A revolutionary computer protocol purposed towards a decentralized payments system -Bitcoin. This revolutionary currency has been gaining popularity for years now. Still, despite its amazing features, there is a burning issue that has brought constraints to its true blossoming.
This debate has been raging for over a decade now, and it’s the issue of the legality of Bitcoin.
So stay tuned as we will be taking you on a journey around this very issue.
Before we dig deep on the legality of Bitcoin, let’s take a quick peek at what it really is.
Bitcoin is a digital currency (cryptocurrency) initially coined (excuse the pun) in 2008 and given a domain name, “Bitcoin.org,” in the same year. It was created by a group of people or just one person who used the assumed false name, Satoshi Nakamoto. It was launched in January 2009.
Bitcoin is a peer-to-peer online digital currency with no third-party facilitation, which means a user can directly share transactions with another user without needing any intermediary such as banks. On October 31, 2008, Nakamoto released a Bitcoin whitepaper, which depicted a vision of how an electronic form of money could revolutionize the current financial markets and transaction systems.
The paper proposed utilizing a decentralized ledger of transactions in batches, known as “blocks.” The blocks refer to files where transaction data is permanently stored. Furthermore, the underlying network that processed the Bitcoin transaction is called the blockchain. The purpose was to offer people secured online transactions; hence the transactions were secured by cryptographic algorithms.
Nakamoto initiated the first transaction on January 3, 2009, on something called the “genesis block” – the first block on the blockchain, which contained 50 Bitcoins. That was when Bitcoin was officially launched as the world’s first cryptocurrency.
Bitcoin’s competitive advantage comes from being the first cryptocurrency created. It has since spawned a worldwide community of millions of devoted followers who put their money into Bitcoin through investing, trading and using Bitcoin in their regular daily transactions. The rise of the principle of cryptographic money is based on a calculated idea that has inspired the advancement of thousands of competing projects. The entire cryptocurrency market has its foundation in the creation of Bitcoin.
Because of its first-to-market status, Bitcoin (BTC) remains at the peak of a very strong cryptocurrency market long after its introduction. Even though Bitcoin has lost its undisputed total dominance, it is still the biggest cryptocurrency with a market capitalization of over 4 times its nearest competitor, Ethereum, as of March 2021.
The actual current value of Bitcoin is constantly fluctuating – something it is well-known for.
Nevertheless, despite its popularity, many countries are still debating if Bitcoin is legal or not. Especially to those new to the currency, many think that Bitcoin actually isn’t. Indeed, in some countries, it isn’t legal. In some other countries, it’s completely legal. While in some other countries, it’s a bit of both (depending on the function). This brings us down to our next concern: why does such an invention with such a huge potential to revolutionize transaction systems have legal concerns?
Why Does Bitcoin Have Legal Concerns?
We all know that every fiat currency is introduced, generated, and regulated by a single entity – central banks. All over the world, central banks control the flow of currencies according to local laws, which means that no ordinary citizen can trade money without abiding by government regulations. It’s considered a crime to act otherwise.
When Bitcoin was introduced, it became an exception to the established legal process that regulates currency. Bitcoin was a currency the first of its kind in the world – not controlled by the government or central banks. Additionally, the fundamental idea of Bitcoin infers that anybody with enough computing force and sound financial acumen can make their coins by just being an active part of the network.
However, the increasing popularity and acceptance of the BTC has led law enforcement and tax authorities worldwide to understand the concept of Bitcoin and how to use it within the existing legal framework. Consequently, the legality of Bitcoin depends upon a few measures – like what you do with it, where are you located, or how old you are.
Regardless of numerous conspiracy theories doubting the utilization of Bitcoin, its decentralized nature guarantees that no one can hold you back from utilizing it. Consequently, many legal experts are being urged to understand the very nature of Bitcoin to be able to regulate it, which would, in turn, make it easier to characterize Bitcoin legally from a legislative and regulatory standpoint.
Concerns About Cryptocurrencies
Several jurisdictions have a hard time legalizing Bitcoin due to its unique, decentralized, and intangible nature. But something that is gaining popularity like a wildfire is harder to control.
