• What does the new definition of “broker” mean for crypto investors?
  • Will technology lead to tyranny?
  • The potential of materials science to change the world…

Dear Reader,

Welcome to our weekly mailbag edition of The Bleeding Edge. All week, you submitted your questions about the biggest trends in technology.

Today, I’ll do my best to answer them.

If you have a question you’d like answered next week, be sure you submit it right here.

And one note before we dive in – my Click for Crypto event is happening next Wednesday evening at 8 p.m. ET. This is the very first crypto livestream I’ve ever done… and it’s the start of many exciting things to come.

Blockchain technology has hit an inflection point. And we’re on the cusp of the biggest giveaway in crypto history – billions are at stake. That’s why I decided right now is the perfect time to hold this event.

And this is all part of a larger move I’m making here at Brownstone Research. If any readers are interested in learning about the most exciting projects, tokens, platforms, and stocks in this space… I’d highly encourage you to attend.

It all goes down on August 25 at 8 p.m. ET. Simply go right here to RSVP for free.

What does “broker” really mean now?

Let’s begin with a question on the recent infrastructure bill’s crypto language:

Jeff,

First, I LOVE The Bleeding Edge. I write science fiction, and your newsletter is my go-to resource to ensure that my sense of wonder does not slide below the technological possibilities already at hand. Furthermore, thank you so much for covering this confusing legislation! I feel grateful that you covered this in The Bleeding Edge right away. There is one area in which I remain confused.

I understand that the definition of “broker” is highly broad. Yet does that mean that individuals who use a third party like Coinbase to stake a bit of a “stake-able” coin, like Ethereum, on a very small amount of crypto are just as liable for somehow turning over information a regular retail investor can’t possibly look up to the IRS as the actual marketplace brokers (Kraken, Coinbase, etc.)?

In a similar vein, do you think it is legal for individual investors to be penalized by the IRS for not providing information that is literally, in every sense of the word, impossible for them to find and/or provide to the IRS?

 – Olivia W.

Hi, Olivia, and thanks for writing in! It’s probably no surprise that I absolutely love science fiction. In fact, I’ve been enjoying a little reading over the summer with my son to help him with his summer reading homework requirements.

We just finished A Wrinkle in Time. I know L’Engle’s classic is not thought of as sci-fi, but come on… There’s a tesseract capable of folding the fabric of space and time! Next up is Ender’s Game. You can’t go wrong there. I’m curious to know… What are your favorites?

Of course, blockchain technology is disrupting just about any kind of financial transaction that exists today and creating new ways of doing things. It has the power to revamp many of the legacy institutions and systems currently in place – from banking and data security to business contracts and much more.

Yet as I wrote in The Bleeding Edge, the language in the recent infrastructure bill that was passed was not well received by the industry.

It didn’t even make any sense, and it was nothing more than a highly ineffective attempt to extract $28 billion of taxes from the industry. It won’t work, and it will have very severe consequences that are bad for the U.S. economy.

The primary point under discussion is the bill’s focus on cryptocurrency “brokers.” It states that all crypto brokers must hand over customer information to the Internal Revenue Service (IRS).

That’s nothing new – our stockbrokers have long been required to report info on our gains and losses to the IRS. This ensures we are all paying our taxes properly. Or to be more precise, it allows for the IRS to quickly check if there is a large gap between what it thinks an individual taxpayer should be paying compared to what is calculated in a tax return.

The problem with the new language was how it defined a “broker.” It defined a broker as anyone or anything that “effectuates transfers of digital assets.” This could expand the meaning to include miners of digital assets, validators, smart contracts, software developers, and others.

And it makes no sense. If you’re not running a centralized exchange and acting as a custodian of assets, you’re not a broker.

The definition is so broad, it’s no wonder there’s confusion about how it will be applied.

And we’ve learned that the Treasury Department had a hand in the broadness of the term… and is now taking steps to clarify its meaning.

A Treasury official came forward this past week to say the department is preparing guidance on what types of crypto companies will be required to comply. The official also indicated that developers, miners, and wallet providers won’t be subjected to the new reporting requirements as long as they don’t also act as brokers.

While the Treasury Department hasn’t yet confirmed this, it’s good news if true. For a real understanding of all the implications, however, we’ll need to wait for it to publish its full guidance, and then we need to confirm how the IRS works with that guidance in practice.

As for your question about individuals using Coinbase or another third party, the new definition of broker likely won’t apply. Coinbase does the actual custodianship and node operation, so the onus for reporting information would almost certainly fall on it rather than the individual consumer.

Of course, the rules become much muddier for decentralized projects and protocols where individuals stake positions themselves rather than through a third party. We’ll have to wait and see where the line is drawn there.

