Each and every fiat currency in the world is created, released, and controlled by a single entity, in most cases a central bank. Ordinary citizens are only allowed to buy, sell or keep the currency according to law. The person will inevitably find themselves behind bars if he/she tries to create any amount of money.
Bitcoin created a completely new and unique paradigm when it was introduced. The world’s first decentralized, digital currency that isn’t controlled by anyone at all. Moreover, the very concept of Bitcoin implies that by simply being an active part of the community, anyone with enough computing power can create coins.
Law enforcement agencies, tax authorities, and legal regulators all over the world are trying to wrap their heads around the concept of cryptocurrency and where exactly does it fit in existing regulations and legal frameworks, as it’s becoming more and more mainstream.
The legality of Bitcoin depends on where you are in the world, on who you are, and what you’re doing with it. Here’s our guide on legal issues concerning Bitcoin, where we mostly focus on the US but cover other major countries as well.
Concerns about cryptocurrencies
The authorities are still struggling to understand Bitcoin, In many jurisdictions, let alone define it in legal terms. Over its decentralized nature, many concerns have been raised. It is only natural for governing authorities to be worried about a financial community that cannot be fully controlled.
This also extends to the protection of people’s funds and exchanges. There are plenty of offshore platforms that don’t, while US-based exchanges have to be regulated. Indeed, cryptocurrency history has been filled with instances of exchanges running away with people’s funds and suddenly shutting down.
The closure of the notorious exchange Mt.Gox is the most famous of such cases. Formerly the most prominent Bitcoin exchange in existence filed for bankruptcy due to technical problems and the apparent theft or loss of 744,000 of its users’ Bitcoins, at the beginning of 2014. That amount made up about six percent of 12.4 mln Bitcoins in circulation at the time.
Another cause for concern is Bitcoin’s ability to be used semi-anonymously.As those records only contain the public keys and the amount of funds transferred, it is very easy for users to stay almost completely anonymous, even if every single transaction is recorded in the Blockchain.
As Bitcoins were the only form of payment accepted there, most of these concerns were voiced after a dark web market Silk Road gained mainstream media attention. The authorities are still worried about Bitcoin’s appeal among the traders of illegal goods and services, even if the market was shut down by the FBI. Moreover, it is feared that Bitcoin’s decentralized nature and semi-anonymity can be exploited in tax evasion schemes and money laundering.
Cryptocurrencies like Bitcoin are to be treated as property instead of as currency and to be taxed as such, as stated by a Virtual Currency Guidance, which was first released by the Internal Revenue Service (IRS) in 2014. However, it isn’t as simple as it might sound.
For instance, it means that you just sold an asset, if you buy something worth $300 with your Bitcoins. Depending on the Bitcoin’s value when you bought it and when you sold it, you either made a profit or a loss on that sale. Whether it counts as short or long term, an ordinary or a capital gain depends on the circumstances.
The IRS is trying to crack down on reporting as the regulation is not entirely clear. Only 802 people paid taxes on Bitcoin profits in the year 2015. To track down Bitcoin tax cheats, the IRS is apparently using special software.
A bipartisan bill was recently introduced in the House of Congress. It calls for a tax exemption for transactions under $600. It will make the lives of small, day-to-day traders much easier if it passes. It is recommended to keep records of all Bitcoin-related activities until then.
The records kept must contain the same information as stock or forex brokerage statements, when it comes to trading Bitcoins: date, price, and fees, description, quantity. You might need to know when the Bitcoin proceeds were attained if you’re mining. Reference of sales, the amount received in BTC, and the date of the transaction should be kept by Businesses accepting Bitcoins as a form of payment. The amount due is calculated based on the average exchange rate at the time of sale if sales taxes are payable.
for Bitcoin companies operating in New York or serving NY residents, the New York State Department of Financial Services (NYDFS) put forward is a set of regulations regarding Bitcoin transactions called BitLicense. Only five licenses were granted, and the companies that managed to obtain them had to spend upwards to $100,000 in order to do so, as of September 2017, two years after the regulation came into effect. With Bitfinex exchange describing the requirements set forth by NYDFS as ‘extremely invasive,’ adding that they would compromise their user base’s privacy, many companies decided to opt-out of serving New York residents.
