Written by: Leah Belanger, CPA, MSA and William Cooper, CPA
Cryptocurrencies have been making their mark on financial services for over a decade. But the past year has seen incredible highs and lows, with the crypto market losing over $2 trillion in 2022 after peaking in November 2021.
Despite this rude awakening, it’s clear that digital currency is here to stay. So what can we expect from the future of cryptocurrency?
What Happened to Cryptocurrency?
In 2021, digital assets, including cryptocurrencies and nonfungible tokens (NFTs), appeared to be a success story. Regular people became millionaires as Bitcoin, and other cryptocurrencies surged in popularity and NFTs sold for millions of dollars alongside fine art in major auction houses.
For some people, even seasoned investors, there appeared to be no limit to the heights digital assets could climb. But 2022 brought even the most optimistic crypto enthusiast back down to reality.
By the end of 2021, inflation was soaring, and it was clear that the Fed would have to raise interest rates to cool off the economy. In December, stock market selloffs began, and Bitcoin dropped 19%. Although some investors believed crypto would be an inflation hedge, that wasn’t the case, as cryptocurrency prices fell along with every rate hike.
The bad news wasn’t over yet, as several cryptocurrency exchanges and lenders filed for bankruptcy or paused customer withdrawals. The biggest newsmaker of the bunch was the FTX platform. When it collapsed in November 2022, it brought many crypto lenders down with it. FTX founder Sam Bankman-Fried was indicted on a battery of fraud charges. And while the investigation into what happened at FTX is still ongoing, the fact that the exchange went from “too big to fail” to collapse within days is a good reminder to investors that when returns appear too good to be true, they probably are.
The Future of Cryptocurrency
Despite the cautionary tales of 2022, it’s clear that cryptocurrencies are here to stay. The technology is still relatively new, so regulations are evolving, and we can expect further developments in the coming years.
Here are a few ways regulations have already started to accelerate in the cryptocurrency space.
Accounting Guidance
The lack of authoritative crypto-specific accounting guidance remains a central sticking point for controllers, CFOs, and auditors working with digital assets. In fact, several large audit firms have announced they’re leaving the crypto space.
In May 2022, the Financial Accounting Standards Board (FASB) added a crypto asset project to its technical agenda, indicating that the accounting standard setter is prioritizing creating standards specific to the crypto industry.
In the meantime, FASB announced it would authorize certain crypto assets to be accounted for at fair market value rather than the cost-less-impairment model that some market participants had adopted by default.
As FASB continues to discuss and refine crypto-accounting issues, this increased clarity should lead to more transparency and accountability in the crypto space.
Tax Oversight
The IRS has already started to ramp up its oversight around cryptocurrency reporting.
A few years ago, cryptocurrency owners and investors were expected to do their best to report taxable gains and losses. But the IRS is dedicating more resources to ensure taxpayers disclose digital assets and pay taxes on gains from cryptocurrency transactions.
The IRS is reportedly developing a new informational return for digital assets: 1099-DA. While the IRS hasn’t announced an implementation date, this form would be similar to the 1099-B that investors receive from brokerages.
SEC Involvement
The US Securities and Exchange Commission (SEC) is already taking steps to increase the regulation of digital assets. SEC Chair Gary Gensler announced in September that the SEC will aggressively police intermediaries offering cryptocurrency services.
Any intermediaries transacting in digital assets would need to register with the SEC and comply with their regulations, making it easier for regulators to identify potential fraudsters and bring them to justice.
As the cryptocurrency market matures, we expect further regulations and standards to emerge. This is a positive development for everyone involved, as it will create a more secure and reliable environment for conducting business in this rapidly growing asset class.
In the meantime, keep in mind that investing in digital assets can be risky, especially given the frequent and drastic price fluctuations that characterize the crypto market. If you need help navigating cryptocurrency issues, reach out to our team of knowledgeable tax and accounting professionals. We can help you navigate the opportunities and challenges inherent in the crypto space.