Coronavirus Impacts on Bitcoin (And the IRS’s Dumb Singularity)

The best Sundays are for long reads and deep conversations. Earlier this week the Let’s Talk Bitcoin! Show gathered to discuss Coronavirus and its potential impacts or disruptions to the decentralized world of bitcoin.

Later, we hear from correspondent George Ettinger about the indications of a “Dumb Currency Singularity” taking place at the IRS right now (also presented in full text below).

On today’s podcast we discuss Coronavirus and:

The Dumb Singularity: Crypto Currencies and Game Currencies are Overdue for a Collision

So.  It has come to this.

One of the biggest barriers to entry for a disruptive technology is the incompetence of the average consumer.  On the other hand, simply preying on the illiteracy of consumers can be a boon for some truly terrible inventions.  It is in the clash of these two ideologies that we have reached the Dumb Currency Singularity.

Digital currency has been on course for the Dumb Singularity for well over a decade, and we finally passed the event horizon late last year.  At the end of 2019, the IRS quietly published a set of virtual currency guidelines that broadly lumped together mainstream cryptocurrency such as Bitcoin and Ethereum with honest-to-god Fortnite V-Bucks and Roblox Money.

I have just been informed that the legal term for Roblox currency is “Robux.”  That seems… fair.

My point, however roundabout it may be, is that somebody in a position of some influence at the United States Internal Revenue Service saw their grandkid beg for a Roblox card in the Walgreens checkout line and thought, “MY GOD, THE BIT-COINS HAVE COME FOR THE CHILDREN.”  And then, when he put his horror to print, enough a phalanx of fellow IRS employees looked it over and thought “yes, that sounds right” that it was greenlit for public consumption. 

That advisement (to which the IRS claimed players of Fortnite and Roblox must report any purchases of “Bucks”, whether “V”- or “Ro”-) stood monolithically for nearly three months before it was escorted off the stage just as quietly as it had arrived.  In a fit of Streisanding, this change caught more attention than the addition had garnered to begin with, and the IRS gave a formal explanation. “The IRS recognizes that the language on our page potentially caused concern for some taxpayers,” they said.  “We have changed the language in order to lessen any confusion. Transacting in virtual currencies as part of a game that do not leave the game environment (virtual currencies that are not convertible) would not require a taxpayer to indicate this on their tax return.”

This is, surprisingly, rather huge.  Huge in that they got this follow-up explanation relatively right, and huge in that they still persist in getting so-called “virtual currency” wrong. 

You see, the IRS has been caught flat-footed over and over with every passing year that crypto currency has spread.  They were slow enough recognizing the growing importance of Bitcoin that it wasn’t until 2013 that they designated a team to begin planning for how to handle the currency… and they still haven’t figured out how to handle it.  Yet, dating back even earlier than this, the IRS has ALSO been blindsided at every turn by non-crypto “gaming” digital currencies. Their official language conflating the two isn’t just a red flag- it’s a canary in the coal mine.

Game Currencies- for simplicity, hereafter referred to as, uh, “Game Currencies”- run a wide gamut but the majority is exactly what the IRS failed to recognize in Fortnite and Roblox: a non-convertible, non-transferrable currency that cannot reasonably leave the confines of its game.  Your Fortnite V-Bucks and Apex Legends Coins and… [SIGH].. Ro-Bux… are just an interstitial medium between your real money and the gameplay. You do not trade these with other players, nor do you have the options to take these chips up to the casino counter and cash them back out: once your USD enters the game, it cannot leave it in any reasonable form.  After the original point-of-sale a Game Currency is no different from Sonic’s rings.

So, for as correct as the IRS eventually got it, they’ve still been handling Game Currencies wrong, and it has informed the ways they still get Crypto wrong.  Many game currencies ARE transferrable and ARE dangerously viable mediums for exchange and laundering, and they have been around longer than Bitcoin.  It’s absolutely no secret that World of Warcraft gold is player-transferrable: it’s the entire reason “gold farming” remains a legitimate source of income for so many.  Though less ubiquitous than Warcraft, the seminal Supply Chain Actuary Simulator EVE Online notoriously monetized its monthly subscription cards into a consumable ingame item.  For those unfamiliar, this means that when you buy a month of game time, it isn’t simply added to your account: it becomes an item in your game inventory that can either be USED to extend your subscription, or TRADED with other players as a dollar-pegged commodity.  Now, the truly fantastical economic tales of money laundering, actual virtual space piracy, and actual-million-actual-dollar banking deals in Eve Online can and HAS filled several books, so I will not go into detail here.

