regulations

a) What is the issue about?

The decentralized nature of Bitcoin is one of its key characteristics. One might think that it is not desirable to attempt to regulate the electronic currency. The fact that there is no issuing body and no central authority in charge of the payment scheme may lead one to believe that it is not even possible to undertake any sort of regulatory effort. However, some form of regulation will become necessary if Bitcoin and its entrepreneurs want it to become a mainstream mean of payment and a legal tender (Guadamuz/Marsden 2015).

Cryptocurrencies represent a challenge for state´s authorities and regulators. First, the legal status has to be clarified. There are different regimes existing across countries, mostly referring to the most popular cryptocurrency Bitcoin. Can Bitcoin be registered as a currency? Is it a commodity or private money? Is it illegal? Secondly, their price volatility and abuses for illegal activities such as drug purchases or terror financing of crypto-money represents an issue concerning the fight against money-laundering and cyber-crimes. Thirdly, there are widespread concerns about the impact on national currencies.

b) What would the regulation be about?

Even if some of the best known cryptocurrencies, like Bitcoin, were found seven years ago in 2009, the debate on if and how to regulate this digital currency remains in an early phase. Governments are just starting to react to the challenges that new digital currencies pose (Boehm/Pesch n.d.). To resume, the most important topics when it comes to the regulation of cryptocurrencies are first of all its status (currency vs. commodity), its price stabilization and security issues connected to the use of those virtual currencies (Huffington Post, Rampton 2016).

1. INTRODUCTION –
Legal status and regulation of cryptocurrencies: a regulator´s issue

2. FROM THE ABSENCE OF REGULATION TO THE BANNING OF BITCOIN:
Examples of regulative approaches around the world

The following overview shows some selected examples of those countries who already attempted a regulation of Bitcoin or who announced strategies to do so. The overview also includes countries which banned Bitcoin and the reasons why they did so. Few countries have dealt with introducing a legal framework and many of them are hostile towards Bitcoin.

1) USA – Bitcoin as a commodity
The USA have the most welcoming approach concerning Bitcoin until now. The U.S. Treasury classified Bitcoin as a convertible decentralized virtual currency in 2013 (FinCEN 2013).
Bitcoin businesses have to register within the FinCEN, the Financial Crimes and Enforcement Network. On July 17th, 2014, New York became the first state to attempt to regulate Bitcoin by introducing a proposed licensing regime to operate in the state, called BitLicense (Tsukerman 2016).

2) China – Bitcoin is banned
In December 2013, the central bank of China and four other central government ministries and commissions jointly issued the Notice on “Precautions Against the Risks of Bitcoins” which defines Bitcoin as a special “virtual commodity”. The official statement claimed that Bitcoin is not a currency and that it should not be circulated and used in the market as a currency (US Congress Research Directorate 2014). This contradicts the fact that most of the mining farms are based in China. Bitcoin experts consider that the legal situation in China will emerge with the pace of the market. They suspect that this overall skepticism is temporary until the market has matured (Foundersgrid, Osborne 2014).

3) European Union
There has been a discussion about if Bitcoin may fall within the definition of the Electronic Money Directive 2009/110/EC or the Payment Services Directive (2007). The first defines electronic money based on three criteria: (a) electronic storage, (b) issuance upon receipt of funds, and (c) acceptance as a means of payment by a legal or natural person other than the issuer. The report states that the Bitcoin meets the first and third criteria but not the second (US Congress Research Directorate 2014). The latter prescribes rules related to the execution of payments with electronic money. However, Bitcoin does not fall in the scope of this Directive because payment institutions introduced by this legal state are not committed to issue electronic money.
Concerning the debate on taxing Bitcoin, the European Court of Justice concluded in an opinion document that Bitcoin should be exempt from VAT (Perez 2015).

4) Russia
Russia’s central bank - Bank of Russia, considers Bitcoin as money substitute which can be used for money laundering and for funding terrorist activities. Hence the use of Bitcoins in the Russian Federation is restricted since 2014 (Scott 2016). Nevertheless no ban was officially imposed since.

5) Brazil
In October 2013, the Brazilian authorities introduced a law that touches upon the possibility to normalize mobile payment systems and the creation of electronic currencies, such as Bitcoin (Scott 2016).

6) Singapore
Bitcoin is not currency issued by the Monetary Authority of Singapore. In January 2014, the Inland Revenue Authority of Singapore issued a series of tax guidelines according to which Bitcoin transactions may be treated as a barter exchange if it is used as a payment method for real goods and services. Businesses that deal with Bitcoin currency exchanges will be taxed based on their Bitcoin sales (Lam 2014).

7) Canada
Canada has introduced legislation to require cryptocurrencies to register and to report suspicious transactions that may be linked to money laundering and terrorist financing (Ponsford 2015).

