What Is Cryptocurrency?
Before we get into cryptocurrency bank accounts, let’s discuss what crypto is. Cryptocurrencies are virtual or digital currencies which utilize cryptography to enhance financial privacy. As a result of the encryption, cryptocurrencies are extremely difficult to counterfeit. One of the most important tenets of cryptocurrency is that it is decentralized. Because cryptocurrencies are not issued by government authorities, they are protected from government interference and manipulation.
Bitcoin was the first cryptocurrency to attract public attention. It was introduced in 2009 by an individual or group operating under the pseudonym Satoshi Nakamoto. Bitcoin remains the most popular cryptocurrency to date. As of May 2018, there are over 17 million bitcoins in circulation. The total market value of bitcoin is over $140 billion. The success of Bitcoin has caused a number of competitors to enter the market, such as Ethereum and Litecoin.
How Does It Work?
Cryptocurrencies facilitate the easy transfer of funds between two parties. Public and private keys are used in conjunction with these transfers in order to provide security. The fees associated with the use of cryptocurrencies are minimal when compared to the these transfers are facilitated through the use of public and private keys for security purposes.
Blockchain technology is a central component to the use of cryptocurrency. A blockchain is an online ledger of all transactions which are ever conducted in a particular cryptocurrency. This data is heavily encrypted in order to limit the threat posed by hackers. It can be copied across all computers running software related to the individual cryptocurrency being used. It is nearly impossible to forge a transaction in the blockchain because every new block registered must be verified by the ledgers of each user on the market. Many experts are forecasting that blockchain technology will have a profound impact on other technologies, such as online voting and crowdfunding. Some major financial institutions are also looking at ways that cryptocurrencies may be used to make payment processing cheaper and more efficient.
Despite the superior financial privacy and freedom from government regulation that cryptocurrencies provide, they are not without caveats. Since cryptocurrencies are digital and they are not backed up with a central repository. As a result, cryptocurrency balances can be wiped out due to computer malfunctions. For this reason, it is essential for users to make backup copies of their holdings. When backups do not exist, cryptocurrency holdings may be lost forever in the event of a computer crash. Additionally, prices for cryptocurrencies are based on supply and demand. The rates of exchange for cryptocurrency can fluctuate wildly as a result.
Since cryptocurrencies are anonymous, they have also become favored currencies for criminal transactions. Popular crimes which are carried out with cryptocurrency include money laundering, tax evasion, and making illegal purchases on the dark web.
However, cryptocurrency advocates assert that the value of the anonymity provided for users conducting legal transactions greatly outweighs the risk posed by criminals. It is important to note that despite the growing popularity of cryptocurrency, cash is still by far the favorite financial instrument used by criminals. Some economists worry that the use of cryptocurrency could be a short-lived fad or speculative bubble. They believe that this is the case because cryptocurrencies are not pegged to any material goods. These economists usually reference the rapid surges and drops in the value of Bitcoin as support for this argument.
It is also important to note that while cryptocurrencies take significant precautions to ward off hackers, they are not immune to the threat posed by hacking. There have been over 40 thefts in the history of cryptocurrency. A small number of these thefts have exceeded US$ 1 million in value.
Despite the risks inherent with using cryptocurrencies, their popularity continues to soar.
Why Use a Cryptocurrency Bank Account?
There are banks accepting bitcoin and other cryptocurrencies but many are not. Several US banks have announced recently that they are limiting the purchase of cryptocurrencies using credit cards. Complaints that banks are denying purchases of cryptocurrencies made with credit cards have been surfacing for years. Until recently, these complaints were disregarded as speculation. However, the recent announcements regarding the lack of US banks accepting bitcoin and other e-currency suggest a shift in the banking industry away from cryptocurrencies. The premiere reason that banks give for banning the use of cryptocurrencies is related to their volatility. Other arguments for limiting cryptocurrency transactions include a lack of mainstream acceptance and an increased risk of threat or fraud.
Financial institutions are faced with increased risk when cryptocurrency purchases are made with credit cards. This is the case as a result of the increased volatility associated with cryptocurrencies. If a purchase of cryptocurrency is made using a credit card, the currency may not have enough value to cover the repayment.
