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Digital currencies are almost certain to succeed and gain mainstream adoption, but we’re probably not ready for it yet. Mainstream adoption isn’t likely until several problems are solved.
The current bull market is outrageous. Long-dead altcoins are being pumped to 10,000% gains, ICOs are raising hundreds of millions of dollars, and the talk over on /r/ethtrader is dominated by folks with lambos. In the midst of it all, Bitcoin has gradually increased its price, from just over $1000 at the beginning of the year to $4250 at press time.
Many are calling this market a bubble, saying that everything that goes up must come down eventually. They are likely correct this time. But there is reason to believe that digital currency is beginning to reach mainstream acceptance.
Regulatory uncertainty is arguably the biggest obstacle to the mass adoption of digital currencies. While tales of “Bitcoin bans” have gradually faded over the years, and governments are looking more favorably upon digital currency, it still has a long way to go. The biggest regulatory obstacles are tax policy, anti-money laundering (AML) laws, and securities regulators.
Recently the U.S. Securities and Exchange Commission (SEC) issued a report condemning many ICOs as violating securities laws. This has resulted in Bitfinex ceasing all trade of ERC20 (ICO) tokens and suspending service to U.S. users.
Despite this, most regulators do seem to hold generally favorable views, or are at least willing to adopt a wait-and-see approach. Japan and South Korea both officially legalized digital currency in recent months, which has proven to be quite a boon to the markets. A large percentage of exchange volume has been coming from both those countries recently, fueling the current bull run.
Though the IRS issued general guidance on taxes in early 2014, many questions remain unanswered. The agency has also shown a troubling propensity to go on fishing expeditions, exemplified by the recent subpoenas against Coinbase.
The IRS has further confused things by declaring that Bitcoin will be taxed like property. This means that even buying a cup of coffee becomes a taxable event. According to U.S. tax law, you actually owe capital gains taxes on any currency appreciation you might have experienced. That’s because you’re technically selling your digital currency in order to purchase coffee, which means you are “realizing” a capital gain.
Globally, tax authorities still have a great deal to figure out. Some countries treat digital currency as property, others as currency, and still others have no policies at all.
Bitcoin’s first attempt to enter the mainstream financial system began in 2014, when the Winklevoss twins proposed a Bitcoin exchange-traded fund (ETF). An ETF tracks the price of an underlying asset, in this case, Bitcoin. The Winklevoss ETF would have had to purchase Bitcoin every time investors bought shares, and they would have sold Bitcoin every time investors sold shares.
ETFs are important because they are very easy for both ordinary investors and institutions to use. Pensions funds and other institutional investors don’t want the headache and challenges that come with trying to store and secure Bitcoin. For that matter, neither does your grandma.
Both ordinary investors and institutions are looking for an easy way to purchase and hold Bitcoin. ETFs offer that ease-of-use. ETFs are also an easy way to invest tax-advantaged retirement funds in Bitcoin.
Unfortunately, the SEC has so far rejected two Bitcoin ETF proposals, citing inadequate markets. The SEC is concerned that the markets on which Bitcoin trades are largely unregulated, which could allow manipulation of Bitcoin prices in a way that would be harmful to mainstream investors.
The good news is that the Commodities and Futures Trading Commission (CFTC) is a bit more optimistic about Bitcoin. They recently gave permission to a company called LedgerX to offer Bitcoin futures. This is doubly good, because the SEC hinted that they may reconsider their decision on a Bitcoin ETF in the event that regulated futures markets are developed.
The Bitcoin Investment Trust, whose shares trade under the GBTC ticker, also provides a way for investors to hold Bitcoin in their retirement account. While GBTC does not offer the same advantages as an ETF, or the same appeal to institutional investors, it is an early inroad into the traditional financial system.
Many digital currency exchanges have been under fire lately because of their inability to handle the huge volume of orders being generated as a result of this bull market. GDAX, Kraken, Poloniex, and others have all been blamed for poor (or nonexistent) order execution, heavy lag, connectivity problems, and poor customer service.
To be fair, none of them had any reason to believe that digital currency adoption would come so quickly. Nobody foresaw the present market mania. Still, it seems reasonable that a digital currency exchange that really believed in the future of digital money would have built considerable over-capacity.
Bitcoin and other digital currencies desperately need reliable and fast exchanges. Until cryptocurrency exchanges are as good as mainstream stock exchanges and brokerages, the adoption of digital currency is going to be stymied.
However, all of these exchanges have pointed out that they are increasing their capacity and ramping up their operations as quickly as possible. They also have plenty of money, as fees from their incredibly high trade volumes should easily finance new systems.
Finally, Blockchain is everywhere. It’s almost impossible to read industry news without hearing something about a new Blockchain-based system that is being tested or piloted somewhere. Recently there has been news about Blockchain in medicine, Blockchain in the food supply chain, and Blockchain in government.
Blockchain technology has the potential to disrupt a great many industries and become a game-changer worldwide. Every time a new Blockchain initiative is successful, people are reminded of the original Blockchain application: Bitcoin.
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