This is the final Crypto for Advisors Newsletter for 2023. All contributors for sharing their knowledge and advice with advisors in this year’s newsletter are thanked.

Kunal Bhasin is the co-leader of KPMG Canada’s blockchain and crypto asset practice. He debunks many bitcoin myths.

I would like to wish everyone a very happy new year. The crypto world is predicting a very exciting 2024.

Enjoy reading.

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Debunking Bitcoin Myths – A Guide for Financial Advisors

The crypto world, as we entered 2023 was still dealing with the fallout of the FTX fiasco and Terra LUNA’s collapse in 2022. These events triggered a chain reaction in the crypto industry that led to significant losses of trust, liquidity problems and market instability. Bitcoin’s price remained resilient despite these challenges. It had risen 150% in the last week of 2023, according to CoinDesk charts. Bitcoin YTD Growth as of December 26, 2023. This growth shows the resilience and potential of digital currencies, despite the challenges.

The digital asset ecosystem continues to be plagued by several myths despite its growth and resilience. These misconceptions can be fueled by a lack understanding, biased perceptions and persistent stereotypes. Financial advisors must provide unbiased and educated responses to these myths, especially as we witness increased investor interest and the possibility of an ETF for bitcoin in the U.S. In this article I won’t be able to cover all of the bitcoin myths, but I will focus on the most common one. Bitcoin is used primarily for illegal activities and to launder money.

As bitcoin gained broader adoption and its value increased, it inevitably caught the attention of criminals. This led to its use in illicit activities. Bitcoin’s popularity and value increased as it gained wider adoption. This attracted the attention of criminals who used bitcoin for illicit activities. One of these was the notorious darknet marketplace Silk Road. Bitcoin became the currency of choice for ransomware. These developments contributed towards bitcoin’s reputation of a “criminal cryptocurrency,” which persists today.

Three key pillars are needed to combat financial crime and money-laundering: technology infrastructure, regulations, and law enforcement. When one or more of the pillars are missing or have not yet evolved, bad actors will always look for new methods.

While acknowledging the above, it’s important to note that the early adoption of bitcoin among illicit users wasn’t due to the alleged untraceable nature of the bitcoin technology, but rather to the lack of sophisticated cryptointelligence and analysis infrastructure as well as the lack of applicable regulations. Bitcoin is not anonymous, as many people believe.

Three pillars of fiat currencies have evolved with the widespread adoption of the Internet and continue to develop today with enhanced compliance requirements in order to capture the ever-changing threats landscape. These three pillars are important, but they don’t guarantee that all illicit activity will be detected and prevented. According to a report from the U.S. in 2022, there are many reasons why this is so. Department of Treasury: Key weaknesses in the U.S. Anti-Money Laundering and Combating the Financing of terrorism (AML/CTF), include a lack of access to beneficial owner information of legal entities and a lack of transparency for non-financed real-estate transactions. The use of virtual assets as a money laundering method is still far behind that of traditional methods and fiat currency. It’s unreasonable to expect a new technology and its users to understand all the pillars from the start. Let’s now break down these pillars for bitcoin today.


Technology Infrastructure

Since 2014, there have been significant efforts to develop and implement infrastructure in order to prevent, detect, and investigate bitcoin and crypto transactions. There are many tools that can be used by financial institutions, regulators and law enforcement, as well as virtual asset service providers. These tools and techniques allow advanced techniques to track and analyse bitcoin and crypto transactions. This leads to the identification of criminals and their arrest in many cases. Bitcoin has a higher level of traceability than many other financial systems. This is especially true for cash transactions, which can be more opaque.

Although there are still improvements to be made in order to allow advanced crypto activities other than bitcoin, like privacy coins, stablecoins, and DeFi, they are already mature enough for monitoring transactions and reporting crypto institutions.


Regulations

It is a common misconception that bitcoins and other crypto-assets are unregulated. It is a well-known fact that regulation follows innovation. Regulators need to go through a thorough administrative process in order to understand and regulate the impact. The U.S., in fact, was among the first countries that subjected crypto exchanges, for AML/CTF, to registration, report and recordkeeping requirements when finCEN classified them as Money Services Businesses(MSB) back in 2013. During the ICO boom of 2017/2018, many other countries followed suit, including Japan, South Korea and Australia. Financial Action Task Force (FATF), in 2019, issued a comprehensive guide that outlines how countries, VASPs and other entities engaged in crypto assets activities must understand the AML/CTF risk associated with their activity and take the appropriate mitigation measures to address it. Since then, these guidelines have been updated periodically.

As of today 83% of G20 countries and major financial centres are enacting or developing national crypto laws. In the world of bitcoin, it’s important to recognize that there is a proactive and reactive approach to regulation.


Law Enforcement

According to the Chainalysis Report (2023), between 2013 and 2023 approximately $8.496 Billion in crypto and fiat has been confiscated as a result law enforcement actions. Globally, we’ve seen several enforcement actions for non-compliance with AML/CTF regulation – the most recent being Binance’s settlement of over $4 billion. The global collaboration between law enforcement agencies, public-private partnerships and other stakeholders is helping to identify and investigate financial crimes in a more efficient manner. This is due to the unique characteristics and underlying technology of bitcoin.

The key message is that, with each technological advance, there is a period of adaption where the benefits are harnessed and risks are minimized by new regulations, improved technology infrastructure, and law enforcement action. Bitcoin is a case in point. It’s evolving at an unprecedented rate, and illicit actors are beginning to realize that bitcoin does not make a good money-laundering instrument given the stature of these three pillars.

Ask an Expert


Q. What are the tax-related items that investors should be aware of?

Investors need to be aware of whether they have unrealized or realized gains or losses on their crypto trading account. Each has unique implications which could have a significant impact on the next taxation year.

Realized Gains – You have to set aside enough money if you sold digital assets in the past year and you want to pay capital gains tax next April. The tax brackets vary according to the individual. Reinvesting profits from successful trades can be risky. Taxes will be due and if you lose a large amount of your principal in your new investments, your tax bill may not be covered.

Unrealized Gains – Crypto is volatile and the closeness of the end of the year may make it more beneficial to you to wait until 2024 before selling your winners, depending on your circumstances. This is because gains made in the year 2023 will be subject to cap gains tax in April 2024. You can delay selling for a week, and the tax will not be due until April 2025. You can reinvest the money and continue to earn interest for another year. If you wait until next year, compounding interest could be a great benefit.

Actualized losses – Crypto losses realized can be offset by other capital gains. Remember that you can carry forward your losses indefinitely to future years. While they are primarily used to offset capital gains, the losses can also be used to offset your ordinary income (up to $3,000 per year).

Realized losses – The current benefit for crypto investors is the ability to realize unrealized losses. Investors are subject to the so-called wash-sale rules for stocks, bonds, mutual funds, and ETFs. If you sold one of these securities for a loss, you have to wait 30 days to repurchase that security. This rule is not applicable to cryptocurrencies. You can sell the digital asset and buy it again immediately if you have an unrealized gain. Even if you cannot offset the capital loss against a gain in this year, having it to carry forward can be very beneficial. You can’t be sure that you will have the exact same amount of units if you decide to repurchase due to exchange fees, slippage and market volatility. This rule will not apply to cryptocurrency until it does. Direct holders are the only ones who can benefit from this. Spot bitcoin ETF owners will be subject to wash-sale regulations as they hold a security and not a digital currency.

– Bryan Courchesne, CEO, DAIM

Continue Reading

The 2024 Bitcoin price predictions have been released and are spread all over the place.

SEC held a “rare” conference call for several bitcoin spot ETF applications.

Bradley Keoun is the editor.