Scanning the news this weekend there were plenty of interesting stories and we’ll be discussing three: central bank digital currencies, privacy and payments. Checking the Coinbase mobile app yesterday, bitcoin broke the $60k mark, reaching on Saturday $60,658. This is going to be a big week for crypto. On Wednesday, April 14, Coinbase, the world’s most popular cryptocurrency exchange, will make its debut on Nasdaq. This is a major step to legitimacy, as Coinbase will be the first cryptocurrency company to be listed on the public markets. They also reported their first quarter results and while the results are preliminary and unaudited, they are impressive. In Q1 2021, their revenue jumped $1.8 billion from $190.6 million in the same quarter a year earlier. Net income grew to between $730 million and $800 million from $31.9 million a year ago. Coinbase said it has 56 million verified users. Speaking today a friend and ex-banker that is heavily invested in bitcoin, he told me that he was also planning on buying Coinbase shares. Coinbase is a great opportunity for anyone into crypto to further diversify their portfolio. Crypto has reached a tipping point that no one can afford to ignore. China has been testing the digital yuan and this month it will be expanding its tests. A lawyer in Argentina is suing the Central bank, trying to prevent it from acquiring data on crypto users. PayPal announced the next phase in its bitcoin rollout, giving users the option to pay vendors during checkout with crypto, instead of a card or other payment method.
Ilias Louis Hatzis is the founder and CEO at Kryptonio wallet.
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CBCD: China expands its testing of the digital yuan
China is forging ahead with its plans to launch its digital version of the yuan, called Digital Currency Electronic Payment (DCEP). So far, China has tested its digital currency in several regions. China is now kicking off another round of testing in Shenzhen from April 10 to 23, enlarging the test population by 500,000 people.
China has leapfrogged just about everyone with the establishment of digital yuan and has taken the lead in this space, thanks to an early start. A digital yuan could give Beijing the power to track spending in real time and use money that isn’t linked to the dollar-dominated global financial system.
Beijing is testing all sorts of things, like expiration dates for the digital yuan to encourage people to spend within a certain time frame and support economic stimulus. As China uses hundreds of millions of facial recognition cameras to track and fine citizens, the digital yuan could add another level of control, allowing the state to automatically take money from people’s accounts for fines.
Central bank digital currencies are a growing source of interest around the world. In the BIS’s most recent survey of 65 central banks (representing 91% of global GDP), 60% disclosed they were engaged in CBDC experiments or proofs of concept in 2020 (up from 43% in 2019). The same survey reported a large number of central banks anticipate launching a CBDC within the next three years.
Russia’s central bank is planning to showcase a prototype for its ruble-backed digital currency later this year. The digital ruble will live in a hybrid technological platform combining distributed ledger technology and centralized control by the central bank.
The Swedish central bank is making steps towards modeling its e-krona pilot. According to Bloomberg, Riksbank just published the results of the first phase of a pilot project into what is essentially the most advanced exploration of a post-cash era to be undertaken by a major, western economy.
For now, the US Federal Reserve has taken a more deliberate approach to the issue and is unlikely to make any reactive moves to the developments in China or anyone else.
The US Dollar is still stable, reliable and used in 88% of foreign exchange trades, while the yuan is used in only 4%. Now that China is positioning the digital yuan for international use. It could potentially be a viable alternative for countries the US has sanctioned. Fortunately, the FED is beginning to understand this and last month, when asked about the digital dollar, Powell responded, “This is going to be an important year. This is going to be the year that we engage with the public pretty actively.”
Despite concerns about China’s development of a digital yuan, bitcoin rise is enhancing the dollar’s dominance. As I’ve written in the past, Bitcoin could be America’s greatest weapon: “Bitcoin is America’s next Internet, an open, transparent microcosm of how a new decentralized, and automated financial system could work. The United States could retain its leadership in the global financial system, by investing in research, experimentation and development of open and transparent cryptocurrency technologies like Bitcoin. If it does, it will thrive in the new, emerging financial world.“
Privacy: A lawyer sues the Argentinean Central Bank to stop it from collecting crypto users data
Argentina’s Central Bank has asked local banks to share information on users that trade cryptocurrencies. The idea of the Argentinean central bank asking local banks for information about customers that buy and sell cryptocurrencies is generating controversy in the country. A local lawyer has filed a complaint against the Central Bank, arguing that the request is illegal. The Central Bank has argued that it is common practice to request information from banks in the country.
