OOPS! Seems I’ve dropped the F-bomb!!

Headline: What is financialization?

Date: 10/23/2022

Body:  I have been looking at the literature related to cryptocurrency and blockchain and I keep seeing a word I am not familiar with.  The word is “financialization.”  In the context presented, it seems to be important, so, let’s take a look at what it means, and what we might learn from it.

What Is Financialization?

When I see it in print, “financialization” seems to refer to the increase in size and importance of a country’s financial sector relative to its overall economy.   This is a semi-confusing and academic way to say that the financial world is seeping into many other aspects of our lives.  (Think of the cryptocurrency you use to buy things in the online games you enjoy.)  On an individual basis, it seems important to note that this process can easily lead to chronic stress on community members.  Just to put things in perspective, in the United States, the size of the financial sector as a percentage of gross domestic product (GDP) grew from 2.8% in 1950 to 21% in 2019.  This is far from a new thing; In fact, it has been happening since the 1980s as people started looking at shorter term investments.

The outfall of this has been seen in a process known as securitization  Think of this like a financial burrito.  The bank takes all of these investments and rolls them together into a holdable package, then they can cut this in almost any way to sell the pieces to different kinds of investors.  And, like a burrito, one cannot really see inside of it until it  is too late (sometimes messing up your hands severely.)  This is exactly what happened in 2008 with mortgage backed securities.  (Forgetting for a moment that these same banks then made bets AGAINST these investments, a.k.a. credit default swaps.)  Point is, in the financial world, things seem to be becoming more like the Wild West all the time.   The opportunities for profit abound, but getting yourself killed is REALLY easy.  As if this were not bad enough, as you add liquidity and borrowing (think of the pandemic payments?), inflation will invariably result.  

Is this REALLY a problem?

It might be.   For an economy to be robust, it must have a large variety of healthy industries and sectors.  But, since globalization has really gained a foothold, things are produced and services are rendered where they can most profitably be performed.  This usually leads to a less robust array of industries within a country, and this has happened to the U.S., for sure.   In 1982, only 10% of corporate profits were from financial services.   In 2003, over 40% of corporate profits were within the financial services sector.  I would intuit that this trend has probably continued and accelerated over the intervening 20 years.

What exactly do we lose due to financialization?

Quite a lot, actually.   In this short-term profits view, anything with ROI under a certain value is curtailed or terminated altogether.   One thing given short shrift is training.   In the past, many companies were happy to pick up high school graduates and train them in an apprenticeship type program.  While certainly valuable, the value of this program is only seen in the long-term.    So, these training type programs have all but disappeared from the corporate landscape.   Development too has suffered.   To roll out new products or services requires a short-term sacrifice to maximize long-run profits.  This process is seen as less essential than the parts of the business that can make money NOW!!  So, the budgets for these activities are minimized or eliminated entirely.

By similar logic, as a nation we are much less likely to see the value of public works projects, especially the routine maintenance projects that would serve the useful purpose of keeping our industrial capacity. (John Oliver had a wonderful episode based upon this.)  If it can make it to a comedy program on HBO, I consider the problem to be “known.”

So, is financialization ALWAYS bad?

No.   In some ways, the additional liquidity makes it possible for more enterprises to  make a go of it, and really try to bring novel products and services to the marketplace, and this is happening around the world.  International trade is also encouraged through financialization.  This is probably good.  One of these novel services is fractional stock ownership made easy a’ la Robinhood, Acorns or any of a dozen other similar apps.  They make it very simple for the common citizen to invest in stocks and do so regularly.  And, the offspring of these sites were all too ready to take your money in exchange for cryptocurrency, and this, I think, is where we went a step too far.  Investing a little bit in cryptocurrency might be good, but I don’t think you want to do it without considered judgement.   And that, gentle readers, takes time.

To be absolutely clear, the financialization of everything isn’t an unalloyed benefit. The phenomenon has a dark side. If everyone becomes an investor, the inverse is also true: Everything—and everyone—becomes a potential investment. As part of $ALEX, Alex Masmej designed a “Control My Life” component. Token-holders could vote on his life decisions—whether he should run three miles every day, stop eating red meat, wake up at 6 a.m. Token-holders had a financial stake in his success, so Masmej followed through on their commands. (To be fair, Masmej admits this was just “a fun experiment.”)

 The Verdict

Financialization is a tough one.  So, let’s finish by looking at it through a different lens, and I’m sure this will bring it home.   Literally.   We are speaking of the financialization of homes.  In the 1980s, 90s and the early 2000s, it seemed as if housing prices just went up, without rest.  As a result of this and the relentless pace of change in all other areas of the economy, homeowners began to see their homes in terms of how much profit they could lock in when they sold it. They began to prioritize at a lesser value, the home’s ability to server a social good of supportive living.   Thus began the process of financialization.  It is an unfortunate, but I might argue human reaction to rapid globalization and changing technologies almost makes it unavoidable.

The real question is what do we do about it.  I think a good first step is to be aware of it when we see effects of this process.  Then, perhaps we can remind ourselves of the true value of a house or an education.

REFERENCES

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwjqh6vF0sv6AhVPFVkFHekPDlgQFnoECAoQAw&url=https%3A%2F%2Fwww.levyinstitute.org%2Fpubs%2Fwp_525.pdf&usg=AOvVaw20-IK3luzggWazMzWDnSCW

Financialization Definition (investopedia.com)

Wall Street And The Financialization Of The Economy (forbes.com)

The Financialization of Everything – The Atlantic

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

 

VPN… Goes Without Stayin’

Headline: What is a VPN?

Date:10/18/2022

Body:  OK, back to basics night.  To  really take advantage of cryptocurrency and NFTs, it might be important to make use of a secure browser and perhaps a VPN (Virtual Private Network.)  So, what are these things and how might they be used in your pursuit of virtual riches?  Might it also make your continuing remote work more palatable to your boss.

What is an VPN?

A Virtual Private Network (VPN) can be used when you are using a public network.  They can be helpful to disguise your identity.  This makes it harder to track your activities and also masks where you are signing on from.  This is important because not all sections of the Internet are available to residents of every country.  People often think of North Korea, or China when they think of a VPN, and it is true, as far s that  goes.   But, perhaps there is a gameshow that is available online only to those within the U.K.  A VPN will mask where you are logging in from, and presents you with a much more comprehensive set of options.  In addition to disguising your location, the VPN  will offer you secure encryption and secure data transfer.

The VPN offers you some real security.  It encrypts your IP address and your protocols.  It also offers a kill switch, where if there is unusual traffic, the connection is shut down immediately.     Finally, it offers extra security by use of 2-factor authentication.    At first a password is required.   But then, they will also text you a one-time use code.   Once you enter it, you will be given access to the VPN.  Unfortunately, it is not a silver bullet.  The use of a VPN does not protect you from malware of any type.  So, even if you are using a VPN, please be sure to also have an updated anti-virus program running.

Is this a large movement?

Yes, it is.  The number of people using VPNs increased more than 4-fold from 2016-18.  Now, in countries like China, it is estimated that 20% of  Internet users are connecting thru a VPN.

Are there different flavors of VPNs?

