We’ve heard it hundreds of times. Blockchain is Web 3.0 or Geekdom’s latest marvel. Entrepreneurs, or business owners, who capitalize on this technology when young make it rich. Innovators like Ripple turned a $10,000 investment into $1.5 million in five years. Binance, only a year old, has a market cap of $840.8 million, according to Coinmarketcap. So it’s understandable that you’d speculate about launching your own business blockchain. You may not want to innovate anything, but, hey, blockchain’s said to be the next Revolution. Blockchain fanatics say it’s a core differentiator and value driver, leading you, if you have a business, to quite likely think maybe you should jump on board.

Should you?

Brian Winker’s take on blockchain for business

Sometime last year, I interviewed Brian Winkers, founder of blockchain money automation company bitlov.com that won first place in the 2015 StartUp Chile! Competition.

Winkers himself is an open-source developer and Bitcoin analyst who has been playing around with crypto projects since 2012 and has helped small and medium-sized businesses get on or, rather, more often, off the blockchain.

For Winkers, blockchain for small business is a bonkers idea, largely because of Bitcoin. Bitcoin’s platform has problems with scalability: The platform is slow – around ten transactions per second compared to Visa’s 5,000 to 8,000 transactions in the same time span. The ledger became congested. The company itself struggles with internal squabbling.

Truth is Bitcoin is competing with more scalable and less problematic platforms like Ethereum and IOTA, so businesses can profit from blockchain more than was possible, say, ten years ago.

The problem is the expense.

Blockchain expense

Blockchain technology is free if you want to do all the work. The problem is recruiting a blockchain developer, and that’s where the trouble starts. As of 2018, a decent blockchain developer costs anywhere from $150,000 to $200,000 at the very least. Forget the fly-by-night freelancer from a platform like Elance, Guru or the like. Actually employing someone from such a platform would likely cost you more, since you may have to pay for errors. Any coding error or slight mishap means the ledger needs to be dismantled and rebuilt from scratch, aside from which technological changes occur so rapidly that top blockchain developers regularly familiarize themselves with updates.

Want a top developer? Expect to pay $250,000-$450,000 for a whiz, or triple that for a world-class specialist, according to Pavel Supronov on Medium. You think blockchain saves you money? According to John Levine, crypto consultant, author, and speaker, blockchain is the most expensive database ever invented.

Is your blockchain for innovation?

To get some ROI from your blockchain investment, you need some really BIG idea that’s stupendously different than competitors and that delights hordes of people. (Think of a Ripple or Binance).  Such a feat, according to Winkers, is performed by only two out of every hundred ICOs or startups.

In all my years,” Winkers told me, “I’ve only found one ICO that makes sense, and that’s the one I’m with right now. A Russian company called Visor looking to create a payment coin. I’m providing some technical guidance, more on the architecture side. I think they have a good team that understands the need to meet the underlying business needs. It’s not about them having a big payday.”

Winkers added:

I regularly tell businesses not to proceed with Bitcoin, but to focus on more conventional solutions. I try to help them customize their business, figure out what they can do.  Unfortunately, most people who approach me are dazzled by Bitcoin and the ledger. They don’t understand it… but just about everyone’s doing it so they want on the bandwagon. Now if they’d have a wonderful remarkable useful idea that may be one thing, but they often emerge with impractical, unfeasible ‘solutions’, so it’s a waste of their time and money.

At the end of the day, if your mind is on blockchain for fame or money, Winkers doubts you’ll succeed. You’ll want to have a solid idea that makes sense and that lasts for decades.

Blockchain to save you money?

How about if you don’t want to innovate but are sold by the blockchain hype and want blockchain to expedite your business? Say, you’ve read reports like that by management consulting giant Accenture and McLagan who insisted that blockchain promises cost savings of 70 percent or more in finance areas? Or you read the 2014 EY report how blockchain-based businesses outpace competitors?

Well, blockchains have certain problems that you’d want to know about…

The National Institute of Standards and Technology (NIST) – a non-regulatory agency of the U.S. Department of Commerce – recently released a report for beginners to blockchain and business owners often tempted by new technology.

