Is the Bitcoin Legal?


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Bitcoin is a form of electronic currency that functions without being backed by any governmental authority. Bitcoin is often called a “cryptocurrency” because it is decentralized and uses a complicated system of cryptography to prevent double-spending. This form of currency has become a matter of great public interest as authorities debate whether it is legal and, if so, how they can regulate its use in illegal transactions and monitor it for tax purposes.

As with any currency, at the end of the day, a Bitcoin's legality is more a question of use. Authorities struggle with understanding how the cryptocurrency even works, let alone make laws around its use. Government agencies' primary concerns about Bitcoin involve its ability to be used anonymously. This makes it a prime vehicle for money laundering and other illicit activities. This is particularly difficult to deal with given the cryptocurrency's decentralized nature. While U.S. based financial exchanges are regulated, Bitcoin, with its decentralized nature, is not and could serve as a means of conducting illegal activities without being traced.

In late 2013, Silk Road, an anonymous marketplace known for selling drugs and other illegal products and services over the Internet, was targeted by federal authorities and shut down. Bitcoin was the preferred form of currency for this operation, which could only be accessed over the TOR anonymous browsing network. Aside from trafficking in narcotics, the owners of Silk Road were also accused of contracting for murder using Bitcoin to pay for the crimes.

As the currency is still fairly new, government regulators have been slow to catch up to its development. Laws vary on a per-country basis, but many nations are slowly beginning to enact legislation and administrative laws designed to regulate Bitcoin use within that country's borders.

In the United States, the Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Treasury Department, has published guidelines about the use of virtual currencies, including Bitcoin. FinCEN’s guidelines set forth the circumstances under which any virtual currency user, including those using Bitcoin, could be categorized as money services businesses (also known as “money transmitting businesses” or MTBs). MTBs were already obligated to observe laws designed to prevent money laundering and anonymous transactions, so extending these regulations to Bitcoin was a natural evolution of those laws.

While federal legislation regarding Bitcoin has not yet been enacted as of the time of this writing, several U.S. states have passed their own laws. California and New York have been particularly aggressive in pursuing criminal organizations that trade in Bitcoin. In May 2013, California’s state financial regulator issued a letter to the Bitcoin Foundation, a nonprofit organization that promotes Bitcoin, warning that it may be considered an MTB subject to regulation as such, and threatening employees of Bitcoin Foundation with potential fines and jail time for violations of those regulations. Similarly, in August 2013, the New York Department of Financial Services issued subpoenas to 22 companies that trade in Bitcoin asking to discuss a means of developing appropriate regulatory guidelines for the digital currency industry in lieu of potential criminal sanctions as in the California letter.

So, coming back to the original question of whether Bitcoin is legal, the answer depends on who the user of the currency is and what they are doing with it. If an individual or business acquires Bitcoins and exchanges them for legal goods and services, then FinCEN guidelines advise that this is an appropriate and legal use. Those who generate FinCEN and exchange it for fiat currency, however, may not be acting legally if they are not duly licensed MTBs. Similarly, Bitcoin exchanges are defined as MTB's and must be registered.

Additionally, there may be certain tax implications for the use of Bitcoin. The IRS has not yet come out with clear policies for handling Bitcoin, but has opined that it may be handled in a similar fashion to earnings derived from barter and gambling.

If in doubt about the use and legality of Bitcoin, it may be wise to hold off until the law related to these types of transactions has more thoroughly evolved so that you do not become the test case for a criminal or regulatory action. If you cannot wait for this body of law to develop, however, you should consult an attorney in your area for guidance on how best to avoid risk associated with the use of this currency.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.

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