If you are looking for your company to implement financial technology based on blockchain, cryptocurrencies (critpocurrency), such as Bitcon or Ethereum, it is necessary that you first know their advantages and disadvantages. Since its introduction, cryptocurrency represents a new and decentralized paradigm for money management, transactions, etc. which has been attractive for several sectors, mainly FinTech.
In this system, centralized intermediaries such as banks and monetary institutions are not required to enforce trust and monitor transactions between two parties. Thus, a system with cryptocurrencies eliminates the possibility of a single point of failure, such as a large bank, triggering a cascade of crises throughout the world, such as the one that broke out in 2008 for the bankruptcy of institutions in the United States and that, even today, has effects throughout the world.
Now, why has this attracted the attention of big companies like Ubisoft, EA, among others? Such decentralized transfers are secured through the use of public keys and private keys and different forms of incentive systems, such as proof-of-work or proof-of-stake. Additionally, markets have skyrocketed in value over the past decade, at one point reaching almost $2 billion dollars. From May 2022, Bitcoin was valued at over $550 billion on the crypto markets.
As we mentioned, many investors are attracted by the potential advantages of investing in cryptocurrencies. But before investing it is important to research how this nascent market works, as well as how any digital currency is handled before you buy it. Even transaction fees when making crypto purchases can vary quite a bit because they are subject to more volatile changes. And, it is worth mentioning that security is paramount to avoid any further problems.
The cryptocurrency space is rapidly evolving, so it is important to pay attention to new developments that may affect your holdings. Companies interested in entering this market and their investors need to understand the tax consequences of using cryptocurrencies, especially if they buy something or sell their investments with it.
How does the Cryptocurrency Market work?
A virtual currency such as cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some settings, it functions as “real” currency (i.e., the currency and paper money of the United States or any other country designated as legal tender, circulates, and is routinely used and accepted as a medium of exchange in the country of issue), but does not have legal tender status in the US. Cryptocurrency is a type of virtual currency that uses cryptography to validate and secure transactions. that are digitally recorded on a distributed ledger, such as a blockchain.
Virtual currency that has an equivalent value in real currency, or acts as a substitute for real currency, is called “convertible” virtual currency. Bitcoin is an example of a convertible virtual currency. Bitcoin can be exchanged digitally between users and can be bought or exchanged for US dollars, euros and other real or virtual currencies through virtual wallets.
Nearly 20,000 different cryptocurrencies are publicly traded, according to CoinMarketCap, a market investment website. And cryptocurrencies continue to proliferate. The total value of all cryptocurrencies on June 13, 2022 was about $970 million., having fallen substantially from an all-time high of more than $2.9 trillion at the end of 2021.
Types of Cryptocurrencies and their advantages
While some of these have total market valuations in the hundreds of billions of dollars, others are little known and essentially worthless. If you are thinking of entering this cryptocurrency market, it can be helpful to start with one that is commonly traded and relatively well established in the market (although that is no guarantee of success in such a volatile space). NerdWallet has created guides for some widely circulated cryptocurrencies, including Bitcoin and some altcoins, or alternatives to Bitcoin:
- Bitcoin it is the first and most valuable cryptocurrency.
- ethereum it is commonly used to perform more complex financial transactions than Bitcoin supports.
- Cardano it is a competitor of Ethereum led by one of its co-founders.
- litecoin it is an adaptation of Bitcoin intended to facilitate payments.
- Solana is another Ethereum competitor that emphasizes speed and profitability.
- Dogecoin It started as a joke, but has become one of the most valuable cryptocurrencies.
- Shiba Inu is another dog-themed token with more complex mechanics.
Stablecoins are a class of cryptocurrencies whose values are designed to remain stable relative to real-world assets, such as the dollar.. Individual units of cryptocurrencies may be referred to as coins or tokens, depending on how they are used. Some are intended to be units of exchange for goods and services, others are stores of value, and some can be used to participate in specific software programs such as games and financial products.
This form of blockchain-based financial technology brings some benefits to communities that have been neglected by the traditional financial system.Some people see cryptocurrencies as a promising foothold. The data of 2021 Pew Research Center They found that Asian, black, and Hispanic people “are more likely than white adults to say they have ever invested, traded, or used a cryptocurrency.”
Other defenders of the use of cryptocurrencies, they mention that the blockchain technology behind it is a decentralized registration and processing system and can be more secure than traditional payment systems. On the other hand, some speculators like cryptocurrencies because they increase in value and have no interest in the long-term acceptance of currencies as a way to move money.
