Cross-chain Portability Without Tax Implications

Cross-chain Portability Without Tax Implications

May 29, 2018

Set to be issued on June 18, Metronome does not promise the best privacy or scalability, nor does it try to be “digital gold”. Instead, it is a single-use crypto currency that has been built so that to serve the needs of individual owners over a long period of time. The result is a non-mineable currency that will have a reliable supply and can be easily moved onto a different blockchain without tax implications.

Moving Metronome across blockchains will most likely not be a taxable event.

All the top cryptocurrencies by marketshare have their pros and cons. Forks and new technology projects are created to address problems but are usually just makeshift solutions. Metronome is what a cryptocurrency would look like if engineers had a clean white board. In an interview, Metronome’s chief designer Jeff Garzik asked, “With a clean sheet of paper and take all of the lessons we have learned over the past 8 or so years with Bitcoin, Ethereum and other currencies, what would it look like?”

The answer is Metronome. An in-depth report published in December 2017 and the 2018 video below both describe how Metronome works, but for the latest details about the project please see Metronome’s website. Here is a quick recap:

  • Self-governance: Metronome is managed by a series of immutable smart contracts that cannot be altered. This eliminates the possibility of fractious forks and disagreement among a project’s governing body. See our previous article about how Metronome’s approach to blockchain governance places users in the driver’s seat. Metronome will not face risks associated with a founder like Vitalik Buterin having too much influence, nor will it be controlled by a corporate entity like Ripple. Even projects like governing foundations have leaders that exert influence on the project’s direction by paying developer bounties.
  • Time-based Mintage: The initial supply auction will be conducted without a presale, therefore not benefiting insiders. Furthermore, there won’t be cat-and-mouse among miners competing to outsmart the latest approach to proof-of-work or proof-of-stake. New coins will be created and auctioned every week, with inflation capped at 2 percent a year. This approach means holders of Metronome coin are encouraged to use instead of hoard it like Bitcoin. Metronome’s issuance structure is particularly appealing to financial institutions.
  • Portability: Metronome rides on top of other blockchains rather than existing in its own isolated network. Metronome currently operates on the the Ethereum blockchain, but once final testing is completed, it will also run on Rootstock on Bitcoin, Ethereum Classic, Qtum and many other blockchains.

Metronome’s Portability Is Better Than Competitors’ Approach

People are afraid of investing in a cryptocurrency and then being locked into using its underlying technology. This is the reason Metronome’s portability may be the most exciting characteristic of the new currency. As Vinny Lingham, Civic’s CEO and a Metronome advisor wrote:

“A cross-chain cryptocurrency means that an owner no longer has to be tied down to one set of governance norms or a set of underlying protocols. So, for example, if you don’t like Ethereum’s move from proof-of-work to proof-of-stake (aka Casper), you will be able to move your Metronome from ETH to ETC, without having to cash anything out for that transfer… Metronome’s existence as a set of contracts across one or more blockchains is equally notable. As new chain support is developed (or even as new contracts on the same chain), the choice to move one’s Metronome to a different set of contracts rests solely on the owner.”

Whenever Metronome is moved to a new blockchain, it takes on many of the same characteristics. Thus, Metronome can exhibit the same privacy or scalability attributes of a coin that claims to superior in that area. In other word’s Metronome is like the Marvel character Rogue from the X-Men, who has the power to absorb another mutant’s powers and make them her own.

Unlike some of the other interoperability attempts and technology, Metronome does not use a dedicated blockchain. It is a set of four smart contracts, on one or more blockchain, informing each other on current global supply, minting new Metronome, and operating the autonomous converter contract.

Cross-chain blockchain swaps have received a lot of attention and potentially address interoperability. Cosmos, Aion, and Polkadot plan to use smart bridges to enable the swapping of coins across blockchains. However, networks have not launched yet and are still immature. Decred also enables portability, but it utilizes consensus voting and proof-of-activity, neither of which are required with Metronome. Overall, it looks like 2018 will not be the year of the cross-blockchain swap.

Although atomic swaps are often promoted as a way to avoid crypto lock-in, Metronome is different. Earlier this year, Garzik explained, “Metronome is the opposite of a swap:  There is no asset exchange, thus no exchange rate difference, thus no exchange rate risk or volatility risk. If you swap BTC/ETH, then you risk BTC price changing or ETH price changing…volatility risk + exchange rate risk. With Metronome, the MET asset moves to a new blockchain, but keeps the same asset (and same asset price).” He went on to provide this analogy:

  • Metronome is like a gold bar. Moving Metronome from blockchain ETH to blockchain ETC is like moving a gold bar from one warehouse to another warehouse. It’s still gold, just different warehouse.
  • A swap is like exchanging a gold bar for a silver bar, with guards watching the exchange to be sure it is safe and honest.

Swaps require oracles, expose an owner to volatility, and are taxable events. In other words, there is potential tax every time an asset is exchanged for another. Changes in the US tax law make it more likely that coins that avoid centralize exchanges qualify for a like-kind exception based on a Section 1031 deferral. The updated law means that exchanges of artwork, collectibles and intangible property now face capital gains taxes. See Tax Treatment of Cryptocurrency Transactions by KROST Certified Public Accountants & Consultants. As always, Strategic Coin articles should not be construed as providing legal or tax advice.

Metronome vs. the Field

The graphic below compares leading cryptocurrencies with how Metronome addresses nine different areas of concern.

“Comparison of Important Attributes Between Today’s Cryptocurrencies: a look at Bitcoin, Litecoin, Ethereum, XRP (Ripple), Zcash and Metronome. Source: Metronome Owner’s Manual.
Disclosure: Strategic Coin is strategic advisor to Metronome.