The report pointed out that blockchain can’t control users’ conduct.  The NIST also highlighted the misconception that blockchain is “trustless” – you need a great deal of trust in the technology, developers, and user cooperation for the blockchain to function. Further, users must manage their own private keys that, once lost, are harder to recover than usernames or passwords on centralized platforms.

Additionally, blockchains are massively inefficient. Set up a blockchain and you’ll need each and every user to archive, and constantly update, a complete history of all that’s happened on that blockchain. 

Finally, but not conclusively, blockchains also require a computational challenge to restrict the creation of new blocks. If it’s too easy, hackers could temporarily mobilize enough computing power to rewrite history; if it’s too hard, each new block will consume megawatts of electricity. And electricity for blockchain costs hundreds, if not thousands, of dollars.

On the other hand…

As we speak, blockchain improves all the time. More modern technologies produce decentralized platforms that have more bandwidth, are faster, more convenient, easier to program. IOTA, for example,  uses a “blockchain” that isn’t the traditional format but a new one called Tangle that knocks out the expense and time of mining. IOTA transactions are super-fast and process several transactions simultaneously.  Its structure perfectly suits the Internet of Things (IoT), where products and appliances like cars, home appliances and machinery “tangle”. Businesses on  “next generation” blockchains like IOTA report a smooth, fast and cheap experience that almost resembles that of the Web.

So to blockchain or not to blockchain?

A unanimous decision tree floating the Web may resolve your problem.

Ask yourself the following:

  1. If you need a database, are all the writers or participants on your team known and trusted? Is there anything you need to hide? Do you need to hire, or involve, trusted third parties? Do you need to control functionality? Are your transactions private? If your answers are a flat “no” to each of these questions, either stick to a standard database or use a public blockchain.
  2. Does more than one participant need to be able to update the data? Do you need to hire third-parties whom you’re unsure whether you can trust? Do you have any confidential data? Do you and all the updates on your team barely know one another or have some qualms of one or more users? If you answered “yes” to one or more of these questions, use a permissioned or hybrid blockchain.
  3. Does the data need to be kept private? Do you need to control who can make changes to the blockchain software? Do you have the money for blockchain programming and continuous maintenance and upgrades? Consider a private blockchain.
Do you even need Blockchain?

Even then Winkers would tell you to mull your decisions carefully. 

“I’ve always worked to make sure that small businesses aren’t taken advantage of by others in the technical fields,” he told me, “And that includes blockchain. For some it’s the right path, for others, it’s a costly diversion.”

“ICO companies that invest in blockchain have a 98% failure rate. That’s not the route,” Brian insisted, ”that I’d want to take.”

 

About three years ago, a so-called crypto-anarchist, deep into libertarianism, hired me to write a book that included content railing against government anti-money laundering regulations. As he saw it, there is essentially nothing wrong with financially supporting terrorist organizations,  smuggling drugs or other contraband items. (Hell, there was nothing wrong with terrorism to him; one man’s terrorist is another man’s freedom fighter). People can do what they want as long as they don’t harm others. Drugs and prostitutes (for instance) delight individuals. And, therefore, the government, which, by the way, does a lousy job of literally minding its own business should focus on “minding its own business”.

Five years later and knowing more on money laundering, I think large-scale smuggling and certainly funding terrorists may have more negative social and economic ramifications than my well-meaning friend opined. This is  partly because unrequited criminal laundering turns us into a criminal society – after all why work ethically when we can make far more money in illicit activities. Above all, successful money laundering means more drugs on the streets, more drug-related crime, more fraud, more corporate embezzling, and more terrorism, among a host of other social ills.

What  is money laundering?

money laundering

 

Money laundering, at its simplest, is the act of trying to make money that comes from nefarious Source A look like it comes from “clean” Source B. If caught, the perpetrator can’t use that money, since law enforcement would seize it. Source A involves funding ISIS, smuggling cocaine, engaging in corrupt political businesses, or benefiting from fraudulent business schemes, as examples.

