Cryptocurrencies are nothing new. Bitcoin, an emblematic crypto-asset, dates from 2009, but the phenomenon accelerated from 2018, with the system becoming accessible to everyone via the internet. Between digital assets and blockchain: does digital dominate reality?
The principle and the development of cryptocurrencies are based on promises: that transactions are made without a trusted third party, therefore without a financial intermediary; that pseudo-anonymity is guaranteed, quickly, without limit of amount or borders; and that the network is open, public, accessible, unlike the servers of players in the current financial system with the objective of greater disintermediation.
what are cryptocurrencies used for?
First of all, it is an investment medium which is fundamentally new, very volatile, but which can no longer be ignored. Bitcoin, for example, went from being worth less than $10,000 in 2020 to over $60,000 in 2021, before dropping to around $20,000 now. It is then a means of payment. Many businesses, especially in the US, are beginning to accept cryptocurrency payments through specific apps. However, there are still drawbacks: the system remains too difficult to use, too slow in certain aspects. It is not free, as each transaction involves fees that can be high. Finally, it is not suitable from a tax and legal point of view, especially in France. Cryptocurrencies are not recognized as currencies today, although they are recognized in some states and even though they are a medium of exchange, a unit of account and a reserve of value.
The appearance of these new financial tools is seen as a threat to States and banks, which must adapt to change. Indeed, cryptocurrencies are not perceived positively on many aspects; for many specialists, it is a well-known bubble phenomenon, not based on any reality, hence a very high risk of collapse. In addition, crypto-assets are seen as a place of money laundering, due to the pseudo-anonymity of transactions. Finally, their use proves to be very consuming in electrical energy, and therefore from a negative environmental point of view.
How do cryptocurrencies work?
In a classic transaction, the financial flow is centralized via two approved organizations which will play the role of intermediary and trusted third party. In the context of a cryptocurrency transaction, the fundamental problem of a financial transaction must be solved: preventing double spending without a trusted third party, and without any centralization of financial information: order without authority!
Cryptocurrencies are based on the principle of asymmetric cryptography, peer-to-peer networks, distributed ledgers, and proof-of-work mining. Good functioning is a subtle balance of economic incentives between the different actors: users, developers and network nodes. The system is open source and therefore does not rely on any proprietary tools.
A transaction is generated by a user who pays a fee, via a simple computer file that generates two keys: one public (his account number) and the other private (his signature), this is asymmetric cryptography. The transaction is transmitted to a first node of the peer-to-peer network, composed of machines connected without a central server, authority or hierarchy. Once the transaction is verified, it is validated and distributed to all network nodes which keep a copy in their ledgers. This is where the “miners” come in: they are the ones who ensure the security of the network by solving an economic equation for remuneration. Mining is the process that secures the system, and makes the chain tamper-proof. Miners write the transaction to the global ledger and create a block chain, called a “blockchain”. Any computer, including yours, can be used for blockchain and mining, making the network virtually indestructible and uncontrollable.
As soon as a block is validated and added (approximately every ten minutes on the bitcoin chain), each mining node will try to create a new block with the pending transactions. This block, to be accepted by others, must contain the solution to a problem, which requires trying many combinations.
What is Blockchain?
The blockchain is the global record of all transactions that have taken place since the creation of cryptocurrency; it can be represented as a file in which are stacked on top of each other, groups of validated transactions called blocks. It is the transmission chain of value.
The string is therefore cut into blocks, it is hashed. Transactions are cut in order to quickly check if any content has been modified. Each block is identified by a calculated hash which represents its content. Each new block is linked to the previous one, because it contains the hash of the previous block. If the contents of the old block are changed, all subsequent blocks must be recalculated. This principle, with storage of identical blocks on several nodes, ensures the reliability and inalterability of the data: malicious actors should be able to modify the majority of the blocks in order to be able to distort the blockchain, which would require enormous computing power.
The most well-known cryptocurrency is bitcoin, but it has some limitations: it is considered slow, expensive, energy-consuming, and limited in its use. Others have appeared, based on more modern technologies such as ethereum, which also allows the exchange of services via the smart-contract (autonomous contract). In a classic scheme, the contract “executes” in programs located on centralized servers (banks, insurance companies, mutuals, etc.). A breakdown, a bankruptcy or an attack can block the execution. A smart contract is a program, driven by the blockchain, which will run without a third party being able to prevent it from modifying it.
What are the accounting and tax consequences?
Digital assets and blockchains are new concepts. Legislative adaptations must therefore be made a posteriori. They are defined by the Monetary and Financial Code. They are also defined, but very recently, by legal texts, administrative doctrine and accounting texts.
The reflex must first be to legally qualify the digital asset used, then to qualify the legal framework of the operation carried out. Mastering the tax issues related to digital assets requires a strong command of the technologies used and general notions of civil law (contract law, property law).
A few principles are accepted: operations to create or use digital assets of the cryptocurrency type are exempt from VAT. In principle, tax (income or company) is only due upon settlement of the transaction and transfer in conventional currency; but it is advisable to remain vigilant because transactions between digital assets, in particular capital gains or income, can generate taxation even if the gains are latent.
Beyond these tax aspects, many questions remain unanswered:
- How to recover flows related to digital assets, especially with a foreign conversion platform? There is no export of accounting data, no “standard” format of the accounting entry file type (FEC).
- How to interpret the files extracted from the platforms? these are extractions bearing lines of codes and amounts that go beyond the second decimal place and which are in most cases difficult to read.
- How to obtain a document with sufficient probative force? It is almost impossible to obtain an invoice linked to a transaction in cryptocurrency.
The universe of cryptocurrencies remains for the moment a vague territory with many risks. You have to venture into it with full knowledge of the facts.
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Cryptocurrencies: new tools, new challenges – La Vie Nouvelle
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