How the Federal Government Prevents You from Investing in Cryptocurrency

Be prepared for some hassles if you're paying your taxes and you've made or sold any cryptocurrency.

There are many reasons why the federal government has decided to make it as difficult as possible for investors to have a taste of cryptocurrency without having to deal with Tax Day issues:

What Stablecoins Can Do for Crypto Investors, and Why the US Government Has Noticed

As a practical and cost-effective method of transacting in cryptocurrency, stablecoins are an important aspect of the ever-growing crypto ecosystem.

Stablecoins are also important to the United States government, which has a keen interest in them.

Stablecoins, which are distinct from other forms of crypto, are being regulated by the US government in a hurry. Stablecoins guarantee to preserve their value since they are anchored to less volatile assets, such as the US dollar or the euro, rather as Bitcoin and Ethereum. U.S. government officials worry about the hazards stablecoins bring to consumers and financial markets if they are left unregulated due to their potential usage as actual currency.

"A stablecoin is a digital money tied to a specific asset, such as gold. In Humphrey Yang's words, "It's like a common denominator amongst all other cryptocurrencies."

Everything you need to know about stablecoins is here.

What Is Stablecoins?

When it comes to cryptocurrencies, stablecoins are the ones that are built around more stable assets. However, stablecoins can also be tied to precious metals or other cryptocurrencies in addition to fiat currencies such as the U.S. dollar. Stablecoins are a sort of cryptocurrency that is less volatile and more closely resembles the kinds of currencies that people are already familiar with.

"Its objective is to give stability of price as people are dealing among coins or between fiat and digital currencies, because crypto markets may be unpredictable," explains Doug Boneparth, a financial advisor and the president of Bone Fide Wealth in New York City.

This could be gold, cash, or even short-term corporate debt known as commercial paper; all stablecoins are backed by some form of asset or mix of assets in reserve. Stablecoin holders can withdraw an equivalent amount of reserve funds each time they cash out their tokens, with the concept being that the reserve serves as collateral for the stablecoin.

Stablecoins come in a wide variety of forms, and not all are made equal. First and largest stablecoin, Tether (USDT) was launched in 2014. According to Tether's website, around 85 percent of its assets are cash, cash equivalents, short-term deposits, and commercial paper. There should be $1 on hand for every stablecoin controlled by Tether, according to Yang.

One of Circle's most popular stablecoins is the USD Coin. According to Circle, the circulation supply of USD Coin is $49 billion, which is fixed to the U.S. dollar and short-term U.S. Treasuries. Dai, Binance USD, and TerraUSD are also popular stablecoins, however they have lesser market capitalisation and different reserve breakdowns.

Stablecoins: How Do You Make Use of Them?

Using stablecoins is beneficial since they make it easier for consumers to invest in cryptocurrency, such as Bitcoin or Ethereum. Bridges the gap between cryptocurrency and traditional assets, including fiat currency. If you use stablecoins instead of US dollars to trade, you can avoid the fees you'd be charged on many exchanges by keeping all of your transactions within the crypto exchanges itself.

To buy more Solana, you can use your Ethereum to buy additional Solana. Stablecoins, like USDT, can be exchanged for Ethereum at a US dollar value, and from there, you can purchase more Solana. You can save on transaction costs and safeguard the value of your cryptocurrency during periods of volatile trade by using stablecoins as a middleman between the Solana and Ethereum blockchains.

A Solana-to-Ethereum conversion may be more difficult due to the fact that the stablecoin is a common denominator across the two separate projects," explains Yang.

Staking and lending stablecoins can be used for more complicated investments, although most novices choose to use them to save down on trading expenses. When exchanging US dollars for stablecoins, several crypto exchanges do not impose fees. There are no fees associated with transactions between USD Coin and the US dollar on the platform Coinbase, for example.

Stablecoins can also be used for international remittances, however this could be problematic because there is little to no formal regulation in this area. There is a real possibility that stablecoins will not be as stable as they claim to be, especially during times of economic difficulty, because they are a kind of private money, which is money backed by a firm rather than by the government. Concerns about fraud and security are also present. In other words, there's no guarantee you'll get your money back if you invest in stablecoins.

Are Stablecoins Investable?

If you're looking to make money in the crypto realm, stablecoins won't be your best option. A better fit for digital transactions and "actual" money exchanges, they are better suited.

It's quicker, faster, and cheaper to exchange coins for stablecoins than it is to trade them in and out of your bank account at the rate at which crypto trading and prices fluctuate. Stablecoins like USDT, which are tethered to the US dollar, can be instantly converted to Bitcoin and remain in the exchange where you're trading and retain their value. Stablecoins could then be traded for other coins. When converting Bitcoin to US dollars, it may take longer for the money to reach your bank account and effectively remove it from the exchange.

According to Boneparth, it's not worth losing money just because you're moving between two distinct currencies.

Stablecoins: What the Future Holds

Stablecoins are expected to be heavily regulated in 2022, according to experts. Authorities are concerned that stablecoins may be sliding through regulatory cracks because they are not part of the U.S. monetary system.

SEC Chairman Gary Gensler, Federal Reserve Chairman Jerome Powell, and Treasury Secretary Janet Yellen, among others, are particularly concerned about stablecoins since these types of crypto hold the most potential for future use by regular customers to purchase goods and services in the future. Stablecoin regulation is likely to be discussed and, analysts think, even passed into law this year as a result of this.

Boneparth predicts that 2022 will be a watershed year for regulation. "Regulators and policymakers will pay more attention to crypto as it becomes more widespread."

For this reason alone, Boneparth argues, regulators are "scrutinizing" all stablecoins, because they have no idea how to treat these new digital currencies yet. Regulators in the United States are still debating whether to classify them as securities, banks, or something quite different. According to a Bloomberg article, the White House plans to develop a first government-wide policy for crypto and other digital assets, and would ask federal agencies to analyze their dangers and prospects.

When it comes to a hot-button issue like this one, the Federal Reserve's digital currency program is a contentious topic (CBDC). An anticipated study by the Federal Reserve on the merits and cons of a CBDC was released in January, but a final decision was postponed. It will wait until May 20th to hear from the general public and other interested parties before moving on with its decision-making process. The change "would constitute a fairly substantial innovation in American money," the Fed said in its study.

Grant Maddox, a licensed financial planner and founder of Hampton Park Financial Planning based in South Carolina, believes that the Federal Reserve's next decision could either "fortify cryptocurrencies or detract from their value." On the other hand, "It all relies on what our government decides," he said recently to NextAdvisor.

Experts also believe that the Federal Reserve's anticipated interest rate increases this year could drive demand for the US dollar and, as a result, enhance interest in cash-backed stablecoins among Americans. According to Scott Bauer, the CEO of Prosper Trading Academy and a former trader at Goldman Sachs, "stablecoins which are tied to the dollar can also catch this upside," because the Fed is expected to raise interest rates numerous times this year.

Stablecoin regulations in the United States may be affected by this, but it's something to keep an eye on in the coming year.

** Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of USA GAG nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

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