Battered And Bruised, Bitcoin Ponders IRS, FBI Scrutiny

A new report from Chainalysis shows US-based investors logged more than $4 billion in realized gains trading Bitcoin last year.

That’s $4 billion, with a “b,” and it was almost four times the next closest nation (figure below). Chinese investors managed $1 billion in gains despite official efforts to lean against crypto.

Obviously, I have no way to verify these figures, but Chainalysis outlined their approach. “We measure the on-chain flows to each cryptocurrency exchange, and approximate the total USD gains made on the asset in question (Bitcoin in this case) by measuring the differences in the asset’s price at the time it was withdrawn from the platform versus when it was received,” the site said, in a report dated June 7. “We then distribute those gains (or losses) by country based on the share of web traffic each country accounts for on each exchange’s website [giving] us a reasonable estimate for the realized gains.”

The approach “doesn’t account for gains on assets that have yet to be withdrawn from an exchange,” the researchers noted.

Who cares? Well, the IRS might. On Tuesday, Commissioner Charles Rettig requested greater latitude (or at least more clarity) from Congress on the scope of the government’s role in regulating the crypto industry. “To have a clear dictate from Congress on [our] authority to collect information is critical,” Rettig said. He noted that the IRS “get[s] challenged frequently” and reminded lawmakers that “most crypto currencies are designed to stay off the radar screen.”

Last month, Janet Yellen’s Treasury released a report that called for more stringent reporting on crypto transactions. “Despite constituting a relatively small portion of business income today, cryptocurrency transactions are likely to rise in importance in the next decade, especially in the presence of a broad-based financial account reporting regime,” Treasury said, adding that “cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion.”

“I think we need congressional authority,” Rettig told the Senate Finance Committee. As Reuters reminded folks in their coverage, “Rettig has said that massive profits from the run-up in crypto asset valuations are escaping the IRS, contributing to a ‘tax gap’ that he estimates at some $1 trillion a year.”

Bitcoin fell to a two-week nadir Tuesday. Its YTD gains are now no better than global equities (figure below).

Some market participants appeared concerned about the government’s capacity to recoup a portion of the Colonial Pipeline ransom.

“By reviewing the Bitcoin public ledger, law enforcement was able to track multiple transfers of Bitcoin and identify that approximately 63.7 bitcoins, representing the proceeds of the victim’s ransom payment, had been transferred to a specific address, for which the FBI has the ‘private key’… needed to access assets accessible from the specific Bitcoin address,” the Justice Department said. If you haven’t seen them, the warrant and affidavit are here and here, respectively.

Seizing the “assets” (scare quotes because it’s Bitcoin) isn’t the same as prosecuting the perpetrators, but I’ve cautioned time and again that Bitcoin adherents (and crypto proponents more generally) are wrong to suggest their holdings are somehow out of reach if the US government wants to go after them. And you can spare me the tech-speak on this one. The logistics were pretty challenging in Abbottabad, too.

“There is no place beyond the reach of the FBI,” Deputy Director Paul Abbate said this week, while announcing the recovery of more than $2 million in Bitcoin paid to DarkSide.

While the comparison is apples to oranges, I’d note that the US drone body count is a macabre testament to the idea that nobody is completely beyond the reach of the US government. Of course, the CIA isn’t going to reduce you to ashes for any crypto-related activity, but then again, this is most assuredly a situation where a few bad apples can spoil the whole bunch. The Colonial ransom was brazen enough. If there’s ever a major terrorist attack against a western target and the funding can be traced to crypto, the US could drop the hammer pretty fast.

Also on Tuesday, Coinbase got its first Sell-equivalent rating courtesy of Raymond James, where analysts are concerned about fee compression. “Over and over again history has shown that brokerage and exchanges see excess profits competed away unless there is a structural barrier to entry,” the note said, referencing revenue from trading commissions. Raymond James sees no such “structural barrier to entry” in this market and as such “expect[s] significant pricing degradation over time.” Analysts reckon fair value is $95. Coinbase closed around $220 Tuesday.

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13 thoughts on “Battered And Bruised, Bitcoin Ponders IRS, FBI Scrutiny

  1. On a (somewhat) related note, El Salvador is on track to be the first country to adopt Bitcoin as an official currency (alongside USD)

    1. Right. And how would that work if the US made it illegal (subject to Treasury sanctions) to convert Bitcoin to USD?

        1. Apparently you don’t follow my commentary on crypto very closely. It’s a reference to a previous article.

        2. On review, my last comment might come off as antagonistic and I don’t mean it to.

          I’m just trying to say that as long as we’re talking about Bitcoin and the narratives around it, the proposed formalized adoption by a nation seems like something worth mentioning.

  2. The race for quantum computing in the bussiness arena is somewhat public. Governments will keep their capabilities secretive. Many believe that quantom computing will easily open Crypto keys. Allegedly Bitcoin is working on preventing this and feel it is a problem 5 years from now. Who got the money back?

  3. There’s been news showing that, apparently, the FBI/DOJ didn’t break anything. They just managed to seize the BTC b/c they were on a server whose owner felt inclined to cooperate with the FBI (or was within its jurisdiction)

    Following the money remains one of the most basic, yet powerful, tools we have,” said Deputy Attorney General Lisa O. Monaco in a statement on Monday

    Because these transnational, organized criminal groups are facilitating these payments in cryptocurrency, and because of the transparency and traceability that cryptocurrency provides, you can actually more effectively follow the money and potentially mitigate and arrest illicit activity within this ecosystem, than you can with traditional finance and fiat currencies and payments.

    Basically, when it comes to committing crimes, keep asking for your ransom in good ol’ USD. Way safer and more anonymous than the ooohh so criminal BTC.

  4. I’ve been seeing more and more hype on Chainanalysis’ capabilities.
    From direct personal experience – they’re fine for getting an idea of mass movements – such as a Silk Road – but they’re terribly for actual accuracy at the individual level. Daily bitcoin transaction data is about 60GB – so while searching 10 years of bitcoin activity is not impossible – Chainanalysis relies on voluntary participation by exchanges to identify ownership/(exchange location) of wallets.
    The voluntary participation means certainly a significant percentage of wallets are not capable of being identified by Chainanalysis’ methods: cold wallets, non-participating exchanges, non-exchange online wallets etc. I have been told by federal LE folk that they cannot rely on the tool for prosecution – which is pretty damning.
    Furthermore, most veteran (or criminal) users of crypto employ many wallets since there is no barrier whatsoever to create new wallets.

  5. “There is no place beyond the reach of the FBI,” Deputy Director Paul Abbate said this week –

    …other than foreign meddling and interference with our elections and commandeering and trying to conquer US democracy…

  6. Sorry to burst your bubble JB, but big business with their lobbying have already done so “interference with our elections and commandeering and trying to conquer US democracy…”

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