Is Bitcoin Legal? A 2021 Update on the Matter
Is Bitcoin Legal? An Update on the matter in 2021
Table of Contents
Is Bitcoin Legal?
Bitcoin’s legality has long been a contentious issue. What is a government’s strategy for dealing with a decentralized global digital asset that isn’t designed to be controlled by a single entity? Is there a new type of cash that is both censorship-resistant and community-focused?
For reasons other than those stated above, the US authorities have battled to regulate Bitcoin (BTC). The first cryptocurrency in the world has numerous levels that go beyond standard ventures like mining and trading. Because most people don’t understand how Bitcoin works, how it’s controlled, or how earnings may be taxed, each activity has its own set of rules. This government battle affects every aspect of the crypto sector.
Legal parties, for instance, cannot enable unauthorized parties to manage cryptocurrencies in the same way that they cannot allow anybody to manage regular fiat currency. Regulators want to create new rules for organizations that provide cryptocurrency custody or handle virtual currencies in other ways. This endeavor is made more difficult by the fact that certain assets are classified as securities while others are classified as properties. There are also derivatives and other components of the investment decision to consider.
Should a profit from an airdrop be subject to tax from a profit from a cryptocurrency investment? Where else do hard forks fit into the picture? Do governments permit mining benefits, how are they taxed, and how is the procedure regulated?
Restrictions differ depending upon how the network’s mining works or if an organization is mining for private or business reasons, as well as its yearly income levels. Some corporations may compensate their staff with mining revenues, which would necessitate a variety of regulatory laws.
In the world of cryptocurrency, there are a plethora of sources of income, the majority of which the average person is unaware of. In some ways, technology is progressing faster than understanding cryptocurrencies, and government rules take time to comprehend and establish.
Finally, globalization and freedom of movement must be taken into consideration. How do governments deal with citizens who may own and earn cryptocurrency anywhere in the world? It’s no surprise that regulation is taking so long, but here’s a look at how different nations are attempting to govern cryptocurrencies.
Is Bitcoin Legal in the US?
Buying and holding Bitcoin has never been “illegal” in the United States – certainly not at the national level. The policies differ depending on where you live.
However, because federal parties have not agreed on a unified strategy and approach, the asset’s regulatory status at the national level has changed from time to time. Some of the authorities that aim to take measures against Bitcoin include the United States Securities Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Financial Crimes Enforcement Network (FinCEN) and their perspectives vary.
1. Securities Commission
Since 2014, when it published an investor notice alerting Americans about the hazards of Bitcoin, the SEC is already discussing it. Potential fraud, instability, and scams are among the dangers. Then-SEC Chairman Jay Clayton concluded in 2018 that Bitcoin should be taxed as a property rather than a security, and therefore should be classed as such.
While other cryptocurrencies are classified as securities, Bitcoin is not since the investment contract has no winner. Nevertheless, the network is self-contained, and the SEC regards Bitcoin as conventional money similar to the US dollar. Clayton also stated that cryptocurrencies “are replacements for sovereign currencies, replacing the dollar, the euro, and the yen,” which influenced his ultimate judgment.
Otherwise, the SEC’s focus is on initial coin offerings (ICOs), which are more akin to the way IT businesses raise money. Other organizations have more to say about the regulation around Bitcoin.
2. Internal Revenue Service
Bitcoin was classified as property by the IRS in 2014, according to Notice 2014-21. This implies that traders should pay capital gains tax on each bitcoin exchange and report it to the Internal Revenue Service in USD once a year. Profits from Bitcoin mining, as well as payments for products and services, are included in this policy.
The IRS didn’t add an official ticker to Form 1040 until 2020, requiring taxpayers to report any virtual currency transaction. Even though many Bitcoin traders took advantage of the asset’s decentralized nature to avoid paying taxes, the IRS organized a task force in 2018 to track down tax evaders.
3. Commodity Futures Trading Commission
Bitcoin is classified as a commodity by the CFTC, much as gold and other precious metals. In the interest of clarity, the commission published a handbook in 2017 defining its positions. As the business becomes more recognized, the group’s influence over derivatives will expand to include insider trading, pump-and-dump, and other related actions.
The CFTC may appeal to institutional investors interested in investing in cryptocurrencies. And besides, the commission published an official Strategic Plan for Bitcoin and other digital currencies from 2020 to 2024. The approach focuses on clear bitcoin legislation for all Americans while also encouraging cryptocurrency innovation. She does want to “be severe” on those who “violate the rules,” though.
The CFTC has also taken its word for it, suing the BitMEX exchange for failing to register the platform. Many crypto aficionados are ecstatic because the legislation might lead to the creation of a Bitcoin exchange-traded fund (ETF), something which SEC has long refused to adopt.
4. Financial Crimes Enforcement Network
FinCEN established guidelines in 2013, indicating that while virtual money is a form of exchange, it lacks all of the characteristics of actual money, making it ineligible for use as legal tender. However, they believe that anybody may use Bitcoin to buy products and services as long as a client is prepared to accept it.