If I were involved in any of these activities and would want to retain my stash, I’d be advised to go through the following three steps:

  1. Placement – Find a place to stash my money. If I wire the trove to my banks Capital One or Charles Schwab, they’d have to tell the government I’m suddenly depositing millions in checks. So I need to find a resilient hiding place.
  2. Layering – Money launderers can teach me all sort of schemes like wiring money between different accounts in different names in different countries, or purchasing high-value items (boats, houses, cars, diamonds) to change the form of my money. I can also change my money’s currency – and this is where cryptocurrency comes in. So, I can change my dirty dollars into Bitcoin and then again into Monero or Dash to better hide its source – now there’s a way to evade the cops!
  3. Integration – At this point, my money re-enters mainstream society as though it comes from a legitimate source. I’ve strategized in such a way that my startling fortune is innocuous and can slip under the radar.

The government’s response to money-laundering

Anti-money laundering regulations

In the United States, the Department of Justice, the State Department, the Federal Bureau of Investigation, the Internal Revenue Service and the Drug Enforcement Agency join forces in catching money-launderers like me. State and local police investigate cases under their jurisdiction. On the international stage (and when it comes to blockchain), organizations like the United Nations, the World Bank, the International Monetary Fund and the Financial Action Task Force on Money Laundering (FATF) send in their troops. The last has 33 member states and organizations, as of 2018.

Cops combine legislation with law enforcement.  In the United States, legislative acts include:

  • The Bank Secrecy Act (1970) – Financial institutions have to report all single transactions above $10,000 and multiple transactions totaling more than $10,000 to or from a single account in one day. When it comes to the blockchain industry, this includes money service businesses (MSB), too. Bankers who violate this rule can serve up to 10 years in prison.
  • The 1986 Money Laundering Control Act – Any aspect of money laundering is a crime punishable by fines or jail.
  • The 1994 Money Laundering Suppression Act – Banks have to establish their own money-laundering task forces to weed out suspicious activity in their institutions. When it comes to blockchain-based financial institutions, customer due diligence (CDD) rules are no different.

In truth, it’s a perpetual chase of cops vs. robbers, with the robbers mostly slipping through even as cops set the traps.

How do AML rules impact ICOs?

ICOs, also known as token sales, can fall foul of anti-money laundering regulations with their digital tokens.  While “utility tokens” that only give investors access to the startup’s features are ok,  it is the “security tokens” that may offer investors equity or some form of an investment return that are problematic.

This is where a growing number of ICOs interest themselves in Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations for reasons that include the following:

  1. Establish credibility with banks – After all, banks don’t want to trip up with organizations like FinCen, a bureau of the U.S. Department of the Treasury, that snoops into whether financial institutions are adhering to KYC.
  2. Long-term legitimacy – It’s good for your bottom line. You don’t want the government to bust your booty as happened in 2014 with Mt. Gox, the largest Bitcoin exchange, after the US Department of Homeland Security (DHS) seized suspicious money from its U.S. subsidiary account.
  3. Improved public perception – You appear more legitimate. You’re more likely to interest investors. The Dutch Authority for the Financial Markets (AFM), for one, warns consumers to avoid ICOs:

“Due to their unregulated status and the anonymous nature of the transactions involved, ICOs are attractive for the laundering of money obtained by criminal means. .. Because of these risks, there is a strong possibility that investors will lose their entire investment.”

With your compliance to KYC/ AML rules, you prove the AFM wrong.

4. Expanded reach – You’re more likely to attract investors in countries with rigid KYC/AML regulations like US, UK and Canada.

5. Avoid Regulatory Fines – There have been cases of regulatory bodies fining or suffocating ICOs that smell suspicious. With the Mt. Gox case, more than 3,000 customers lost some, or all, of their investments. You really don’t want that happening to you! AML in practice?

Our most recent guide to all there’s to “KYC: A  Practical Guide for Blockchain Entrepreneur and Investor” gives you the overall picture.