Yes, there are different varieties of VPN, mainly 2 different ones.  First there is a site-to-site VPN and this is used mostly in very large companies with facilities all around the world.  (Think of Boeing or Airbus.)  They might want to send engineering plans from a new airliner to their other facility.  On the intranet, things are pretty secure, and there is an intranet at each facility.   The VPN acts as an encrypted tunnel between the 2 networks.  The other variety is a Client-to-Server connection  Think for a moment (hey, no cussing) about your ISP, whether it be Xfinity, Cox, whatever.  The VPN forms an untraceable tunnel for your now-encrypted data, before it hits Cox or Xfinity, taking your transmissions DIRECTLY down the encrypted rabbit hole.  That way the rest of the Internet has no idea of where you’re  transmitting from.

How Do I choose the right VPN for me?

Choosing the best VPN comes down to what you want to get out of a VPN. You should consider locations, cost, speed and security protocols. You may want to choose a VPN service based on whether it will maintain a connection as your internet changes (from Wi-Fi to cellular, for example).

	NordVPN	ExpressVPN	Hotspot Shield	Surfshark	Private Internet Access
Price Range (per Month)	$3.99 to $11.99	$8.32 to $12.95	$7.99 to $11.99	$2.49 to $12.95	$2.03 to $9.95
Free Plan	X	X	✅	X	X
Number of Devices	$6	$5	1 to 25	Unlimited	10
Number of Countries	$60	$94	$80	95	84
Encryption Type	256-bit AES	256-bit AES	256-bit AES	256-bit AES	256-bit AES
Money-Back Guarantee	30 days	30 days	45 days	30 days	30 days
24/7 Support	✅	✅	✅	✅	✅

OK, I’m sold.  Is there any reason NOT to get a VPN?

While a VPN will keep your connection secure and your data safe, there are some potential drawbacks to using one.

Problems	Comment
Blocked services	I take Uber a lot, and this requires that Uber knows where I am.  If I had a VPN, there would have to be a very carefully considered carveout for Uber.  If you have similar location-dependent apps, this could be an issue.
Downtime	Maintenance is required on any system, and the VPN is no exception.  During these periods, your VPN will not be available.
Dropped VPN connections	If your connection to the VPN is temporarily down, you might be browsing the internet without the protection of the VPN, without knowing it.  THE EMPEROR IS NAKED!!  It can happen.
Connection speed	Using a VPN, you are dependent upon a server that can be very distant from you, and this could slow down your connection speed.

The Verdict

Depending on what you do on the internet, investing in an VPN might be a good idea.   Perhaps you are looking for academic information that your country’s leadership doesn’t want you to have, perhaps you are doing cryptocurrency transactions, and you just wish to have a safe connection to the internet.  Both of these are completely valid reasons to get a VPN.  It’s pretty simple to do, too.  Consider it carefully.

REFERENCES

https://www.kaspersky.com/resource-center/definitions/what-is-a-vpn

https://www.forbes.com/advisor/business/software/what-is-a-vpn-and-how-does-it-work/

https://www.pcmag.com/how-to/what-is-a-vpn-and-why-you-need-one

https://www.codecademy.com/resources/blog/what-is-a-vpn/

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

 

Have Your Cake and Eat it… Two?

Headline: What is the double spending problem with cryptocurrency?

Date: 10/14/2022

Body:  I have read more than a couple of articles about cryptocurrency, and I keep running into something called the “double-spending problem” with cryptocurrency.  I don’t fully understand this, and I would imagine that I am not the only one confused.   So, let’s dig in.

“Double spending” is the proper economics-speak for what is being attempted, but I would like you to think of another word you are more comfortable with, counterfeit.    Let’s say that you put together a press in your basement and have the correct paper and inks necessary to print money.  But, at heart, what you have is a photocopier.  Once you have run  a good number of $100 bills, you notice that they look VERY real, but, all of the serial numbers are identical.  So, once you spend the first one, the chances for you to get caught go up appreciably, as the Secret Service will clearly be looking for bills with that serial number.  Spend the same dollar multiple times and you are risking prison.  Bitcoin and other cryptocurrencies do not have serial numbers( or fiat currency that you turn over to a person in return for a good or service) , so, there is a risk of double-spending, and the process must have a functionality to prevent this.  Enter the blockchain.

In this ecosystem, the miners make sure that the transactions come from a sufficient source, go to the right wallet and do this by a consensus system, but the vast majority of the reward goes to the miner who verifies the transaction first.  The key here, is two-fold:

1. Multiple miners who don’t know about the identities of the other miners, verify the transactions independently.  The block of transactions is only added when all details have been confirmed.
2. The ledger behind this process is “distributed” and simultaneously held by millions of people.  Hacking is deemed almost impossible.
3. Once recorded on the blockchain, the transaction is immutable, and cannot be erased.

In this way, no  central Bank is necessary, and the decentralized system can work its magic.

Well, this is neat, but how is double-spending avoided?

Let’s have some fun here and take the worst case scenario.   Let’s say that you have 1,000 BTC.  You spend it once on a house, then you buy a 2^nd house with the same 1,000 coins.  As they come into the system, both transactions are placed into a suspense file until they can be verified, usually within 10 minutes.  So, the result will be verification of the first transaction and rejection of the second.  It is a fairly well-known guideline that many merchants wait for 6 confirmations of one transaction.

OK, good, but what exactly do these miners do?

This is referred to as the consensus model.  There are several of them.   The first used by Bitcoin was the Proof of work.  This is effectively an extremely complicated math problem.   The miner is given a hash function involving original data.  Once solved, a hash total of the same length will result (and the details of the transaction are confirmed), and the miner will receive a reward in Bitcoin.  Because they are not economically punished for incorrect guesses, people can set up impressive “rigs” to send out a huge long series of hash totals, guessing until they get the right hash total to evaluate the function.  Once a correct answer is obtained by 6 miners, this answer that solves the hash is transmitted to the entire network.  This process makes counterfeiting nearly impossible.

“Nearly impossible?”

OK, there will always be bad actors in any social network, and the blockchain is no exception.  There are 3 main kind of attacks, but, they are all very haphazardly successful.  They are as follows:

Type of Attack	Comment
Race attacks	In these attacks, a legitimate transaction is sent through first.   Then, a second transaction(less legitimate) is sent through within the same 10 minute period.  The hope is that the first one being found legit will lead one to assume that the second one is legit too.
Finney  attacks	This is nearly the same as the Race attack, but the attacker is a legitimate miner.  They use a block code for a legit block to code for a less legitimate block.
51% attacks	This is when a group of people control more than 51% of the computing power contributing to the consensus model.   But the bitcoin network is so vast, this kind of attack is virtually impossible.

How concerned should I be?

Don’t’ be.  Like the Hitchhiker’s Guide to the Galaxy, the entry here would be “mostly harmless.”   The bottom line is that if you don’t accept any transactions, that you are not expecting, you won’t be fooled by these techniques.

The Verdict

I work for the U.S. Government and I almost laughed when I first heard of “double spending.”   Then I realized that it was an attempt to defraud.  Fortunately, it turns out that the person who designed this cryptocurrency system had thought of this and made it extremely difficult to execute.   This would tend to make cryptocurrency more secure to invest in.  Just be aware that there is severe price volatility that you have to consider.   Also, it should be borne in mind that bad actors are cobbling together more and more sophisticated rigs, every year.  Bitcoin buyer beware.