8) United Kingdom
A high-level review of Bitcoin use took place in the summer of 2013, at which time concerns were raised as to the lack of transparency with the use of the coin, but it was left unregulated.

9) India
At present there is no regulation concerning any cryptocurrency in India. The government stated not to have enough experts on this regulation. They cautioned Indian citizens to trade with Bitcoin.

3. FUTURE PERSPECTIVES

Credits:
Hannah CORNELSEN

Sources:
Andreessen, M. (2014) “Why Bitcoin Matters.” Retrieved from: dealbook.nytimes .com/2014/01/21/why bitcoin Matters.

Boehm, Franziska, Pesch, Paulina (n.d.): Bitcoin: A First Legal Analysis - with reference to German and US-American law institute for Information, Telecommunication, and Media Law, University of Münster, Germany

Caleb O. Brown and Austin Bragg (Directors). Regulation and Bitcoin. Interview with Jerry Brito. CATO Institute videos. Washington 2015. Internet link: https://www.youtube.com/watch?v=Zgf5UnhirR0

Financial Crimes Enforcement Network, 19th november 2013. Retrieved from: https://www.fincen.gov/news_room/testimony/html/20131119.html

Global Research Directorate Staff (2014): Regulation of Bitcoin in Selected Jurisdictions. The Law Library of Congress. Global Research Directorate.

Guadamuz, Andres and Chris Marsden (2015): Blockchains and Bitcoin: Regulatory responses cryptocurrencies Volume 20, Number 12 - 7 December 2015

Hottot,Kevin (01/04/2016): Entre régulation et encadrement: La blockchain en phase de reconnaissance. Retrieved from: http://www.nextinpact.com/news/99208-entre-regulation-et-encadrement-blockchain-en-phase-reconnaissance.htm

Hughe, Sarah Jana and Stephen T. Middlebrook (2014): Regulating Cryotocurrencies in the United States.Current Issues and Future directions. Research Paper Number 282 40 WM. MITCHELL L. REV. 813 (2014)

Osborne, Chris (20014): 50+ Bitcoin Experts Share Their Thoughts On What The Future Holds For Bitcoin. Retrieved from: https://foundersgrid.com/Bitcoin-regulation/

Rampton, John (15/3/2016) Why Bitcoin is not regulated; retrieved from http://www.huffingtonpost.com/john-rampton/why-Bitcoin-is-not-regula_b_9458864.html

Scott, Allen (29/3/2016):These are the World´s top 10 Bitcoin friendly countries. Retrieved from https://news.Bitcoin.com/worlds-top-10-Bitcoin-friendly-countries/

Suberg, Wiilam (4/11/2015): Cryptocurrency regulation across the globle 2015, part 1. Retrieved from:https://cointelegraph.com/news/cryptocurrency-regulation-in-the-international-community-2015-part-1

Tsukerman, Misha (2016): The block is hot: a survey of the state of Bitcoin regulation and suggestions for the future. BERKELEY TECHNOLOGY LAW JOURNAL Vol. 30:385.

Ponsford, Matthew P. (2015). A comparative analysis of Bitcoin and other decentralized currencies: legal regulation in the people´s republic of China, Canada and the United States. In: Hong Kong
Journal of Legal Studies – Volume 9 (2015). p.29-50.

Lam Pak Nian (2014) : Bitcoin in Singapore. A light touch approach to regulation. National University of Singapore. Working Paper 11 April 2014

Yessi Bello Perez (15/7/2015): European Court of Justice official proposes Bitcoin VAT exemption. Retrieved from:;http://www.coindesk.com/european-court-of-justice-official-proposes-Bitcoin-vat-exemption/

In order to clarify the term “regulation” one has to differentiate between two categories. There are statutes and regulations that should protect people who use Bitcoins (consumers, investors), and those that are supposed to protect society from people who use, or might use, Bitcoins (drug dealers, terrorists, violent criminals) for illegal purposes (Tsukerman 2016).
Initial questions are for example, whether Bitcoin trading platform operators must be licensed by financial supervisory agencies (Boehm/Pesch n.d.). Concerning taxation, the rapid rise of the Bitcoin exchange rate resulted in an increased attention from tax authorities. Other questions remain unfold: What kind of security challenges do arise through the skyrocketing use of Bitcoin for speculation and online trading? What are the consumer and investor protection concerns associated with Bitcoin compared to traditional financial exchanges? (Ponsford 2015).