Really, it reduces to three steps:

  • Identify and do background checks on depositors.
  • Report all suspicious activity. (For example, if a background check revealed that depositor A works in an oil rig, and he deposits $2,000 every two weeks, a series of ten $9,000 deposits over two weeks should worry you.)
  • Build an internal task-force to identify laundering clues.

The rest is up to you.

SegWit, short for Segregated Witness, is a system that makes your Bitcoin transactions faster.

Why do we need SegWit?

Think of a single lane highway with 5,000 vehicles driving along smoothly. As traffic builds to 50,000 and more, that single lane becomes clogged forcing you to wait hours on end in congested traffic and maybe miss your appointment. That’s Bitcoin. It’s called the scalability problem, and it’s an issue that the smartest blockchain developers have been trying to find solutions to for years.

SegWit is the Bitcoin team’s solution.

The scalability problem

One of Bitcoin’s most aggravating issues is its lack of speed. Ten transactions take about a second on average to process. Compare that to payment companies like Visa that are able to process around 5,000 to 8,000 transactions per second.

Pay more and you can get yours to the front of the queue, but that makes Bitcoin an expensive and undemocratic system. Besides which, Bitcoin wants to make its platform as efficient and as whizzingly fast as the internet to retain its users and grow its appeal.

The SegWit solution

Bitcoin transactions are made up of blocks with each block able to absorb no more than 1MB of data.

The blocks come in two parts: a header and a body. The header stores a cryptographic hash of the previous block, along with a time signature and other data. The body stores the transactions, including sender data and receiver public keys, which shows you this is a legitimate transaction. Each part takes up room and increases the mass of the block. The signature part alone that is needed to validate the information takes up around 60 percent of its bulk.

In October 2016, Pieter Wuille, co-founder of Blockstream and a Bitcoin Core developer decided to hack of the signature part and put it in a separate block.

Model: Structure of Segregated Witness

This block, called the “witness” block is separate to Bitcoin’s original block. We now have more room in our core block to slip in more information.  The block becomes lighter, so Peter’s idea also helps Bitcoin transactions move more efficiently.

In essence, Bitcoin added a parallel lane to its highway to divert some of its traffic from Route A (call it that) to Route B. Route A has the blocks with sender and receiver data, while the new parallel lane contains the “witness” segment with the scripts and signatures.

Result? The highway is less congested. Your Bitcoin transactions slip through faster.

Other benefits

  • Node performance – The Bitcoin platform is less congested, so nodes can verify blocks, or transactions, faster.
  • Cheaper transactions – At one time, increased demand raised fees. Now, Bitcoin can reduce its fees.
  • Transaction malleability – Originally, the sender’s signature, or the transaction id (txid), was vulnerable to an intruder hacking and changing it and, thereby, hacking the transaction. By SegWit moving the signature from the transaction data to another “lane”, it protects your transaction data from being hacked. 
  • Linear scaling of signature hashing operations – For certain transactions, adding more data, expands the amount of time that each signature needs to be verified. Segwit resolves this by changing the calculation of the transaction hash for signatures so that each byte of a transaction only needs to be hashed no more than twice.
  • Increased security for multi-signature transactions – SegWit provides two different scripts; one to a single public key that is vulnerable to hacking (and therefore to payments being stolen) and another that directs payments to a script hash. This boosts security for multi-signature transactions.
  • Building on top – SegWit frees Bitcoin for the development of second layer protocols, like its lightning network. SegWit activation also boosted development work on other features such as MAST (which enables more complex bitcoin smart contracts), Schnorr signatures (which would enable another transaction capacity boost) and TumbleBit (an anonymous top-layer network).
  • Protects Lightning Network – SegWit is great for payment channels like the Lightning Network (LN), where a vulnerable signature originally prevented more people from using it to remit Bitcoin. 

Where is SegWit now?

In August 2017, Bitcoin finally integrated SegWit into its system. SegWit is called a “soft fork” which means it is compatible with Bitcoin’s old code, minimalizing the hassle to make SegWit work. A hard fork, in contrast, is a system that is so totally incompatible with the old that a separate blockchain and currency is needed to make it work. 