REFERENCES

https://www.investopedia.com/ask/answers/061915/how-does-block-chain-prevent-doublespending-bitcoins.asp

https://www.sofi.com/learn/content/double-spending/

https://www.gemini.com/cryptopedia/double-spending-problem-crypto

https://www.coindesk.com/tech/2021/01/21/the-bitcoin-double-spend-that-never-happened/

https://academy.binance.com/en/articles/double-spending-explained

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

 

FinTok? Are We Talking About Fishing?

Headline: What is FinTok?

Date:

Body:  Ok, confession time.  I’m 46 years old and I watch a lot of TikTok. (The Dreadnaughts sing, “old Mauii” and it is fantastic!!!)  I find it interesting to be able to really  interact with the content in a very personal way.  Others apparently feel similarly positive.  Over the months, several communities have sprouted, each with a 3-letter word tied to “Tok.”  For instance, the community aimed at veterans and members of the military, there is “MilTok.”  (I can only assume that there is a community for social media people called “ClickTok.”  Perhaps there will be soon.)  Imagine my surprise to find that there is a financial industry community called “FinTok.”  (Not sure what the people from Finland use.)  My questions are simple.  First, is this really a thing?   Second, if it a thing, can we learn from it to eventually make money from it?  (For the remainder of the entry, it might appear that I impugn the integrity of anybody giving financial advice on TikTok.  I’m not.   Many are good-hearted people who believe deeply in their own information.  However, I DO, mean to skewer any financial “guru” who claims to have the “one secret for ANYBODY to get rich!!”  It doesn’t exist.)

In times past (i.e. my childhood) investment advice and maxims came from my dad.  For centuries this has been the way, and for some reason, we have assumed that women are not up to the task (turns out, they’re better at it.)  Back then, it was “cool” to hear a co-worker talking about a “hot stock pick” and then go home, call your broker and make the (probably ill-advised) trade.  As generations go on, the technology improves and now, this generation is over TV.   They want their advice to come from the social media channels they spend so much time and energy on.  Enter FinTok.

Unsurprisingly, you usually find the flavor of the month here.  Currently, it’s all about cryptocurrencies, and in recent days, it’s all been about real estate investing.  (Oddly, the same people can sometimes be seen hawking both using VERY similar logic.)  But, on occasion, you do come across some good stuff, especially videos about business.  There is one REALLY smart guy who owns a septic company on the East Coast.  (Septic pumping?   Yes, septic pumping.  And the business related conundrums he asks his audience about are some humdingers.)  There are others who suggest that there are savings to be made using different sites to find discount codes.  These are all good and interesting to watch, but before making purchases or lifestyle changes to institute these changes, seriously ask yourself it it’s a good idea or not, for YOU!!  Remember, you are not a notional character.   You have past experiences, biases  and beliefs that have to be taken into account when instituting behavior changes.

This is  just another marketplace of ideas, so, that’s fine

Well, yes and no.  Certainly they should have the right to put up their content.    But, the problems begin to come into focus when people try to execute on the strategies they learned on FinTok.  Problem is, you might very easily have a reasonably well- educated person giving commonsense financial advice, let’s say, in Australis.  If a 20-year old in the U.S. tried to execute on this advice, they’d likely lose pretty big.  The financial systems are pretty  similar, but when you get into the weeds, there are some details that make the advice given to any client, very different within the U.S. v. in Australia.

I understand that the GenZ aged people are just trying their best, using the tools that are so familiar to them, to fill a gap in their education.  I actually salute them for going on this journey.  But, if given just a short segment on being a  critical thinker, they might come to notice a very large conflict of interest here.

Have you ever been reading a  magazine, and you have read 2-3 good articles, and happen upon what you think will be the 4^th well-researched article.   And, it does look the same, same typeface, a few high-value pictures, but all of the stories seem to be about the country of Qatar or the caring professionals at Astra Zeneca.  Now, your spider senses are tingling, any you scan to the top.   In the middle of the top margin, it says, “Advertorial.”   This means that the “article” was provided by a sponsor.  Though the information might be accurate, the point of view might not be held by many people.    TikTok can have many of the same kind of things.   I can’t tell you how many videos of cute puppies, then the voice starts,”You want to keep these puppies safe and healthy, right?   Feed  them Farmer’s Best.”  Thus it becomes pretty obvious which videos are most likely to be… perhaps biased.  The problem is, that in the FinTok areas, the creators are not required to label their videos as sponsored content.  The video might introduce a lot of different investment opportunities, but, oh, guess what?  You can get them ALL thru USAA!!  Perhaps you can get these investment opportunities from Morgan Stanley.  I pick on these 2, but it could be any of the thousands of other companies.  The point is that  within social media, the FinTok area is very like the Old West.  Both possibility for striking it rich, and the probability of hurting yourself exist

OK, this has to be addressed

For centuries now, the field of finance has been almost exclusively the province of men.  Women can understand an teach financial lessons just as well as men can.  (They can also be prosecuted for financial crimes, just like the men.   This law-breaking potential is very equal opportunity.  But, the fact cannot be denied.   To this point, most of the self-appointed personal finance gurus have been men.   So, some women (some VERY well-qualified, some less qualified) have taken TikTok as an opportunity to close this gap.  But, it’s very tricky to evaluate the advice giver (always.)  On TikTok, this can be made impossible, and those who even try to independently vet these financial gurus are in the tiniest minority.  This critical reviewing of information has never been more… er…um…CRITICAL!!

This being careful about information obtained should extend beyond TikTok too.  (I once had a really good chart of the financial abbreviations people put after their names.    This can be really confusing because there are only about 200 different credentials.   Some require much study and perhaps night school.   Others, all you have to do is say, “Goodnight, school!” and you are now  qualified to use the abbreviation after your name.   I cannot believe how many of the certifications demand little to no training.  (As I recall, it was nearly half of them.)  So, please be careful about the information you take as gospel.   (Unless you’re on my page.   You can TRUST that source.)

Finfluencers?

This is what the financial influencers on TikTok calls themselves.  But other countries have been presented with this problem too.  In Australia, for instance, a number of regulations have been considered and most were rejected.   The minister for financial services called them, “an inevitable part of a financial ecosystem.”  They also struggled with these  questions, as she identified the crux of the problem in the following manner.  “The bloke at the pub, for one thing, does not make money from his talk.”  But, many social media influencers do.   I really like dogs and follow this woman who has 2  extraordinarily cute golden retrievers.  She has a series of wonderful videos of them in the pool, on walks and in the ocean.   Just recently, she began introducing the corporate name behind the doggie beds they have.  Some might say she’s sold out.   It’s my judgement that you just have to exercise some of your own.

Beware of 3 red flags:

Advice	Comment
Do not assume that more followers means more credibility for that source.	I know a guy online with well over 1,000,000 followers and I would ascribe to him a high level of credibility.   I also know of a lady who has less than 5,000 followers, and she’s equally credible, to my view.  I know of one guy with well over 2,000,000 followers and I wouldn’t trust him to be credible, ever.
Why are they sharing valuable secrets with you for free?	If their process or product is SO good at earning money, why are they offering to explain it to you for FREE?
Beware of all people offering a get-rich quick plan.	Get rich quick schemes do work.   They work very well for the “guru” who is trying to sell a book or set of DVDs.

