Is it just a matter of time before the U.S. government adopts cryptocurrencies?
Is it just a matter of time before the U.S. government adopts cryptocurrencies?
Colorado will accept cryptocurrencies for taxation. Some experts believe it is only a matter of time before other U.S. states follow suit.
Colorado Gov. Jared Polis announced in February that the state plans to allow residents to pay taxes using cryptocurrencies as early as the summer of 2022. In an interview, Polis said Colorado cryptocurrency holders could choose to pay their taxes in digital currency, with the state converting the funds back to legal tender once payment is received through an unnamed intermediary.
Polis added that the state could accept cryptocurrency payments within a few months after the launch this summer. The governor said at the time that he was "not at all concerned" about the potential volatility of cryptocurrencies such as bitcoin because the state does not intend to hold these tokens for the long term.
Shortly after taking office in 2019, Polis signed the Colorado Digital Token Act into law, which aims to exempt tokens with "primary consumer purposes" from some securities regulations. The governor also said state Sen. Chris Hansen is working on a bill that would "allow state-created digital tokens to be used for state reserve purposes."
Senator Hansen said in an interview that the bill "introduces additional security, saves costs, diversifies the investor base and has the potential to lower the rates the state pays."
Hansen said, "We need to ensure that every Coloradan can fairly participate in and benefit from investments in our state. By expanding beyond institutional investors and commercial banks, we are inviting millions of Coloradans to participate in the financing of new capital assets."
The senator said he looks forward to seeing how the state will help "communities recover from the outbreak, improve their quality of life and address the economic inequalities that are holding back ordinary people."
Brian Pasfield, chief technology officer of decentralized lending platform Fringe Finance, shows that cryptocurrencies are being legalized by initiatives such as Colorado.
Pasfield said, "Seeing the government recognize cryptocurrencies as a viable medium for tax payments speaks volumes about the change in mentality with which we view these currencies."
Pasfield added that accepting cryptocurrency taxes would "inevitably result in governments having to manage and hold these currencies in their treasuries," which would help reduce the volatility of cryptocurrency assets.
DeFi Technologies CEO Russel Starr said he believes government treasuries should be denominated in the currency used to pay for services, meaning that if employees are to be paid in U.S. dollars, their crypto revenues should be converted to U.S. dollars.
However, Starr said that any entity should "have diversified investment holdings" that should "absolutely include cryptocurrencies and other decentralized financial products.
According to him, "the growth potential of cryptocurrencies will make them an attractive asset in any carefully balanced portfolio." This growth potential could also mean that the acceptance of cryptocurrencies by governments for tax purposes is a long shot.
Government adoption "just a matter of time"
In February, California State Senator Sydney Kamlager introduced a bill that would authorize state agencies to accept cryptocurrencies as a form of payment for the provision of government services.
Back in 2018, Ohio became the first U.S. state to accept bitcoin for taxation, but dropped its crypto taxation plan in 2019, citing legal issues.
Jaideep Singh, co-founder and CEO of FlyFin, an artificial intelligence tax engine company, said cryptocurrencies are slowly coming under regulation. According to Singh, crypto regulation began with reporting crypto transactions for U.S. tax filers, and then government agencies moved to tracking cryptocurrency transactions.
Tracking cryptocurrency transactions reduces their anonymity and "furthers a trend we will see in the coming years" involving greater transparency, tracking technology and higher regulatory requirements for cryptocurrencies: "Governments have a responsibility to ensure that their citizens are not defrauded, that criminal activity is curbed , and that taxes are not circumvented. Therefore, it is only a matter of time before this new development takes place in Colorado."
Singh sees the U.S. leading the world in accepting cryptocurrencies, with other countries following suit, as "we're definitely going to see central banks adopting blockchain and other crypto technologies."
Ben Weiss, chief operating officer of bitcoin ATM operator CoinFlip, said he believes Colorado's move "could have a ripple effect, with other states in the country following suit." For Weiss, it could be "an important step in getting consumers to recognize crypto as a legitimate form of currency.
Weiss added that the move could further boost the use of cryptocurrency in government services: "This advancement may also encourage the implementation of crypto transactions elsewhere across the state, such as at the local DMV [Department of Motor Vehicles]. This is an excellent opportunity for Colorado to build its reputation as a tech hub and mark its place at the forefront of the digital revolution."
Weiss said U.S. states could consider holding crypto assets because of their appreciation potential, as the extra money gained through it could be "used to improve roads, clean up parks and help fund other underfunded areas of local government."
Patrick White, co-founder and CEO of Bitwave, a provider of tax and accounting software for crypto assets, said in an interview that he would be happy to see states like Colorado and California begin to accept cryptocurrency taxation.
White added that using crypto assets requires "muscle memory: it requires understanding how to convert between cryptocurrencies and fiat currencies, learning about taxes and accounting, figuring out escrow, etc."
He added, "It's a huge step forward for the industry that multiple states have to really understand cryptocurrencies, develop rules for pricing digital assets for actual tax purposes, etc."
Weiss hopes that the U.S. federal government will follow suit and that government agencies will eventually "keep some of their assets on their balance sheets rather than selling them outright."
Even if governments do not keep crypto assets on their balance sheets, the demand for them to accept cryptocurrency payments is likely to surge. One way to maintain demand for fiat currency is through its use in tax payments: people need to hold fiat currency so that they can meet their tax obligations at the end of the month or at the end of the year. If cryptocurrencies are to be used to pay taxes, then the demand to hold legal tender will be greatly affected as it becomes easier to use crypto debit cards to pay for goods and services.
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