Bitcoin was created based on the decentralization principle. This means that cryptocurrency is not regulated in the traditional way such as fiat currency in which the National Government / Central Authority controls currencies. Bitcoin and the blockchain technology behind it are still entirely new, and the authorities are still trying to understand what it is while it is in its early stages of development. This means that regulating measures are yet being developed, especially with regards to money laundering and taxation.
With no uniform international approach to the legality of Bitcoin, its acceptance will depend on the country of residence of the user. On the brighter side, authorities are gaining more knowledge and experience about the cryptocurrency industry in general, and Bitcoin is at the forefront. This indicates that soon, a vast majority of countries will likely come up with some certain levels of regulations to apply, which will see bitcoin prices over time vary. Furthermore, the value of Bitcoin has made some very significant gains this year. This has prompted many governments to consider speeding up the process of regulating the sector. It has also inspired more than 30 global regulators to announce different approaches to control the bitcoin prices overtime in recent months.
The popularity of Bitcoin amongst vendors and customers on the dark web attracted the attention of the regulators. The dark web is an internet part that was active with illegal trading activities. The items of trade usually include Weaponry and illicit drugs. The Silk Road marketplace, for example, was famous because it only accepted Bitcoin on its site. This ensured anonymity for its customers. The negative information about Bitcoin led to the closing down of the infamous market place by the FBI. Bitcoin was termed as a “surrogate currency” by a US Senator Charles Schumer. The legislator said that Bitcoin gave way to criminal activities. These are among the reasons that raise concerns about Bitcoin.
Bitcoin Throughout History
Also, the decentralized and semi-anonymous nature of Bitcoin sparked fears in the authorities with regards to the potential of it being used for money laundering. The FBI indicated that as early as April 2012, the lack of laws regulating the use of Bitcoin could lead to its use by criminals mainly when offshore account exchanges are possible.
Other concerns coming up are the fact that the Bitcoin prices over time have risen considerably. This means that it is being used mostly to store value. This is because the cost of bitcoin currently deems it less likely to be used to make transactions, and this may lead to a bubble. According to analysis, the majority of Bitcoin dealings in 12-24 months have been for speculation purposes only. The sudden rise of interest in Bitcoin has caused an increase in demand and also made it very volatile. This has translated to it being unsuitable for day to day transactions.
Current Approach to Regulations
A small fraction of countries have banned the use of Bitcoin, but most states have welcomed the currency. Several regulations have been established in different countries. Even in the countries that have banned Bitcoin, the decentralized nature of it makes it almost impossible to enforce any form of restriction.
Approaches of Different Jurisdictions
Below you will find how this currency is approached in various jurisdictions.
European Union Stance on Bitcoin
The union takes an open approach to Bitcoin, and it is also less ambiguous compared to the US. It is essential to note that the European Union had a framework to manage the use of money electronically, and this was before Bitcoin’s invention. This framework was able to integrate cryptocurrencies such as Bitcoin.
The ECB has categorized Bitcoin as a decentralized virtual currency that is highly convertible. The European Banking Authority EBA advised against dealings with any cryptocurrencies before the establishment of a regulatory regime. A task force was to be set up as agreed in the European Parliament in 2016. The task force was given the responsibility of monitoring cryptocurrencies to counter-terrorism and money laundering. To prevent tax evasion, the European Commission further proposed that digital wallets and cryptocurrencies exchanges to be subject to regulations.
According to the rapporteur of the first blockchain Resolution of the European Parliament, the benefit of structuring rules concerning the blockchain industry is to level the playing field. This would apply to both the companies and customers doing their business in the sphere. Without the certainty of regulations, the expected scalability of the technology would be unlikely to occur, she added. Moreover, she proposed that ICOs should be outlined within their structure, rather than try to incorporate them with the other regulatory frameworks of commodities and securities. This approach is similar to the view that of Bitcoin foundations themselves, who warned against any premature regulations of Bitcoin, should be handled separately instead of boxing it in an environment that it will most likely outgrow later.
The USA and Bitcoin
At a federal or state level, the US does not have in place an organized approach to the regulations of Bitcoin. Currently, the Federal Reserve has not established a policy that is aimed at Bitcoin regulation. Federal Reserve claims that this is a matter that will be addressed soon enough. Guidelines about cryptocurrencies were published by the Financial Crimes Enforcement Networks (FinCEN). An agency within the US Treasury Department, published as early as 2013, explained that using cryptocurrencies to purchase legal goods and services was not illegal in the US. However, trading or mining and operations of exchanges upon which Bitcoins are traded would be categorized as ‘money transmitters, ‘ which will be subjected to the same Anti-Money Laundering (AML) and Know Your Client (KYC) conditions as other businesses in the money service.
US Securities and Exchange Commission (SEC) has not outlined any laws regarding Bitcoin or any other cryptocurrency. The Chairman of the SEC, however, issued a warning in November 2017, stating the volatility and fraud risks surrounding the ICOs. The US Commodity Futures Trading Commission (CFTC) has classified Bitcoin as a commodity. CFTC does not regulate Bitcoin directly. However, it has the control over the cryptocurrency market when it comes to the commodity futures that are connected to Bitcoin. For instance, CFTC recently accepted a suggestion by the Chicago Mercantile Exchange that proposed to allow clearance of Bitcoin and other cryptocurrencies to be the same as other products. Bitcoin prices could be positively affected as a result of this proposal.