The Verdict

So, I guess the question we windup with is, “Is it safe to use social media as a way to educate ourselves on financial matters?”  And I guess the answer goes something like, well it’s a great place to start.  But, many professionals agree that they are unsure of themselves within this environment.  “TikTok is the opposite end of spectrum from the 20-page whitepapers that we are very good at producing,” laughed Rich Latour, BlackRock’s global head of content.    So, I guess the best answer is that we should all become very much aware of the credibility of the sources we listen to.

REFERENCES

https://www.theguardian.com/money/2021/jul/10/fintok-how-tiktok-is-helping-young-people-use-cash-wisely

https://www.fool.com/the-ascent/personal-finance/articles/2-big-problems-with-fintok/

https://markets.businessinsider.com/news/stocks/tiktok-feminist-finance-gender-equality-investing-fintok-stocktok-2021-5-1030476909

https://www.reuters.com/markets/us/financial-giants-tiptoe-into-tiktok-2022-05-12/

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

 

NFTs can be MONEY!!

Headline: How are NFTs used in Finance?

Date: 10/6/2022

Body:  So, we are hearing all kinds of things about NFTs.   The lady who started the Bored Ape series of NFTs made $2 Million in the space of 2 days.    (The cheapest one is now going for tens of thousands of dollars.)  So, there is a lot of money in NFTs.   The question is, are there a lot of NFTs in money?  So, let’s see.

How NFTs Can Play Into Trade Finance

OK, first, NFTs are more than just pictures.   They are pictures that come with a receipt of ownership that resides on the blockchain, and that is immutable.  This attribute makes NFTs very useful.  Even if a hacker can steal an NFT, the history would be on the blockchain, transparent to all.  Within the world of business, the NFT can be used to streamline the cryptocurrency process.  In trade finance, NFTs could help because developing a convincing fraudulent NFT is effectively impossible, as the transaction to create them is memorialized on the blockchain.  NFTs could also help by minimizing human error, as signatures are difficult to read, but a tokenized NFT is readily identifiable and instantly verifiable.  Further, as smart contracts become ever more, well, smarter, they can ensure that routine transactions stay within normal limits, freeing up employee time to work on other tasks.  And, yes, this is already happening.   Tradeteq executed the world’s first on-chain tokenized transaction.

What you talkin’ about, Wallace?

OK, first you have to understand that NFT does not equal picture.   Up to now, that has largely been correct, because most NFT’s have been sold as art pieces.  In simple terms, NFTs are digital receipts of purchase that reside, forever, on the blockchain. This means that any item that may benefit from being more easily verifiable and interoperable with the blockchain could eventually become an NFT.    This provides a level of certainty and transparency that has never existed before.  The thing to remember here, is that the NFT is really the entry on the blockchain, and the picture, or sound file that is associated with it is not the NFT itself.  (Per Forester Research, 28% of Americans don’t know this, so, if it’s weird to you, you’re in good company.

Despite this oft-misunderstood attribute, the money being shelled out for these NFTs is very large.  Adidas sold more than $22 Million in NFTs in 2021 alone.     Already, in 2022, more than $40 Billion of NFTs have been sold.  One major bank considers NFTs to be an entirely novel class of digital assets.  (I’m not one to make predictions often, especially concerning the future, but I can foresee an online world where your NFT becomes almost a signature for you.  You would tote that NFT around with you from metaverse to metaverse, and you could do business with people based upon an evidenced, immutable history of interactions that went favorably or not.  Really, handwritten signatures can be faked.   But, the NFT is recorded on the blockchain.)  We might not be there today, but I feel pretty confident that this is our eventual destination.)  Interestingly, some NFT purchasers are already using NFTs as collateral on a loan.   So, I take this as progress toward my prediction.

Let’s Take it to the House!!!

Real estate is a pain.  Commercial real estate can be governed by contracts that run into the hundreds of pages.  This means thousands of individual details that are vitally important.  I have never done a commercial real estate transaction, but, I have done several residential real estate transactions, and I can attest to the pain involved.   Oftentimes, things are so stressful that I begin feeling it as symptoms in my body.  Somehow, I doubt that I am alone in this.  But, as we get the blockchain involved, things could become much simpler.  Title Insurance searches are now so complex that there is an entire industry dedicated to it.   With all transactions permanently on a blockchain, proving clean title will be made much faster, and significantly less expensive too.  These benefits could easily apply to other types of insurances and taxes as well.

The Verdict

The blockchain will have significant effects upon how we transact business.   It will stand as a check on credibility, a simplification of research  and likely turn into some type of signature, signifying you.  I wouldn’t blame you for not believing me.  Things right now are so vague that NFTs are anything to everybody.  But, for just a moment, I ask you to think of the evolution of the signature and similar devices and how important they are.   Several centuries ago, the signet ring was invented, and a person would leave a characteristic mark on the wax sealing an envelope.  Even today, signatures are vital.  If you got an e-mail shouting in the subject line, “LOSE 20 POUNDS IN ONE MONTH!!!” would you be more likely to open this if it came from your doctor (high credibility) of from your Uncle Victor who is always  going on about how the Lindbergh baby was launched into space with the Tesla (likely lower credibility.)  As NFT usage matures, especially within social media, I can easily envision  a situation where you will begin to notice which NFTs are presented with information that turns out to be true, and you then making decisions based on the belief that this information is more credible.

The point I am trying to make is that financial information can tend to be VERY complicated.  In order to have at finding a way in this world, you must subject every fact presented to you to the sniff test.  Key to that test being successful, one must develop a finely tuned, err… um… BS detector.   And one of the keys here is to understand the sources of your information and which ones you can trust, and which ones you should probably inspect closely.

REFERENCES

Opinion: Real-World Use Cases for NFTs in Finance and Trade | FinTech Magazine

Beyond CryptoKitties and bragging rights: A look at the financial use cases of NFTs – Tearsheet

How NFTs Can Impact the Financial Industry (newsweek.com)

NFT Meltdowns Are Paving The Way For Better Use Cases (forbes.com)

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

 

We’re Not Playing Games… OK, Maybe We Are.

Headline: How to play games while earning cryptocurrency.

Date:

Body:  For millennia now, people have done work (usually hard work) and gotten in return, some rate of monetary compensation.  (“A good day’s pay for a good day’s work.”   And all that).  We are all quite familiar with this model, most of us engage with it every single day.  If one is really lucky and works very hard, one can work out a career that does not feel like everyday drudgery. But, what if we change this model and get paid for playing games?   Could we do this?   Yes, we can, and some do.   Welcome to the brave new world of GameFi.   GameFi combines NFTs, and blockchains  into online games.   And, instead of paying for “in-game purchases” the player is instead rewarded (with a digital asset of some type) for the amount of time they spend playing the game.  Confused?  I was too.  (At the start of writing, the only financial model I could understand is if players see a plethora of online ads constantly, or if they have to agree to become some sort of brand ambassador.)  But, I will cautiously push aside this initial kneejerk response and try to understand.  Perhaps you can too?

