Current and Future Applications of Cryptocurrencies
Bitcoin may have been the way that many CPAs and financial professionals were introduced to cryptocurrency, but that is just one of thousands of cryptocurrency options available in the marketplace. Compounding the confusion, the price volatility that dominated the cryptocurrency market during 2017 (upward) and 2018 (downward) muddied the waters for practitioners and organizations seeking to obtain a more comprehensive understanding of just how these assets function. As 2019 continues to roll forward, this seems an appropriate time to examine some of the other current and future applications that may have been previously overshadowed.
As if cryptocurrencies were not confusing and complicated enough, the development of a new cryptocurrency asset class — stablecoins — is something that should be on every CPA’s radar. A good way to think of this asset is a hybridization between traditional cryptocurrencies such as Bitcoin and fiat currencies backed by governmental organizations. The primary selling attribute of a stablecoin is that it offers the distributed functionality of cryptocurrencies without the price volatility that has often been associated with crypto. The specifics of how this stability is achieved will vary from coin to coin, but these stablecoins are tethered to fiat currencies, commodities or other assets such as gold. Practitioners need to understand what these coins are tethered to and how the stability is achieved (e.g., 1:1 backing, smart contract execution). As these different instruments become increasingly widespread and circulated, the stability associated with them will help accelerate the shift toward cryptocurrencies actually being used as currency options. What this means is that there are going to be more questions and opportunities for practitioners to develop and expand service lines connected to cryptocurrency taxation, reporting and custody.
Common issues about Bitcoin and other cryptocurrencies is that, in original formats using a Proof of Work consensus methodology, these networks and various cryptoassets do not function quickly enough for enterprise adoption. One possible solution, building in previous applications and options while simultaneously leading to additional developments itself, is the idea of a lightning network. Without drilling down too much into technical specifications or details, the concept of a lightning network can be summarized as follows: Using a tool known as a payment channel, the lightning network allows individuals or institutions to conduct business and send payments back and forth on a nearly continuous basis. Originally designed with micropayments in mind, these channels allow payments to be sent between organizations for whatever time is deemed appropriate. The true takeaway, however, is the fact that, under such a methodology, the underlying blockchain is only used for the opening and ending balances of transactions. This increases the speed with which transactions can be processed while still leveraging the encryption of blockchain technologies.
Cryptocurrencies, despite the label of currency, have not yet been adopted by the mass market for the purchase of goods and services. This is primarily due to the lack of clarity from a regulatory perspective with the only definitive guidance currently available taking the form of an IRS memo from 2014. That said, there are several interesting developments occurring in different parts of the country that are driving change and disruption in the cryptocurrency space. Interestingly enough, and perhaps contradictory to what normally occurs, various regulatory and oversight bodies are increasingly leading the conversation instead of being led and advised forward by the private sector. Keep an eye on the following states in 2019 and going forward:
- New York, which is revisiting the BitLicense regulation
- New Hampshire and Ohio, both of which are accepting Bitcoin for state tax payments
- Wyoming, whose legislature is working on nearly a dozen bills and items to help clarify
- and standardize cryptocurrency reporting
As time moves on, different states will approach blockchain and cryptocurrency from different perspectives, but the underlying trend is clear. Regulation is coming to the cryptocurrency space, and these rules, guidelines and standards will inevitably drive new developments and applications.
Cryptocurrencies are a fast moving and rapidly evolving area for practitioners, and no single article can summarize what the future applications and drivers of change will be. That said, keeping an eye on emerging developments such as those mentioned here will leave you well prepared to deal with changes as they arise.
This article appeared in the May/June 2019 issue of New Jersey CPA magazine. Read the full issue.