Are virtual currencies here to stay? Will one of them become the world's currency, supplanting the dollar as the currency of choice for international transactions? Probably not any time soon. Recently the Securities and Exchange Commission, Financial Industry Regulatory Authority and the Internal Revenue Service issued statements designed to strongly discourage the use of virtual currencies.
Bitcoin is one of a number of virtual currencies (often referred to as crypto currencies) that are not issued by any central bank or government. Some feel this is a positive since no particular government can control the value of a virtual currency. Libertarians and anarchists, who desire no government authority over money, are leading proponents of crypto currencies. Experts estimate that there are 500,000 to 1,000,000 digital currency account users in the U.S.
The anonymous nature of how virtual currencies are traded makes them susceptible to fraud, money laundering and other criminal activity. The SECs most recent alert listed these and other concerns it has with bitcoin:
- Bitcoin is not considered legal tender and its use may be restricted by local, state and federal governments.
- If lost or stolen, investors in bitcoin have no recourse to recover their investment.
- Bitcoins held in digital wallets are uninsured (nearly all bank accounts in the U.S. are insured by the FDIC).
- Since the virtual currency market is not regulated, investors may be subject to loss of their investment due to hacking, fraud, mismanagement, technical problems or malware.
No legitimate government in the world views the development of virtual currencies in a positive light. If virtual currencies were extensively used, governments would lose control over monetary policy and the ability to effectively tax.
To restrict the use of virtual currencies, recently the IRS indicated that they consider all virtual currencies to be property. Consequently, there may be income tax due each time a virtual currency is exchanged and reporting requirements when a virtual currency is used as payment. This will make it very difficult for any virtual currency to evolve into a legitimate method of payment.
Until governments have the ability to regulate monetary policy via virtual currencies and tax virtual currency transactions, it is unlikely any virtual currency will gain permanence.
Robert C. Lawton is president of Lawton Retirement Plan Consultants, LLC (lawtonrpc.com), an RIA firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities He may be contacted at email@example.com or 414.828.4015.
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