What will be the challenges for the fintech environment in 2018? Douglas King with he Federal Reserve Bank of Atlanta wrote a piece back on 4 December 2017 laying out potential questions that the Federal Reserve may address. They include:
- Will it continue to be up to financial institutions to do due diligence on fintech companies, much as they do for third-party service providers?
- Will regulatory agencies offer financial institutions additional guidance or due diligence frameworks for fintechs over and above what they do for third-party service providers?
- Will one of the regulatory agencies decide that the role of fintech companies in financial services companies is becoming so important that the companies should be subject to examinations like the financial companies get?
In addition, as we get closer to Jerome Powell taken the helm as the chairman of the Board of Governors of the Federal Reserve, what type of relationship should the fintech industry expect? Probably one of proactive collaboration, according to comments Mr Powell made back in September 2017. The Federal Reserve has as a policy goal a faster U.S. payments system that is also ubiquitous and safe, and a positive relationship with the private sector is key.
Back on 16 November I posted a brief post opining on whether the federal government would go after Bitcoin, the cryptocurrency that has appreciated immensely in value this year. I wrote that if anything, the Federal Reserve would consider issuing there own digital currency. Federal Reserve Bank of New York president William Dudley alluded to the central bank issuing its own digital currency back on 28 November although nothing definitive has been set.
Readers should bear in mind that the primary role of the United States government is to conduct a resource extraction and protection scheme over its physical jurisdiction. To carry out these main functions it taxes citizens and businesses. Bitcoin is property and where an investor enjoys gains from the sale of that property, the United States Treasury will be there to collect. According to a 2013 report by the General Accounting Office, right now the biggest tax problem surrounding cryptocurrency is ensuring that taxpayers either investing in or using Bitcoin for transacting commerce are aware that they may be liable for taxes.
Fortunately for taxpayers investing in or using Bitcoin, the Internal Revenue Service does not have the resources to implement a tax compliance approach specific to virtual economies and virtual or cryptocurrency. The GAO recommended that at the least the IRS use a low cost information distribution approach, its website, to make taxpayers aware that they may be liable for income taxes as a result of investing in cryptocurrency.
Whether you agree with Warren Buffet’s assessment on Bitcoin, something that isn’t real and producing no dividends hence scheduled to implode, what’s real is that the Internal Revenue Service is ready to collect.
The financial press has been focusing on Bitcoin’s rapid appreciation in value of late. The value of a single Bitcoin eclipsed the $7,000 mark a couple weeks ago. At the time of this writing, Bitcoin.com reported the cryptocurrency is selling for around $7,171 while its “fork”, Bitcoin Cash, is selling at $1,181.
Supply and demand primarily drive the price the currency. I guess it also helps that over 100,000 merchants accept the coin. A payment system driven by blockchain provides Bitcoin owners additional certainty about who actually owns a generated coin at a particular time. Also the near instantaneous payment is an attractive feature.
In my business, I focus on political threats and I see the Federal Reserve taking a parallel approach to Bitcoin as a payment system. One possible route is issuing its own digital currency supported by an enhanced payment system. A report filed last September by CNBC described a recommendation by the Bank of International Settlements that central banks consider issuing their own digital currencies.
Also, the Federal Reserve is in the process of revamping the payments process system. Bitcoin competes with at least two prongs of the Federal Reserve’s payments system: clearinghouse services and coin distribution services. Federal Reserve governor and Fed chair nominee, Jerome Powell, currently serves as co-chair of the Federal Reserve’s payments improvement oversight committee. I expect given Bitcoin’s growing popularity, the appeal of blockchain, and the concerns about using cryptocurrency for fraudulent purposes that should Mr Powell become Fed chair, improving the payments system and increasing the Fed’s ability to compete with innovative payment systems will remain a priority.