Stablecoin Classifications, Regulations, and Tax Implications from a Certified Public Accountant

Guest post by Dmitri Alexeev from BPM LLP. Dmitri Alexeev is a Tax Partner at BPM LLP. Stablecoins are the latest innovation to emerge over the past year and have the potential to revolutionize not only virtual currency markets but to also become a new mechanism for worldwide commerce.

While the virtual currency is new, the stablecoin concept has been around for several years.

The public at large has not yet embraced convertible virtual currency and the stablecoin concept has the potential of becoming the bridge that may enable a wider acceptance by the public and investors that have not yet warmed up to it.

At this point, the list of stablecoin projects is expected to grow.

Examples of crypto stablecoin are Bitshares, BitUSD, MakerDAO, nUSD, and Augmint.

Hybrid stablecoins can employ characteristics of other stablecoins listed above and can be viewed or become a financial instrument.

Countries like Cuba, Russia, China, Iran, North Korea, and Venezuela can use a sovereign stablecoin to fight inflation, trade wars, economic embargos or sanctions.

Separately, Nippon Yusen Kaisha, a shipping company, announced in November that it will create its own stablecoin to pay its employees.

In turn, the fate of stablecoins is less certain and will require significant tax analysis to determine if the issuance of a coin is a taxable event.

Key questions: what are the facts and circumstances around the stablecoin issuance? What are the rights and obligations or parties involved in a transaction? Is stablecoin an advanced payment or a deposit, bailment or a notional principal contract, an option or a warrant, a note or equity investment, or is it a multi-layered financial instrument? Companies issuing or investing in stablecoins will need to work with their attorneys, accountants, and regulators to answer these questions.