Vivian Fang of the U of M on the “Wild West” of cryptocurrencies – Finance & Commerce

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There is no doubt that cryptocurrencies have grown in popularity over the past year. Yet it is a largely unregulated market, which has led Securities and Exchange Commission Chairman Gary Gensler to recently call the market the “Wild West.”

Vivian Fang is an expert in cryptocurrency and blockchain, as well as corporate finance and financial accounting. She is an Associate Professor and Honeywell Professor of Accounting at the Carlson School of Management at the University of Minnesota.

Fang discussed the basics of digital currencies, the growing role they play in our economy, and why Gensler has equated the digital market with the Old West.

This interview has been edited slightly for length and clarity.

Q: Let’s start with the basics. What are cryptocurrencies and what role do they play in our economy?

A: Cryptocurrencies are digital currencies that rely on decentralized systems and rely on cryptography for security. Cryptocurrencies have three peculiarities. First, they are virtual, which means that they have no physical form. There are no invoices. There are no coins. … Second, all cryptocurrencies are cryptographically secured, which means encryption techniques are used to ensure that records of cryptocurrency transactions are not tempered. Finally, most cryptocurrencies are decentralized, which means that there is no central issuing agency, like the [Federal Reserve] or central clearing agencies such as banks or credit card companies. They rely exclusively on distributed ledger technology, usually blockchain technology, to record transactions.

… Now, to understand the role that cryptocurrencies can play in our economy, we must first understand how they were created. Going back to the 1990s, some people who like to call themselves “cypherpunks” have become increasingly skeptical of central banks – and not just the US central bank, central banks around the world. So they really wanted a decentralized currency, free from government involvement, free from government interference, and truly cyberspace native. Bitcoin, the first true cryptocurrency, has become a reality.

For this reason, proponents of cryptocurrencies… believe that cryptocurrencies could provide a significant benefit to society by overcoming the lack of trust in government and increasing everyone’s access to financial services. With this in mind, cryptocurrencies can serve as a way to support economic growth, especially in developing countries, by expanding financial inclusion, providing better traceability of funds to fight corruption, for example, and to help people escape poverty.

… Cryptocurrencies now work like dollar bills, as they can be used to purchase goods and services in many places.

Q: How do cryptocurrencies get their value?

A: This is probably the most difficult question. … Unlike stocks… cryptocurrency values ​​are primarily affected by supply, market demand, and competing cryptocurrencies, making it very difficult to come up with an accurate number. Now, I can give you some arguments as to why cryptocurrencies are valuable, especially for cypherpunks and libertarians, because they represent decentralized currencies free from government intervention. You will always have people behind the cryptocurrencies who are loyal to the cryptocurrencies all the way. And they also have value now because they serve as a medium of exchange. They now allow us to buy goods and services online from many places. And they are anti-inflationary by nature. For example, Bitcoin is capped at 21 million.

… However, on the other hand, most cryptocurrencies have no intrinsic value. They don’t generate cash flow like funds… nor do they have a stable source of value. So there are arguments for and against their value. And there are valuation techniques to get an idea of ​​the relative values ​​of one type of cryptocurrency versus other types. But coming up with an absolute number is really difficult.

Q: You mentioned Bitcoin, and I think it’s a currency that everyone is familiar with, but what are the others that are out there? Are there certain types around which specific groups of people revolve?

A: Bitcoin was the first true cryptocurrency [using] decentralized blockchain and it remains the most popular, with by far the largest market capitalization. … The market capitalization is around 750 billion dollars. And the second most popular cryptocurrency, and the one with the second largest market capitalization, is Ether, which is based on the Ethereum blockchain. Now, Bitcoin was intended to be a currency from the start. … Ethereum, on the other hand, was created to allow IT developers to create and publish smart contracts, which is why Ethereum describes itself as a programmable blockchain. And for this reason, Bitcoin attracts more general investors. Anyone who thinks of cryptocurrencies is turning to Bitcoin in some way. And Ethereum, on the other hand, is certainly attracting more tech-savvy investors. The two other popular cryptocurrencies [are] Litecoin and Bitcoin Cash, both of which are Bitcoin spin-offs.

Q: I wanted to discuss future regulations. What can we expect, if any?

A: The short answer is that we should definitely expect more regulations in the future. And just this month the two [Federal Reserve] and the SEC has repeatedly called for more crypto regulations. And I think SEC Chairman Gary Gensler on Tuesday described the crypto market as the “Wild West” – riddled with scams and abuse and threatening national security. And he called on Congress to give the SEC more reach, more authority, and more resources to oversee the crypto industry.

Now my personal point of view, and you know I could be wrong, is that regulation is not a bad thing for this market. A blanket ban would be bad. But regulations are necessary steps for the stability and acceptance of cryptocurrencies. And no one can deny that this market is incredibly volatile and that we are seeing extreme price movements, both up and down. … The biggest political debate we face is whether we should think of cryptocurrencies as securities like stocks or bonds? And that brings us to the question: how should we regulate the issuance of cryptocurrencies and the trading of cryptocurrencies? If we were to treat them like stocks, then the regulation of the issuance of a cryptocurrency should simply be treated like stock offerings. So it’s a big debate and the SEC absolutely needs to provide more clarity on this front.

Another important issue here is how the tax authorities levy and collect the tax on crypto transactions. For example, if Tesla were to start accepting bitcoin, again, as a form of payment for the car, how should we view transactions like this? How do we collect the tax on crypto transactions? the [Internal Revenue Service] makes it very clear that anyone who profits from mining or Bitcoin transactions has to pay taxes, but tax authorities still face incredible challenges in collecting tax on those profits.

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