You are correct that there are transactions, which while traceable, would be very difficult to discover. That said, we should remember that the burden is on us, the taxpayers, to disclose those transactions that result in income of any kind – or, of course, capital gains.

Ultimately, I would encourage investors to keep excellent records of their crypto transactions – which is a good idea regardless of how this legislation plays out – and be patient as we wait to see how things move forward.

Where the IRS has fallen behind is in clarifying guidance on how to treat taxation of transactions related to digital assets. How do we deal with air drops, forks, staking, lending for liquidity, etc.?

The Chamber of Digital Commerce continues to work hard with policy makers and the IRS to clarify these issues. And, of course, we want a tax code that is reasonable, fair, and actually possible to track and implement for normal taxpayers.

I do recommend working with a good tax accountant to help with these issues. The latest version of the Internal Revenue Code (IRC) is 6,688 pages long. It is so complex. And I’m not an expert on tax code, so I rely on a fantastic professional that I’ve worked with for years to help ensure proper tax filings.

One way or another, the blockchain industry is highly motivated to clarify this and other legal requirements for operating in this space. We’ll keep working hard to create a positive environment where this incredible technology can flourish.

Many good things are used for bad purposes…

Next, a reader wants to know more about the downside of technology:

Dear Jeff, while I find your discussion on many things very enlightening, I am concerned about your embracing blockchain as much as you do. Many things that are good are used for bad purposes, and we are right in the midst of that now.

I do not want to be tracked anywhere at any time for any reason. And no one needs to know what medication I may have taken or not, where I went or who I saw. Technology is going to lead to tyranny. Switch to electric cars, they say. Then they turn off your power. I’ll keep reading you, though, because it keeps me abreast of what nefarious thing may be coming next. 🙂

 – Heather P.

Hi, Heather, and thanks for being a reader. And you may be surprised that I deeply share your concerns. Of course, I tend to be a rational optimist, but you are absolutely correct that technology can be used for tyranny. In fact, I would argue that it is happening now.

2020 was a turning point. Facebook, Google, and Twitter collaborated with parts of the U.S. government to influence elections. It isn’t the first time, but it is the first time that it was so egregious and widespread.

Vaccine passports and contact tracing are tyrannical. They’re a complete violation of our privacy and our rights. We are being told that we must do things without any regard for our age, health, or acknowledgement of the existence of natural immunity.

And we’re being forced to do things that have no scientific research to support those actions. That is tyranny, and it is clearly getting worse.

With all that said, as a technologist, of course, I believe that technology is the key to solving the world’s most pressing problems. But we must also use it ethically and morally.

One of the most challenging tasks humanity will face over the next several years will be to ensure that bleeding-edge technology is used in a way that doesn’t endanger our liberties.

This isn’t restricted to blockchain technology, of course. Already, we’ve seen Google and Facebook harvest our data… privacy-destroying facial recognition tech… and “Live Time Intelligence” AI surveillance.

We must stay vigilant to make sure powerful technologies are used for the benefit of mankind rather than in dystopian, harmful ways.

And while almost all transactions can be tracked when using blockchain technology, they are typically pseudo-anonymous and designed only to share the least amount of information necessary to achieve a desired transaction.

It’s worth saying that this is far better than what we have today. Right now, most of our sensitive data and information is controlled by centralized organizations.

Multiple parties, for example, know exactly which medications we take. And companies like Facebook and Google have collected and stored just about everything about us. They have the most complete collection of private information on us, and they monetize it each and every day.

Blockchain technology at least solves many problems present in the current system. One simple example is censorship.

It’s far too easy for the “big tech” companies to shut down free speech that doesn’t align with their preferred political narrative at any given time.

Google, Amazon, and Microsoft, for example, control such a large percentage of cloud-based software hosting that they have the power to effectively shut down applications and remove websites from the internet.

Wireless operators like Verizon, AT&T, T-Mobile, and other internet service providers (ISPs) – like our local CATV companies – can also block websites from being accessed as well.

So even if a company moves its website off of the cloud services controlled by Google, Amazon, or Microsoft, the site can still effectively be shut down.

This is why we need a “next generation” of the internet, where control isn’t tightly held by just a few companies. Blockchain lets us rebuild the internet and decentralize it, so it doesn’t have the same chokepoints.

This is just one example of blockchain’s potential… but there are many. It will eventually touch almost every aspect of our lives.

And ultimately, whether we agree with it or not, blockchain technology is coming… At this point, it’s inevitable. These developments are going to happen whether we want them to or not.

So Heather, you are smart to stay on top of these developments. It’s far better to be well informed. At least that way we can figure out if we might be able to take any corrective actions to avoid that nefarious behavior that we’re worried about.

