Outside Economics

Understanding Bitcoin

Posted by Wendell Brock, MBA, ChFC on Thu, Jun 26, 2014

Bitcoin is a payment system introduced as open-source software in 2009 by developer Satoshi Nakamoto. It is the first decentralized digital currency. Bitcoins are digital coins that can be sent through the internet.Bitcoin

The payments in the system are recorded in a public ledger using its own unit of account, which is also called bitcoin. Payments work peer-to-peer without going through a bank, a clearinghouse, a central repository or single administrator. This has led the US Treasury to call bitcoin a decentralized virtual currency. Although its status as a currency is disputed, media reports often refer to bitcoin as a cryptocurrency or digital currency.

Bitcoin promotes a number of advantages to it's use. Namely, the lack of a middleman via a bank or clearinghouse means lower fees. Bitcoin can be used throughout the world, in virtually every country. A bitcoin account can never be frozen. There are no prerequisites for using bitcoin and there are no arbitrary limits.

There are several currency exchanges that exist where people can buy bitcoins for dollars, Euros, etc. They can also be earned by what is termed mining. In mining, the bitcoins are created as a reward for the payment processing work associated with bitcoin in which miners verify and record payments into the public ledger. Besides mining, bitcoins can be obtained in exchange for products and services.

Bitcoins are stored in a digital wallet that can be accessed through a computer or mobile device. Sending bitcoins is as easy as sending an email. About 1,000 brick and mortar businesses were willing to accept payment in bitcoins as of November 2013 in addition to more than 35,000 online merchants.

The biggest problem with bitcoin seems to be in it's volatility. The price of bitcoins has gone through various cycles of appreciation and depreciation referred to by some as bubbles and busts. In 2011, the value of one bitcoin rapidly rose from about US$0.30 to US$32 before returning to US$2.

In the latter half of 2012 and during the 2012-2013 Cypriot Financial Crisis, the bitcoin price began to rise, reaching a peak of US$266 on 10 April 2013, before crashing to around US$50. As the people of Greece began to see their financial markets collapse, they sought out alternative ways to preserve their wealth and bitcoin was seen as a viable option.

At the end of 2013, the cost of one bitcoin rose to the all-round peak of US$1135, but fell to the price of US$693 three days later. In 2014 the price fell sharply, and as of April remained depressed at little more than half that of 2013.

Growth of the bitcoin supply is predefined by the bitcoin protocol. Currently there are over twelve million bitcoins in circulation with an approximate creation rate of 25 every ten minutes. The total supply is capped at an arbitrary limit of 21 million, and every four years the creation rate is halved. This means new bitcoins will continue to be released for more than a hundred years.

Bitcoin opens up a whole new platform for innovation. It provides access for everyone to a global market. Businesses have an advantage with using bitcoin as it minimizes transaction fees, there is no cost to start accepting them, it is easy to set up, and they get additional business from the bitcoin economy.

Bitcoin is an interesting currency, worth investigating. There are many pro's and con's to this as it is making it's way into a more prominent role in the financial world. There have been many innovations in many fields for many years. But innovations in the monetary system are long over-due. Perhaps bitcoin is the new competition that will prompt the Federal Reserve System and other central banks to operate sound policies.

Topics: Bitcoin, digital coins

Rising Interest Rates...

Posted by Wendell Brock, MBA, ChFC on Fri, Jun 20, 2014

In May, consumer prices posted their sharpest increase in 15 months as inflation continued a recent acceleration from unusually low levels. According to the Labor Department, the consumer price index jumped 0.4% after rising 0.3% in April. Economists had expected a 0.2% increase. Over the past 12 months, prices have increased 2.1%. Core inflation, which excludes the volatile food and energy categories, was up 0.3% last month the most since August 2011. And housing starts fell 6.5% in May.

Rising Interest RatesThe rise in prices was broad-based, with energy, food, housing, apparel and other costs among those increasing. Energy costs surged, with gasoline prices rising 0.7% and electricity costs increasing 2.3%. Food costs jumped 0.5%, the largest increase since August 2011, as meat, poultry fish and eggs rose 1.4% and fruits and vegetables rose 1.1%. Those categories have been rising for months, in part because of a drought in California, the huge loss of cattle herds from an early blizzard in the upper Midwest last fall, and a virus in the pork population.

Prices for goods other than food and energy also were up. Airline fares jumped 5.8%, the largest increase in 15 years. Apparel prices and housing costs both rose 0.3%. And an index of medical care costs increased 0.3% with prescription drug prices expanding by 0.7%. Last week, the Labor Dept. said that wholesale prices fell in May for the first time in three months.

The recent pick-up in consumer prices is generally considered good news for the economy because annual inflation was well below the Federal Reserve's 2% target last year. Low inflation reflects a weak economy and can lead to deflation, or falling wages and prices, which often foreshadows recession.