It’s also worth noting that those who buy products and services with cryptocurrencies aren’t considered money services businesses, which means they’re subject to different regulations than traditional businesses.
5. Federal Reserve
Bitcoin, as declared by Federal Reserve Chairman Jerome Powell, is more of a “speculative asset” similar to gold than a currency or a store of value, as he stated in March 2021. Powell also said that owing to its volatility, Bitcoin is not a particularly brilliant store of value, thus the moniker “speculative.”
In reality, the Federal Reserve has frequently warned individuals about the dangers of Bitcoin and other virtual assets, recommending them not to invest. One of the top chairs of the Federal Reserve Board of Governors, Randal K Quarles, has gone so far as to exclaim that Bitcoin would never be a “revolutionary mode of payment.”
Ironically, the Federal Reserve intends to keep developing its own digital money, which will most likely resemble a stable currency.
6. Financial Industry Regulatory Authority
To engage with such investments as Bitcoin, FINRA needs cryptocurrency brokers to be certified. If an accused cryptocurrency broker, for example, submits false information, FINRA can give legal assistance. If the broker isn’t licensed, he’ll have a hard time staying in business and will most likely have to close his doors.
Otherwise, FINRA tries its utmost to alert individuals about the dangers of cryptocurrencies by offering podcasts and educational manuals on the subject.
7. Office of the Comptroller of the Currency
In terms of regulation on Bitcoin and cryptocurrencies, the OCC has been one of the more proactive government entities. The agency, which regulates big banks, authorized domestic banks to legally offer crypto custody services and deal with stablecoins in 2020, before designating the first “digital asset bank” in the US the following year.
Since then, Michael Hsu, the OCC’s acting comptroller, has stated that he intends to amend his crypto guidelines in order to foster “responsible innovation.” He wants crypto entrepreneurs to feel at ease in the United States, as long as they keep residents secure.
Regulation in the United States: A Historical Perspective
Governments, it’s reasonable to assume, didn’t care about Bitcoin when it first appeared in 2009 – if they even heard about it. Regulators started to take interest as news got out that civilians were utilizing it on the dark web. When the FBI shut down The Silk Road in 2013, another of the primary dark web marketplaces that exclusively accepted Bitcoin, the scenario took a turn for the worst.
The Silk Road has generated over $ 1.3 billion in Bitcoin in just two years. The FBI suspected that much of the revenue was the consequence of laundering money, which sparked a discussion regarding Bitcoin’s anonymity. In the same year, the Financial Crimes Enforcement Network (FinCEN) proclaimed Bitcoin to be illegal tender. The US Senate also addressed letters to law enforcement warning them about the dangers of digital assets.
However, no state came even close to regulating the usage of cryptocurrencies until 2015. This was New York, who had been examining the industry for two years in public. Then there was the BitLicense, which is a legal requirement that a company must meet in order to mediate the buy and trade of cryptocurrencies, store or offer bitcoin custody, or run a cryptocurrency exchange.
Among other things, BitLicense approval necessitates the establishment of Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures. Many states followed the suit to regulate Bitcoin, and yet none of them have a BitLicense-style system in place.
According to the Conference of State Bank Supervisors, the regulation will be accelerated even more in 2020. (CSBS). PayPal and other comparable payment companies were able to supply digital assets more easily as a result of this.
Wyoming is a crypto-friendly state that recognizes them as legal tender. The state has made it possible for cryptocurrency enterprises into becoming Special Purpose Depository Institutions (SPDIs), which are a form of bank that may lend digital assets, give crypto custody, and provide other services.
In the same way that Wyoming acknowledges cryptocurrency as a form of payment, Texas does as well. It has become one of the most welcoming states for bitcoin mining. Texas intends to develop into a significant bitcoin mining hub.
Finally, in 2021, Miami’s mayor spent the year enacting progressive cryptocurrency legislation in the state of Florida. Among other key advances that acknowledge cryptocurrencies as a means of wealth transfer, the city is seeking to allow people to pay taxes in Bitcoin.
Is Bitcoin legal in China?
China formally prohibited financial institutions from offering any Bitcoin-related services in May 2021. While the nation has already prohibited cryptocurrency trading and cryptocurrency-related financing methods, this restriction focused on traditional crypto firms like financial institutions. The nation highlighted cryptocurrency volatility as a cause.
Citizens who already own cryptocurrencies, on the other hand, can keep them lawfully.
Regulation in China: A Brief History
China does not strive to control cryptocurrencies in a proactive manner in general, although this was often not the case. Only until the end of 2017, Chinese citizens are allowed to use cryptocurrencies without the involvement of the government. The authorities eventually understood enough about cryptocurrency to crack down on high-risk businesses.
As a result, the People’s Bank of China outlawed initial coin offerings (ICOs), making it impossible for projects to raise funds in China. This should not be surprising, given the Chinese authorities have been involved in a variety of foreign activities, including cryptocurrencies and others. These rules had an impact on bitcoin trading in China, and several businesses were expelled from the country as a result.
