Is bitcoin legal?
Is bitcoin legal in South Africa?
Bitcoin is of interest to law enforcement, tax authorities, and legal regulators, all of which are trying to understand how it fits into existing frameworks.
The legality of your bitcoin activities will depend on who you are and what you are doing with it.
Bitcoin has proven to be a contentious issue for regulators and law enforcers, both of which have targeted the virtual currency in an attempt to control its use.
We are still early on in the game and many legal authorities are still struggling to understand the cryptocurrency, let alone make laws around it.
Amid all this uncertainty, one question stands out: is Bitcoin legal?
The answer is yes, depending on what you’re doing with it. Read on for our guide to the complex legal landscape surrounding bitcoin. Most of the discussion concerns the US, where many of the legal dramas are currently playing out.
What are the concerns about bitcoin?
Bitcoin is often used anonymously. This makes it a potential instrument for money laundering. In particular, law enforcers seem to be concerned about the decentralized nature of the currency.
As early as April 2012, the FBI published a document highlighting its fears around bitcoin specifically, drawing a distinction between it and centralized digital currencies such as eGold and WebMoney. They stated that while US-based exchanges are regulated, offshore services may not be. This has been proven to be a haven for criminals to use bitcoin for illicit activities without being traced.
The Silk Road is an anonymous marketplace that can only be accessed over the TOR anonymous browsing network. Bitcoin was used as it’s preffered currency when trading on the site. Silk Road was used to sell goods that are illegal in many countries. US Senator Charles Schumer shut down the site explicitly linking it to bitcoin, calling it a “surrogate currency”. And the US Drug Enforcement Administration seized bitcoins from a US resident for purchasing a controlled substance in June 2013.
Who regulates it?
In South Africa bitcoin falls under the Financial Intelligence Centre Act 38 of 2001.
Regulators will vary on a per-country basis, but you can expect to see national financial regulators interested in bitcoin and other virtual currencies. This could potentially come with regional regulators at a sub-country level.
In the US, the Financial Crimes Enforcement Network (FinCEN) took the initiative. It published guidelines about the use of virtual currencies. FinCEN’s March 18, 2013 guidance defines the circumstances under which virtual currency users could be categorized as money services businesses (also commonly known as money transmitting business or MTBs). MTBs must enforce Anti-Money Laundering (AML) and Know Your Client (KYC) measures, identifying the people that they’re doing business with.
What this means to you
The legality of bitcoin depends on who you are, and what you’re doing with it. There are three main categories of bitcoin stakeholder. Someone may fall under more than one of these categories, and each category has its own legal considerations.
These are individuals that obtain bitcoins, and either hoard them or spend them. Under the FinCEN guidance, users who simply exchange bitcoins for goods and services are using it legally.
FinCEN: “A person that creates units of this convertible virtual currency and uses it to purchase real or virtual goods and services is a user of the convertible virtual currency and not subject to regulation as a money transmitter.”
According to the FinCEN guidance, people creating bitcoins and exchanging them for fiat currency are not safe.
FinCEN: “By contrast, a person that creates units of convertible virtual currency and sells those units to another person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter.”
Miners seem to fall into this category, which could theoretically make them liable for MTB classification. This is a bone of contention for bitcoin miners, who have asked for clarification.
FinCEN: “In addition, a person is an exchanger and a money transmitter if the person accepts such de-centralized convertible virtual currency from one person and transmits it to another person as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency.”
What is the industry doing?
- The industry has responded to growing regulator concerns in several ways.
- Several companies created a committee to form a self-regulatory body called DATA, designed to encourage open conversation with regulators.
- The Bitcoin Foundation formed committees to offer legal guidance, steer policy, and liaise with regulators.
- Exchanges are attempting to secure MTB licenses at the state and federal levels, and some have avoided doing business with US customers until this is resolved.
Germany is perhaps the most advanced country when it comes to regulating bitcoin and virtual currencies. Although some issues remain unresolved, the German government has exempted bitcoin transactions held for over one year from 25% capital gains tax. It also categorized bitcoin as a form of private money.
In July 2013, reports suggested that Thailand had banned bitcoin. However, this is not the case. The Bank of Thailand was the main entity behind banning bitcoin, however, they do not have the power to do so. During this time, many different exchanges were still trading. As of August 2013, the Bank of Thailand was simply considering whether to give the exchange in question a license.
“Because they have not been granted a license this does not automatically mean that an individual in Thailand selling or buying bitcoins with a bitcoin exchange in another country, e.g. Mt. Gox, is breaking the law,” said Bank of Thailand Governor Prasarn Trairatvoraku.
India’s central bank is currently “watching” bitcoin. Currently, they are gathering more information about cryptocurrencies, but in the meantime, they will not be regulating it
Canada has announced that it will tax bitcoins in two ways. Their barter transaction rules will treat all transactions for goods and services. While its Transactions in Securities document says that profits made on commodity transactions could be income or capital.