Cryptocurrency (likeBitcoin,Dogecoin, Litecoin, or Peercoin)is a digital virtual, e-commerce currency or electronic currency.Thenomenclature is borneout of use of cryptography for embedding security in computer programs. To date, cryptocurrencyis promoted by nongovernment organizations. Cryptocurrency is more convenientto generate as it requires no physical resources like metal, paper, plastic, and printingink. It is easy to store, transact, and operate cryptocurrency. It is cheaper and faster to transact.Cryptocurrency is one of the widely known species of currency that is promoted bynon-governmental organizations.
The cryptocurrency is not issued by any governmentor central banks, rendering in principle immune to government interference or manipulation.But youmay not be protected by the government in case of a dispute or a fraud involvingcryptocurrency. The promoters of cryptocurrency claim that it is difficult to counterfeitbecause of special and complex security features. But computer programs and the Internetare facing constant security threats; the cryptocurrency is in bedrock of computer and theInternet.Another security lies in the value of any currency.Official currencies are backed bythe government and are minted after securing assets like gold, coupled with sovereign guarantee.Cryptocurrency market operates without such formal procedure and backing.
Why do Cryptocurrencies Pose a Threat?
The cryptocurrency is a decentralized, virtually anonymous, substantially unregulateddigital currency that has become exponentially popular in the recent years. The cryptocurrencyis promoted by nongovernment persons or entities using peer private network,operating on the basis of decentralized autonomy. The anonymous nature of cryptocurrencytransactions makes them well suited for a multitude of despicable activities such asunauthorized transactions to save identity of the transactors, illegal transactions, moneylaundering, and tax evasion. The governments are becoming alarmed and concentratingmore over such transactions.
One of the cryptocurrencies “Bitcoins” is open-source and their transactions requireno third-party intermediary. The buyer and seller interact directly (peer to peer) but theiridentities are encrypted and no personal information is transferred from one to the other.However, unlike a fully anonymous transaction, there is a transaction record. A full transactionrecord of every Bitcoin and every Bitcoin user’s encrypted identity is maintainedon the public ledger. For this reason, Bitcoin transactions are thought to be pseudonymous,not anonymous.
Cryptocurrencies are legal in few countries but not in many countries. It remainsuncertain when the government will take over any perceived legal shield. We categoricallyused the word perceived shield, because in many countries, cryptocurrency is notexpressly declared illegal, but it does not mean cryptocurrency becomes legal thereby.With this context, cryptocurrency has raised several new complicated legal, social, economic,and administrative issues.
The rising popularity of cryptocurrencies is due to the convenience to generate ormanufacture, store, handle, manage, and account cryptocurrencies and transact them;get shield from discovery by government authorities for taxation or, otherwise, to carryillegal transactions; and so forth. The promoters require no material resources to producecryptocurrency, as it is generated through computer programs, stored on computers, andtransacted through the Internet. Promoters require no license or gold in their treasury togenerate cryptocurrency unlike governments and central banks that require certain security,assets, and procedure to follow when uncertain how much currency the governmentcan print. Cryptocurrency is designed to operate without any sovereign regulation.
Why is it Important to Regulate Cryptocurrencies?
The above-described characteristics of cryptocurrency become the core cause of legalproblem that one can face. The legal problem may range from being sued by the governmentfor involvement in the transaction that has no legal validity as currency to availingjustice in case one becomes a victim of fraud by other participating peers orpromoters. The transactions of cryptocurrency occur in the absence of government,bank, authorized dealer, payment network, or regulator. As all transactions are on theInternet, users interact with each other directly, without any license, anonymously,and without third-party interventions. In the absence of legal evidences, the victimmay not be supported by court.
The cryptocurrency transaction occurs only on the basis of trust on the promoters,peers, and system. If the trust imposed is materialized into reality, any dispute may not arise. But if the reality becomes far from the perception, dispute may arise, which willnot be honoured by court of justice. Official currencies are denominated by specificnumber under promise and undertaking of the national government or central agencies.Official currencies have back up of law and court of justice. Cryptocurrency is in aunit of accounts that have no physical verifiable counterpart with legal tender. Thetransactions are carried by peers without any legal backing. The interaction betweenany official currency and cryptocurrency is not regulated by law in many countries.
