Are Bitcoins Legal?
Experienced Defense Team
- Bitcoins are a recent, valuable form of exchange for goods and services, though they lack legal tender.
- Since its creation, Bitcoin has gained both mainstream acceptance and popularity due to its ease in execution and anonymity.
- This has created a complication for law enforcement agencies and federal regulators who have tried to place cryptocurrencies such as the Bitcoin within a regulatory framework.
- Results have come up inconsistent. The CFTC treats the Bitcoin as a commodity, while the IRS treats it as property.
- Companies regularly transacting with Bitcoin are easily placed under the spotlight.
- Consider hiring an attorney who specializes in digital assets to help resolve the complex issues surrounding Bitcoin.
The purchase and sale of various goods and services can now be made online. This has inevitably led to the rise of digital, or cryptocurrencies, such as Bitcoin. Bitcoin is the most popular digital currency today.
Nevertheless, its use has led some to question its legality. Federal agencies have responded by trying to regulate Bitcoin similar to traditional currencies or trying to analogize it to other forms of ownership like property. The lack of a uniform regulatory framework has created inconsistency and ambiguity.
Congress responded by introducing a bill, the Crypto-Currency Act of 2020, that imposes regulation on cryptocurrencies and vests the regulation and enforcement of such digital assets in different federal agencies and departments.
However, much legal uncertainty remains. Bitcoin transactions can be challenging to understand. It is critical that you are given advice from a competent and experienced attorney with extensive knowledge of Bitcoin.
Do not wait to get in touch with a qualified attorney today. Put Oberheiden, P.C. on your side to advise you on these novel legal issues surrounding Bitcoin.
What are Bitcoins?
The Bitcoin was the first blockchain cryptocurrency in the world. Since its creation in 2009, Bitcoin has been both successful and widespread.
Broadly speaking, Bitcoin is a type of cryptocurrency. It is valuable because people are willing to exchange them for goods, services, and cash. Many businesses accept Bitcoins as a means of payment for goods and services.
There are no physical Bitcoins; the balance of an individual’s Bitcoins is kept on a public ledger on the cloud and verified by a significant amount of computing power.
Payment via Bitcoin has very low transaction fees compared to traditional online payment methods. They can be spent anonymously. The Bitcoin tokens are kept using a public key and a private key:
- Public key: The Bitcoin public key is the public address that operates like a bank account number. It is published worldwide and used so that individuals may send Bitcoins to other individuals or make a payment.
- Private key: The Bitcoin private key is a personalized code that functions similar to an ATM pin. It is used to authorize certain Bitcoin transaction that the user approves and should be kept secret by that individual user.
In contrast to the Bitcoin keys, the Bitcoin wallet is a digital device that allows the trading of Bitcoins and provides a means for the user to track the ownership of coins.
Bitcoin is decentralized, meaning that no single entity or institution controls its network. It is instead controlled by coders and operated by an open network of computers. The Bitcoin wallet is similarly kept decentralized on a blockchain.
Today, there are many non-centralized exchanges that trade Bitcoins, including Coinbase. The prices of the Bitcoin within these exchanges may be different, causing individuals to engage in arbitrage—taking advantage of the price differences within markets. The decentralized nature of Bitcoin makes it challenging to provide a uniform price.
Understanding Bitcoin can be confusing due to the complexity involved in its operation, monitoring, and execution. We are here to resolve some common issues regarding the differences between cryptocurrencies such as Bitcoin versus the traditional fiat currencies as well the debate on the legality of Bitcoin.
The Cryptocurrency, Bitcoin vs. the Fiat Currencies
What is the difference between cryptocurrencies such as Bitcoin and fiat currencies?
Fiat currency is currency in paper form that is backed by the government and regulated by a central authority such as a central bank. Examples of fiat currencies include the U.S. Dollar, the Pound, and the Euro—all of which derive their value from supply and demand forces in the market.
Fiat money requires some engagement with the government, making it easier to track and identify fraudulent activity.
