There is certainly a hype around virtual currencies, purely because they are relatively new. The concept of a currency that you can control directly outside of the banking system definitely appeals to some. If we look back to the creation of currencies, it’s based on trusting the value of the currency and the ability to exchange it with a stranger.
Allow me to speculate that the current interest in virtual currencies is down to the distrust in traditional currencies, rather than a strong trust in crypto currencies. Increased government debt and spending, combined with an overheated financial market, is scaring a lot of people. The fear of excessive taxation, increased inflation or worse, devaluation, is a real threat and talked about within the investor community on a regular basis. Hence, crypto currencies are quickly becoming part of a diversified portfolio, which I expect to be a standard allocation in a few years. We have clients who personally bought crypto currencies some time ago, and they expect banks to adapt to their needs and hold them directly in future.
Indeed, crypto currencies are rather volatile. For example, Tesla announces its acceptance and we see a major rise, followed by a steep decline a few weeks later.
But as I mentioned earlier, I think crypto currencies will become part of a standard HNW portfolio, just like Private Equity, Venture Capital and other derivatives which are risky and difficult to understand. This investment should be for the long term and only a limited part of the overall portfolio.
I don’t consider it as a reliable investment (yet)… besides, one should differentiate between the top 10 currencies and “the rest of the pack”…
One of the major problems in regulating crypto currencies, apart from the technical difficulties and ultimate beneficial owner (UBO) identification, which can be overcome, is the fundamental fact that they are not recognised as legal tender.
Whilst the US Commodity Futures Trading Commission (CFTC) gives guidelines and attempts to regulate the market, I’m sure all major exchanges, starting from the US SEC, are looking into regulations for virtual currencies.
The UK only regulates it for AML purposes, Switzerland is quite advanced and wishes to be one of the early movers. Gibraltar offers an exchange, but from what I hear, there is some reluctance and most major players are waiting for a premier financial centre to establish a more widely accepted and robust exchange.
Well, let’s assume first that crypto currency holdings are reported and included in the annual tax return. Then it all depends where they are tax resident, because countries approach crypto currency taxation differently.
The US, for example, taxes only upon sale/exchange or use. In the UK you are taxed on ownership above a certain threshold and Portugal doesn’t tax crypto currencies at all.
In general, I believe most countries would like to tax crypto currencies somehow, but they lack the access and data to do so effectively, and it will take years for most to apply a workable and fair tax regulation.