The unusually sharp rise in inflation last month could help prompt the Fed to begin to raise interest rates earlier in 2015 than expected or to increase rates more rapidly, especially if significant price increases continue. "The chances that (the Fed) will raise interest rates before the middle of next year are increasing," economist Paul Dales of Capital Economics said in a research note this month.

In planning for increasing interest rates, typically a person would invest in short-term instruments, these will have the lowest interest rates and least chance of principal loss. As they renew, they will renew at a higher rate. It is not a bad thing to look at other investments as well, but the whole portfolio should be structured in a way that it is well balanced, diversified, and has depth and breadth. Mutual funds and ETF’s can give you the depth, while a wide variety of those funds can provide the breadth.

Laddering bonds (bonds are purchased based on their duration over a period of time, for example purchasing each month a bond that expires in three years) is another strategy that when implemented can provide increasing rates – but again looking at short-term durations, typically nothing over three years, with something maturing monthly or quarterly.

Any of these strategic solutions also depends on how fast rates rise. If rates rise fast in a short period of time it can be difficult to manage, while a slow steady increase in rates is more manageable. However remember that rates at 25 basis points, which is a very low rate, increases to 50 basis points, still a very low rate; that is a 100 percent increase in the rate and is a very big move.

The years of low interest rates seem to be coming to an end. As investors, what does this mean for you? If you are close to retiring, this may influence you to re-think some of your investments. Bonds, equities, stock market, alternatives? What is the best route for your money?

Topics: CPI, Consumer Prices, Interest Rates, Core Inflation

Wellness Programs

Posted by Wendell Brock, MBA, ChFC on Fri, Jun 13, 2014

Outcome-based wellness programs are more popular than ever. Employers want to reward employees who take personal responsibility for their health. The obvious goal of the outcome-based wellness incentive approach for employers is to reduce medical costs. In addition to this, employers lose money when their employees are sick or injured, and other employees have to make up for their absence. It is in an employers best interest to encourage healthy behavior from their employees.

Healthy Fit Employees 3Recently, requirements for wellness programs were issued as a part of the Affordable Care Act (ACA). The main goal of these wellness regulations is to make sure employers do not use wellness programs as a way to discriminate. The regulations state that there are two types of wellness programs:  Participatory and Health Contingent.

A participatory wellness program functions in a way that the reward (or penalty) is based on participation only – so the average employee does not have to meet a health standard (e.g. blood pressure below a certain level).

A Health Contingent wellness program can be activity only or outcome-based. With the activity only option, there is a requirement to do some activity related to a health standard but the user is not required to meet a specific health standard. An example of this might be to require an employee to do exercise or follow a diet that can help reduce blood cholesterol.

For the outcome-based option, the user must attain or maintain a health standard such as body mass index, cholesterol, blood pressure, etc. or meet an alternative standard to qualify for an exemption.

Here are several elements to consider if a company offers a Health Contingent program: If an outcome-based program is used, one element is that a “reasonably designed program” must be provided to help the employee change their numbers and achieve the reward. These guidelines specify that the employer cannot require the employee to pay for this effort and the requirements must be practical. 

The ACA regulations state that there must be alternative ways to earn the reward or to have the standard waived altogether. A possible statement to help accomplish this might be: “Our goal is to help you be healthy by providing a wellness program that includes rewards! These rewards are available to all employees. If you think you might be unable to complete tasks required to earn a reward in the wellness program, contact us at (insert contact info) and we will work with you to modify the tasks so you can still qualify for the reward.” This statement could be included in your open enrollment materials. This statement in other words negates the “standard” because the programs standards can be modified for anyone who thinks they are special.

The requirements also counsel employers to use a Health Risk Appraisal that is HIPPA and GINA compliant. “Do not base incentives, health enrollment, eligibility, or benefits on genetic or family medical history information.”

Wellness programs that are just getting started should be a “participatory” wellness program for at least the first year. This means that employees should not be required to participate or to meet a health standard in order to qualify for benefits, etc. In other words, rewards should be based on participation in the wellness program and not on health screening data, personal medical history, or addictive behaviors.

The primary notion of an outcome-based incentive strategy is to offer rewards for healthy behaviors and penalties for unhealthy behaviors. But from a scientific perspective, is this approach effective? The Safeway case study is commonly cited to support the outcome-based approach because Safeway had a flat medical cost trend from 2005 to 2009 purportedly by tying employee health insurance premiums to outcome-based wellness incentives. However, Safeway's program began in 2008, making it an unlikely cause of the flat cost-trend between 2005 and 2009. The truth is, the evidence is fairly limited at this point.

Too many outcome-based strategies simply raise standards that must be met by employees to qualify for preferred rates without providing behavioral tools and skills to help employees adopt and maintain healthy behaviors. That is a little like requiring an employee to produce a business report without providing a desk or a computer. When an outcome-based strategy is paired with a well-designed wellness program that creates impact – you have a winning combination!

