Cryptocurrency has been around since 2009, when the first digital currency Bitcoin was launched.
However, at present, cryptocurrency is not regulated in Ireland and warnings have been issued by the Central Bank regarding the risks around investing in such currencies, as they are proving to be a hugely volatile investment.
But with global cryptocurrencies now estimated to be worth about $3 trillion in market capitalisation, it’s becoming more critical that regulators take steps to oversee their use.
Also, in a sign that cryptocurrency is entering the mainstream and cannot be ignored, Revenue recently issued guidance on the tax implications of cryptocurrency.
And when Revenue gets involved, this means you need to understand the implications of cryptocurrency for your business.
In this article, we give an overview of cryptocurrency, how Revenue views the currency and what it could mean for businesses in the future.
- What is cryptocurrency?
- Revenue guidelines
- Cryptocurrency entering the mainstream?
- Benefits for businesses
- Current barriers to adoption
- What does the future hold?
What is cryptocurrency?
First things first, what exactly is cryptocurrency? The Central Bank has a clear explanation on its website:
“Cryptocurrencies – also known as digital currencies or virtual currencies – are a form of digital money. They allow payments to be made electronically and function in a similar way to standard currencies that use physical cash.
“However, unlike standard currencies that can be exchanged physically using notes and coins, cryptocurrencies are only exchanged electronically using lines of computer code.
“Examples of well-known cryptocurrencies are Bitcoin and Ethereum, but a wide range of others also exist.”
A key to understating cryptocurrency is also to understand the technology behind it, as the Central Bank outlines:
“Cryptocurrencies are controlled using a technology known as ‘blockchain’ or ‘distributed ledger technology’. A good way to understand distributed ledger technology is to think of it like one big public file – or ledger – that is shared and stored across a huge network of computers.
“This file contains all the transactions made using the cryptocurrency.
“Because it is publicly shared and its contents validated by so many different people, it makes it virtually impossible for anyone to include a fraudulent transaction on it.”
Of course, unlike the euro, cryptocurrency has no legal tender status and is unregulated.
As part of the Eurosystem, the Central Bank is investigating the potential issuance of a central bank digital currency (CBDC), as in a digital euro.
The Bahamas was the first country to launch a CBDC and closer to home, Sweden is currently running a pilot project.
Revenue recently published guidelines on the tax implications of cryptocurrency.
The main point from Revenue’s guidance is that cryptocurrency transactions are really no different from transactions made in any other currency and should be treated the same way.
VAT should be charged and the normal rules for calculating tax gains or losses apply.
The guidelines cover issues such as VAT treatment, Capital Gains Tax, valuation of crypto assets and reporting requirements.
While outside the remit of Revenue’s guidelines, transactions should also be monitored to ensure that they are compliant with Anti-Money Laundering (AML) and Combating the Finance of Terrorism (CFT) procedures, particularly in light of the implementation of the European Union’s (EU) Money Laundering Directive 5 (MLD5) in Ireland.
The EU is also developing regulations to do with the transfer of funds which reportedly would require cryptocurrency issuers to apply more identity checks on their customers, and more tracking and tracing of transactions.
Cryptocurrency entering the mainstream?
To date, cryptocurrency has been mainly used as an investment tool rather than as a form of payment, and this will probably continue to be the case until there is more price stability.
In terms of being used as a form of investment, research published in September 2021 by the Competition and Consumer Protection Commission, which surveyed over 1,000 adults, showed that over one in ten (11%) of those with investments held some kind of crypto asset or cryptocurrency, such as Bitcoin.
This increased to one in four (25%) among those aged 25-34.
In terms of payments, its use as an actual currency remains niche.
All the same, there are increasing numbers of large global companies that accept cryptocurrency as payment, including Tesla, Microsoft, Subway, Red Cross, BMW, Expedia, PayPal and Twitch.
Benefits for businesses
What are the benefits for businesses of using cryptocurrency?
As an investment tool, some cryptocurrency has performed exceedingly well in the past few years.
On the flip side, huge losses have also been made. So, your company needs to consider the volatility risks when investing in cryptocurrency.
Some companies also facilitate crypto payments. When deciding on such a move, you need to decide whether you’d handle the trade yourself and integrate the currency into your company’s own systems or use a third party and pay a fee.
Using cryptocurrency as a payment method ensures that the business deals with the customer directly, and the absence of a middleman means that the transaction cost will be much lower.
In addition, the payment is instant.
Once the blockchain with a transaction in it is confirmed by the network, it’s fully settled and the funds are available to use.
An advantage of accepting crypto payments is that you’re potentially increasing your consumer base and also perhaps showing your company to be an innovator.
In addition, if your company does a lot of international business, crypto payments bypass many of the restrictions and barriers of global trading and also makes it easier to accept payments in any currency.
Lastly, another benefit of crypto payments, though maybe not as relevant to Ireland, is that it’s sometimes used as a hedging tool in countries where there is hyperinflation.
Current barriers to adoption
The main barrier to adoption is the huge volatility of cryptocurrency, along with the lack of regulation, which means that there are none of the standard protections.
For instance, this lack of regulations means there can be inadequate reserves for a particular cryptocurrency and also inaccurate disclosures.
In addition, another negative that’s widely mentioned about cryptocurrency is the high energy usage involved in running the computer networks or mining the digital currency.
While there’s some greener mining with energy renewables, and there have also been innovative developments such as sourcing energy by harnessing excess natural gas from oil and gas drilling sites, these initiatives are as yet limited.
What does the future hold?
There’s always been a lot of discussion about whether cryptocurrency is a good or bad thing.
And this conversation continues.
A PwC report from 2015 said: “Cryptocurrencies carry ground-breaking potential to allow consumers access to a global payment system – anywhere, anytime – in which participation is restricted only by access to technology, rather than by factors such as having a credit history or a bank account.
“The discussion is no longer one of whether cryptocurrency will survive, but rather how it will evolve – and when it will reach maturity.”
While maturity is still a long way off, the pandemic has accelerated the shift from cash to online financial transactions and also given a further push to cryptocurrency and other crypto assets such as NFTs (non-fungible tokens).
And many believe there will continue to be expanding and accelerating adoption of cryptocurrency in the years ahead.
Where does Ireland fit into this?
Ireland has an enviable reputation as a technology hub and this puts us in a good position to embrace any emerging opportunities.
However, for cryptocurrency to really take off in Ireland, regulators will need to provide clear guidance and put structures in place to prevent abuses.
That being said regulators have a difficult challenge.
They need to protect financial stability and vulnerable customers, but also need to balance this with the benefits that cryptocurrency could provide.
Continue watching this space.
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