Cryptocurrency is Hybrid Financial Instrument but Should Not Have Special Treatment

There is more to cryptocurrencies than just being money, or currency, and there are very good reasons for them to fall under a tax regulation in the traditional sense.

Bitcoin and the like can also be debt and equity, and that automatically lends them to being regulated and taxed just like many other types of finance.

Both an equity and a debt

Bitcoin can be used to buy into other cryptocurrencies, and Blockchain startups in the way of ICOs and other methods, so it can be argued that they are an equity investment. When these Blockchain startups issue the equivalent of their shares - in the form of an ICO - it is comparable to equity.

Cryptocurrencies are also used to finance specific assets, like debt. So essentially it is a single financial instrument that has the advantages of both debt and equity.

Defining Bitcoin

The question of how to define Bitcoin is still an ongoing debate. It was announced as a currency, but many did not buy that, as its usage changed as its value rose. It became much more a store of value.

As a store of value it is then a type of asset, like gold.

"Usually if investors acquire or sell an asset, it would be liable to tax, such as the GST. This means people using Bitcoin would be taxed twice when using it."

This was the case for Australia for a time. It would be taxed when the person bought Bitcoin and taxed again when they used it to buy something. Luckily the federal government realised this was a bad idea and moved to repeal the double taxation of Bitcoin.

Debt and equity are financial instruments used to raise money to finance economic activity. It is something of a puzzle to financial economists why firms use debt in some instances to raise finance, while using equity in other situations.

Dequity

However, when it comes to cryptocurrency, it can be defined as “dequity”, which is a concept put forward by the 2009 economics Laureate Oliver Williamson. He defined dequity as an instrument of both debt and equity.

Cryptocurrency is the only financial instrument that can be defined like this because of its trustless base. Dequity was unworkable was due to opportunism – investors simply could not trust dequity issuers.

How should dequity be regulated then?

If cryptocurrency can be defined as dequity, then it can fall under the traditional norms of regulation and taxation. So, how should dequity be regulated?

Currently, cryptocurrencies are either being met with acceptance, and many regulators are changing the rules for them - such as in Singapore - or they are being cracked down on - such as in China.

"However, it can be argued that regulators should really regulate cryptocurrencies in much the same way as they do existing financial instruments. It shouldn’t be given special treatment."

Despite all the complexity of cryptocurrency it really is simple: it’s a financial instrument that combines all the advantages of money with debt and equity. It’s none of those well known concepts in isolation, but a viable and workable hybrid of all three.

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