So, how does this all work?

It all started with cryptokitties.  Then, slowly, other games of various types were added.  As the players go further and further into these games, they will encounter a variety of NFTs, which they can earn in time playing the game.  Then, once accrued, these NFTs can be traded at a marketplace or sold for digital currency.    As they go, they will certainly come up with unique ways to combine attributes, and others will want these attributes in their character, or piece of land, or other asset.  These new protocols can then be traded  for NFTs, and the process can begin anew.  Remember, all of this is built on a blockchain, so players can easily prove ownership of digital assets, and since this information is distributed, if there is one malfunction, the rest of the game is unimpaired..

OK, you had me at making money while playing games.

So, what do I have to do to get started.  It’s as easy as 1:2:3, (isn’t it always?)

Supplies Needed	Comment
Create a cryptocurrency wallet.	Coinbase offers a good wallet, but if you are a bit more advanced in your usage, MetaMask is often offered as an excellent (and very secure) choice.
Pre-fund your cryptocurrency wallet.	Many games have their own native currency, but many of these can easily be purchased in exchange for other cryptocurrency.   Bitcoin and ETH are common types here.
Purchase starter items	Dungeons and Dragons is not a high-tech game, at all.  Even here, though, you have to purchase a few things like module books, dice and  little creature tokens.  This can really add up, as can the purchases to start an online game.

Are there some examples?

Yes, there are many examples.   Just a few that caught my eye:

1.  Alien Worlds—In this game, the player goes into several foreign planets to mine and gather resources.   The player can make money (TLM) by renting out  their land to others.  It has broken through the 1,000,000 monthly users level and works on a variety of blockchains.  Before one can play, though, they must purchase several cards that give them the right to own land within the game.
2. CryptoBlades—This is a role-playing game where you design the development of your character and craft unique weapons to help him or her.  These weapons can then be traded at the marketplace.  The player can make money (SKILL)  by selling their unique weapons and armor.  It has a monthly user base of just over half a million and works on the Binance blockchain.  Players do have to pay a few fees to use the game.
3. Axie Infinity—This is a game that allows you to create Pokemon-type characters as combinations of animals.   As it involved the care of “animals” it is very time-intensive.  When trained, these animated beasts can “battle”  When created, these unique beasts can be traded to other users.  The player can earn (AXS) and (SLP, smooth love potion) for doing quests and resource farming.   Axie itself   It has a monthly user base of over 300,000 users and runs on the Ethereum blockchain.  Before you can play, you have to purchase 3 “Axies” from the marketplace.  They surpassed $1 Billion in 2021.

Before we leave this topic, there is one more thing which is worth mentioning.  There are platforms (like MOBOX) which feature multiple games wherein a player can migrate items from one game to another.  These platforms are pretty sophisticated already, allowing people to earn money by “staking” and even joining liquidity pools.

How big are these, really?

In a word, BIG.  There is a “holding company for games” called Yield Guild Games.  In addition to hosting the games, YGG will also act to facilitate trading amongst players.  Within the community itself, there are various roles called “scholars” and “community managers.”   Each role gets a piece of the action as new creations are sold and traded.     There are some people in the Phillipines who make 5-10 times the amount of money they made at a normal job, doing these roles within the game.  Oh, and don’t cry for ther management either.   The YGG Treasury is worth over $415 Million (This is the pot of real money they use to develop the game more.)

The Verdict

We are still in the very early stages of this phenomenon.   Doubtless, as more and more people interact in this virtual ecosystem, we will better learn both the benefits and the potential pitfalls represented by these games.  I have to wonder, though, if games like these are going to become the social media platforms of tomorrow.  Instead of TikTok, you’ll check in on your friends within a platform within the gameplay.    Wouldn’t that be fun?  Copuldn’t that be profitable?

 REFERENCES

https://www.coindesk.com/learn/gamefi-how-to-earn-crypto-playing-games-online/

Play-to-Earn Bitcoin: 7 Games You Must Try

https://www.nasdaq.com/articles/nft-based-video-game-helps-gamers-earn-crypto-while-playing-online

https://www.coinbase.com/learn/market-updates/around-the-block-issue-16

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

The Council Will See You Now.

Headline: What is the Crypto Council for Innovation?

Date: 9/24/2022

Body:  I keep seeing references to the Crypto Council for Innovation, and I have no idea who they are and what they do.   I like to picture them arrayed around a dark wood conference table in some stone tiled basement, and the head sits in a bigger chair with dragons carved on the sides, with 2 Doberman pinschers at either side.   But, probably not.   Let’s investigate.

Who are they and what do they do?

The Crypto Council for Innovation is a lobbying group to influence regulation.   There are some heavyweights on this Council including a former CIA Acting Director.  These individuals write reports in favor of their members and present these findings in report form, to Congress and potential regulators.  Said one member, “We have a lot of policy makers who are becoming aware of crypto and at the same time might harbor some misconceptions about it.”  Just recently, they published a report on Bitcoin.     It seemed to be “common knowledge” that Bitcoin represented a major money laundering threat, and the report was written to investigate that thesis and either debunk it or provide support for it.  They make it quite clear on their website that education of the investing public is also key to their purpose.

Who were the founders?

Fidelity Digital Assets, Coinbase, Square and Paradigm are the founding members.   These have been joined by many former government officials.

Why do they exist?

There is already a Blockchain Association and a Chamber for Digital Commerce, so, one might rightly ask why add a third body?   They focus more on international regulation than regulations that arise in America only.

Do all experts agree with them?

In a word, no.   No less than Jamie Dimon said, “Something that’s not supported by anything, I do not believe has much value,”

 Why do we need such a group?

The securities Acts were passed in 1933 and 1934, and thus could not envision the changing financial landscape of today.     A central part of this act is Rule 3b-16 which defines an exchange.  The exchanges that we have today are far from the physical buildings thought of in 1934.  They occur on websites, which are somewhere in cyberspace, so, the rules have to be updated.  The update requires such an exchange to register as a broker-dealer.  Even the President seems to be onboard with these ideas, saying, “we must reinforce United States leadership in the global financial system and in technological and economic competitiveness, including through the responsible development of  payment innovations and digital assets.”

The CCI is concerned about the ramifications of the new rule.   They suggest that a traditional definition of finance is used to define non-traditional finance, and no accommodations seem to have been made to provide for the special nature of cryptocurrencies.  Their recommendations are as follow:

1.  Limit the applicability of the new rule to a small number of cryptocurrnecies.
2.  Evaluate the risk of the new rule to place the U.S. at a competitive disadvantage as compared to other countries.
3. The Commission should clearly define “communication protocol system.”

The remainder of the letter is pretty much focused on #3.   So, we’ll look there next.

So, what is a communication protocol system?

It appears that the communication protocol system is the manner in which willing buyers and willing sellers are brought together.  In the past, this was a trading floor and telephones.  But, given the fact that  decentralized finance was not mentioned by name, the SEC appears to be trying to be aggressively expanding its portfolio.  As I mentioned in a previous post, there were many different government agencies  battling for a place in regulation of cryptocurrency, and it seems that this is the SEC’s attempt to jump into the fray.  The agency’s rationale for introducing the amendments is that the definition of “exchange” must be updated in light of recent technological developments, most notably digitization of securities marketplaces. The proposal states that the new definition is supposed to be “flexible enough to accommodate the evolving technology.”

