Crypto-currencies began to emerge during the banking crisis of 2008. Over time, Bitcoin has become the most popular crypto-currency. In the early days, Bitcoin owners would contact each other and meet at Starbucks to swap Bitcoin for cash. Since then, there have been several groups that have tried to organize online exchanges. The one currently handling the most Bitcoin is a company called Coinbase. In January 2017, one Bitcoin was worth $1000. By December 2017, one Bitcoin was worth $20,000. By February 2018, one Bitcoin was worth
$6900. As you can imagine, with such extreme volatility Coinbase quickly became overloaded and was unable to respond to execute all trades. One of their customers, Nikhil Thomas, was unable to trade for four months during the volatility. He lost a lot of money by not being able to trade promptly. Currently, Coinbase is working hard to increase its capacity.
The IRS believes there are a lot of people not reporting gains on Bitcoin trading, so the IRS has ramped up a campaign to make sure taxes are paid. Digital currency holders should not think they can hide from the IRS. Many crypto-currency holders are now beginning to disclose past tax lapses.
Recent suspicious market moves in Coinbase have lead to allegations of insider trading. The North American Securities Administrators Association (NASAA) is launching a program called crypto-sweep. They have noticed that there have been numerous fraudulent initial crypto-coin offerings in numerous states in the United States and in Canada. Joseph P. Borg, NASAA President and director of the Alabama Securities Commission, says, “We urge investors to approach any initial coin offering…with extreme caution.” The NASAA currently has 70 inquiries and investigations pending.
As it turns out, Bitcoin has become the preferred medium of financial exchange for jihadists and terrorists. A group called Al Sadaqah (which means “charity” in Arabic) has urged people to donate to fighters in Syria. Their online solicitations encourage donors to donate anonymously with crypto-currency and are followed by a Bitcoin address. They have realized that raising funds in crypto-currencies can evade rules the global banking system has put in place to block terror financing and money laundering. In 2015, a Virginia teenager was charged with conspiring to provide material support to a foreign terrorist organization for explaining on Twitter how to send Bitcoin to the group. A federal judge sentenced him to 11 years in prison.
During a recent committee meeting of the senate banking committee, Senator Joe Donnelly, D- Indiana, asked Jay Clayton, Chairman of the Securities and Exchange Commission, what he would tell investors who think they can fund their retirement through investing in Bitcoin or initial coin offerings. Mr. Clayton’s response was, “Pumping all of your money in a disruptive technology has a very high likelihood of not working out for you as an individual.” He went on to say, “There will be winners, but there will be many losers. That’s the way it works.”
Sources: Wall Street Journal, Los Angeles Times, Investment News, FPA Journal