In SegWit’s case, all the system needed was 95 percent of Bitcoin miners to accept the changes, which happened in less than a year.

In 2017, Bitcoin came out with a controversial hard fork SegWit 2x which increased block sizes from 1 MB to 2 MB. Most of the crypto community resisted SegWit 2x due to its ambitious changes. Consequently, the hard fork was canceled only a week before it was scheduled to occur.

What are the main problems with SegWit?

For one, miners and mining pool operators dislike SegWit. Transactions that go through Lightning Network are in a separate channel (i.e., the parallel “line”), which means these transaction fees will not flow to miners.

Some Bitcoin services – like Bitcoin wallets – have been slow to support the SegWit changes. In February 2018, only 14% of Bitcoin transactions were made using SegWit Bitcoin. The numbers have improved since then, but the network is still in the woods.

Critics complain that SegWit doesn’t go far enough to solve the scalability problem. They maintain that only major changes to the Bitcoin platform and to the way Bitcoin handles transactions can decongest transaction flow.

Finally, SegWit has caused divisions in the bitcoin community leading to several hard forks, such as Bitcoin Cash (BCH).

Cryptocurrency

Bet your bottom dollar, you’ll want to keep a clear account of your cryptocurrency income.

In its recent IR-2018-71, the IRS warned that virtual currency transactions are taxable by law and that people who fail to report their cryptocurrency income, file cryptocurrency late, or file crypto taxes improperly may incur penalties and interest.  

When the IRS speaks, you should notice!

Which accounting model should you use?

You may think that virtual currency is a digital asset and, therefore, should be recorded as such, but since cryptocurrency has no status as legal tender, the IRS requires us to treat it as a property transaction.

Among other things, this means that cryptocurrency investments are bundled under short and long-term capital gains. The amount of tax you pay depends on how long you hold your cryptocurrency.

Thus:

  • Short-term capital gains:  If you hold Bitcoin or another cryptocurrency for less than a year, you’ll be paying regular income tax as with regular property tax. This is anywhere from 10 to 37 percent of your cryptocurrency income depending on your income level.
  • Long-term capital gains: If you hoard your cryptocurrency for longer than a year, you’ll pay long-term capital gains tax, which caps at 20 percent of your cryptocurrency income.

The crazy implication of this plan is that the longer you sit on your Bitcoin, the fewer taxes you pay – which is more reason to “hodl” your currency.

7 other IRS implications and rules

  • Payment made using virtual currency has to be reported using the same rules as any other payment made in property. This means the taxpayer who receives virtual currency as payment for goods or services reports how much that digital currency was in USD on the date that cryptocurrency was received. All transactions are converted to and reported in U.S. Dollars.
  • Payment made to an independent contractor, or freelancer, of $600 USD or more has to be reported on Form 1099-MISC using the fair market value of the virtual currency in U.S. Dollars of the date of payment.
  • As with all property tax, it is the payee, not the payor, who deducts tax. For that reason, the payor must ask the independent contractor for a  taxpayer identification number (TIN) and can only pay his worker once that is received.
  • Gain or loss depends on whether the virtual currency is a capital asset, like stocks, bonds, and other investment property. If it is merely a utility token, i.e., a token used by ICOs to operate their system, there’s no tax. Tax only incurs on virtual currency that can be converted to USD, Euros or other money, namely if the coin has economic value. The IRS refers to this kind of cryptocurrency as “convertible virtual currency”.
  • Someone who mines virtual currency needs to report the exchange value of any income received from that mining in USD. He uses that current exchange value on the day his income was received. Income is reported on either an IRS Form W-2 or an IRS Form 1099, depending on whether the miner works for himself or others.
  • Wages paid in cryptocurrency are reported by an employer on a Form W-2.
  • Wages using virtual currency to independent contractors and freelancers are taxable and the regular self-employment tax rules apply. Payers must issue Form 1099.


