Uncle Sam’s Next Target: Bitcoin? -Miller Hoffman

Governmental structures and the private sector have often conflicted in the modern history of the United States. There are still remnants from the “Robber baron” days and, as a result the Sherman Antitrust Act along with other key pieces of legislation, this struggle hasn’t disappeared. It doesn’t show signs of slowing down, either.

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The recent rise of Bitcoin, as well as other “cryptocurrencies”, has reignited the rivalry between private and government interests. Bitcoin is a bit of a complicated idea to understand. Bitcoin was created in 2009 by an anonymous person using an alias. It acts as an online currency that can be used in exchange for goods and services. These units of currency are created through a process called ‘mining’ which utilizes a computer to solve complex algorithms. The process of mining and exchanging is all done privately without the use of names, social security numbers, or any other identifying information. Bitcoin is a revolutionary idea and is challenging conventional currency as we know it and it isn’t traditionally backed or insured the way other currencies typically are. Because of this, calls for regulation are too attractive for the government not to intervene. Cryptocurrency offers a substitute that could potentially compete with the US dollar and the fiat system, which we currently have. While this by no means will happen tomorrow, the rise of credit cards and other online payment systems have similarly outdated the tangible methods of payments of the past.

Investors closely follow a company’s earnings, potential for innovation, payment of dividends, as well as many other factors before investing. Bitcoin and other cryptocurrencies have bypassed this classic approach in several ways. In the classic approach, the government has its hands in it from the beginning. High corporate taxes, state taxes, strict regulations, interest rates, as well as other contingencies affect shareholder value and its attractiveness to investors. Bitcoin avoids much of this. It isn’t regulated(yet) or subject to taxes (excluding capital gains for investors). Bitcoin’s biggest strength is also its biggest weakness: it’s independence. Bitcoin relies on consumer belief in its value to survive; it isn’t backed by the government, like bank accounts or other highly liquid assets. Bitcoin’s insistence on anonymity allows users to easily exchange payments without involving anyone else besides the parties doing business.

This is not a call to immediately unload your savings on Bitcoin or other cryptocurrencies. There are unique challenges the system is now facing and will continue to face, and I do believe governmental agencies such as the Securities and Exchange Commission (SEC) will soon become engaged in regulating the somewhat rogue method of currency, despite very little reasons to do so. The question still remains: how long until Uncle Sam gets his wish?

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