Sunday, 1st January, 2017
| A different direction
TL;DR The IRS request for Coinbase’s client information is about much more than tax avoidance. It highlights deeper issues the entire industry needs to resolve before we can go forward. (Read more in THE TAKEAWAY below.)
TOP 5 STORIES ON COINDESK 2016 in headlines: As part of our Year in Review series, CoinDesk's editors compiled a list of what they think are the most important stories of the year. Stories with impact, that changed our thinking, that gave us a glimpse of where this is heading… we had a lot of that, and much more. Narrowing the list down was a struggle, but we think we pulled it off. See the list.
Content creation and blockchain truth. Could the blockchain restore our trust in journalism? Some new projects hope to find out. The issue is complicated, however. While they may find ways to democratically remunerate journalists for their work, how do we filter out quality investigation and writing from clickbait? Read more.
Blockchain economics. Wayne Vaughn, CEO of Tierion, walks us through three of the main ecosystems – bitcoin, ethereum and Hyperledger – and shows how they are (or will become) self-sustaining. He then asks us to think about how blockchains pay for themselves. What incentives will drive a stable ecosystem? Read more.
Bitcoin fungibility. In another article from our Year in Review series, Bitcoin Core developer David Vorick highlights the importance of fungibility for the bitcoin ecosystem, and how lack of it can lead to centralization. He details several initiatives that are attempting to address the issue, such as Zcash, Monero, Tumblebit, Lightning and others. Read more.
Be safe. Bill Shihara, CEO of Bittrex, takes a look at the major cryptocurrency security breaches in 2016, and contrasts those against centralized services (such as Bitfinex, Shapeshift, Gatecoin and The DAO) with those against individuals. He then goes on to give advice on how to keep your cryptocurrencies secure, and looks forward to progress in privacy technology in 2017. Read more.
We begin the countdown to CONSTRUCT, our invite-only summit for developers and senior engineers.
With exclusive in-depth talks from founders and/or high-level execs from Zcash, Hyperledger, MIT, the Ethereum Foundation, Blockstack, IBM and more, CONSTRUCT gives you the opportunity to hear first-hand how the sector is evolving. Join us in San Francisco, USA from January 30-31, and network with industry leaders to discuss network security, access management, and financial services.
😎 APPLY TO ATTEND 😎
QUOTE OF THE WEEK “But the closed-access permissioned financial blockchains envisioned by incumbents in the industry are not disruptive. Rather, they represent the ongoing march of database technology.” – Sviatsolav Rosov, ‘ How should blockchain be regulated?’, in The Hill |
THE TAKEAWAY
This past week saw yet another move in the scuffle between the US Internal Revenue Service (IRS) and cryptocurrency exchange Coinbase.
If you haven’t been following the story, here’s a summary: In November, the IRS presented Coinbase with a summons requiring the company to disclose client transactions between 2013 and 2015. Coinbase has hinted that they’d rather not. Shortly after, a Coinbase customer presented a motion against the IRS, alleging the subpoena was too broad. This week, the IRS responded, saying “go away”. They claim that since this client has identified himself as a Coinbase user, he is now excluded from the original summons, and his motion is irrelevant (which would make sense if all they wanted was the clients’ names, but the summons asks for much more than that).
This case has the bitcoin community understandably concerned.
Aside from the violation of privacy, there is the strong impression that this is prosecutorial. Simply through association with Coinbase, clients appear to be under IRS suspicion. Even users who declare every last satoshi may be subject to a tax inspection.
The IRS is probably only after high-net-worth individuals, but the damage is done. If the request is successful, bitcoin users and businesses are likely to feel vulnerable, even when they’ve done nothing wrong.
However, the potential harm in terms of sentiment is not the most pressing concern.
A deeper issue is insufficient regulation.
According to a report from the Treasury Inspector General for Tax Administration, the IRS does not have a coherent virtual currency strategy.
When policy isn't being put to practice, this leads to confusion and unpredictability, neither of which create a good environment for development. Usually, businesses and individuals are willing to comply with reasonable rules. Not knowing what they are leads to unnecessary expenditure and reluctance.
Yet even that isn’t the main problem.
A bigger concern is that we don’t know how to regulate virtual currencies. Bitcoin is eight years old, and lawmakers still don’t have a clear idea of what to do about it.
Progress is being made. Several institutions and governments are studying the problem, establishing work groups and publishing papers. A few seem to be moving down a path that the respective local ecosystems appear happy with.
To be fair, virtual currencies are still a minuscule part of the world economy, so they understandably haven’t been a priority. Their presence is growing, however, and the disruptive threat is becoming more obvious.
Also, we are facing completely new circumstances. History is not lending us a hand here. Never before have we had such interpersonal connectivity, and the fallout from lack of control over information is not limited to the field of finance.
Add to the mix the slippery concept of bitcoin and similar cryptocurrencies, and the confusion becomes even more understandable. They don’t belong to any specific jurisdiction, no-one controls them, and no official organization can influence where they go.
Which brings us to the question: is it possible to regulate this new technology?
It helps to consider what type of regulation we want, and what it is we’re trying to control. Consumer protection rules already exist in many jurisdictions. Anti-money laundering disclosure requirements are already part of the financial landscape. Neither are technology-specific.
Tax evasion isn’t, either. Cryptocurrencies may provide a vehicle, but the tech is not the problem here. The IRS move against Coinbase isn’t about bitcoin. It’s about lack of information.
The implied threat and the accompanying publicity will push some transactions elsewhere, perhaps to less cooperative environments. In the process, they will likely damage a young network with significant potential to contribute to economic development.
Clear guidelines on disclosure requirements for individuals and businesses will help avoid the collateral damage from shortsighted summons, but a sharper focus on what really matters will help clarify what rules are needed.
Just as this new technology is making us rethink the concept of value, so we need to rethink what regulation is for, and what is needed to enforce it. The issue is not cryptocurrencies or even their uses. The issue is information: what is necessary, and who provides it.
– Noelle
More background:
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OTHERS ARE TALKING ABOUT...
The bitcoin price continued to feature heavily in the mainstream press, compounded by end-of-year retrospectives and predictions. WSJ, TechCrunch, Quartz and Fortune are just some of the outlets that carried price profiles, yet only the FT dared to hint at an impending correction.
Elsewhere, The Hill dove into blockchain regulation, and had the temerity to point out that private blockchains were not disruptive. And TechCrunch talks about the blockchain’s potential impact on computing.
UPCOMING EVENTS
WHAT WE’VE BEEN UP TO It's been a week of reflection, planning and tidying up. While we continue to enjoy the festive season, we want to thank you for being with us in 2016.
As we together look ahead to a 2017 full of innovation, collaboration and achievement, all of us here at CoinDesk wish you a Happy New Year.
May we continue to dream, but with our feet on the ground.
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