The license which costs $5,000 can be obtained through a process of application. A compliance officer, responsible for overseeing the firm’s compliance with the regulations is required by the Companies looking to obtain the license. Moreover, all other states and federal laws that is applicable to Bitcoin have to be obeyed. This includes compliance with Anti-Money Laundering, Money Transmitter laws, and Know Your Customer policies. Such protections can get very expensive.
SEC — Securities and Exchange Commission
Compared to regulatory bodies in other countries, The Securities and Exchange Commission has been notably quiet on the subject of Bitcoins. An investor alert, in which they warned people that Bitcoin users can be targeted by fraudsters was published by them in 2014
The SEC has recently investigated a cryptocurrency initial coin offering (ICO) called ‘DAO.’ in which about $50 mln worth of Ether coins were stolen by hacking. Whether DAO coins constituted security in this investigation was the SEC’s primary focus. The report concluded that by expecting a profit that derives from the managerial efforts of other people, investing money in a token, makes cryptocurrency secure and requires appropriate regulation.
However, SEC’s report focused entirely on Initial Coin Offerings, and Bitcoin is way past that. So, most likely only newcomers to the market will face concerns regarding regulations the SEC is likely to impose. It depends on the particular transaction whether Bitcoin can be treated as a security or not
It had been decided by the SEC that any firm using Blockchain technology to trade securities would need to register as an exchange, Alternative Trading System (ATS), or broker/dealer.
FinCEN — Financial Crimes Enforcement Network
Virtual currency is defined as a ‘medium of exchange that operates like a currency in some environments but does not have all the attributes of real currency’, according to FinCEN’s guidance on cryptocurrency. convertible virtual currency like Bitcoin, which can either act as a substitute for real currency or has an equivalent in existing currency is addressed by the guidance.
Under FinCEN’s regulations, ‘Users’ of virtual currency are not considered an MSB (Money Serving Business). This means that you are not subject to MSB registration, reporting, and recordkeeping regulations if you received Bitcoins to pay for goods or services.
‘exchangers’ and ‘administrators’ are considered money transmitters, In contrast, and therefore are required to comply with FinCEN’s regulations. The guidance defines ‘exchangers’ as people engaged as a business in the exchange of Bitcoins and other digital currencies, while ‘administrators’ are engaged as a business in putting virtual currency into circulation.
FinCEN imposed a £110 mln penalty on BTC-e exchange, arresting one of its operators and seizing the site’s domain, in its first action against a foreign-located MSB operating in the U.S. in July 2017.
CFTC — Commodity Futures Trading Commission
An independent US Federal agency that looks after financial derivatives is CFTC. As they believed it can be classified as a commodity, In 2014, a CFTC Commissioner stated that the agency definitely has authority when it comes to Bitcoin.
Recently, the agency released a primer, in which they stated that depending on the particular facts and circumstances, virtual currencies can be considered commodities or derivatives contracts. As investors feared tighter regulations, this resulted in an eight percent drop in Bitcoin’s exchange rate.
Recently granting LedgerX the right to create a regulated Bitcoin futures market, CFTC seems to have taken a pro-Bitcoin stance. In September 2017, against Bitcoin fraudsters, CFTC filed its first-ever charges. Gelfman Blueprint was charged with fraud, misappropriation, and issuing false account statements in connection with solicited investments in Bitcoin, in a move welcomed by genuine Bitcoin investors.
IRS — Internal Revenue Service
Many questions still remain unanswered, Even though the IRS released general guidance on taxing digital currencies. With its decision to tax Bitcoin as property, the agency further complicated things, which means that even paying for a cup of coffee with the cryptocurrency will incur a tax.