Not everybody is drinking the same Kool-aid, however.  Pro-crypto SEC Commissioner Hester Peirce was among the first opinion leaders to ring the alarm over the proposal. She offered a dissenting statement in which she called the document “too wide-ranging.”   At stake here is the very presence of crypto exchanges, as per the verbiage in the amended rule, they probably wouldn’t meet the new definition, and might be regulated severely.  Patrick Daugherty, partner at law firm Foley and Lardner and the leader of its blockchain taskforce, calls the SEC’s initiative a “stealth rulemaking proposal,” agreeing with Commissioner Peirce on its potential to be used in targeting crypto industry players.   If the new rule takes effect, the exchanges would have to register as a broker-dealer and as an “Alternative Trading System”, a slightly less regulated entity.

The Verdict

Given that there is an intense battle within the government to see which agency will take the lead in regulating crypto, it seems like a good counter-balance to have an entity like the Crypto Council for Innovation.  I understand that most people hear the phrase “lobbying group” and immediately think of back room deals and people with suitcases full of cash.  Given that many of the people on this Council are former government officials, I understand where this comes from.  But, really, it’s just like what the IRS does: When they suggest a change in rules, they write an Exposure Draft, and then the professionals within the field review it and suggest alterations during the “comment period.”  Given this similarity in , procedure.I have to think that the  CCI is a good counterweight to a potential government over-reach.  What do you think?

 REFERENCES

https://www.coindesk.com/markets/2021/04/13/ex-cia-director-says-criminals-will-move-away-from-bitcoin-in-new-lobbying-groups-first-report/

https://www.businessinsider.com/crypto-council-innovation-square-fidelity-coinbase-paradigm-boss-bitcoin-2021-5

https://www.sec.gov/comments/s7-02-22/s70222-20124040-280166.pdf

https://cointelegraph.com/news/stealth-rulemaking-is-proposed-sec-rule-with-no-mention-of-crypto-a-threat-to-defi

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Show Them the Money!!

Headline: What is a digital currency custodian?

Date: 8/6/2022

Body:  Let’s say you have an older-laptop, 5 years old or so.  (Like the one I’m using now…hmm)  Anyway, let’s assume that you have a cold wallet, and you keep your Master password on a file within this computer.   If your hard drive crashes and you forgot your Master password, and you had $2,000 in cryptocurrency in that wallet, it is not good, but you will financially recover.  Now, let’s change things a bit.   Let’s say that you are in charge of a pension fund, and you have several million dollars of cryptocurrency on that device.  Now, you’re well and truly screwed.  But, what if, instead of this cold wallet, there was a business that would keep your cryptocurrency safe (and accessible) all the time, and they are insured to do this very business.  They have an IT department where every programmer seems to wear a cape: They’re awesome!!  Might it be worth paying this notional “bank”  just a little bit?  Yes, it would be, and this “bank” is known as a custodian for your digital currency.

Why are these services so badly needed?

OK, let’s take the example of a cold wallet used for offline storage of digital assets.  Usually, it is protected with a very complex alphanumeric password (resembling a nuclear launch code) and these codes are easily forgotten.  So, these services stand in as safer ways to secure our cryptocurrency and digital assets.

Second, even if it is a custodian hosting your hot wallet, stored online, it is much more secure than other solutions.  These services employ some very good programmers and your digital assets started safe and are now, even safer.  Most custodians offer a combination of hot and cold storage.   Coinbase advertises that 95% of the assets in their care are stored offline in cold wallets which are much more secure.  This arrangement allows for you to use your cryptocurrency online while keeping the majority of your cryptocurrency, [

The other important reason for the existence of cryptocurrency custody solutions is regulation. According to SEC regulation promulgated as part of the Dodd Frank Act, institutional investors that have customer assets worth more $150,000 are required to store the holdings with a “qualified custodian.” The SEC’s definition of such entities includes banks and savings associations and registered broker-dealers. Futures commission merchants and foreign financial institutions are also included in this definition. Within the cryptocurrency ecosystem, very few mainstream banks offer custodian services. Kingdom Trust, a Kentucky-based custodian, was the largest such service for cryptocurrencies until it was purchased by BitGo, a San Francisco-based startup. 

Let’s meet the Players in this drama

First, there are exchanges.  (We are only speaking of centralized exchanges here.   Decentralized exchanges are a different breed.)  A centralized exchange  will serve as your custodian; Said a different way, the will hold your private key to disburse cryptocurrency.  There is a risk if the exchange is hacked, but, this is probably a small risk compared to you losing your private key and not being able to access your cold wallet.  Plus, they have security personnel who are likely VERY good.

Second, there are Digital asset managers.  These managers act like banks.  They are licensed and regulated to an extent.

Third, there are custodial banks.   Per a letter from the OCC (remember them?) dated July 2020, custodial banks within the U.S. can now be custodians for cryptocurrency and digital assets.  But, please remember that not all custody arrangements are for everybody.  Some are aimed at institutional investors only and some are only willing to help ultra-high net-worth individuals

How much does third-party crypto custody cost?

If you go shopping for a new car, the price on the window is not what is charged: The dealership will add on all sorts of fees (freight fees, the financing fee, etc.)  Should it be any great surprise that cryptocurrency custodians charge a similar roster of fees?   There are 3 main fees:

Type of fee charged.	Commentary.	How much is this fee?
Custody Fee	Because they are safeguarding your assets, these custodians are taking on a risk, and they need to be compensated for this risk.	Usually less than 1%.
Setup Fee	There are some initial file management tasks that must be done to prepare for the acceptance of your digital assets into the custodian’s digital architecture.	This fee is not much, and might be waived entirely to entice new customers.
Withdrawal Fee	You might have to pay an amount every time you take currency out of your account.	Sometimes this is a flat amount, sometimes a percentage of the amount withdrawn.

What’s next for these digital asset custodians?

This is difficult because you have the confluence of 2 different dynamics: banking and Cryptocurrency.  Banking has for a long time, been traditional in outlook.   At the same time, cryptocurrency firms have to stay on the leading edge of technology.  Custodians have to speak both languages and have the skill sets represented by each.  Stepping into this shifting milieu,  are two changing attributes.  First, some of the traditional banking institutions  have been dipping a toe into these waters, and this could improve a lot of things within the industry.  Second, the government is cautiously beginning to become involved, in terms of regulation and in terms of taxation.  This could serve to allow others to get into the space.  Remember, for the most part, competition is good.

And these sentiments were also reflected in the letter from the Office of the Comptroller of the Currency.  I won’t bore you with the whole letter, but I suspect that the thought process might be salient.  They concluded that providing digital asset custodian services is a modern form of traditional bank activities and that custodial services of this type may involve more than holding keys.  Said the acting Comptroller of the Currency, Mr. Brian P. Brooks, “From safe-deposit boxes to virtual vaults, we must ensure banks can meet the financial services needs of their customers today.”