While US-based traders are controlled and monitored by regulators, many offshore traders still don’t, which provides regulating bodies with an edge to classifying Bitcoin as illegal. For instance, the history of cryptographic money is filled with scams. Instances where traders were robbed and fell prey to digital currency scammers are unfortunately not uncommon occurrences.
It’s quite normal for regulators to be concerned over a monetary system that cannot be completely controlled, considering historical scams. At most, the authorities can attempt to discourage individuals from using Bitcoin through threats or cutting off access to the world World Wide Web, which isn’t practical in all reality, considering the current dependency of people and businesses on the internet.
Here are a few concerns that hold back regulating authorities to legalize Bitcoin;
· Theft and Scams: One of the most talked-about cases was the famous incident of Mt. Gox. At the start of 2014, when one of the most noticeable Bitcoin exchanges at the time filed for bankruptcy because of technology concerns and a theft that claimed 744,000 from its users’ Bitcoins. That was around six percent of the 12.4 million Bitcoins available for use at that point.
· Its Anonymous Use: Another concern regarding Bitcoin is the users can use it anonymously, which means there is no identity of the user available on record. Although every exchange is recorded in the blockchain, it is easy for clients to remain anonymous, as those records just contain the public keys and the number of funds transferred. The network’s anonymous nature increased the number of fraudulent activities as the network grew more and more popular globally.
· Use over the darkweb: The majority of these worries came to light after a dark-web market called the Silk Road came to light and caught the media’s attention. Since Bitcoins were one of the only sources of payment accepted over the dark-web, it also came to the FBI’s attention. The market was then promptly shut down, and later attempts to reincarnate the market were shut down by the authorities very quickly.
Still, law enforcement authorities remain concerned over Bitcoin’s popularity among the traders of illegal products. It is suspected that Bitcoin’s secrecy, anonymous transactions, and decentralized nature can be misused in tax evasion structures and black money markets (money laundering).
Where Is Bitcoin Legal?
Let’s look at the United States first. What is its legal status there?
Despite all these concerns about its use in the illegal trading of goods, the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has categorized Bitcoin as a decentralized virtual currency. They issued a guideline that stated that those who obtain virtual currency and use it to purchase legal goods are not breaking the law. Several websites, such as OkCupid, Overstock, and Shopify, accept cryptocurrency as a form of payment. Besides these websites, there is an increasing number of merchants across the United States where Bitcoins are accepted as a form of currency.
Besides, the authorities categorizing Bitcoin legal at several instances, the list goes on where nothing seems to be stopping Bitcoin from gaining popularity. Some of these things are;
· Investing: Investing in Bitcoin is also considered legal. The US-based exchanges are regulated and have to comply with different laws, so if you plan to buy Bitcoin, it is important to verify your ID and connect with a US bank.
· Mining: However, the users who are creating Bitcoins units intending to exchange them with a currency are considered money transmitters and may be reported to regulators.
· Business payments in Bitcoins: According to FinCEN, business accepting Bitcoins in return for legal, well-natured, and non-hazardous goods is legal. However, any business accepting Bitcoins as a form of payment is subject to tax. In this case, it is the same as accepting cash, gold, or any gift.
Bitcoins are treated as property rather than cash or liquid money. For instance, if you make a purchase using your Bitcoin, you actually traded an asset vs. the commodity or service required. The value of Bitcoin depends upon the market rate at the time of buying or selling. So any profit, or loss is subject to taxation and the pulse of the market.
In January 2020, a US House of Representatives bill was proposed to exempt taxing Bitcoin transactions, if the gain is up to $200. The bill has not been voted into law yet.
Countries Where Bitcoin Is Legal
Here is a pick of some other countries where Bitcoin is recognized as being legal.
· Australia: Australians are liable for goods and service tax when they either buy or spend a digital currency. Customers could potentially bear this tax twice: when they buy the cryptocurrency and when they’ve utilized it in return for merchandise and ventures subject to that charge.
· Bulgaria: The first European Union member to officially identify Bitcoin as a currency, rather than treating it as a property like gold or a gift.