Buying goods and services with Bitcoin is exactly the same as selling an asset, according to IRS regulations. It means that you’ve either made a profit or a loss, depending on a BTC’s exchange rate when you bought it and when you sold it if you spend your Bitcoins.
It is recommended that you keep a record of all your Bitcoin-related transactions, in order to comply with the IRS regulations.
The IRS has ramped up their hunt for Bitcoin tax evaders, has even formed a dedicated task force, as only 0.04% of customers included crypto in their 2017 tax reports. However, there have been rumors about a possible future tax amnesty for Bitcoin users, while the IRS is closely monitoring Bitcoin and other cryptocurrency transactions in an attempt to get more tax dollars. Whether it will actually happen as well as when it will happen still remains to be seen.
As The US Federal Reserve controls the global reserve currency – the US dollar, it is the world’s most influential banking entity. Having published through papers on both Bitcoin and Blockchain, they are very interested in digital currencies and the technology associated with them. The point that a financial giant like the Federal Reserve invested a lot of into understanding the concept of Bitcoin speaks volumes about how influential the currency is becoming now.
However, the organization has frequently-issued warnings about the risks associated with digital currencies. Recently, describing Blockchain as something that ‘could ameliorate or exacerbate traditional financial risks’, the Federal Reserve stated that they are keeping very ‘close attention’ to it. Saying that digital currencies could make it easier to hide illegal activities, a US Fed Governor was also quoted.
Saying that the Fed is currently researching into introducing its own digital currency, Janet Yellen, the US Federal Reserve chair, was recently quoted. The U.S. will join the crypto market with their own, official and state-controlled cryptocurrency if that happens.
FINRA — Financial Industry Regulatory Authority
It is interesting that in its report on Distributed Ledger Technology FINRA implied that the widespread use of Blockchain technology could impact the organization’s core business practices. Specifically, the way FINRA members self-regulate in the areas of Anti Money Laundering and asset verification, surveillance, Know Your Customer policies, business continuity, payments and even record-keeping.
OCC — Office of the Controller of the Currency
In its 2016 paper, with considering applications from fintech companies to become special purpose national banks (SPNBs), the office of the US Treasury proposed a possibility of moving forward. This initiative is established to provide companies that want to become limited-purpose digital banks with a unified federal regulatory regime. However, there are still some significant political and legal uncertainties surrounding this initiative, as of November 2017.
Moreover, another optimistic paper in which it called for the formation of a ‘responsible innovation’ department was released by the OCC. To spur the growth of emerging technologies, including digital currencies, they are planning to launch offices in Washington, New York and San Francisco.
CFPB — Customer Financial Protection Bureau
The Bureau has handed out a consumer warning about Bitcoin. Among potential issues, the volatile exchange rates, the threat of hacking and scams, and possible lack of assistance from exchanges in case of lost funds were cited. Besides that, the CFPB has also acknowledged Bitcoin’s benefits.
NFA — National Futures Association
An independent self-regulatory organization for the US futures market is the NFA. Including those trading in Bitcoin, every participant in the futures market is required to have the NFA membership.
The legal status of Bitcoin in the United States under state law
The situation regarding Bitcoin is patchy because of the fragmented legal system in the US. There are myriad laws, and they vary from state to state. For instance, Hawaii, banned all crypto operations in 2014 but relented in 2018, and to apply for a money transmitter license, now requires anyone involved in operations related to Bitcoin and cryptocurrencies. The majority of states haven’t legislated on cryptocurrency, but New York, Delaware, Florida, and Kansas have also adopted regulations.
Wyoming stands out. For cryptocurrency businesses and broader acceptance of crypto, “The Blockchain State” has passed over a dozen laws facilitating easier commerce —including authorizing banks to hold digital assets in custody and granting digital currencies the same legal status as money.