The Verdict

In the Old West, there used to be Wells Fargo stagecoaches that would take custody of the deposits going to the bank, and they had to be guarded by strong boxes, men on horseback and men carrying shotguns.  Custodians for our digital assets are just an updated version of this Old West figure.  In the place of handkerchief-masked banditos, there are  organized gangs of crypto-warriors, trying to separate us from our  digital assets.   To fight against this, it might make sense for you to consider deputizing  a custodian.  It costs a little, but, to sleep well is invaluable. 

 REFERENCES

https://www.investopedia.com/news/what-are-cryptocurrency-custody-solutions/

https://www.coindesk.com/learn/what-is-crypto-custody/

https://www.forbes.com/sites/lawrencewintermeyer/2021/12/09/digital-custody-is-the-key-to-unlocking-crypto-spot-markets-for-institutions/?sh=7e4cb6621ab0

https://www.occ.gov/news-issuances/news-releases/2020/nr-occ-2020-98.html

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Web 3.0 is really Sticky, err, um, Resilient.

Headline: What is Web 3.0?

Date:

Body:  If I hear about Web 3.0 from another pointy-headed geek, just one more time, I’m going to find where they live and fantasize about killing them in their sleep… or at least sending them glitter bombs.  But, my cantankerous nature aside, this is very important, as Web 3.0 is where we are aiming, as a society.   So, how do we get there?  How will we know that we have reached it?   What advantages can we predict?   What dangers might we face?   There are a lot of questions.  Beyond question, though, NFTs, cryptocurrency and other items will reach much closer to their fullest expression as Web 3.0 evolves.

OK, I might have been asleep, when was Web 1.0 and Web 2.0?

In Web 1.0 (roughly in the early 1990s) HTML was started, along with some of the organizational concepts like URL and HTTP were created.   Netscape Navigator was the highest tech in browsers, and e-mail was a real treat.

In Web 2.0 (roughly 2000 to today) user generated content became a really big deal.  Ever read fan fiction?  This is a part of Web 2.0.     Social media sites have begun to be very important.   Interaction seems to be the name of the game.   As the pandemic started, the FAANG stocks went crazy as Zoom and many other apps became central to our lives.  Now, the Web 2.0 is revolutionary enough, many people ser using it to report to work in the gig economy.

In Web 3.0, the keyword becomes participation.  In Web 2.0, there was a smallish group of people called coders who were behind the construction of each website and experience.  In the Web 3.0 world, anybody should be able to put up a website and coding and linguistic capabilities should be almost irrelevant.  Permissions needed are very few, and artificial intelligence becomes very important.  The Internet of Things (IoT) is also  part of Web 3.0   In one appliance, you can get an internet-enabled fridge, and this can e-mail you a list of what you need, when you get to the grocery store.   An internet-enabled toaster might toast the  weather forecast on your bread in the morning.   The possibilities are endless.

OK, Web 3.0 sounds really cool!!

Yes, it does sound really cool, but, cool down a little, for there are potential pitfalls as well.  Do I think that our computers will act together in a conspiracy, and like HAL try to kill us all?    No, this is unlikely.  But, there are still potential problems.   Most broadly, the computers could learn our leanings so well that we only get information that agrees with our opinions, even if the Truth is contrary.  This would make the echo-chamber problem of today’s media much, much worse.  I think it quite valuable for our opinions to be challenged, in a civil manner.  On the more felonious track, computers could decide that the “safest course” would be to do one thing, when for humans, it is unsafe.  (Assume that there are flood waters.  The computer might decide that, to save itself, and thus control, certain gates should be opened, even if it endangers a nearby senior community.)  Sometimes, it is optimal for the computer to control because response time needs to be very fast, and we have to be able to know when to override this response.  It’s a tricky thing.

Further, as there is no central executive authority, it is exceedingly easy to launch Denial of Service (DoS) attacks on individual websites.  If there was an intermediary, it could notice the repeated targeting, and take that node offline until the problem was fixed.

The thing to remember here, is that Web 2.0 is becoming Web 3.0 before our very eyes.   The transformation is rather slow in many ways, and the outward appearance of the websites will likely not change.   But, the coding behind the scenes has changed materially.

I have heard of the Semantic Web, is this the same as Web 3.0?

The Semantic Web was envisioned in 2001 to include natural language processing.   Web 3.0 adds a significant amount of artificial intelligence and uses the blockchain model as a replacement for a central authority.  We can easily see this today.   The Bitcoin and Ethereum currencies run on their own independent blockchains, maintained by the people who use the networks.   As far as AI goes, the best example I can give you is TikTok.  When first starting, the system asks you to check off boxes related to which types of content you would like to see.   But, the level of priority is not set by you.  As it serves you hundreds of video clips, the AI system takes note of what kind of content you “like” which content you watch to the end, and which pieces of content you comment upon.  It then gives you more of this kind of content, and your other choices are presented to you less.  (TikTok knows me WAY too well, serving up mainly videos of dogs being cute in families, and the occasional bikini-clad young woman.  It even picked up on my political leanings, and will prioritize a very active poster, who espouses opinions I am likely to agree with.)

Web 3.0 and its connection to cryptocurrency.

The point of cryptocurrency is to find a way around having a central authority in charge of the transactions.   That is why it is part of a movement called decentralized finance.  Web 3.0 is very similar in its attempt to allow for the broadest participation without need for a centralized authority.  In brief, if you agree to help maintain the system (e.g. being a miner or playing some other role) your participation in and support of the cryptocurrency is rewarded by earning cryptocurrency.  It’s quite easy for me to imagine a system in which individuals could develop d’apps to help in their DeFi experiences, and people would individually pay them cryptocurrency in return for the use of their programming.  In the past, when one would dig up physical gold, you would take it to the assayer’s office.   This person would certify the gold as 100% genuine and provide certification of the weight.    Thus, the reputation of the assayer was central to their success: one public whiff of being unscrupulous, and they would be out of the game.    It is not hard for me to imagine a Web 3.0 future where people and their reputations (good or bad) are represented by their NFTs.  The NFTs that have always been paired with truthful, factual information will become trusted and relied upon.

Another thing to consider is that 3-D graphics (even in the mobile sphere) are improving each day.   This will have huge implications for Web 3.0.   For instance, you might buy a Tesla if you can pay cryptocurrency, after having hand manipulated a projection of it.   In this way, you can alter the paint color, kind of roof or any other option.  Imagine how successful you could be in clothes shopping online.  Right now, it’s pretty much a guessing game to see if a pair of pants will fit.   But, if your phone can scan you, a truthful avatar can be made, and the clothes you are considering can be virtually “tried on.”  It’s kind of fun to theorize these things, but they would all be game changers.

What’s the chance Web3 is just an over-hyped fantasy?

Just to be fair, there are quite a lot of specialists who refer to Web 3.0 as “vaporware.” (This means a kind of software that sounds great and promises a lot and yet, never  achieves its potential.  James Grimmelman is a professor at Cornell who studies computer science and law, and seems to be one of these scholars.  He opines that if one of the purpose of Web 3.0 is eliminate any centralized authority, the blockchain retains all of the challenges related to the central authority.  He suggests that blockchains might be in the toolkit of Web 3.0, but it will not be the steel or rock underlying it.  He concluded that as of now, Web 3.0 is an aspirational statement.