Some cryptocurrencies offer their owners the opportunity to earn passive income through a process called staking. Cryptocurrency staking involves its use to help verify transactions in a blockchain protocol. Although staking has its risks, it can allow you to increase your cryptocurrency holdings without having to buy more.
What is the legal situation of cryptocurrencies?
A common way cryptocurrencies are created is through a process known as mining, which is used by Bitcoin.. Mining can be an energy-intensive process in which computers solve complex puzzles to verify the authenticity of transactions on the network. As a reward, the owners of those computers can receive newly created cryptocurrencies. Other cryptocurrencies use different methods to create and distribute tokens, and many have significantly less environmental impact.
Given its nature, its movement may or may not be regulated by legal institutions. Said that, Cryptocurrency transactions are taxed by law just like transactions in any other property. Taxpayers who conduct virtual currency transactions may have to report those transactions on their tax returns.
The sale or other type of exchange of virtual currencies, or the use of cryptocurrencies to pay for goods or services, or to hold virtual currencies as an investment, may have tax consequences that could give rise to a tax liability. For example, in the United States, the IRS issued the Notice of I.R.S. 2014-21, IRB 2014-16, as guidance for individuals and companies on the tax treatment of transactions using virtual currencies:
“The Internal Revenue Service (IRS) is aware that “virtual currency” can be used to pay for goods or services, or held for investment. Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some settings, it functions as “real” currency, that is, the currency and paper money of the United States or any other country designated as legal tender, circulates and is routinely used and accepted as a means of exchange in the country . Country of Issue, but it does not have legal currency status in any jurisdiction.”
For the above, it is conclusive to say that cryptocurrencies are not backed by any public or private entity. Therefore, it has been difficult to defend its legal status in different financial jurisdictions around the world. It doesn't help that cryptocurrencies have largely functioned outside of most existing financial infrastructures. The legal status of cryptocurrencies has implications for their use in transactions and day-to-day transactions. In June 2019, the Financial Action Task Force (FATF) recommended that cryptocurrency wire transfers should be subject to the requirements of its Travel Rule, which mandates AML compliance.
Cryptocurrencies are legal in the European Union. Derivatives and other products that use cryptocurrencies will have to qualify as "financial instruments." In June 2021, the European Commission published the regulation Markets in Crypto-Assets (MiCA) that establishes safeguards for regulation and establishes rules for companies or providers that provide financial services that use cryptocurrencies.
Within the United States, the largest and most sophisticated financial market in the world, crypto derivatives such as Bitcoin futures are available on the Chicago Mercantile Exchange. In the past, the Securities and Exchange Commission (SEC) took the position that Bitcoin and Ethereum were not securities; however, in September 2022, SEC Chairman Gary Gensler stated that he believes that cryptocurrencies are securities. This position implies that the legal status of the cryptocurrency may be subject to constant changes in its regulation.
Investment in cryptocurrencies such as Bitcoin and Ethereum
Cryptocurrencies have earned a reputation for unstable investments, due to investors losing heavily as a result of scams, hacks, and bugs. Although the underlying BlockChain-based cryptography is generally secure, the technical complexity of using and storing crypto assets can be a major danger for new users.
Despite this, in September 2022, the chairman of the SECGary Gensler stated that believes that cryptocurrencies are safe and has asked the SEC staff to start working with cryptocurrency developers to register their investments. However, he also clarified that he did not speak on behalf of the SEC; he was just speaking for himself. He encouraged those starting out in the crypto space to register their crypto in the spirit of getting ahead because “it is much less expensive to do it from the start.”
Any investor can buy cryptocurrencies in virtual wallets that allow it. Another popular way to invest in cryptocurrencies is through financial derivatives, such as CME Bitcoin futures, or through other instruments, such as Bitcoin trusts and Bitcoin ETFs. Before even thinking about investing in cryptocurrencies such as Ethereum and Bitcoin, we would recommend that you learn more about the processes of Blockchain and Codster can help you.
To make a decision about the adoption of blockchain processes for financial transactions supported by some cryptocurrencies, it is necessary to analyze in detail the benefits and advantages that it can offer, as well as the challenges that it would represent for your team. If you are interested learn more about this, discover the solutions it offers and will offer Codster through a consultancy that can help solve all your doubts.