The commercial landscape has changed for digital assets over the past 12-18 months. In this article, we will explore experiences in the UK and the US.
Early Acceptance of Digital Assets in the UK
The UK is in a stage of early acceptance and adoption of digital asset technology. However, the technology is not quite being used as intended.
The volatility of the market is attracting speculators. As with any new market rife with inefficiencies, there are opportunities to arbitrage against exchanges and against prices.
The UK is thus seeing a return to the sort of high-frequency trading activity that disappeared from normal financial markets some time ago.
At the same time, the EU’s Fifth Anti-Money Laundering Directive seeks to regulate those running exchanges, providing OTC transactional or custodian services while large auction houses are now transacting non-fungible tokens and selling digital assets and digital artwork.
It is now possible to collateralize your assets, finance them, and then stake them for returns. This presents an exciting and possibly dangerous scenario, given that these new products entering the market are not necessarily offered by a traditional financial institution such as a bank.
The View from the US
In the US, as elsewhere, professionals are faced with the challenge of providing up to date expertise to clients interested in digital assets. The landscape is moving so fast that even those who deal with them all day, every day, have trouble keeping pace.
We see market flux in terms of the prices of asset prices, with new players and tokens entering the space, with innovative technology such as non-fungible tokens, as well as with new DeFi protocols.
All these changes raise the question of whether existing financial markets will adopt digital assets and use them in a combination of traditional and digital transactions, or will digital assets disrupt existing structures? A good example is the way in which DeFi could disrupt a traditional loan office by establishing a structure where money can be loaned without the involvement of a centralized party.
The pace of change is very high, requiring constant realignment. How we use digital assets now may be very different from how they are used six months from now.
What are the biggest risks and challenges for the crypto asset industry and for traditional players seeking entry into the industry?
One of the biggest challenges is the lack of infrastructure in the digital asset market.
The lack of traditional brokerage house custodianship of these assets means that traditional players entering the market must give some thought to the lack of the safe custody of assets.
The need for safety and cold wallet storage must be balanced with the necessity for elements to remain online so that trades can happen and so that investors can connect with those trades.
Regulation will likely tighten. It is best to treat this market as if it were a heavily regulated industry, in fact.
The US Faces Regulation Challenges
In the US, the question of regulation is one of the biggest hurdles.
It is typical for the IRS to straggle behind innovation, but, currently, the agency is providing very little guidance as to whether cryptocurrency is treated as property for tax purposes.
The transaction of cryptocurrency, for individuals, means capital gains treatment, as well as ordinary income treatment for assets earned from activities like mining or contributing to the network and receiving a reward from that network. People believe that when we can pay for a cup of coffee with bitcoin, then we will see retail adoption. But capital gains treatment is not useful for retail and limits adoption.
The US Securities and Exchange Commission has been more forward than the IRS in promulgating guidance at the public investment level—but still not incredibly helpful.
Ultimately, the need for a safe investment system will require coherent regulation and tax rules. The balance, however, will be between allowing the industry to grow or killing it and not allowing it to flourish.
Thomas Hulme of Mackrell.Solicitors was in conversation with Jon Wedge of BKL and Noah Buxton, Armanino LLP and other tax professionals at the Mackrell International webinar titled “Digital Asset Tax Issues.” You can view the entire session at https://youtu.be/davbCdhw3TQ