a) A legal and favorable framework for cryptocurrencies – a long road to go?
The overview shows: There exists no clear cut consensus on how to proceed with developing a broad regulatory framework which addresses security concerns without undermining the innovative aspects of the Bitcoin currency. The academic literature as well as the most known web forums on the topics claim that governments should deal with the topic in a transparent and open-minded way instead of holding a hostile approach. Still, the discourse on national security will remain the hardest competitor of Bitcoin-favourable policies. The real questions according to the authors Sarah Jane Hughe and Stephen Middlebrock are which paradigm(s) governments will use on regulating cryptocurrencies and how they might finally compete with each other to offer regulatory schemes that do not send cryptocurrency entrepreneurs, investors, and users running offshore (Hughe/Middlebrock 2014).

b) Could the state and Bitcoin entrepreneurs work together?
On the other hand it will be also important in which way the Bitcoin entrepreneurs react – some are observing the current debates on regulation with a lot of skepticism, some are even included in this bargaining process (Caleb/Bragg 2015). Discussions on how to regulate and also legalize the use of Bitcoin should be led on both sides and also mutually shared in order to develop an acceptable legal frame.
If a particular cryptocurrency is able to accept that the government is part of the ecosystem and its community engages with the government meaningfully in creating the ecosystem, that cryptocurrency is likely to become more widely accepted (Caleb/Bragg 2015). Some authors evoke that Bitcoin users should register their public key addresses to their real identities. While some of the benefits of anonymity will be lost, it might be a worthwhile tradeoff to both make illicit use of Bitcoin more difficult, and to build public confidence and acceptance. This is already happening to some extent with Bank Secrecy Act registration of Bitcoin exchanges with FinCEN. Also, projects like Elliptic are providing actionable intelligence to financial institutions and law enforcement agencies by identifying illicit activity on the Bitcoin blockchain.
While such a change may drive away some of Bitcoins’ initial users in the libertarian scene, the potential of Bitcoin and the block chain are too important to be lost in an attempt to accommodate such idiosyncratic beliefs, say venture-capitalists who believe in the numerous possibilities this technology made arise (New York Times, Andreessen 2014).
To conclude, a compromise between regulators and users would be that some of its anonymity is lost in favor of a more reliable use of Bitcoin and an efficient prosecution of those who abuse it for illegal activities.

c) What do Bitcoin experts have to say about regulation?
Opinions of Bitcoin experts on the topic will be resumed in the following paragraph:
Most of them expect the discussions on regulation to increase. In Europe they see an overall positive trend as is the case in the US. Considering the paradoxical case of China, where Bitcoin has been banned but where the use if Bitcoin is rising and huge mines are becoming a business, experts like Coindesk Director Jeremy Bonney think that Bitcoin will continue to impose its rules. Regarding a possible future legal regime, the estimation that governments will continue in trying to get to know Bitcoin and to balance between the risks and business opportunities is the most found. There is a hope that this development will lead to arbitrage in creation and resettlement of Bitcoin businesses to territories with more Bitcoin friendly environment (Foundersgrid, Osborne 2014).

a) Germany – Bitcoin, a private money
In Germany virtual currency regulation exists. The scope of Section 1 of the German Banking-Act that prescribes persons who conduct banking businesses or financial services a written authorization by the German Federal Financial Supervisory has been adaptable to virtual currencies (Boehm/Pesch n.d.). Moreover, German Federal law classifies Bitcoin as an economic asset – in consequence it is subject to the income tax.

b) France
Imposing taxes on Bitcoin is a controversial issue in the country because of the uncertain legal definition of the digital currency.
La “Maison du Bitcoin” opened in 2014 in Paris and represents Europe´s first Bitcoin center. This co-working space offers assistance for Bitcoin startup companies and contributes to a dialogue on regulation within the public institutions (Next Impact, Hottot 2016).

c) Estonia
Estonia´s government is generally tech-friendly as it is for example one of the few countries in the world using e-government tools. The government is interested to expant the blockchain technology to a wide range of public services, as it was also used in the national e-voting system.

d) Denmark
Denmark´s regulating authorities stated that they won´t regulate Bitcoin so far. The government is considered as tech-friendly. In the context of cryptocurrencies it is interesting to note that Denmark is one of the countries which announced plans to eliminate cash money in a near future.

e) Sweden
The Swedish Financial Supervisory Authority have legitimized the fast growing industry in the country by publicly declaring Bitcoin (and other cryptocurrencies) as a means of payment (Scott 2016).

The current situation can be described as a patchwork of different attempts (Caleb/Bragg 2015). The incoherent regulatory environment for cryptocurrency across the globe is a symbol for its challenging nature itself. Bitcoin is nowhere an official currency but some countries classified it as a commodity. It is neither illegal nor legal in the most of the countries – its status remains unclear. In those where Bitcoin was officially banned, it is not yet ruled how the use or the trading with Bitcoin could be pursued. Blockchain technology and the various ways in which it manifests itself in practice create a complex new area for legislators. The difficulty of regulating cryptocurrency is conspicuous in the fact that no jurisdiction has so far managed to produce an entirely effective solution (Suberg 2015).