This article is courtesy of Kunal Sawhney , CEO of Kalkine Media.
The world of finance is complicated, and it becomes a little more so when we talk of a government’s finances.
It may sound easy: The government imposes taxes to fund public expenditure. But complications seep in quickly with regards to scope and quantum of levies. The one-trillion-dollar bipartisan infrastructure bill comes with its own share of complications. The deal is the US federal government will build bridges and other critical infrastructure, but that’s not all.
What makes it interesting is the inclusion of cryptocurrencies in the bill. The Senate’s approval for the bill was preceded by another event — the Senate Banking Committee’s hearing in July. The “Cryptocurrencies: What are they good for?” hearing largely saw senators like Elizabeth Warren criticizing virtual currencies amid a slightly favorable stance by some including Sen. Cynthia Lummis.
US$28 million in revenue over 10 years
The Senate’s committee may have debated why cryptos are bad for the overall financial system of the country, but the Internal Revenue Service (IRS) has a long list of FAQs on reporting cryptocurrency transactions for federal tax purposes.
The IRS had issued a notice in 2014 clarifying cryptocurrencies will be treated as “property.” Cryptos are a part of the broader virtual currency label, and the latter includes everything that is a “digital representation of value” and used as a medium of exchange. Capital gains on crypto transactions should be disclosed to the IRS. The infrastructure bill adds to this quasi-approval of crypto trading in the US.
The bill mandates new reporting guidelines. It defines a “broker” in a manner that can broaden the scope of disclosures of crypto activity. A few sections are labeling this as prejudicial to the cryptocurrency world. They fear the definition can include even stakeholders, like miners, that have nothing to do with trading. This, they assume, can harm the prospects of the industry.
But it cannot be disregarded that the bill further adds to the legitimacy of cryptos. The Joint Committee on Taxation has estimated that the new enforcement can bring in US$28 billion in revenue over the next 10 years. This means that despite the generally negative government stance toward cryptos, the revenue-generating capacity may never allow the issuance of any sweeping ban on the space.
Investors flock to cryptocurrencies
PayPal has lately expanded its cryptocurrency services to customers in the UK. Earlier, the major player in the financial services world had allowed US customers to buy and sell cryptos. What are such companies relying on?
In the past few months, new Bitcoin and Ether ETFs have been launched. The S&P Dow Jones now has indices that track movement in prices of tied cryptocurrencies. Big US banks have either started or are in the final stages of allowing cryptocurrency exposures to clients. PayPal’s UK move came despite a months-long downward trend in the crypto space.
In a matter of some weeks, cryptos are back to where they were in May 2021. Bitcoin touched US$50,000 in Asian trading, and the combined market value of the cryptos tracked by CoinGecko is now nearly US$2.2 trillion. Almost US$1 trillion was added in a matter of one month. Data suggests both retail as well as institutional investors have fueled this growth.
A key element is that it is not just the largest cryptocurrency, Bitcoin, drawing investors’ interest. In the past few weeks, tokens like ADA (Cardano) and Ether (Ethereum) have also gained. This irrefutably points toward the competition in the space, and competition compels players to add more value to their products. The underlying blockchain tech might be the same in all, but the way transactions are approved within different blockchains is evolving. This can add to the utility of cryptocurrencies.
Recent pulls make cryptos more interesting
It usually adds value when more people talk about a certain thing. A few investors like Warren Buffet and his company’s vice chairman, Charlie Munger, may have publicly declared their aversion to the volatile world of crypto investment, but a 2-trillion-dollar market cap is a testament to its growing acceptance.
Within the regulatory space, sentiments are diverse. The IRS treats cryptos as property, but in his recent commentary, the Securities and Exchange Commission (SEC) Chair, Gary Gensler, said that the crypto space is “rife with fraud.” Gensler has also written to Sen. Warren stating inadequate protection of investors using crypto exchange platforms. He critiqued the entire asset class including stablecoins that are pegged to the dollar or other non-volatile assets.
The SEC Chair or Sen. Warren or any other prominent crypto critic is aware of the inclusion of the asset class in the bipartisan infrastructure bill. The inclusion, which experts say will bring in tens of billions of dollars in revenue over the next decade, was not possible unless people traded in crypto assets. The US$28 billion estimate most likely was arrived at by extrapolation from present investment stats.
Various government agencies are indirectly recognizing, and even to some level promoting, trading in virtual currencies. This leaves the crypto space neither black nor white but grey since blanket acceptance or rejection is missing. Amid multiple pulls, investors are likely to stick to the wealth-multiplier crypto investment space.
Conclusion
It can also be said that the government is facing an unprecedented fiscal situation. Economic recovery still relies on how the Delta variant impacts reopening. Macroeconomic indicators are weak. Despite rising inflationary pressures, the Fed has yet to announce any withdrawal of liquidity from the economy.
In this light, the government is eyeing new revenue-generating sources, and the crypto world is undeniably a lucrative one. Taxes cannot be easily raised as political opponents will target the government, and hence looking for even disputable sources was a better alternative.
The world of finance is complicated. If the asset class continues to find mention in critical government literature like the infrastructure bill, more investors are likely to view cryptos as a sound investment option. This can ease the burdens of complications and disagreements surrounding cryptocurrencies.
