In 2021, we observed the continuation of the prior year’s technological hyper-adoption trend, as was compulsory early into the COVID-19 pandemic. However, 2021 was distinct in that digital and blockchain assets entered the legacy financial services sector, resulting in many industry experts developing the opinion that the industry is on the brink of mainstream disruption. Deloitte, a multinational tax, audit and consulting advisory, recently published its annual Global Blockchain Survey
, which had 76% of its respondents opine that digital assets will serve as a strong alternative to, or outright replacement of, fiat currencies in the next 5 to 10 years. Additionally, more than 75% of respondents strongly or somewhat agree that their organization will lose an opportunity for competitive advantage if they fail to adopt blockchain and digital assets. Accordingly, it is imperative for business owners to understand potential use cases for blockchain and digital assets in their industry and be prepared to navigate legal and regulatory developments, which may impact core business activities.
In its most basic form, cryptocurrencies can serve as an efficient, cost-effective alternative to fiat currencies without the permission of or reliance on third-party intermediaries. For example, Bitcoin, the most widely known cryptocurrency, does not represent and is not backed by fiat money; however, Bitcoin may be utilized by two contracting entities as a near-instantaneous payment method for goods and services, while also lowering transaction costs, and without needing to contact a bank or another third party intermediary to securely transfer funds. The transaction is immediately settled and convertible to fiat currency and/or another cryptocurrency, which can facilitate a seamless cross-border payment experience. In addition, cryptocurrencies promote transparency and trust between transacting parties because every transaction is verifiable and traceable on the blockchain, a digitally distributed, decentralized ledger that exists across a network.
Similarly, business owners may utilize smart contracts (a self-executing contract with the terms of agreement between a buyer and seller) on the blockchain to automate recurring or one-time payments, purchase orders, shipments and more. This promotes efficiency and transparency in the supply chain, as organizations can verify the source of their goods, including, for example, pharmaceutical products, food and clothing, and obtain real-time tracking information of the shipment. The auditable nature of the blockchain can also reduce the risks of fraud or counterfeit products in such instances and identify when manual, human intervention is required. As a result, blockchain technology can improve dispute resolution by automatically instituting dispute resolution procedures, provided certain preconditions have been met, and stopping payment for disputed good or services until the issue is resolved.
Lastly, due to their existent economic value, digital assets provide a novel avenue for business owners to access funding. In 2021, the market cap of digital assets surpassed $3 trillion, up from $14 billion just five years ago. Accordingly, certain lenders have accepted digital assets as security for loaning fiat money – to both individuals and organizations alike – while others offer varying rates of interest in exchange for staking (the process of locking up crypto holdings, akin to a savings account, without selling the asset) digital assets.
Utilizing digital assets and the blockchain do not come without legal risks, consideration and planning. The existing regulatory environment is ever evolving due to mainstream attraction to digital assets by legacy financial actors, such as publicly traded companies and lending institutions, and the nonexistence of uniform regulatory framework. Further, other countries have legalized certain cryptocurrencies for use as legal tender. More recently, an Executive Order issued by President Biden directs several federal agencies to rapidly study digital assets and support technological advances, create a uniform regulatory policy to promote consumer protection while utilizing digital assets and explore the development of a United States Central Bank Digital Currency, a digital form of a country’s sovereign currency, pegged to its value.
In the current regulatory environment, the IRS categorizes cryptocurrencies as capital assets, which carries the potential for a taxable event upon sale, conversion or exchange. For more information related to crypto tax reporting requirements, please read Mitchell Weinstein’s, president of Chuhak & Tecson, P.C., article here
However, given the developing nature of this technological innovation and regulatory response, business owners must be prepared to navigate a new and uncertain legal environment. Contact a Chuhak & Tecson corporate transactions and business law attorney to assist in interpreting regulatory guidance, documentation of equity arrangements and surpassing other legal hurdles.