Bitcoin and other cryptocurrency is a new technological innovation that has not yet been fully implemented into the legal framework of many countries across the globe. There are many legal aspects of Bitcoin and cryptocurrency in general to consider. The laws that apply to Bitcoin typically apply to other cryptocurrencies, the umbrella term Virtual Currency is often used. The following will be discussed: Legality of cryptocurrency in different countries, taxation, money laundering, other legal issues, and legal status by country.
The legality of cryptocurrency in different countries
Bitcoin and cryptocurrency have various legal aspects to consider depending on the country. Some countries class Bitcoin and other virtual currency as money and legal, some class it as an asset and legal, some class it as neither illegal nor legal, with no legal frameworks in place.
In Russia, Ecuador, and Bangladesh, Bitcoin is Banned outright, in other countries such as China, Bitcoin is illegal for commercial use but legal for private individuals to hold, trade, mine, buy and sell. In some countries Bitcoin is banned due to already existing laws, such as Iceland.
In the United Kingdom, however, like many countries, Bitcoin is unregulated with no legal framework in place. However, a recent ruling in the EU court system meant Bitcoin was exempt from VAT taxes in any EU member state.
The countries where most or all use of Bitcoin and other virtual currency is illegal are:
- Iceland (Excluding Mining)
- China (legal only for private individuals)
- Russia Kyrgyzstan
The next section will discuss taxation and taxation issues on Bitcoin.
The subject of taxation is one of the main issues to come up. Due to Bitcoin’s pseudo anonymity, if used correctly, usage of Bitcoin to hide assets and help reduce taxation is not too difficult provided the person follows precautions doing so. Bitcoin is often classed as an asset in many countries for tax purposes, such as in the United States. While bringing large amounts of foreign currency into a country can cause tax issues, bringing in or storing a Bitcoin private key online makes it much easier to bring money past border checkpoints, where you can cash it out when in the country, effectively bypassing taxes of this kind.
For legitimate taxpayers, Bitcoin income can be declared at the current exchange rate in most places, although good record keeping of Bitcoin to fiat transactions and vice versa is recommended, depending on the tax laws in your jurisdiction which should be researched. In countries where it is illegal, taxation has typically not been considered in the law as it is supposed to be banned.
It is typically illegal to avoid taxes, although some countries have legal loopholes. Ensure that you are paying the correct taxes on any Bitcoin income by researching the tax laws under your jurisdiction, some countries may class Bitcoin and cryptocurrency as an asset, not a currency so the tax situation may differ.
Money laundering is typically considered for designing legal framework when Bitcoin is discussed. Bangladesh bans Bitcoin outright under existing Money Laundering statutes. Money Laundering is a key legal problem with Bitcoin due to the ease of moving money between countries, in seconds with no monitoring. While it can trace Bitcoins bought through banks, when cash or other hard to trace methods are used to obtain the coins, they can then be moved.
Using it to launder money on a large scale is risky, due to the publicity of the blockchain ledger. More advanced police forces are learning how to analyze the public Bitcoin ledger to work out where funds went. Money laundering is typically illegal in virtually all jurisdictions, regardless of how it is done, although some have loopholes. Countries such as South Korea have given legal advice that they would not outlaw Bitcoin, but that any illegal activities of this kind involving Bitcoin will be prosecuted.
Other Legal Issues
Other key legal issues of recent times include the following:
- Large thefts of Bitcoins prompting industry action.
- EU court hearings on whether VAT applies to Bitcoin, the courts ruled Bitcoin is VAT free.
- Banning of Bitcoin in certain countries.
- Bitcoin taxation in the US eventually declared Bitcoin as an asset.
- Loss of Bitcoin private keys hard to prove.
- Online drug marketplaces.
- Chargeback ability and scams.
- Hiding assets.
- Lack of legal protections.
