You know you’ve made it big when you get on Uncle Sam’s radar. That seems to be the case for cryptocurrencies this week as reported by Forbes, Yahoo Finance, and Bloomberg. The IRS’s Fraud Enforcement Office, whose formation dates back to March 5th, 2020, announced that under the auspices of its “emerging threats mitigation team” it was implementing a new program aimed at identifying non-reported cryptocurrency income on tax returns. Based on the reporting, it appears that enforcement would parallel measures used for other non-reporting violations of the tax code.
The information, mainly coming from the mitigation team’s Executive Director, Damon Rowe, doesn’t mention specific cryptocurrencies by name, but given the enormity of Bitcoin’s media attention these days, and to a lesser extent Ethereum, both seem to be the most likely candidates to be in the crosshairs.
The named operation – yes, not only has cryptocurrency landed on the government’s radar but also commands its own super cool operation name – is “hidden treasure”. To my mind, this invokes almost a gamification of the exercise and strikes me more of a warning shot than a hardcore Department of Treasury law enforcement campaign. Even still, it ought to serve as a harbinger of what is likely to be increased regulatory oversight over the continually growing cryptocurrency marketplace.
As of this writing, Bitcoin is trading above at $60,000 USD, and this past week saw the $69.3M sale of Beeple’s digital, non-fungible token (“NFT”) artwork, “Everydays — The First 5000 Days”, at Christie’s auction house. (Yes, you read that correctly, a $69,300,000 NFT.) Is it any surprise that the Feds are getting into the act too? The buyer of the artwork was a crypto investor known only by the pseudonym “Metakovan”, and the artwork was paid for in Ether.
We’re at a point now where the volumes of cryptocurrencies traded are massive, the trading is highly speculative, and the amounts being transacted are very large. I can’t imagine that the SEC isn’t going to chime-in soon on the trading itself and as a function of the sheer number of dollars being transacted, this won’t be the last operation that the IRS employs.
Should cryptocurrency traders and investors be concerned with “Operation Hidden Treasure”? I don’t know. But, the overarching trend of greater oversight is nothing I’d expect to ebb. More germane to our readership, though, is the question of what this new D.O.T. focus on cryptocurrencies means for small businesses (“SMEs”) and their payments providers – whether merchant acquirer or fintech – who are contemplating the acceptance of digital assets? My feeling is not much of anything at the moment.
The only cryptocurrencies being considered as payment options for SMEs over the major card network rails ( Mastercard, VISA ) are stable coins and CBDCs. In both instances the cryptocurrency is pegged to the dollar. As far as Bitcoin and Ether are concerned, I’m not aware of any small, mainstream businesses that accept these forms of payment directly. Meaning, in almost all cases where these particular cryptocurrencies are “accepted”, there’s a fiat conversion executed before monies are routed from issuer to merchant.
Mastercard has been explicit about its intention to permit cryptocurrencies to run on its network. Their reason for doing so is “choice” – to provide a choice for the consumer and merchant. But that choice comes with minimum qualifications that most cryptocurrencies don’t currently meet. I mentioned stability above, with the cryptocurrency tether to USD. Mastercard will also require cryptocurrencies to meet minimum criteria for regulatory compliance and consumer protections. With these high thresholds in place, I don’t see cryptocurrency acceptance by SMEs any time soon, at least from the card network perspective.
The current workaround for the card network issue has been solved, at least temporarily, by some cutting edge fintech companies. One of my favorites is Bitpanda which is taking pre-orders for a new VISA branded card that will allow people to purchase goods and services using crypto assets and precious metals. But here’s the catch: the mechanism for enabling these types of payments involves Bitpanda being an intermediary via a mobile wallet application which effectuates a crypto-to-fiat conversion before monies are routed to a merchant. Thus, the merchants aren’t actually receiving cryptocurrency or other digitized assets, they’re receiving good ole USD.
The fact that the use of cryptocurrency is drawing increased scrutiny from the federal government, in this case the IRS, should come as no surprise to anyone. It’s my opinion that this scrutiny is only going to intensify, and its scope will continue to expand. Regardless, I don’t believe the current IRS “hidden treasure” operation rises to the level of a justifiable concern for SMEs, payment companies or fintechs; it will be cryptocurrency trading on which the IRS will set their sights. But the current IRS focus does raise questions as to where else governmental and regulatory scrutiny will come from – Congress, SEC, other divisions of Treasury? Let’s not kid ourselves, Uncle Sam’s nifty operational name aside, there’s a real mandate in place and there’s surely more to come.
– Adam T. Hark, Managing Director, Wellesley Hills Financial, LLC