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Christopher Odinet, law professor at the University of Iowa In some ways, cryptocurrency is like the shiny new toy under the tree on Christmas morning, offering a plethora of exciting possibilities for exploration. And it’s also in some ways like the biggest roller coaster at the amusement park, with all the lofty peaks and the stomach-churning valleys such thrill rides promise. Certainly, digital currency has ushered in a new financial world. And there’s been plenty of news activity of late in the world of cryptocurrency – making the phenomenon increasingly harder to ignore. Coinbase, perhaps the most prominent cryptocurrency trading platform, went public April 14 and, after a few volatile days of trading, was valued at around $65 billion last week in its first full week on the Nasdaq. Last week, Venmo put crypto access into the palm of everyone’s hand. CNN reported on April 20 that the mobile payment service, owned by PayPal, announced they were adding crypto support, offering their more than 70 million customers an opportunity to buy bitcoin, ethereum, litecoin and bitcoin cash for as little as $1. And here’s an eye-opener: Bitcoin, the world’s most popular digital currency, dropped in value by up to 15% earlier this month, falling from an all-time high of $64,895 on April 14 to as low as $52,810 April 17 before rebounding later that day to $56,044. Despite the declines, bitcoin is still valued at more than $1 trillion following a nearly 700% surge in the past 12 months. Heady numbers, to be sure. But in a true business sense, how should you engage with cryptocurrency, if at all? There’s no cut and dried answer, experts say, but several factors should be considered before deciding whether to jump into the turbulent waters of digital currency. “I do think there is a pathway for cryptocurrency to become part of the mainstream. We just haven’t seen it yet,” said Trent Von Ahsen, chief investment strategist and private client advisor with United Iowa Financial, which has offices in both Cedar Rapids and Iowa City. “We’re waiting on regulatory rulings, and there are a number of events that need to take place. There’s definitely a pathway forward to consider it an alternative asset class, like hard commodities or futures, things that folks currently speculate in. There’s evidence that it provides diversified benefits, and I think cryptocurrencies could fall in that realm. But currently, for the masses, it’s still in the early days.” “It’s very, very volatile,” added Christopher Odinet, a law professor at the University of Iowa who teaches courses in property law, secured transactions and consumer finance law. “In fact, I think it’s more useful to think about this not as a cryptocurrency, but as a crypto asset, because the way we talk about it is more like an investment product, saying the value of this is going up and down. We don’t really talk about money in that same way.” Dave Swenson, a research scientist in the economics department at Iowa State University, was blunt in his assessment. “I am not an expert on cryptocurrency,” he said in an email, “(but) my economics understanding tells me that it only has value as long as its holders feel it has value and funds keep flowing in. It is not backed with any kind of pledge of ‘full faith and credit’ as is the case with the U.S. dollar, so it is therefore politically unmoored. The fact that it has become a thing to which vast amounts of money (and vast amounts of energy) have flowed feels like nothing more complex or durable than a Ponzi set-up.” So at its most basic level, what is cryptocurrency? Here’s how Mr. Odinet summarized it: Cryptocurrency is a digital asset — a piece of binary code that exists on the internet. You could think of it as a piece of property, but again, it’s entirely digital. It was made famous in 2009 when a computer program was released that generated the use of digital properties called bitcoins. And as part of a network of computers across the world, the program created a distributed ledger (known as a blockchain) to track who “mines” and owns each bitcoin. Since then, other types of digital assets, or cryptocurrencies, have been created by other groups, ethereum being the other well-known and popular cryptocurrency platform. “There are really two ways in which crypto assets can be used,” Mr. Odinet said. “One is to use them as an investment asset. So you buy them at a certain price, and then you hope later to sell them to someone else at a higher price. So in that way, they’re really no different, at least economically, than any other type of investment products that you might buy, from stocks to gold. “The other way that these virtual properties are used is to make payments, to literally use them like currency,” he added. “So for instance, if bitcoin were trading at $500, then you’d have 500 bitcoin dollars, so you could buy something for 500 bitcoin dollars.” After meandering along at a relatively stable level for several years, the value of cryptocurrency has multiplied exponentially in the last few years, and acceptance is growing – Tesla is carrying cryptocurrency on its balance sheet, and Visa is moving to allow payment settlements using crypto assets. So what’s driven the popularity of cryptocurrency as an alternative to traditional money? “I think it has a lot to do with the 2008 financial crisis,” Mr. Odinet said. “That was a time when it appeared that financial institutions around the world were using their market power to manipulate transactions, to manipulate the money supply, and that really impacted