Author Topic: The End of Cryptomoney  (Read 3432 times)

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Offline bytemaster

The End of Cryptomoney
by Charles W. Evans

2014-03-25 the US Internal Revenue Service (IRS) issued its long-awaited Guidance on how to categorize cryptocurrencies for tax reporting in the USA. The reactions were more or less what one would have expected: libertarians yowled like betrayed cats, accountants breathed sighs of relief with only three weeks to go until this year's filing deadline for personal taxes (pity about the corporate deadline just missed, but that's what extensions are for), and Bitcoin supporters cried foul.
Lost in the din of responses was the relatively quiet and fast growing Distributed Autonomous Company (DAC) community, for whom the Guidance was a mixed bag. On the one hand, well... taxes. On the other hand, it made complete sense.

As supremely ironic as this decision should be to those who know him, this provides perverse vindication for BitShares founder, Daniel Larimer, who coined the phrase Distributed Autonomous Company to describe systems like Bitcoin, and who has argued all along that the units issued by a distributed, token-issuing blockchain management system (cryptocurrency) are more accurately viewed as shares, and not as coins. It also provides vindication for his position in favor of Proof of Stake (POS) over Proof of Work (POW) as the means of confirming transactions and securing the network.

Since the 2013-03-18 FinCEN Guidance on Virtual Currency, accounting and finance professionals have wondered what the ultimate fate of 'miners' would be. Should they pay taxes on their gains only when liquidated or used to purchase goods and services, or should they pay taxes on the value of the bitcoins at the moment that they are 'mined' and pay either income or capital gains taxes later, depending on how long the bitcoins were held before changing hands and on whether their value had risen or fallen in the meantime? Intelligent individuals have made impassioned arguments supporting both views.

By declaring bitcoins to be property, and not currency, IRS officials have put cryptocurrencies into the Barter 'regulatory bucket', the rules of which are well defined in statutes and regulations. If they had opted instead for currency, as Bitcoin supporters had hoped, this would have been the first time that a privately minted, unbacked medium of exchange issued by an autonomous software network—with no corporate sponsor or responsible individual—had been recognized as being in the same category as a national currency... except that this 'nation' is a world-spanning nomadic disapora with no homeland. In all fairness, that is a lot to ask; it's so much easier to lump bitcoins together with comic books, collectable stamps, and Magic: The Gathering playing cards.

If history is any guide, Finance Ministers around the world are likely to follow their US counterpart's lead and treat bitcoins the same way that one would treat anything that one acquires in the expectation of liquidating it at a gain later; in other words: assets.

Intriguingly, this episode fits Richard Rahn's 1999 prediction in The End of Money:

Quote
In the future, trade will be executed by instantaneous and simultaneous debiting and crediting liquid wealth accounts, held by both banking and non-banking institutions. The new electronic digital payments technology will enable property rights claims on real assets, such as stock and bond funds, or gold, to be utilitzed as the medium of exchange for virtually all transactions. (p.33)


As Larimer has pointed out on many occasions, the units issued by Bitcoin and all other cryptocurrency systems more intuitively resemble shares in startups with small capitalizations than legal tender of sovereign nations.

When seen in terms of shares rather than coins the tokens that a cryptocurrency system issues beg for closer scrutiny. In particular, note who in the Bitcoin system holds the voting power: the transaction processors, known metaphorically as 'miners'. The holders of bitcoins are passive participants who have no voting power. Seen as a company, the holders of bitcoin-the-unit own non-voting capital shares. The miners, who might or might not hold bitcoins, have all of the voting power. This is a necessary consequence of Bitcoin's reliance on POW.

One way of getting around this problem is to use POS, which secures a system by having the 'shareholders' vote on the valid transaction ledger in proportion to their holdings. In this way, those who own the system secure the system without having to spend huge amounts of resources on doing more work than any attacker can. POS is directly analogous to conventional one-vote-per-share corporate governance.

Granted, Bitcoin developers could replace POW with POS, but they would need the cooperation of the miners, as they control the majority of the computing power that makes up the Bitcoin system, even if they choose not to hold bitcoins. This would be asking them to kill the goose that lays the cryptocurrency eggs.
This corporate governance structure is unusual in countries that tend to attract a lot of foreign investment, like Australia, Canada, the UK, and the USA. It is much more like the large, family-owned combines that one sees in the Developing World.

Carrying the company analogy a bit further, the goal of maximizing the 'equity-value-per-share' ratio replaces the goal of maintaining a constant 'purchasing-power-per-unit' ratio in a currency system. With a currency, the general tendency is to strive for a stable price-per-stuff ratio. Shares, on the other hand, are expected to pay dividends, appreciate in value, or both. When we think of a DAC as a company, rather than as a mint, the idea of units that increase in value comes more naturally.

When we think of cryptocurrency units as shares in the DACs that issue them, we can think of our holdings as Rahn's "liquid wealth accounts" from which we spend, e.g., $X worth of bitcoins, rather than Y bitcoins. In this way, the cryptocurrency acts as a medium of exchange and store of value, but not as a unit of account or measure of value... just like transferable shares in an investment portfolio... rather like buying goods and services with shares from one's investment portfolio.

Of course, True Scotsmen will persist in describing cryptocurrencies as currency, but now that the IRS has instructed US users to think of them as property, clinging to this One True analogy and railing against those who foresake it is as useful in practical, day-to-day business as an Englishman in New York insisting on driving on the 'proper' side of the street and railing against the bloody colonials who all drive on the wrong side of the street.
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