Although it’s not due any time soon, California’s “Digital Asset Regulatory Bill” is designed to (it hopes) position it as a potential hot spot for crypto businesses and provide the state with similar regulatory clarity. In August It was overwhelmingly passed by the State’s Senate Committee and is now subject to a report.
Is buying and selling Bitcoin legal in the United States?
It’s perfectly legal to buy Bitcoin n many states. In 2013, the US Treasury Department’s Financial Crimes Enforcement Network (FINCEN) guidelines stated that it’s legal to invest in Bitcoin and to use it as a form of payment, as long as the seller of the goods or services is willing to accept it.
In fact, explicit laws forbidding the purchase or sale of Bitcoin are not there in various US states. California is a good example, where Bitcoin’s status is not yet defined, and it is therefore not regulated. Crypto exchanges and other businesses have been attracted to the state due to the flexibility this offers.
The first state to publish a memorandum declaring that no money transmitter license was needed to sell Bitcoin or other digital currencies was Texas. (The state also nearly passed a bill that would have banned the usage of cryptocurrencies between unidentified parties.)
The legislation passed in 2019, in Colorado exempts crypto broker-dealers from state licensing requirements under certain circumstances.
But requiring money transmitter licenses for cryptocurrency operators, some states, including New York, New Hampshire, New Mexico, Florida, and Connecticut are more hostile toward Bitcoin.
48 states agreed to follow a single set of licensing rules, In September 2020.as a result, companies already operating as money transmitters in one state become eligible for a license in another, participating, the state automatically.
Is operating a Bitcoin ATM legal in the United States?
For Bitcoin ATMs, Again, states have differing laws. For instance, New York requires licensing for virtual currency financial intermediaries through its BitLicense. As ruled by others, the act of transmitting money doesn’t affect cryptocurrencies, and some have a more nuanced strategy. For example, in Texas, a license is only required if an ATM is connected to a cryptocurrency exchange, where the Bitcoin is purchased.
State guidance is in flux. Last year, for example, for crypto ATM owners, obliging them to obtain a transmission license, Nevada unveiled new requirements.
Is promoting Bitcoin legal in the United States?
If the activity is construed as a pump-and-dump scheme, which the CFTC defines as “coordinated efforts to create phony demand (the pump) and then sell quickly (the dump) to profit by taking advantage of traders who are unaware of the scheme”, promoting cryptocurrency markets can be illegal.
It was recently warned by Jake Chervinsky, a lawyer and general counsel to decentralized finance startup Compound, that such activity is equally risky with cryptocurrencies as with stocks and shares.
According to Jason Gottlieb, Attorney, and Partner at the New York-based Morrison Cohen law firm, for either tipping off someone or acting on a tip, the same applies to insider trading, and the SEC or CFTC could pursue crypto traders.
Is mining Bitcoin legal in the United States?
In a word, yes. In the US, mining of Bitcoin is perfectly legal. Here’s our handy guide to Bitcoin mining, if you’re interested in getting started.
Is gambling with Bitcoin legal in the US?
Again, in most states, few clear guidelines about using Bitcoin to gamble in online casinos is provided by the current legal framework.
Thus, betting with Bitcoin is perfectly legal at those casinos that accept it, and the same applies to lotteries, where tickets can be purchased with Bitcoin.
Is trading with Bitcoin legal in the US?
The answer here is complex as there are various definitions as to what “trading” constitutes.
And, it often comes down to individual states as to whether a money transmitter license is required since there is no unified law governing cryptocurrencies.
For instance, in January 2019, Pennsylvania, published guidance on virtual currency trading platforms. The state clarified that, generally, they are not money transmitters under state law.
Federal law provides some clarification. It defines a business as a Money Services Business if it conducts more than $1,000 in business with one person in one or more transactions involving any kind of money transfer services, such as currency dealing or exchange. A license is required in these cases.