal advisors decrying many of the recent actions and enforcement measures taken by the SEC against crypto exchanges, stablecoin issuers, and other market making platforms, the need for regulatory clarity is growing more urgent. While some legal experts in the space state – correctly – that the actions taken by the SEC make sense when viewed in the context of previously issued comments, this does not change the fundamental concerns.

Even if the ongoing legal cases with Binance and Coinbase – both of whom have the financial resources and management commitment to see them through – are resolved via the courst system, the likelihood is that these cases will not set far-ranging legal precedent. Oftentimes, as in the Jarrett staking case, the outcomes of the cases are limited to the specific parties involved, and do not lead to sweeping regulatory changes.

Some of the fundamental issues that have resurfaced with regards to regulatory guidance and transparency have to do with 1) which cryptoassets will be treated and regulated as equity securities, and 2) how this decision will impact other operators in the crypto space. The Securities Clarity Act, introduced by Representatives Tom Emmer and Darren Soto, is an admirable attempt to address this issue in a concise manner. Let’s take a look at the core points of this proposed bill, and why enacting them would be a good first step toward making the U.S. more open and amendable to cryptoasset development.

Distinguishing Between Investment Contract And Asset

A commonly cited piece of data used by the SEC and other advocates of cryptoassets-are-securities is the fact that organizations are issuing tokens with the express intent of raising money, using these funds to conduct business operations, and that investors are purchasing these tokens with the express intent of earning a profit as a result.

The Securities Clarity Act would delineate and distinguish between the underlying investment contract that governs the actual issuance of the token and/or cryptoasset itself, and the token instrument. Specifically this proposed legislation would state that even if an investment contract transaction (the offering) has taken place, that the investment contract asset (the token) need not automatically become a security as a result.

Such an approach also has the benefit of building upon and leveraging the Howey Test, and therefore is not trying to recreate the wheel or otherwise upend the entire financial regulatory framework in the United States.

SEC Still Has The Final Say

Another interesting component of this proposed act is that the SEC will still have ultimate jurisdiction over what is and what is not classified as an equity security. This might disappoint some of the more maximalist minded crypto advocates in the marketplace, but is an important measure for the time being. As strict and adversarial as Gary Gensler has been perceived – by some – to be versus the cryptoasset space, the SEC as an organization serves an important role in the smooth functioning of U.S. capital markets. No chairperson lasts forever, and retaining oversight of crypto at the most powerful and well-staffed U.S. markets regulator makes logical policy sense.

What the SCA would accomplish is create a crypto-specific, unique, and repeatable framework for organizations seeking to issue tokens to work within while entering into dialogue with the SEC. While the SEC has encouraged firms to register with the agency, this has proven difficult to do so in practice, due in no small part to the lack of standardized frameworks for token issuances. Retaining transparency and objective rule-making over the cryptoasset marketplace, which has had its fair share of frauds and scams occur, is something that ethical actors and firms should applaud.

Better Accounting And Tax Standards

One of the major issues with cryptoassets remains the somewhat tricky tax and accounting questions that yet to be addressed in a systemic and objectives manner. While the Financial Accounting Standards Board has put forward some proposed guidance that looks on track to be codified by the end of the year, that remains the extent of productive financial reporting dialogue. The FASB standard, ground-breaking as the first crypto specific accounting standard under Generally Accepted Accounting Principles, is limited in its scope as it pertains to only bitcoin and ether, mirroring the limited approach taken the already passed MiCA legislation from the European Union.

Accounting and financial reporting do not exist in a vacuum, however, and more transparent and repeatable rules around reporting and disclosures for U.S. traded firms would help this process proceed along productively. Comparable and relevant financial data is the lifeblood of any asset class, and cryptoassets have been subjected to a lack of both even as they have grown in prominence since bitcoin burst into the mainstream conversation in 2016. Improved and more consistent reporting, regulatory, and disclosure requirement would go a long way toward better tax and accounting rules.

Crypto legislation is going to be a long process, but the SCA is a good first step in the right direction.

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