households and consumers negatively. I think that created mistrust in large incumbent, financial institutions and their management of our government-issued money. “This idea that there’s digital money that is divorced from government control is very attractive,” he continued, “particularly combined with the unique blockchain infrastructure that undergirds the bitcoin system, where there is no single institution that serves as the intermediary between someone who wants to pay for something with this currency and someone who wants to accept cryptocurrency as payment. Instead, there’s this network of independent actors and computers, the miners who are constantly validating and checking and adding to the big ledger of who owns all the bitcoins, and none of those people are banks or any sort of government-backed entity that at least nominally would be subject to corruption and malfeasance in the way that we saw in 2008. I think that’s what’s driving it.” Yet the idea of government regulation can be a double-edged sword, Mr. Odinet said. “Money’s a little different because we know that it’s backed by the full faith and credit of the United States, and we have a monetary control system where the government can tighten up the money supply if it looks like there’s too much money in circulation,” he said. “There’s no monetary control for bitcoin because according to the computer program that was released in 2009, there’s only to be so many bitcoins out there at any given point in time, and eventually there will be a maximum reached. And then there’s no way to increase the supply if it becomes desirable to increase the supply. So from a more macro-economics perspective, to use these pieces of digital property as a currency is a very volatile enterprise because there’s no way to engage in monetary coordination. And then you can end up with really wacky prices.” There are tax implications to consider as well, Mr. Von Ahsen said. “Coinbase is still an American company,” he said. “And since they operate here in the United States, they’re under the jurisdiction of the Internal Revenue Service. We have seen scenarios where they subpoenaed records to make sure that people are reporting [transactions]. We’re still in the early days in terms of the recording mechanism, so there’s going to be higher scrutiny given to tax returns where crypto activity took place, whether that’s warranted or not. So I think that’s something that most industries should be aware of — if you buy something for $10 and you sell it for $20, in most cases, you will have some tax due to the federal government. It’s not necessarily that you’re selling bitcoin, you may be using a small piece of it, but that action of using it to exchange for a good or service — that technically becomes a transactional event from a capital gains standpoint. So that to me would be a disincentive to use bitcoin versus a cash app.” So is this a good time for a typical small business to jump on the crypto express? Perhaps as an investment, experts say, but not for everyday business transactions. “I would add just one thing on the downside, and it goes to the gains and losses,” Mr. Odinet said. “Crypto-assets, unless one of these cryptocurrencies is pegged to fiat money, can be extremely volatile in terms of value. Bitcoin was originally valued at a couple pennies per coin. Now it’s many thousands of dollars per bitcoin, and there have been periods of time where it’s fluctuated wildly in just a couple weeks. “So if you’re a business and you accept a crypto asset for payment of a good and you don’t convert it into cash fairly quickly, let’s say you hold on to it, you may discover that it has dropped significantly in value,” he added. “So the volatility in cryptocurrencies is really a significant consideration.” Mr. Von Ahsen stressed that in his position, he’s not able to offer or recommend crypto assets to his clients. “They’re not a regulated security, so it’s not within our purview to necessarily act on it,” he said. “For larger players, the banks, large hedge funds, that’s definitely part of their purview. And there’s certainly fear of missing out. But it just has so much volatility. It’s tough not to equate it to the 1630s Tulipmania, the Beanie Babies in the 1990s. It operates on what some would call the greater fool theory, that someone will come along willing to pay more than you paid, and it’s essentially a pyramid at that point. “But I question whether small businesses are set up to do this,” he added. “And right now, I would say the infrastructure is not there yet. We’re still in the adaptive phase, where folks are starting to open their minds to it. They may hold a little bit because of the rise of Coinbase, and many Americans now have extra money that they haven’t been able to spend because of the pandemic, so it’s something fun for them to do. And, you know, that’s kind of the extent of it so far. I think companies like Coinbase have high goals for broader adoption, and somewhere down the road, they’d love to see corporate balance sheets holding cryptocurrencies and then transacting and exchanging services and goods through those currencies. “I do think there’s a first-mover advantage possible,” he added. “And you can say it’s marketing. It gathers attention when somebody announces they’re now taking crypto. It’s a new fun thing to experiment with. But when you think about the business climate around here, in our Corridor area, is it going to become a material part of their business in the next couple of years? Probably not. In the next five to 10 years, possibly. I think that’s the way to look at it.”