The point is, simply, that player-exchangeable cash-value items have been a massive grey market for years and continued to slip under the IRS’s nose.  They didn’t bat an eye at the horrifying headlines of Diablo 3’s aborted real-cash auction house fiasco, yet now in 2020 they’re fumbling to grasp onto its legacy. 

That fumbling is part-and-parcel with their fumbling of Bitcoin, and the timeline tells a story.  A recent Government Accountability Office review of IRS virtual currency policies painted a somewhat scathing picture of a bureaucracy that was slow to notice and even slower to adapt.  The IRS initiative in 2013 was a kneejerk response to the first truly landmark year of Bitcoin cash trading, where dollar parity was suddenly blown aside by hundred dollar parity.  The impetus is obvious: disruptive changes to currency don’t matter to the IRS until they see it on the “Wacky Stories” segment of their local station news. 

The financial establishments that stood to gain from digital currencies were quick on the uptake, but the groups tasked with oversight were responding to changing conditions and new developments with the grace of a grandparent still giftwrapping cabbage patch dolls for the kids’ 35th birthdays.  The GAO points out that, across three years, the IRS was trying to garner clues from the 900 people that had self-reported Bitcoin capital gains. That’s right- from 2013 to 2015, nearly a thousand god-fearing Americans had the saintly humility to self-report their Bitcoin earnings to the feds, and it took three years of analysis for those feds to deduce that there might be more out there going unreported. 

Kudos, by the way, to those 900 honorable people who attempted to watch out for the watchmen while the watchmen weren’t even watching.

In these years since, the spectrum of cryptocurrencies has exploded and the applications of game currencies has become strangely homogenized.  Convertible game currencies like Warcraft gold persist, but they are the exception rather than the rule. Publishers have found that stifling a cross-player economy gives them a better control over the experience and far less accountability for what is done with that money.  Fortnite follows this modern standard; real currency is an aggressively-optimized one-way flow from player to publisher, with no convertible gains to tax. The IRS has long since missed the boat on game currencies.

Why, then, did they so recently and so awkwardly collide with cryptocurrencies in the revenue service’s jumbled mind?  This, my friend, is the beginning of the Dumb Singularity: desperation and technological-illiteracy have finally boiled over, and the bureau is trying to play catch-up on the years that have passed it by.  They may have smoothed over the initial blunder, but this is indicative of their intent to move forward with a more active hand, and the broad use the phrase “virtual currency” means that more blunders lie ahead. 

The GAO excoriated them for their slowness, vagueness, and all-around wishy-washiness in these regards, but to some extent it was not the IRS’s fault.  The organization has struggled under budget cuts and a dangerous lack of new blood, and yes, you may read that as younger-and-more-savvy blood. It was that same old blood that struggled to make any headway with their internal Virtual Currency Issues Team in 2013 and still wasn’t seriously analyzing self-reported data from major crypto exchanges even into 2016.  Some gentle flame finally reached their backsides sometime after, because by 2018 they were beginning to proactively reach out to users with obvious crypto gains and attempting to secure accurate reporting.

Now, with the end of tax year 2019 upon us, they are finally facing the ontological conundrum at the center of the Dumb Singularity: What is the Enforceable Definition of “Virtual Currency?”  What will distinguish between play money and dangerous money? While they dragged their feet comprehending the question, the answers have gotten only more muddled as technology blazed trails forward with no policy guidance.  This year, game currencies are completely surpassing retail purchases as the primary source of publisher revenue and most of them aren’t convertible or taxable; most, but not all.  The IRS’s complacency left it with a massive ecosystem to sift through and a lack of reliable, literate talent to do it.  If their random grab at the most obvious game currencies they could think of was any indication, there will be more broad and clumsy strokes before there are any real answers. 

The IRS has the unenviable task of writing a perfect definition in a language it can’t seem to speak, all because they never got around the asking the question that I accidentally stumbled on twenty years ago. 

When my 13-year-old self spent 10 bucks on eBay for a wealth of obviously-hacked Phantasy Star Online loot, I wondered: what laws can actually apply to the man who Game-Genies’ his paychecks?