In the summer of 2021, the Chinese government stepped up its anti-mining campaign. Given that the country accounted for a substantial portion of the world’s miners (between 50 and 70 percent), the bitcoin price dropped sharply as a result. China has accused Bitcoin miners of the country’s failure to reach its environmental goals. In the same year, China prohibited financial institutions from providing crypto services, as well as huge corporations including Alipay.
On the flip side of China’s massive crackdown is the government’s interest in blockchain technology and central bank digital currency (CBDC). The country is rumored to be working on its own CBDC, a constant coin cryptocurrency that is tethered one-to-one to the price of the yen. The technology would eventually allow China to digitize the yen once it was released.
Bitcoin Regulation in the Rest of the World
As you may have guessed, there is no global regulatory framework for cryptocurrencies. Almost every country has standards that are different from one another. Let’s take a look at the most notable ones.
Bitcoin was unregulated in Russia for a period of time. Nevertheless, in 2020, the government implemented legislation prohibiting federal employees and their families from owning cryptocurrency in any form. The Russian government also recognized Bitcoin trade, however, it forbade the use of Bitcoin and other cryptocurrencies as a means of exchanging goods and services. Some authorities have attempted to refute this, and there’s also a lobbying organization that claims the Russian government is stifling the bitcoin business. There are also reports that a new bill would be introduced that will require citizens to reveal their assets.
Since 2016, the Japanese government has deemed Bitcoin legal cash, and crypto exchanges must adhere to AML and KYC standards. Years of government research into the Mt. Gox disaster led to this outcome.
Other crypto exchanges in Japan have been hacked, forcing regulators to demand stronger security procedures and put future exchanges on hold for now. However, in 2019, Japan began authorizing new cryptocurrency exchanges and focusing rules on the security token offering (STO) and initial coin offering (ICO) industries.
In 2018, the Reserve Bank of India (RBI) made it illegal for local firms to service cryptocurrencies, claiming that they were not legal cash and that no organization could have a “relationship” with them. This prohibition lasted for two years until the RBI reversed its decision in March 2020. As a result, while Bitcoin and cryptocurrency transactions are now allowed, initial coin offers (ICOs) and asset funds are still prohibited.
Even though the European Union is still striving to reach a regulatory agreement, European countries are rather progressive. The European Union’s Court of Justice (CJEU) determined in 2015 that bitcoin trading constitutes a kind of service providing. This phrase indicates that virtual currencies are exempt from VAT (VAT). Individual countries, like states in the United States, can still set their own policies.
However, the European Union has signed the 5th Anti-Money Laundering Directive (AMLD5), which applies to all nations. In order to combat terrorism and money laundering, this regulation would develop a record of all bitcoin dealers and holders.
In 2019, France regulated initial coin offerings (ICOs) and entities that provide crypto services. Since then, all KYC and AML procedures for French exchanges have been drastically tightened, and they have been compelled to register with the federal government. However, the government is currently working on establishing a broad regulatory framework as of 2021. Francois Villeroy de Galhau, the governor of the Bank of France, argued that the EU has only one-two years to do before digital assets threaten its financial sovereignty.
Coinbase received an official license from Germany’s Federal Financial Supervisory Authority (BaFin) in 2021, allowing it to continue servicing consumers in the nation. Coinbase is the first cryptocurrency-related company to obtain this license, which becomes mandatory in November 2019. BaFin intends to distribute the license to a variety of other organizations.
3. The United Kingdom
Despite the fact that Bitcoin is not regarded as legal cash in the United Kingdom, the Financial Conduct Authority (FCA) is enthusiastic about it. The asset will be deemed property in the UK as of 2020, which means it will be subject to capital gains tax. Because cryptocurrencies are not a standard asset class, the tax imposed on them may change depending on the involved parties.
Due to an examination of operations, the FCA barred Binance from engaging in regulated activities in the UK in 2021. Customers cannot “reliably value” cryptocurrency derivatives, thus the country made it a point to prohibit them.
South and Central America
1. The Savior
El Salvador is the world’s first country to make Bitcoin legal tender. A regulation requiring companies to recognize Bitcoin for products and services went into effect in the summer of 2021. Citizens can also use the digital asset to pay for housing, as it is not subject to capital gains tax when spent. El Salvador’s president handed $ 30 in Bitcoin to any inhabitant of legal age who wanted to use the new payment method.
Many expected that Paraguay would be the next country to follow El Salvador’s lead. The Paraguayan Congress released a bill on July 14, 2021, to “control the activities of creation and sale of virtual assets or crypto assets.” In essence, three government bodies will manage various elements of crypto, attempting to end money laundering and overseeing all electrical usage.
On the other side, the nation will impose cryptocurrency transaction controls that everyone must adhere to, and miners will be required to get a virtual asset mining license in order to continue mining. It’s worth noting, though, that virtual assets in Paraguay aren’t regarded as legal cash. Instead, they’ve examined security tokens that the whole public is entitled to.
Finally, in July 2021, Panamanian politicians intend to adopt Bitcoin regulation. The country will introduce legislation that establishes clear standards and allows for the use of digital currencies. Panama will become an incubator for fintech and company development, according to Congressman Gabriel Silva.