One of the best ways to put ourselves in the position to be able to protect ourselves is to have the financial resources to do so.

I’m going to show my readers how they can invest in this trend and profit from the coming tidal wave of changes. If you haven’t already, Heather, I’d encourage you to sign up for my presentation next Wednesday evening.

There, I’ll discuss some of the most promising ways blockchain technology will truly improve our lives and lead to greater freedom… not tyranny.

Clean energy and new materials…

Let’s conclude with a question about the move away from petroleum:

I enjoy reading The Bleeding Edge every weeknight. Thanks for your insight.

I see more electric vehicles on the road every day and know there is a big push to move away from gas-driven vehicles by 2030. Even Exxon Mobil Corporation is now projecting they will be zero carbon by 2050. I’m having a real problem believing any of this since the world we have is built around petroleum.

It’s difficult to look around and find something that is not manufactured from or with our petroleum or natural gas industry products. If we do away with gasoline, what are all the EVs going to drive on? Asphalt is pretty much the bottom of crude oil refining. Concrete is made from firing limestone with natural gas. Steel is produced by reducing iron ore with natural gas. The list goes on and on.

The switch away from crude oil is already being felt in some areas. The city I live in is delaying or canceling paving projects that were scheduled for this year due to the short supply of asphalt. I would like to hear some discussion on the movement to eliminate the petroleum industry and how it will affect our society as we know it.

 – Charles B.

Hello, Charles, and thank you for your kind words. This is an interesting question to consider.

The technological advancements in the energy production industry, combined with the rapid shift toward electric vehicles (EVs), are ultimately going to send the demand for crude oil off a cliff.

And the implications will be vast for both the oil industry and the countries whose economies are primarily built on oil exploration.

That said, as the country and the world move toward these goals for 2030, there is almost no discussion about where the electricity is coming from.

After all, most of the electricity that we use today is produced by dirty sources. Natural gas, coal, and even nuclear fission produce radioactive waste. If the electricity that fuels our EVs comes from these sources, the EVs are not clean at all.

And most people don’t understand how wasteful our energy grid infrastructure is. Anywhere between 7–20% of electricity that is sent over the power distribution lines is lost between the power plant and our homes. Talk about wasteful.

My point is that we cannot have clean energy-based electric vehicles if we do not have clean energy to fuel them. Driving an EV that is fueled by natural gas and coal is not clean… It simply displaces where the carbon is emitted.

I believe that nuclear fusion, not fission, is the answer to producing limitless clean energy that can power our base load electricity requirements. If the U.S. can spend more than $1 trillion on COVID-related matters, why not spend a fraction of that to push clean energy over the line?

Assuming I’m right about this tech, it will be one of the largest societal disruptions that we’ll see during the next 20 years. That’s what technology does after all. It disrupts.

Yet the first point I’ll make is that this shift away from crude oil and petroleum will happen over time. And new technologies in fields like materials science will make the way for our transition from petroleum-based products.

You mentioned concrete as an example. In addition to requiring fossil fuels to make, our concrete right now costs a lot to transport to remote locations, and it doesn’t last forever. Those are a couple of reasons why scientists are currently working on alternatives to our traditional materials.

For instance, the U.S. Department of Defense has funded a project making “living” concrete that solves those problems. The “living” concrete is far cheaper to produce since it uses sand, water, gelatin, and a special kind of bacteria to create calcium carbonate. This concrete can be made at the building site, and even more exciting, it can “heal” itself.

Or there’s a group from UCLA that’s taking another interesting approach. It’s created a system that uses carbon dioxide (CO2) waste from industrial plants to make concrete blocks. The team uses 3D printing to craft the gas into new building material. This, too, is much cheaper and will reduce pollution.

I’ve also written about developments with algae. When algae absorb carbon dioxide, they can then be converted into something called “algae oil.” Algae oil can be burned as a source of energy. It can be used as a cooking oil. And it can also be used to create cheap carbon fibers.

These algae-based carbon fibers could, in theory, be used to create materials for everyday products like tennis shoes or shampoo bottles. They could even be used to create a steel alternative. And believe it or not, algae can even be used in cosmetics.

A number of these products are currently petroleum-based, and there’s certainly a path forward for scientists and technologists to develop alternatives. These are just a few examples, but I think they show the incredible work being done to shake up our legacy ways of producing things.

While it might not be easy to see right now, the future is going to look radically different. That’s why I’m so dedicated to showing my readers the immense potential in front of us.

And as investors, we want to tune out the noise and focus on the big picture. If we can do that, we’ll do extremely well in the years to come.

That’s all we have time for this week. If you have a question for a future mailbag, you can send it to me right here.

Have a good weekend.

Regards,

Jeff Brown
Editor, The Bleeding Edge

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