Gov. Jared Polis wants you to be able to pay your taxes in cryptocurrency, but how does it all work?

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Hart Van Denburg/CPR News
Cryptocurrency developer Mitchell Valentine on South Broadway in Denver, April 1, 2022.

On a recent Wednesday evening, about 50 people who buy, sell, market and create cryptocurrency gathered at a brewery in Downtown Denver to network.

Colorado is a welcoming place for these market enthusiasts. Gov. Jared Polis wants the state to become the first to let residents use cryptocurrency to pay taxes. He signaled a hands-off approach to regulation of it when he signed a law in 2019 that exempts so-called digital tokens from securities laws that govern things like stocks and bonds.

Still, the technology remains somewhat intimidating to most Coloradans. So, what is cryptocurrency? The people at the crypto event had a lot of different answers.

I would say it is a digital ledger. That’s the way it originally started …. It’s a ledger where you can see absolutely every single transaction. And then you have … other chains, like Ethereum, that came on where you can actually bring in a smart contract .… So it’s like a programmable smart contract,” said Orsain Larrahondo, who works in IT security and trades crypto on the side. 

Maxwell Saul is a molecular biologist. He’s not much of a trader, but said he is drawn to the underlying technology.  

“Essentially what it boils down to is the concept of verifiable digital ownership, which I think is actually a much bigger revolution than a lot of people might realize,” he said.

Crypto 101, and why Polis wants in

If you found those explanations a little confusing, you’re not alone. 

“It’s hard because … it’s everything you don’t know about computers and everything you don’t know about math rolled into one,” said Chris Wallworth, a software engineer.

Basically, cryptocurrency is virtual money. But unlike the dollar, or the euro, or the peso, or the pound, there’s no government standing behind it, securing its value. Instead, there’s people all around the world minting coins on computer processors. The most well-known cryptocurrency is Bitcoin, but there are thousands of different kinds.

Proponents say the lack of government intervention is a big part of what makes cryptocurrency appealing. But that view has yet to catch on in the mainstream.

One of the biggest differences between cryptocurrency and regular currency is that you can’t really use crypto to buy most things. Since there’s no central authority behind it, and it’s completely unregulated, the value hinges entirely on what you can sell it for. That makes it very hard to predict what it’s worth, hence the reason most businesses won’t take it.

In fact, the state of Colorado doesn’t really want to take it either, despite Polis saying people will be able to use cryptocurrency to pay taxes by summer. The state plans to work with a third party to convert the crypto into dollars before it goes into the state’s treasury.

“It's exciting, but I don't [want to] make it sound like more than it is because we still budget and spend money in dollars. That's still where the world is. That’s where government is,” Polis said in February while speaking to a crowd at the EHTDenver convention, an annual meeting for Ethereum, the second-largest cryptocurrency behind Bitcoin.  

The details of the tax plan are still hazy, but the message is clear: Crypto is the future, and Polis wants Colorado on board.

Fraud and environmental concerns are common points of pushback

One thing that’s certain is that some people have made a lot of money speculating in the crypto market. Of course, some people have lost a lot of money, too.

People in the industry will tell you that fraud is a big problem.

“A lot of exchanges try to protect people from the scams, but … throughout the last five or six years, you can look at the number of major projects, and it's a very large percentage of people that got scammed, [their investments] went to zero, and founders walked away with all of their money ... They’re not gonna get rich quick. It’s the Wild West,” said Steven Pattison, a consultant in the cryptocurrency space.

There are also environmental concerns, because the powerful processors used to create this stuff use a lot of electricity.

Polis didn’t agree to an interview with CPR News, but a spokesperson for the governor said Polis is proud to put Colorado at the forefront of digital innovation, and that those mining crypto in Colorado are encouraged to use renewable energy.

Crypto mining uses huge amounts of energy to run the math problems needed to decrypt transactions on what’s called the blockchain, the running ledger of who buys what cryptocurrency and when.

Hart Van Denburg/CPR News
Cryptocurrency developer Mitchell Valentine on South Broadway in Denver, April 1, 2022.

But believers in cryptocurrency say it's worth the risk

The true believers swear that behind the impenetrable jargon and the more unsavory characters in the crypto universe is a technology with the power to change the world.

They point to the blockchain as a way to democratize the financial system. They think crypto can be part of a kind of decentralized utopia, where people take back control of the internet — and their money — from giant corporations and the government.

But this part is really hard to explain.

“This is like climbing a fourteener,” said Mitchell Valentine, a computer programmer and developer in Denver. “There's a lot to it. I was trying to explain this to my wife last night, too. And she was asking me like, how do you explain all these … things? And it definitely turns into sort of like a swirling ‘Which trail do you want to go down?’”

Valentine won a prize for his blockchain project at that conference Polis was speaking at. To really simplify his idea, Valentine’s application allows people to connect things like digital concert tickets with their real-world identity while protecting their privacy.

Valentine’s also been lucky with crypto in a way most people can understand. He sold a bunch of it just before the value of cryptocurrencies tanked last year.  

“I bought a pretty cool sports car with it. And I bought a boat with my buddy. And then the price crashed … lost about two-thirds of its value basically a month after I did all that,” Valentine said.

Since then, values for some cryptocurrencies have started to climb again. But Valentine says he’s more interested in building the underlying technology, as opposed to looking to make another big profit in the space.

“That was just luck,” he said.