Large thefts of Bitcoins such as the exchange Mt. Gox resulted in pressure for regulators to regulate Bitcoin, the deregulated nature of Bitcoin can make this very difficult during large thefts.
There was a recent court ruling in the EU, allowing Bitcoins to be transacted without VAT being applied, in a manner similar to gold.
Bitcoin has been banned in certain countries, the list is above.
Bitcoin taxation was a widely discussed issue in the U.S. While the U.S classes Bitcoin as a virtual currency, it classes Bitcoin as an asset for tax purposes.
If someone has held large quantities of Bitcoin, if they somehow lose their private keys, this is hard to prove and a tax jurisdiction may treat you as still owning those coins as it is difficult to prove otherwise, although over time none of the coins moving on the blockchain would prove the person has not used them, either because they won’t or cannot.
Recently the online drugs marketplace silk road was closed down. The marketplace was able to transact without being traced due to the use of Bitcoin, although the site’s design caused it to give away the server’s real IP address, and eventually, after years of investigation resulted in the capture of those running it. They had not properly secured their wallets either, resulting in the FBI being able to seize the coins and auction them. Some corrupt FBI agents tried to steal some of the coins but were caught partially due to the publicity of the blockchain.
Due to the one-way nature of Bitcoin transactions, there is little protection from scams with no ability to chargeback if needed, but this can also work the other way, preventing fraudulent chargebacks. This is one area of a legal framework that is being considered in some jurisdictions.
Bitcoin can be used to legally or illegally hide assets, for example in divorce cases etc. This is very easy to do and if done correctly difficult to prove. It is a legal loophole in some places, illegal in others. Check your local laws if in doubt.
Lack of legal protections can be a problem, especially if you are scammed when using Bitcoin due to the deregulated nature of bitcoin. This should be taken into account when using Bitcoin.
These are some of the key recent legal issues that have come to light concerning Bitcoin. The next section will discuss legal status by country.
Legal status by country
This section will discuss the legal status of Bitcoin by country. It will discuss unregulated, regulated, restricted, and banned countries. This is the current list as of September 2016 and may not include all countries.
Unregulated is where no legal framework is yet in place, or the use of Bitcoin has been deregulated and is free to use in any capacity with no or very few legal restrictions.
- United Kingdom
- Czech Republic
- Hong Kong
- India (Although many Indian banks do not allow transactions pertaining to them)
- New Zealand
- The Netherlands
- South Africa
- North Korea (tourists have used Bitcoin on the tourist internet services with no problems, most North Korea citizens have no access to the public internet)
- Papua New Guinea
- Saudi Arabia
Countries where Bitcoin use is legal but specifically regulated for tax or other purposes, and in some cases classed as money are:
- South Korea
Countries where Bitcoin use is restricted but legal in some circumstances are:
- China (Private Individuals may transact, corporations and banks cannot, mining is legal).
- Iceland (illegal to buy/sell, but mining is legal)
- Taiwan (legal to buy/sell, transact and trade, but ATMs for Bitcoins are not legal)
Countries where Bitcoin use is banned outright are:
- Russia (banned outright)
Most Bitcoin use around the world is legal and unregulated at present. Some countries have incorporated it into their financial system, but very few have outright banned it. Bitcoin has, therefore, got a great potential to become a global currency. Even in countries where it is banned, it is very difficult to regulate usefully without internet censorship. It shows there is a great potential for growth and incorporation into legal frameworks and to the existing financial system. The key legal issues surrounding Bitcoin have been discussed and these are the main issues nation-states consider when considering legislation for Bitcoin.
If Bitcoin’s popularity increases further, more countries may regulate it, although it does not seem like many are considering banning it.
There are likely to be more legal precedents set in the next few years surrounding digital currencies. This document has discussed the key legal issues surrounding Bitcoin, and the current legality of Bitcoin in 2016 in many countries. Further legal developments over the next several years are likely to occur, for both the good and ill of Bitcoin and other cryptocurrencies.