When Bitcoin Isn’t a Currency

Bitcoin Neon Sign

So what is bitcoin? Economists say it acts like an asset or a commodity. Technologists focus on the payment protocol. And now the Internal Revenue Service will treat bitcoin as property, according to guidance released Tuesday. Apparently for many, bitcoin is anything but a currency.

That includes the bad guys. “Terrorists generally need ‘real’ currency, not virtual currency, to pay their expenses,” said David S. Cohen, Secretary of Terrorism and Financial Intelligence for the US Treasury, in a speech on Tuesday.

Part of it is political, as governments have long monopolized the business of issuing legal tender—a practice established in the US in the 19th century with the National Banking Acts of 1863 and 1864. Incidentally, a slew of other countries don’t consider bitcoin a legitimate currency, including France, Denmark, the Netherlands, and Japan, among others.

Part of it is functional, given extreme price volatility that makes cryptocurrencies, at least for now, a poor store of value. “Bitcoin likely can’t work as a currency, but … the ledger-based technology that underlies it could hold promise,” said Goldman Sachs in its recent report.

And part of it is technological. While a currency has been the first iteration of the bitcoin model, it certainly won’t be the last nor even the most compelling. Indeed, technologists have begun to focus on the payment protocol, which could unleash countless applications like domain name services, social networks, or even insurance companies.

“Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate,” wrote Marc Andreessen in January.

This evolving consensus of bitcoin’s potential as a currency may come at the chagrin of more ideological early adopters who view cryptocurrencies as a way to challenge and subvert governments. And while it’s impossible to rule out that bitcoin or something like it might one day become the global currency of choice, the pragmatic would perceive this as highly unlikely.

In fact, as bitcoin continues to grow up, anarcho capitalists will come to terms with the notion that bitcoin isn’t the vehicle for revolution they thought it was, says Andreessen.

“I think the relevant comparison point for bitcoin is 1993 or 1994 for the consumer Internet,” said Andreessen, during a panel on the first day of the CoinSummit conference. “It arrived with fringe politics and fringe characteristics. But you just have to go through a maturation process, and along the way, the fringe characters can get alienated.”

“My prediction is that the libertarians will turn on bitcoin. The libertarians will discover that the blockchain is public,” he added, referring to the transparent public ledger, which undermines anonymity.

For the rest of us, it simply means we have to follow the rules, which also means paying taxes. As some have pointed out, this could turn out to be a hassle—mainly because bitcoin isn’t considered a currency. That means all retail transactions would be considered a taxable “event.” In other words, “purchasing a $2 cup of coffee with Bitcoins bought for $1 would trigger $1 in capital gains for the coffee drinker and $2 of gross income for the coffee shop,” according to a report by Bloomberg.

New apps could make that process more convenient. And it likely won’t be the last attempt by the IRS to adapt math-based currencies to the existing framework. “Tax professionals can then identify issues and advocate possible solutions,” Tyson Cross, a “Bitcoin tax expert,” told Business Insider. “So between now and the issuance of actual regulations (which takes years), there’s ample opportunity to shape the tax treatment.”

Because regulators, along with the rest of us, are still scrambling to figure out just what bitcoin is: that bitcoin isn’t just a currency but as something totally brand new, stands in a class of its own.

Photo: Duncan Rawlinson