    Foreign Asset Reporting Requirements

If you have more than 10,000 bitcoins in a non-US/ offshore account, use the following forms to report your stash:

Donating Helps you Save

Make some Bitcoin, Ether, or Dash donations to some non-profit charity, and you may be able to see some deductions on your taxes as well as avoid tax on your gains. This applies only to cryptocurrency that has recognizable value.

Cryptocurrency Amendments since Jan. 1, 2018

  • No More Like-for-Like loophole

Like-for-like allows you to swap one item for a similar one within a certain time period (typically 180 days), so you may be able to avoid taxes. Since the IRS pegs cryptocurrency as property, and since property investors use the like-for-like loophole for assets like real estate, art, or racehorses, you’d think we’d have this loophole for Bitcoin too.  The loophole existed until the current administration did away with it in January 2018. 

  • No more Cryptocurrency Tax Fairness Act

Before the Trump administration, there was a Cryptocurrency Tax Fairness Act (CFTA) that waived tax from cryptocurrency transactions under $600.  So, say, you used Bitcoin to buy a cup of coffee, you didn’t need to add tax to that Bitcoin transaction. The new tax rules added tax to every itty-bitty purchase – that cup of coffee too.

Bonus: 3 cryptocurrency tax resources

  • Coinbase – A free tool for calculating cryptocurrency taxes that, more or less, works as long as you use it for simple hoarding, rather than trading, and as long as you stash your cryptocurrency with Coinbase. (Warning: The moment you send your coins to an external wallet or another site, Coinbase may inaccurately report these transactions as “sales”).
  • BitcoinTax – There’s a free version for transactions done by any cryptocurrency, as long as the transactions are simple and deal with small amounts, For unlimited and more complex transactions, BitcoinTax offers a 19.95 version per tax year.  This option is your closest to a qualified accountant and may be valuable if you trade in cryptocurrency.
  • Bitcoin Tax Attorneys, CPAs, and Accountants – For complex trading and accounts, you’ll likely want a qualified tax attorney, CPA or tax accountant who knows Bitcoin and digital currencies. That’s where the Directory of Bitcoin Tax Professionals helps you.

 

 

coin renders

Use our news to inform cryptocurrency trading decisions, stay up-to-date on happenings in the industry, and more!

Wells Fargo Is The Latest Bank To Block Cryptocurrency Purchases On Credit
You can’t buy bitcoin with Wells Fargo credit cards anymore. Engadget reports, “Wells Fargo is pumping the brakes on customers using their credit cards to buy bitcoin — the bank has banned credit card cryptocurrency purchases. However, this isn’t a permanent measure, as Wells Fargo will monitor the crypto market and reassess the issue as needed”.

SEC Launches ICO Portal: Highlights Risks, Rewards, and Responsibilities
According to Tony Spilotro of BlockExplorer, “The United States Securities and Exchange Commission (SEC) is vehemently opposed to a common crowdfunding practice in the cryptocurrency industry called the initial coin offering (ICO). An ICO is similar to an initial public offering where a company or corporation raises investment capital by offering its stock to the public for the first time. Only in an ICO, a digital currency or token is distributed instead of a stock, and the token can have a variety of uses that blur the line of what defines a traditional security.”

Hackers Steal $20 Million Of Ethereum From Ethereum-based Apps and Mining Rigs
The Chinese cyber-security firm Qihoo 360 Netlab reported hackers stole over $20 million of Ethereum. BleepingComputer tells us, “The cause of these thefts is Ethereum software applications that have been configured to expose an RPC [Remote Procedure Call] interface on port 8545. The purpose of this interface is to provide access to a programmatic API that an approved third-party service or app can query and interact or retrieve data from the original Ethereum-based service —such as a mineror wallet application that users or companies have set up for mining or managing funds.”

Argo Blockchain to List on London Stock Exchange, Launches Subscription Crypto-mining
Argo Blockchain, a business that seeks to offer cryptocurrency-mining to the masses, announced its plans to list its shares on the London Stock Exchange. BlockExplorer’s Julia Travers shares with us that “the announcement coincided with the launch of Argo’s Mining as a Service, or MaaS, program, which will allow users to participate in mining through the Argo site with their home computers or smartphones.”