Military Personnel: Cryptocurrency Investment Opportunities And Challenges

Cryptocurrency is a digital form of money that is decentralised and controlled by unrelated and often anonymous individuals worldwide. It is a high-risk investment due to its volatile nature. Military members interested in investing in cryptocurrency must consider the security clearance and financial risks associated with it. While there is no explicit requirement for military members to report cryptocurrency holdings, being honest during the security clearance process is crucial. The Department of Defense (DoD) and the Director of National Intelligence (DNI) are working on providing clear guidance on this matter.

Military members don't need to report cryptocurrency holdings when applying for security clearance

Military members are not required to report their cryptocurrency holdings when applying for security clearance. However, this may change in the future when the Department of Defense (DoD) and the Director of National Intelligence (DNI) publish clear guidance. For now, the lack of reporting requirements does not mean that service members can freely invest in cryptocurrencies without considering the potential impact on their security clearance.

Firstly, it's important to understand that the DoD can deny or revoke security clearances for various reasons, including financial missteps such as "heedless investing." While cryptocurrency can be part of a well-hedged investment strategy, it is a highly speculative and volatile asset class. Military members should exercise caution and not allocate a significant portion of their investment portfolio to cryptocurrency. Financial advisors often suggest investing no more than 5% of one's total investment portfolio in cryptocurrency.

Secondly, the purpose of a security clearance is to determine whether an individual can be trusted with sensitive national security information. Background investigators consider various factors, including financial issues, criminal behaviour, and foreign influence, which could indicate a lack of trustworthiness. While holding cryptocurrency itself may not be a direct issue, it could indirectly impact an individual's security clearance if it leads to financial problems or is associated with criminal or foreign entities.

Thirdly, the Internal Revenue Service (IRS) in the United States treats cryptocurrency as property rather than currency for tax purposes. Therefore, military members must declare any capital gains from cryptocurrency investments on their tax returns. Failing to comply with tax laws can jeopardize one's security clearance, as it indicates unreliability and an inability to follow rules and regulations.

In conclusion, while military members do not need to report cryptocurrency holdings when applying for security clearance, they should carefully consider the potential risks associated with investing in cryptocurrency. It is essential to practice caution, diversify one's investment portfolio, and comply with all relevant tax laws to minimize any negative impact on their security clearance.

Security clearance may be affected by crypto holdings if they cause financial problems

As of late 2022, military members are not required to report their cryptocurrency holdings when applying for security clearance. However, if their investments in cryptocurrency are held in a fund that is entirely composed of holdings in cryptocurrency backed, hosted, or managed by a foreign state, they must disclose this information.

Financial issues are consistently the top reason for security clearance denials and revocations. If military members face major financial issues, it may call into question their reliability and trustworthiness. Risky investments, such as borrowing money to invest in cryptocurrency, can lead to significant debt, which could potentially make them susceptible to blackmail or other forms of manipulation. Therefore, while not directly impacting security clearance, financial problems stemming from cryptocurrency investments could indirectly affect a military member's security clearance.

To mitigate these risks, it is recommended that military members diversify their investments and maintain a rainy-day fund to protect against market crashes, exchange implosions, or unexpected life events. By doing so, they can reduce the potential impact of financial problems on their security clearance.

Crypto holdings may be viewed as a security risk due to their use in criminal activity

The anonymous nature of cryptocurrency also poses security risks. Crypto wallet addresses are long strings of alphanumeric characters, making it easy to transfer assets to the wrong party. This, combined with the instant transferability of cryptocurrency, makes investors vulnerable to criminals. Billions of dollars have been lost to faceless crypto scams, with fraud, increasing regulation, and environmental concerns being major risks facing crypto.

The volatility of cryptocurrency also makes it vulnerable to market manipulation. From November 7 to November 14, 2023, Bitcoin saw its price swing from a low of $34,620 to a high of $37,970, then back to $36,500. This extreme volatility, combined with the anonymous and irreversible nature of transactions, makes cryptocurrency an attractive vehicle for money laundering and the financing of terrorism.

While the exact percentage of crypto transactions related to criminal activity is unknown, it is estimated to be very small. According to data from crypto forensics firm Chainalysis, the highest volume of cryptocurrency transactions related to illegal activities occurred in 2022, accounting for just 0.24% of all crypto transactions that year. However, the decentralised and unregulated nature of cryptocurrency makes it difficult to obtain accurate data on its use in criminal activity.

In conclusion, while cryptocurrency has many legitimate uses and can be a valuable investment for some individuals, it also poses security risks due to its anonymous, irreversible, and volatile nature. The lack of oversight and the ease of transactions make it attractive to criminals, including scammers and terrorists. Therefore, individuals considering investing in cryptocurrency should carefully weigh the risks and benefits and only invest what they can afford to lose.

Foreign influence is a security clearance concern, and crypto transactions are largely untraceable

Foreign influence is a significant concern in security clearance evaluations, as it can compromise an individual's allegiance to their nation. This includes personal relationships, financial interests, or other ties that may impact their loyalty and reliability.

Cryptocurrency transactions, particularly those involving privacy coins, are largely untraceable, which raises security clearance concerns. For example, a foreign government could use cryptocurrencies to send regular transfers to a military member in exchange for classified information. As such, investigators will want to know the source of an individual's cryptocurrency holdings to ensure they are not subject to foreign influence or coercion.

While military members do not currently need to report their cryptocurrency holdings, certain federal employees and contractors do, indicating that service members will likely need to in the future. The Department of Defense (DoD) and the Director of National Intelligence (DNI) are working on guidance in this area, but no firm policies exist yet.

Therefore, military members must exercise caution when investing in cryptocurrency to maintain their security clearance. Being honest during the security clearance process is crucial, and individuals should disclose any cryptocurrency holdings and explain their source.

Steps to invest in cryptocurrency: choose an exchange, connect your bank, submit a purchase order, and transfer to a wallet

Military members need to be aware of the changing rules around reporting their crypto holdings. As of late 2022, investors were required to report crypto holdings if the crypto was purchased from foreign exchanges or held in foreign-backed wallets, but not if the holdings were backed by U.S. companies.

If you are in the military and want to invest in cryptocurrency, here are the steps you can follow:

Choose an Exchange

Firstly, you will need to select a cryptocurrency exchange. These are online platforms that allow you to buy, sell, and sometimes trade various types of crypto. Popular exchanges in the U.S. include Coinbase, Kraken, Gemini, and Binance. When creating an account, it is important to use two-factor authentication and a strong, unique password.

Connect Your Bank

The next step is to connect your bank account or provide other payment information, such as a debit or credit card. Most exchanges allow you to link your bank account directly. It is worth noting that credit cards are not always accepted as a payment method due to the associated processing fees and the risk of fraud.

Submit a Purchase Order

Once your payment method is set up, you can place an order for the cryptocurrency of your choice. Different exchanges offer various order types and ways to invest. Almost all crypto exchanges offer market and limit orders, and some also provide stop-loss orders.

Transfer to a Wallet (Optional)

After purchasing your crypto, you have the option to transfer it to a dedicated cryptocurrency wallet. There are different types of wallets, such as hot wallets (online wallets) and cold wallets (offline wallets). Cold wallets are generally considered more secure, but hot wallets are more convenient for active trading.

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