· Canada: Bitcoin is classified as an insubstantial resource. It is regulated under the Anti-Money Laundering and Counter-Terrorist Financing laws. As a result, any cryptocurrency dealer is regulated as a money service business.
· China: People’s Bank of China (PBOC) disqualified all financial institutions from any sort of Bitcoin-related transactions in 2013. Buying and selling Bitcoins is legal in China. However, it isn’t recognized as legal tender.
· Estonia: The Estonian Ministry of Finance has decreed that there are no legitimate obstructions to utilizing Bitcoin and other comparable digital forms of money as an installment technique. Dealers should distinguish the purchaser while building up a business relationship or if the purchaser obtains more than €1,000 worth of cash a month.
· Finland: The Finnish Tax Administration chose to regard Bitcoin exchanges as private agreements comparable to contracts for distinction for tax purposes. In case you are purchasing products with Bitcoins or changing into flat currency, any increment in cost will be available, while misfortunes are not assessment deductible. Mined Bitcoins are viewed as earned income.
· France: In 2014, the French Ministry of the Economy and Finance set forth guidelines for financial institutions and users of digital currencies. The guidelines required Bitcoin wholesalers to restrict the level of anonymity by recognizing and confirming their clients. A threshold of €5,000 was proposed on margin tax to permit the populace to “try, invest and develop business with Bitcoin” before being taxed.
· Germany: Germany recognizes Bitcoin as private money, which means users can use Bitcoin without any government interference, and authorities can tax companies’ profits using cryptocurrency.
· Israel: As of 2017, the Israel tax authorities view Bitcoin as a taxable asset rather than currency or a financial security. Each time a Bitcoin is sold per this arrangement, the seller needs to pay capital gains tax amounting to 25%. Miners and Traders are treated as businesses, which makes them subject to corporate income tax and 17% VAT.
· Italy: Italy doesn’t have any regulations in place to prevent use by private individuals.
· Japan: Japan recognizes Bitcoin as a legal form of payment. In 2017, and Japanese financial authorities issued cryptocurrency exchange licenses.
· Mexico: Mexico’s parliament recognizes Bitcoin as a legal virtual asset through its Fintech law.
· Sweden: The Swedish Financial Supervisory Authority has publicly declared digital currencies like Bitcoin a legal form of payment.
· United Kingdom: Bitcoin is unregulated but is legal in the United Kingdom. Suppliers of any goods and services which involve the exchange of Bitcoin for fiat or another cryptocurrency are subject to VAT. Also, any profits or losses made as a result of cryptocurrency investing and trading are subject to capital gains tax.
However, there are several countries around the world where Bitcoin is illegal to some extent. Some in more aspects than others.
There are only a few countries where Bitcoin is illegal in every shape and form. They include Algeria, Bolivia, Egypt, Morocco, and Nepal.
Will Bitcoin Be Legal In The Future?
There is much speculation about the future of Bitcoin.
Some limitations that keep cryptographic forms of currency from gaining widespread popularity are the chances that a person’s digital currency fortune could easily be destroyed by a PC crash or that a virtual vault might be unprotected by a programmer. These issues may resolve with time as technology advances. What will be harder to overcome is the essential oddity that besets digital forms of money – the more well-known they become, the more guideline and government investigations they are probably going to attract, which happens to erode the basic reason for their existence.
The cryptocurrency may be rising in use as a part of the world’s financial system, but it still has to gain the legal authorities’ confidence. It has to provide security and safeguard and preserve user anonymity. If all these areas are satisfied, we may see new avenues open for the world’s biggest cryptocurrency. However, looking at Bitcoin’s current situation, there is little doubt about Bitcoin’s future success. But how successful it can get, may well depend on its legal status in different countries around the world.
The Bottom Line
The seemingly exponential rise of Bitcoin has created a buzz and triggered many debates globally about the future of cryptocurrency. No matter which way you look at it, however, on a global scale, the popularity of Bitcoin is rising. In the coming years, as it is adopted more into the mainstream, then it isn’t a realistic expectation that more and more countries will fully embrace it legally.
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