Today, under Argentinean law, the only authority that can legally issue currency is the Central Bank. Strictly speaking, bitcoin is not legal currency, since it is not issued by the government Although bitcoin is not specifically regulated, it is increasingly being used in Argentina. The latest amendment to the Income tax law, says that profit that comes from sale of digital currency will be considered a taxable income.
The lawyer that filed the complaint claims that the ruling violates the privacy and human rights, which are constitutionally protected: “The BCRA does not have the power to compile a list of these characteristics, and if it does, that power does not allow it to avoid the obligations regarding the protection of personal data provided by Law 25,326 and Regulatory Decree 1558/2001.”
The Argentinean Central Bank is not the first government organization to act in a forceful way. Late last year, it was rumored that the outgoing US administration was going to pass legislation to require financial institutions to verify identities of recipients and senders for transactions involving self-hosted crypto wallets or wallets that are not provided by a financial institution or service.
One of the biggest questions that arise from allowing investments in cryptocurrencies is the issue of taxation.
The challenge governments face is how to categorize cryptocurrencies and the specific activities involving them for purposes of taxation. In the US, cryptos are treated as a hybrid asset class and are taxable. In Singapore, cryptocurrencies fall under the Payment Services Act and are treated as digital tokens. Since there is no long-term capital gains tax in Singapore, the capitals gains on bitcoins as a security token is tax free. Australia has made sure there is no double taxation. Germany regards Bitcoin as private money, as opposed to a currency, commodity, or stock. Portugal declared in 2019 that it will not tax cryptocurrency and that cryptocurrency trading is not considered investment income. In Switzerland all profits and losses from crypto transactions made by individuals are exempt from tax reporting.
Crypto needs to be taxed differently from other assets, uniformly across borders and not necessarily using a capital gains tax. An idea could be to impose some kind of “crypto energy tax” depending on the number of bitcoins you’re hodling. While no one likes taxes, crypto should be taxed and we have to figure out how.
Payments with Crypto: PayPal lets users pay in crypto
PayPal customers in the US can now pay millions of online merchants with bitcoin, ethereum, litecoin and bitcoin cash. The “Checkout with Crypto” feature converts users’ crypto holdings to fiat currency at checkout. The option automatically appears in the PayPal wallet at checkout for customers with sufficient cryptocurrency balance to cover an eligible purchase. Merchants don’t actually get paid in crypto and for now that’s safer for them, since crypto is volatile. In the coming months, PayPal plans to expand crypto checkout to 29 million merchants.
Paying with crypto, but not really. PayPal will convert your crypto into fiat and pay the merchant in dollars, just like bitcoin debit cards that let people make online or in-person purchases or withdraw cash from ATMs using bitcoin and automatically converting it to fiat at the time of the transaction.
PayPal’s launch came a week after Tesla said it would start accepting bitcoin payments for its cars. Tesla announced that it would accept bitcoin as a form of payment from customers and that those payments would be retained as bitcoin and not converted to fiat currency. Visa also announced that it will allow people to use the USDCoin (a US dollar-backed stablecoin) to settle payments. Crypto.com is the first company to test the new capability with its own Visa-branded cards.
Bitcoin and cryptocurrencies continue to be speculative instruments, rather than a means for payments. While this is only “sudo” crypto payments, it’s a big step in the right direction. It will add great value in bringing cryptocurrency to the masses. The use of digital assets for payments will only increase and tilt the scale of how we use crypto. While lawmakers are still trying to figure out a regulatory framework, crypto will continue to make deeper inroads into the legacy financial system.
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