At the state level, some individual states have taken various approaches concerning the laws governing exchanges or other money transmitters on why is Bitcoin a good investment. Some attempts to make specific licensing programs applicable to cryptocurrency exchange have been made by states such as New York. Others like Texas have decided to stick to the current financial laws and regulations and apply them to the use of cryptocurrencies. Some criticized the licensing in New York as it was considered to have a strangling effect on the fintech industry’s usage of Bitcoin. Bitcoin Foundation is currently challenging the Bitlicence. The Bitcoin Foundation is of the view that the US government is deliberately trying to stifle the adoption of the virtual currencies. The foundation goes ahead to say that the government is doing this by increasing regulations at both federal and state levels.
Bitcoin in China
Bitcoin is legal in China. However, there have been a clampdown since 2017 on the trading of bitcoin. This saw multiples exchanges having delays or a pause in Bitcoin withdrawal services. The People’s Bank of China has discovered the need for strict supervision and a way to license the industry. The clampdown came in waves as a result of Chinese media acknowledging the downsides of cryptocurrency. One of the demerits was the potential to be used to conduct illegal activities.
How is Bitcoin Taxed?
In the tax area, authorities are actively looking for ways to enforce regulation with respect to Bitcoin. According to the authorities, Bitcoin’s semi-anonymous nature can be taken advantage of, for example, by hiding assets and assist in the reduction of taxation. Internationally, there does not exist an organized system on how to approach taxation of profits made from trading of bitcoin or other cryptocurrencies. In the EU, it has been declared that VAT should be exempted from the selling of cryptocurrency. This is because transactions were an exchange of services and not a supply of goods. This is the same approach taken by the United Kingdom before the EU ruling. The IRS in the US verified in 2014 that instead of currency, it would treat Bitcoin as property, this also applies to the other cryptocurrencies. This implies that any gain acquired from Bitcoin investment is being charged at each capital gains rate of the investor, not as to their usual income rate.
When it comes to Bitcoin regulations, there are numerous possible approaches that the authorities can take….
The providers of cryptocurrencies and exchanges will behave as regulators. This is by making sure that AML and KYC rules and regulations are followed. Coinbase is an existing exchange and is already enforcing this rule. Governments could limit the number of prohibitions imposed. For example, eliminating the option of paying for real goods with cryptocurrencies, this will hinder Bitcoin usage as payments for illegal goods. The nuclear option, eliminating the cryptocurrency that doesn’t abide by the regulations established by the government. This would be difficult to block because the government cannot entirely prevent access to websites.
They should be selective regulation of the industry. This is especially in areas of taxations. Governments should adopt the current EU and UK approach. This would translate to the regulation of some of the major regions of the industry. These includes the tax and AML, without the need to adopt abroad framework. Provision of supporting mechanisms that allow consensus among communal users and will enable them to set their societal standards. This, however, has a downside, in that the regulators may enable illegal activities to go on unchecked.
Bitcoin regulation is inevitable according to Steve Keen. Keen is the Head of the School of Economics, History, and Politics at Kingston University in London. He noted that there is a likelihood that bitcoin prices over time will drop due to different positions that can take place in Bitcoin. He also stated that it was necessary to have a proper framework and regulations. Why is Bitcoin a good investment? Bitcoins are poised to continue in value addition in the future. However, others put more value in the traditional systems of banks and institutions run by the government. This would most likely direct a people away from investing in the cryptocurrency market.
Determining the possibility of a good outcome out of an investment is usually a guessing game. However, numerous ways have been tested that help to assess the worth of an asset. One clear way is to consider its hastened rise against the US Dollar. Bitcoin prices recently passed $1,000 and have climbed well over $5000.
An underpinning idea behind Bitcoin is only to have 21,000,000 Bitcoins in circulation. This means that it will be most likely consistently adding value relative to other types of currencies, which can be produced at a significant rate.
Across the globe, there are varying opinions and legislations being passed for the regulation of Bitcoin. Some see the regulation of Bitcoin as adding legitimacy to the cryptocurrency market and answering the question of why is Bitcoin is a good investment. Furthermore, the industry is against the extensive scale regulation that would severely affect the decentralized nature of Bitcoin. Incorporating the cryptocurrency industry into traditional structures is likely to struggle in the sector. To develop a new tax and regulatory structure only for Bitcoin and other cryptocurrencies would result in significant expenses for the taxpayer.
The past years have witnessed Bitcoin branch away from its niche of the tech industry to become more mainstream. You’ll even see that it’s possible to invest in bitcoin for your IRA account. This breakout has prompted Bitcoin to be a common word in offices and homes. As a result, it has become almost inevitable that some form of regulation is on its way. However, the kind of rules and regulations that will be effected remains the big question to industry players and what effects will be felt by the industry are yet to be seen. The EU suggestions for regulations on the value of bitcoin and its use broadly follow the method taken by the French government. One of the proposals states that a set of instructions should be published for both consumers and regulators when it comes to virtual currency taxation.