The Verdict.

“Every new advent of the web is at first baffling,”   And this was said by a uniquely well-educated computer scientist.  So, you can just imagine the effect upon people who are not tech experts.  One computer scientist went even further.    “To the average person, it does sounds like voodoo,” said Olga Mack, entrepreneur and blockchain lecturer at University of California, Berkeley. “But when you press a button to switch on lights, do you understand how the electricity is made? You don’t have to know how electricity works to understand the benefits. Same is true of the blockchain.”  So, given these opinions of experts, what are we to conclude?    Well, I think we can conclude that people are aiming to achieve a more participative Web 3.0, but the timeline is uncertain.  More to the point, the timing is most probably going to be diffused over many attributes.  (The toaster I spoke of?   I saw that in an in-flight magazine offered by a major national airline.  It’s here NOW!!)  Other things like the crypocurrency  disbursement engines will likely take a little bit longer to develop, and that’s probably as it should be.  What do you think?   Remember, participation is a key attribute of Web 3.0.

REFERENCES

Web 2.0 and Web 3.0 Definitions (investopedia.com)

What is Web 3.0: A beginner’s guide to the decentralized internet of the future (cointelegraph.com)

What Is Web 3.0? (forbes.com)

People are talking about Web3. Is it the Internet of the future or just a buzzword? : NPR

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

 

Pay for Tea with Cryptocurrency?

Headline: Cryptocurrency British style

Date: 9/13/2022 –

Body: Not too long ago, Queen Elizabeth II passed away.  Her death has caused a cascade of changes in the governance of the U.K.   Almost unnoticed was the announcement that the U.K. would be looking to begin accepting stablecoins in exchange for goods and services.  Currently, there is a bill in Parliament that would do this, but the exact rules governing these activities continue to be amorphous.    But, there does seem to be some impetus behind this, as cryptocurrency is expected to be a major portion of a post-Brexit economic plan.    In the UK, these virtual currencies are referred to as “Digital settlement assets.”  Most interesting to note will be the role each financial regulator will be assigned to play in regulating this new ecosystem.

What caused them to act now?

OK, there are at least 2 reasons that they are choosing to act now:

1.   The E.U. is already considering their own framework for stablecoin issues within the continent.   Certainly, they don’t want to lag behind the EU for long.
2.   Even among the “stablecoins” which should be tethered to a fiat currency or a commodity, there have been problems.  When Terra imploded, there was a $40 Billion hole in the economy.

Whatever the impetus, there seems to be real pressure to ensure that the UK could become a nexus for cryptocurrency transactions.  “I see this as a key piece of legislation for financial services, which I hope can allow us to make the most of the opportunities of Brexit and to establish an approach to crypto regulation that is right for the U.K.,” said Lisa Cameron, a member of Parliament and chairwoman of the cross-party group for crypto.  “By bringing stablecoins within the scope of regulation, the bill paves the way for further adoption in the U.K., and this will be a key area of focus for parliamentarians as part of our inquiry into the wider sector,” she added.

How is the legislation in the U.K. different from the legislation in the E.U.?

The E.U. legislation is somewhat more limited in scope.  They have decided to focus upon the setting of standards that need to be met before an organization can issue stablecoins.  The U.K. legislation attempts to go further  and tries to define how various regulators would be required to interact with these issuers if they find themselves at risk of bankruptcy.  Despite the larger scope of the U.K. legislation, it is important to note that it does not disallow any category of issuer from issuing these stablecoins in the first place.  “The BoE will need to authorize any stablecoin, and there are due processes that firms will need to follow before being given authorization,” the PSR told CoinDesk in an emailed statement.  (The PSR appears to be the equivalent to SWIFT within the U.S.)  The FCA, which has already been authorizing crypto companies under the government’s anti-money laundering rules, will probably continue to focus on consumer protection, according to Alleyne, while the BoE is likely to focus on wider financial stability.

This timing appears to be very important, as the Tether cryptocurrency is preparing to launch a U.K. version.    The U.S. based Tether is worth  about $60 billion, so, it seems advisable that the system for regulation be there before the  currency gets there.  “We believe that the United Kingdom is the next frontier for blockchain innovation and the wider implementation of cryptocurrency for financial markets. We hope to help lead this innovation by providing cryptocurrency users worldwide with access to a GBP-denominated stablecoin issued by the largest stablecoin issuer,” said Paolo Ardoino, Tether’s chief technology officer. 

OK, so what else will this legislation do?

Well, that is at present unclear, but there are a few things that appear to be important. First, this will be only the first of several pieces of legislation designed to make the U.K. a very productive place to do cryptocurrency investing and handling.   Second, the FCA  has pointed out that they would setup a “sandbox” designed to work with industry to introduce more stable currencies and NFTs that retain their value.  Chancellor of the Exchequer (read Secretary of the Treasury) Rishi Sunak said:  “It’s my ambition to make the UK a global hub for cryptoasset technology, and the measures we’ve outlined today will help to ensure firms can invest, innovate and scale up in this country.”

Other measures include:

·         The UK government will explore ways of enhancing the competitiveness of the UK tax system to encourage further development of the cryptoasset market in the UK. It will review how DeFi loans – where holders of cryptoassets lend them out for a return – are treated for tax purposes. The government will also consult on extending the scope of the Investment Manager Exemption to include cryptoassets.

·         The Chancellor has commissioned the Royal Mint to create a Non-Fungible Token this summer.

·         The Financial Conduct Authority will hold a two day ‘CryptoSprint’ in May with industry participants, seeking views directly from industry on key issues relating to the development of a future cryptoasset regime.

·         The Economic Secretary will establish and chair a Cryptoasset Engagement Group, convening key figures from the regulatory authorities and industry to advise the government on issues facing the cryptoasset sector.

The government has started a Center for Finance, Innovation and Technology, and the steering committee has already met at least once.

And, as the Bank of England’s Financial Policy Committee recently noted, we’re also mindful that as crypto-technologies grow and become more interconnected with the core financial system we’ll need to ensure that regulators have the right tools to manage the associated risks.  (It might be useful  to consider the Bank of England to be equivalent to the Federal Reserve.)  And it appears that “staking” with cryptocurrency will likely be taxed differently compared to other investments.

The Verdict

I fully understand that this entry goes over political activity within a country that is not our own.  But, it appears that they are genuinely trying to take a leading role in cryptocurrency, and the U.S. might be able to avoid some mis-steps if only we pay attention to what is happening on the other side of the Pond.  When the U.S. was setup, each state was seen as a laboratory of democracy, and lessons could be learned and mistakes avoided.  In a similar way, the U.S. should be taking careful notes on what the U.K. is doing and learn what we can.

REFERENCES

UK Crypto Industry Welcomes New Stablecoin Rules, Awaits Guidance (coindesk.com)

Tether to launch stablecoin tied to pound as UK aims to become crypto hub | Cryptocurrencies | The Guardian

Keynote Speech by John Glen, Economic Secretary to the Treasury, at the Innovate Finance Global Summit – GOV.UK (www.gov.uk)