The value of cryptocurrency is determined by perception of demand and supply link.As there is no security, undertaking, or promise of any national government, the perceivedvalue of cryptocurrency is merely on the basis of speculation. Few governmentsin advanced countries have started to work on regularizing cryptocurrency markets. Asthis is emerging market, there will be flood of rules in several other countries. We havediscussed some of the real-life experiences that are legally relevant to cryptocurrencystakeholders.
Several instances of dispute or fraud have surfaced in recent past. Few hackersmounted a massive series of distributed denial-of-service attacks against the most popular Bitcoin exchange. A trader was arrested who subsequently became bankrupt. In August2012, an operation titled Bitcoin Savings and Trust was shut down by the owner, allegedlyleaving around 5.6 million USD in Bitcoin-based debts.
In September 2012, Bitfloor, a Bitcoin exchange, was reported to be hacked, with24,000 Bitcoins stolen. As a result, Bitfloor temporarily suspended operations. In April2013, Instawallet, a web-based wallet provider, was hacked, resulting in the theft of over35,000 Bitcoins. With a price of 129.90 USD per Bitcoin at the time, or nearly 4.6 millionUSD in total, Instawallet suspended operations. In August 2013, the Bitcoin Foundationannounced that a bug in the software within the Android operating system hadbeen exploited to steal from users’ wallets. In October 2013, a Bitcoin bank, operatedfrom Australia but stored on servers in the United States, was hacked, with a loss of4100 Bitcoins.
So Where is Cryptocurrency Legal?
Most countries have not clearly established the legality of Bitcoin, preferring a wait–approach instead. Some countries have indirectly agreed to the legal use of Bitcoin by implementing some regulatory oversight. However, Bitcoin is never legally acceptable as a substitute for the legal tender of a country.
The United States has generally taken a positive stance towards Bitcoin, although several government agencies are working to prevent or reduce the use of Bitcoin for illegal transactions. Prominent businesses like Dish Network, Microsoft Store, Subway Sandwich Retailer, and Overstock.com welcome payment to Bitcoin.Digital money has also made its way to U.S. financial markets, which speak about its increasingly legal presence.
The US Treasury Department’s Financial Crimes Enforcement Network has been issuing guidance on Bitcoin since 2013. The Treasury defined Bitcoin not as currency, but as a money services business. This puts it within the scope of the Bank Secrecy Act, which requires exchanges and payment processors to fulfill certain responsibilities, such as reporting, registration and record keeping. In addition, Bitcoin is classified by the Internal Revenue Service as property for tax purposes.
Like its southern counterpart, the United States, Canada maintains a relatively bitcoin-friendly approach while still ensuring the cryptocurrency is not used for money laundering. Bitcoin is considered a asset by the Canada Revenue Agency. This implies that bitcoin transactions are regarded as barter transactions, and the income generated is considered to be business income. Taxation often depends on whether the person has a purchase-selling company or is only concerned with investing. Similar to Canada, Australia finds Bitcoin neither money nor foreign currency, and the Australian Taxation Office (ATO) agrees that Bitcoin is an asset for capital gains tax purposes.
The ECJ ruled on 22 October 2015 that the purchasing and selling of digital currencies is considered to have been the provision of services, which are excluded from VAT in all the Member States of the Union. However, several EU countries have established their own Bitcoin perspectives as well.
In Finland, by classifying Bitcoin as a financial service, the Central Tax Board (CTB) provided Bitcoin with a VAT exempt status. In Finland, Bitcoin is not a currency, but a commodity. Bitcoin has also been removed from VAT by the Belgian federal public service financing. Bitcoin is also not regulated or managed in Cyprus. A pro-Bitcoin approach has been adopted by the United Kingdom financial lead authority (FCA) that wants to help digital currency in the regulatory climate. Bitcoin is in the United Kingdom under some tax laws. Bitcoin also has come under current tax laws by the Bulgarian National Revenue Agency (NRA).Germany is open to Bitcoin; it is considered legal but taxed differently depending upon whether the authorities are dealing with exchanges, miners, enterprises, or users.
Although Bitcoin is now nearly 10 years old, many countries have no clear mechanism for controlling, regulating or banning cryptocurrencies. The decentralized and anonymous existence of Bitcoin has challenged many governments in the prevention of illegal transactions to make legal usage. Many countries are still exploring ways in which cryptocurrency can be controlled. In general, for most of the world Bitcoin exists in a legal gray area.
