Laws for Bitcoin
The use of Bitcoin is certainly Lawful. The issuance of legal tender is a government monopoly in the US. However, the issuance of private currencies is permitted under the law, as long as the private currencies do not resemble the US dollar (1).
The legal standing of Bitcoin is not fully defined. There are no laws (yet) explicitly stating Bitcoin is legal or illegal. Recent court rulings do declare Bitcoin a Currency. In addition, even the US government sells bitcoin (US Marshal Service). Therefore, all that can be said at this time is, under these rulings, Bitcoin should not be considered illegal.
The legal standing of Bitcoin is not fully defined. There are no laws (yet) explicitly stating Bitcoin is legal or illegal. Recent court rulings do declare Bitcoin a Currency. In addition, even the US government sells bitcoin (US Marshal Service). Therefore, all that can be said at this time is, under these rulings, Bitcoin should not be considered illegal.
Laws for Money
A money transmitter is a business that transfers funds from one person to another. Bitcoin itself is a decentralized network, and thus cannot be classified as a money transmitter. However, some businesses involved in Bitcoin, such as exchanges or payment processors, generally fall under the definition of money transmitters. Money transmitters are required to obtain a license in every state in which they operate. This forces businesses to seek a license in each state. The goal of these licenses is to protect consumers, as traditionally money transmitters have not operated under deposit insurance.
FinCEN is to detect and prevent money laundering and financing of illegal activities. Businesses registered with FinCEN are required to implement Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures. These rules force businesses to identify their customers and monitor their transactions, reporting on suspicious ones.
Critics argue that compliance with these regulations can add a considerable cost to the operation and that regulation created to protect consumers or to prevent illegal activities could greatly increase the friction without ultimately achieving its goal. Additionally, they argue that laundering money using Bitcoin is very risky given that all transaction records are kept in the blockchain.
Recent FinCEN rulings have declared that neither investors nor miners should be considered money transmitters. However, this ruling did not cover web wallet services.
FinCEN is to detect and prevent money laundering and financing of illegal activities. Businesses registered with FinCEN are required to implement Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures. These rules force businesses to identify their customers and monitor their transactions, reporting on suspicious ones.
Critics argue that compliance with these regulations can add a considerable cost to the operation and that regulation created to protect consumers or to prevent illegal activities could greatly increase the friction without ultimately achieving its goal. Additionally, they argue that laundering money using Bitcoin is very risky given that all transaction records are kept in the blockchain.
Recent FinCEN rulings have declared that neither investors nor miners should be considered money transmitters. However, this ruling did not cover web wallet services.
Bitcoin as Money
When utilized as a currency, bitcoin should fall under pre-existing laws and regulations. The difficulty for law makers arises because Bitcoin is much more than a currency. Regulations covering financial instruments based on cryptocurrencies, such as derivatives or Exchange Traded Funds (ETFs), are still in the early stages of discussion. New applications of the decentralized technology introduced by Bitcoin, such as distributed exchanges or betting could present a challenge for regulators. A detailed analysis of the regulatory status for these instruments can be found in Brito et al. (2014).
Taxes
The IRS (Internal Revenue Service) has recently issued tax guidance, determining that cryptocurrencies should be treated as property for tax purposes. Critics have argued that this imposes unreasonable reporting costs for users, making every transaction a taxable event (Santori, 2014). Nonetheless, some developers have rushed to the challenge and have started integrating tax recording capabilities into existing Bitcoin wallets.
Learn More
Bitcoin Paper
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Bitcoin Legal Issues
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IRS on Bitcoin
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