The recent crackdown by US banks on credit card purchases was foreseeable for those watching trends related to cryptocurrency. Previously, several major US credit card networks changed the merchant category code for cryptocurrencies. The change in code allowed these banks and card issuers to charge cash advance fees when credit cards are used to purchase cryptocurrencies. The fees are levied in addition to the fees charged by cryptocurrency exchanges for conducting the transactions. In addition to those fees, some credit card companies also charge extremely high interest rates for cryptocurrency purchases. There are both domestic and offshore exchanges. For bitcoin, for example, we call the foreign version an offshore bitcoin exchange.
Many people speculated that as a result of the change in the merchant category code for cryptocurrencies, more regulations are on the way. It is not only banks who are looking to restrict cryptocurrencies in the United States. The US government is jumping on the bandwagon as well. The reason for this is that the US government wishes to regulate and tax all domestic cryptocurrency transactions. As a result, many US government agencies are clamping down on cryptocurrencies. The International Revenue Service (IRS) is not considering cryptocurrencies to be an asset. If cryptocurrencies are considered an asset, they can be taxed in the same manner as conventional currencies. Currently, the IRS is issuing John Doe summons for traders of cryptocurrency. These summons compel traders to reveal the cryptocurrency holdings of their US based accounts. The United States Security and Exchange Commission (SEC) is also trying to restrict the use of cryptocurrencies. The SEC has begun to regulate initial coin offerings (ICOs) in the same way as initial public offerings (IPOs).
For the above reasons, purchasing cryptocurrency with a bank account is far more popular than using a credit card. Bank accounts allow investors to purchase large amounts of cryptocurrency in a single transaction. There is also reduced financial risk with using a bank account for investors because they do not have to worry about repaying the amount of the purchase. This risk is the main caveat for investors looking to purchase cryptocurrency with credit cards.
When investors use bank accounts, the risk for financial institutions is also reduced. Purchases made with credit cards as opposed to bank accounts can result in chargebacks. Chargebacks occur when financial institutions initiate a forced transaction reversal. There have been a number of recent reports which have suggested that financial institutions are initiating chargebacks on purchases of cryptocurrency. These reports have been confirmed by several US banks, including Bank of America and Wells Fargo. Bank transfers, however, are immune to chargebacks because the transfers are irreversible.
Because cryptocurrency exchanges do not face the risk of chargebacks with bank transfers, they offer lower fees for transactions made by bank transfer. If an investor buys US$1000 worth of cryptocurrency from Coinbase using a bank transfer, they will pay a fee of US$14.90. However, the fee would be US$ 39.99 if that same purchase were made using a credit card. Bank transfers allow investors to save more than 50% on the fees associated with cryptocurrency transactions.
The main caveat to using a bank account for purchasing cryptocurrency is that bank transfers usually take more time than credit card purchases. Bank transfers, however, also receive the best exchange rates. Bank transfers are widely regarded as preferable over credit cards for purchasing cryptocurrency for the above reasons. It is important to note that regulations regarding the use of bank accounts for cryptocurrency purchases vary widely depending on the jurisdiction where the account is located.
Why Are Offshore Bank Accounts Preferable?
As regulations continue to tighten in the United States, investors are looking to offshore jurisdictions for financial solutions. The main advantage that cryptocurrencies provide over conventional currencies is financial privacy. Cryptocurrencies themselves are anonymous. However, bank accounts located in the United States are most definitely not anonymous. In order to open a bank account in the United States, a person must allow the bank to record identifying information. As a result, using cryptocurrency in conjunction with a US bank account can weaken the financial privacy that it provides. It is of paramount importance to pick the correct jurisdiction when opening a bank account to purchase cryptocurrency. The laws that the bank account will be subjected to are determined by the jurisdiction where the bank is located.
For these reasons, many educated investors are choosing to take their cryptocurrency offshore. Cryptocurrency investors open offshore bank accounts for the same reasons that people using conventional currency do. The benefits related to asset protection and financial privacy provided by offshore bank accounts are far greater than those offered by domestic accounts. The main reason for this is that domestic accounts are subject to the laws of the United States. As a result, domestic banks can be ordered to reveal the identities of their account holders. It is also possible for judgments against debtors in the United States to be enforced against domestic bank accounts holding cryptocurrency.
The biggest advantage in using an offshore bank account is that the majority of highly regarded offshore jurisdictions do not recognize foreign judgments. These jurisdictions will also refuse to reveal the identities of account holders unless they have tax information exchange agreements with the United States. Offshore bank accounts can also be combined with offshore LLCs to provide maximum benefits for asset protection and financial privacy. To set up an offshore LLC, call 1-800-959-8819 in the US or Canada or internationally at +1-661-310-2929.