Legislators Worry about Cryptocurrencies-As They Should

On February 5th Lloyds Banking Group, Plc., Britain’s largest mortgage lender, recent acquirer of MBNA, and issuer of one-quarter of all credit cards in Britain, banned its credit card customers from buying cryptocurrencies. Lloyds followed the lead of Bank of America, J.P. Morgan and Citigroup who announced they would no longer permit customers to buy cryptocurrencies like cups of coffee. After having reviewed their policies for the previous week, they called a complete halt to the practice of providing unsecured loans for the purchase of the most volatile and least collateralized investment to date. Capital One Financial stopped cryptocurrency purchases on its cards on January 12th.


But major banks were silent about their customers’ credit card accounts when in December, with bitcoin approaching a $20,000 market price, 18% of bitcoin buyers used credit cards and one-fifth of those could not afford to pay off their balances. As cryptocurrency price charts approached their apexes and Google searches for ways to buy bitcoin surged, consumer credit balances did as well, jumping 13.3% in November and 9.9% in October. Most credit card buyers of bitcoin paid a 3% cash advance fee and were subject to a 29.9% interest rate. Only half of those who borrowed to buy cryptocurrency repaid their debt. Some expected to pay off their balances with the profits from a future sale.


In January, Visa stopped customers from withdrawing their funds via cryptocurrency debit cards. Digital money debit cards like Bitwala, Cryptopay, Wirex, and TenX, were informed by Wavecrest, a servicer of such cryptocurrency debit cards, that it was required “to immediately close all such cards.” Visa said: "We recently terminated a single prepaid card issuer in Europe from our network for violating Visa's operating regulations.” Visa did not offer further details on the particulars of these violations. Wirex, an issuer of over 500,000 cryptocurrency debit cards, said, “We asked for more information but they (Visa) haven’t provided any.”


One of the first cryptocurrency debit cards to come out is TokenCard.io, which began development operation in the spring of 2017. TokenCard will allow users to recharge their debit cards with proceeds of sales in their cryptocurrency “wallets.” Sales of stocks, bonds, and mutual funds are deposited into money market accounts. They plan to make the sale of digital currency available for use with TokenCard. TokenCard.io had begun working “in stealth” on a new partnership with a “prominent and large issuer” in the fall of 2017, before the Visa action against Wavecrest. TokenCard is focused on establishing a wider range of options than were available through Wavecrest.


Banks no longer allow credit customers to buy bitcoin (BTC $6,848.37 04/11/18) now that it has bottomed and is trending higher, but banks imposed no restrictions when the cryptocurrency was above $19,000. Banks inflated their fourth-quarter income statements with credit card fees and interest charged, but now that their earnings reports have been posted and cryptocurrency prices have plummeted, banks see problems with unsecured lending to buy speculative investments. These are the same banks that ten years ago lent unqualified buyers up to 125% of the inflated values of their dream homes; the same banks that were later bailed out by the U. S. government as “too big to fail.” American exemplars like Citigroup, J. P. Morgan and Bank of America are now worried that they may not get back the money they loaned without requiring collateral. There may be no one to bail them out this time; cryptocurrency finance occurs in a different casino with new rules that are still being written.


Legislators may not understand how lending to finance speculation of digital currency compares with allowing citizens to achieve the American Dream. While major banks are looking for an exit, the United States Internal Revenue Service (IRS) is looking for an entrance. Before the U. S Senate Banking Committee on February 5th and amid announcements of multiple banks shutting down their leveraged support of cryptocurrency prices, Securities and Exchange Commission (SEC) chairman Jay Clayton said that if Congress does not act to extend regulation of cryptocurrencies his agency “may be back with our friends from the Treasury and the Fed to ask for additional legislation.” Mr. Clayton’s “friends from the Treasury and the Fed” include the Internal Revenue Service, which supplies the Treasury with income to support government operation of agencies like the SEC. In 2014 the IRS stated that cryptocurrencies should be treated like property and profits from sales reported as capital gains. CNBC reports  “fewer than 100 of 250,000 federal tax returns prepared and filed so far this year by its customers have included reports on cryptocurrency gains and losses.”


Cryptocurrency complexity and opacity could prevent the IRS from ever receiving its dues without placing the onus for reporting upon the operators of cryptocurrency exchanges. In November, a Federal judge ordered Coinbase.com to reveal the identities of 14,000 account holders responsible for over 9,000,000 transactions. Coinbase then reminded its users to pay their taxes without providing them with further guidance on the matter. Exchanges may become the new middlemen, keeping track of their customers’ identities and reporting their activities to the taxman and so, one of the most attractive advantages of using virtual money may be lost.


The burgeoning cryptocurrency market has been fueled in part by a desire for anonymity. Banks, brokers, and credit card issuers not only serve to facilitate transactions but also to record and report, in the United States via IRS Forms 1099. Taxation of cryptocurrency currently works as an honor system. Cryptocurrency transactions are not recorded or reported by any meddling middlemen and since cryptocurrency transactions are anonymous and thereby untraceable, the responsibility for reporting profits falls to the individual taxpayer. That honest taxpayer needs to keep a year’s worth of personal records without the benefit of receipts, statements or year-end summaries.


Banks, financial service providers, and government taxing authorities are concerned about a blockchain-based monetary system, which operates outside of their authorization and regulation. They should be. Cryptocurrency cuts out middlemen thereby avoiding charged bank interest, transaction fees, and taxation without which the current global financial system will collapse. But cryptocurrency is here to stay. It is the Model-T Ford that replaces the horse, the computer the slide rule, and the Internet the library. Banks, payment systems, and government tax collection are in danger of being left behind. As legislators once found the need to establish speed limits on highways, so will they wish to regulate blockchain-based commerce. But this time they may be too far behind to catch up.