The key for employers then is to create a healthy culture by providing tools and skills to help employees change. This can be done in part by providing incentives. There are essentially two ways to provide incentives and both have one primary advantage and disadvantage.

Strategy number one is to reduce the employee portion of the premium every month, which is a good thing now but it creates complexity for HR, payroll, and/or benefits. Strategy number two is to reduce employee portion of co-pays and deductibles along the way (good thing later). This strategy comes with the advantage of administrative simplicity that HR, payroll, and benefits managers will love. Other incentive ideas include a discount or rebate of a premium or contribution; a waiver of all or part of a deductible, co-pay, or coinsurance; the absence of a surcharge; or the value of a benefit that would otherwise not be provided.

If the goal is to reduce medical costs, employee must make healthy life choices. The outcome-based wellness strategy is promising because it provides tools and skills to help create a culture of health coupled with incentives that encourage employees to change.

These programs are more complex and maybe difficult to implement due to the over-kill of ACA regulations. With a little paperwork and tracking; this type of a program can be instituted in small businesses as well, which can help the owners too, by providing extra benefits they can qualify for, thus making a fitness membership tax deductible. 

Topics: ACA, Affordable Care Act, Wellness Programs

More Problems: Foreign Account Tax Compliance Act (FATCA)

Posted by Wendell Brock, MBA, ChFC on Thu, Jun 05, 2014

A follow up from last week’s article about FBAR, the next hammer to drop is: The Foreign Account Tax Compliance Act, better known as FATCA, was passed in 2010 as part of the HIRE act. Which was supposed to start on July 1, 2014, but last week was postponed a second time until January 1, 2016, foreign financial institutions (FFI) will be required by the US government to report information regarding accounts of all US citizens – living in the US and abroad, US “persons”, green card holders and individuals holding certain US investments – to the IRS.

While the law’s full implementation mkeep calm and fatca on.jpegay be postponed, it does not mean that you do not need to be compliant with the law. The postponed implementation is most likely on the part of the FFI’s than on the American citizens complying with the reporting requirements of the law. So you need to report your foreign assets.

(A United States “person” includes U.S. citizens; U.S. residents; entities, including but not limited to, corporations, partnerships, or limited liability companies, created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.)

This law requires foreign financial institutions such as local banks, stock brokers, hedge funds, insurance companies, trusts, etc., to report directly to the IRS all their clients who are US “persons.” FFIs that do not become compliant will be subject to a 30% withholding on their US investments when they are cashed in, which will directly impact FFI clients with US holdings.

FATCA requires financial institutions to use enhanced due diligence procedures to identify US persons who have invested in either non-US financial accounts or non-US entities. The intent behind FATCA is to keep US persons from hiding income and assets overseas. The key word here is “hiding”. Its O.K. to have assets over seas and follow that jurisdictions tax codes, but it’s not O.K. to “hide” those assets from the IRS.

The ability to align all key stakeholders, including operations, technology, risk, legal, and tax, are critical to successfully complying with FATCA. Both financial institutions and non-financial multinational corporations should consider steps such as:

  • Analyzing legal entity structures and registering FFIs that are required to register
  • Conducting gap analysis to identify systems and processes that must be updated
  • Develop an implementation plan for the changes required for FATCA compliance
  • Performing due diligence on preexisting account holders and re-mediate non-compliant accounts
  • Evaluating your controls related to FATCA compliance

FATCA also requires US citizens who have foreign financial assets in excess of $50,000 to report those assets every year on a new Form 8938 (FBAR) and may be filed with the 1040 tax return. The FBAR was discussed in more detail in a previous article.

This law is in essence making all the FFI’s in the world, similar to the US Banks, unemployed, unpaid IRS agents reporting on US citizens and their companies that may do business with their FFI.

Many Americans residing overseas are reporting banking lock-out. A number of foreign financial institutions have simply chosen to eliminate the accounts of US citizens and their US companies in order to minimize their exposure to FATCA reporting requirements, withholding fees and potential penalties. This is causing a lot of problems for US citizens and their companies doing business overseas.

The US Treasury/IRS has mandated the FFI’s use their Intergovernmental Agreements (IGAs); many countries have signed on and will facilitate the transfer of information. The IGA agreements include a non-discriminatory clause that is aimed at helping alleviate issues of lock-out of banking services to US citizens and US persons. In other words these FFI’s must be compliant or they will be placed on the IRS watch list and the FFI’s dollar assets could be impacted.

Many are calling this the “end of the dollar law” as many countries around the globe are looking to find alternatives to the dollar as the reserve currency to use when trading with their neighbor countries. This is one of the most overreaching laws the US Government has ever passed. In the end it appears to be a law that is doing more damage than good. As with all laws we never know the full ramifications until it is completely implemented, but this one was an easy one to spot that it would be bad, very bad for Americans the world over.

Topics: IRS, FBAR, FATCA, HIRE Act, Foreign Financial Institutions, US Citizens


Wendell W. Brock, MBA, ChFC

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