Cryptoassets

Cryptoassets have been experiencing some excitement for the past few years and are becoming more and more democratized. It is important to understand the various tools that blockchain offers in order to better understand cryptos :

 

The Blockchain

 

In order to understand the mechanism of crypto assets it is necessary to look at the blockchain. It is a technology consisting of a distributed ledger that records and authenticates transactions between users. 

The blockchain is a collection of blocks and each block consists of three elements:

    - 1st element: The data stored in the block;

   - 2nd element: The hash of the relevant block; this can be defined as a unique digital fingerprint that is generated as soon as the block is created and changes if the block is modified ;

    - 3rd element: The previous hash; this is the hash of the previous block.

 

It is the identification hash of the previous block, which prevents the addition of a block in the middle of the chain, it creates a link between the blocks. Indeed, if a block is modified, its hash will also be modified and will no longer correspond to the "previous hash" found in the next block. This indicates an anomaly.

 

The characteristic element of the blockchain is that it is independent of any trusted third party, if today our daily operations are authenticated by a bank, the blockchain technology is not attached to a large banking institution, it is autonomous and unfalsifiable.

 

 

Proof of work or proof of stake?

 

Proof of work (PoW) has quickly become the most common validation, and Bitcoin was the first crypto to use it to validate its blockchain. If a blockchain is independent of any trusted third party, it is necessary that each block is certified. The PoW allows the authentication of blocks thanks to "miners" who will validate a block by solving mathematical problems and by bringing a significant computing power to the blockchain. These miners, for their certification work, will then be rewarded. The problem of PoW is that at the beginning of cryptos a simple laptop could be enough to validate the blocks, but the development of the technology has forced miners to have a computing power always more important to remain competitive. This computing power can only be achieved today with the help of overdeveloped computers that are extremely energy intensive.

The Proof of Stake (PoS) is a recent mode of validation but tends to replace the PoW because it is much more ecological. Crypto holders choose to escrow a certain number of their crypto-currencies in order to be chosen to validate a block. Once the choice is made, participants will vote to validate or not the block. If a "validator" decides to cheat, a significant portion of the "staker" or escrowed bitcoins will be destroyed. A simple laptop is enough for the operation, which competes strongly with PoW.

Ethereum, a blockchain that offers multiple services, has decided to transition during 2022 to Proof of Stake. The blockchain is developing several phases to secure its network, including the practical application of Ether escrow to validate its blocks.

 

Cryptocurrencies

 

Crypto-currencies have rapidly gained traction in recent years and this asset has quickly been made accessible to individuals.

 

Reminder: crypto-currencies are currencies that are not legally traded. In order to be exchanged, these assets do not need an intermediary because the exchange is done on the blockchain.

If from the beginning a craze occurred around this digital currency and some merchants even offered payments in Bitcoin, the effusion quickly calmed down and today many actors are organizing to offer more traditional savings products, but in cryptos. Indeed, crypto Livret A savings accounts are developing or even crypto funds that can be integrated into life insurance. 

 

Stablecoins

 

Stablecoins are crypto currencies that have a weakened volatility thanks to the indexation on a fiduciary currency, like the dollar. They appeared in a mainly fiscal dimension. Indeed, the stablecoins allow to "stabilize" its cryptos without converting them into fiduciary currencies which would automatically lead to taxation.

 

Ethereum and smart contracts

 

If Ethereum is known for its cryptocurrency, its blockchain offers other services, such as smart contracts. Smart contracts are irrevocable computer programs, on a blockchain, that execute a set of instructions. This can be defined as a new way of organizing contracts. This technology could give a durable and unfalsifiable support to contracts that do not have one, such as consensual contracts. For the moment they are limited to "if" and "then" instructions and more complex contracts have not yet been tamed or cost much more. Moreover, solemn contracts that require, for example, a notarized deed, cannot yet be complied with if they are on a blockchain. However, this technology, which provides contractors with an unfalsifiable medium that is frozen in time, could greatly develop in the years to come.

 

The NFT

 

The NFT, or “non fungible tokens” can be defined as certificates of authenticity that exist thanks to smart contracts. This token attached to an asset, demonstrates that you are the true and only owner of the asset. NFTs oscillate between a speculative tool and a real revolution in property contracts. Indeed, the register that composes the NFT allows to trace the history of purchases and sales and is a real guarantee of the uniqueness of a property. Also, NFTs have given birth to a digital art market, more and more collectors are interested in digital works and use NFTs as a certificate of authenticity. If an image on the internet can be shared hundreds of times, only an NFT can prove that you are the sole owner of that work.

 

Taxation of cryptos

 

Crypto-currencies have created such a buzz that lawmakers had to react quickly. As of January 1, 2019, the first tax regime for cryptos applied, quickly supplemented by the 2022 Finance Act.

In France, the exchange of cryptos for cryptos is not a tax trigger.

For individuals: article 150 VH bis of the monetary and financial code states that individuals who invest as part of their private assets are taxed in principle at the 30% "flat tax" which is broken down into a 12.8% income tax and 17.2% social security levies. However, from 2023 onwards, individuals will be able to choose, by irrevocable and express option, to be taxed on the progressive income tax scale.

For professionals: this concerns investors who acquire cryptos on a daily basis with a view to reselling them. These gains are assimilated to industrial and commercial profits and must be declared as such. Regarding the gains from mining, they are taxed as non-commercial profits.

Diversifying your portfolio with crypto assets is a recent opportunity but one that requires special attention, your wealth manager can assist you in this search for diversification.

 

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