Cryptocurrency is a digital form of currency that is not backed by a government or central authority but instead based on algorithms. It is a decentralized and global currency that is generated through mining and stored on the ledger system—the blockchain. Cryptocurrencies allow for direct and instant transactions between individuals without the use of an intermediary. Most importantly, cryptocurrencies are not legal tender, meaning it is not a recognized form of payment since it has no intrinsic value on its own.
The first and the largest digital currency is the Bitcoin. Unlike fiat currencies, Bitcoin transactions cannot be reversed or modified.
While some people think that cryptocurrencies will soon eliminate the need to use fiat currencies, others say that cryptocurrencies are effectively a form of digitalized fiat money.
This debate can be confusing and present some unforeseen challenges for businesses. If you need advice regarding Bitcoin regulation, contact our office today.
The Legality of Bitcoins
When Bitcoin was first introduced, it created a host of legal issues. Bitcoin was the world’s first digital, decentralized currency that is not controlled by anyone but can be generated by anyone with enough computing power to create coins.
As its acceptance and popularity become more mainstream, legal regulators, law enforcement agents, and tax authorities have struggled to determine where this concept of the “cryptocurrencies” such as Bitcoin fits within existing laws and regulations.
It is simplest to think of Bitcoin as a casino chip. Both forms of currency are “legal” in the sense that it is a representation of value that is eventually converted into legal currency. If it is not converted into cash or some other form of legal currency, it has no value in and of itself. But once it is converted into legal value, you must pay taxes on the cash or other value received, and then it can be redistributed into the economy.
Others regard the Bitcoin as a legal currency, albeit in digital form.
The Federal Response
This is a very debateable topic. The inclination to consider Bitcoin as a means of legal value only once it is converted into cash is pushed back by the mainstream popularity of using the Bitcoin as an exchange of value for goods or services.
Many agencies struggle with this debate by trying to classify Bitcoin into an existing, recognized form of regulation. For instance, the Commodity Futures Trading Commission classified the Bitcoin as a commodity in 2015, while the IRS treats the Bitcoin as a form of property. In 2020, the IRS took an additional step by creating a new tax form that requires taxpayers to declare if they engaged in any virtual currency transactions.
Recognizing this legal uncertainty and understanding the need to impose regulation on such currencies, Congress has a current bill pending called the “Crypto-Currency Act of 2020.”
The Crypto-Currency Act of 2020 would clarify which federal agencies regulate which digital assets and would require those agencies to notify the pubic of any licenses or other certifications needed to create digital assets. The agencies in charge of the relevant digital asset would be vested with the power to establish rules to trace cryptocurrency transactions.
The Risks and Concerns of Bitcoin
Despite the current debate on the legality of the Bitcoin and the federal response to understand and impose regulation on the trade of cryptocurrencies such as Bitcoin, there are several risks and concerns that we should note.
For instance, the legality of Bitcoin depends on where you are in the world and what you are doing with it. As of 2020, the use of Bitcoin is legal in the United States, Canada, United Kingdom, Japan, and many other developed countries, while several countries including China, Russia, and Colombia have outlawed the investment and use of Bitcoin and other cryptocurrencies.
At the present time, in the United States, Bitcoin is still treated as property for tax purposes and is generally not considered legal tender.
Further, because Bitcoin exists and operates in a de-regulated marketplace, there is no centralized regulation authority. Even though every single transaction is stored in the blockchain, it is easy for users to stay virtually anonymous. The record in the blockchain only shows the public key and the amount of funds transferred.
Individuals trading with Bitcoin do not need to provide a social security number nor any other personal information such as U.S. bank accounts. This has inevitably led some to use Bitcoins for illicit purposes such as drug trafficking.
Need Advice with Bitcoin?
Bitcoin transactions can eliminate the time and expense associated with regular transactions involving the traditional fiat currency. However, it can simultaneously be accompanied by a mound of legal problems.
If you need advice on how to proceed with a complex Bitcoin transaction or are having issues understanding legal implications regarding the blockchain, and the execution and regulation of Bitcoin, you need an attorney skilled in advising clients on Bitcoin.
The attorneys at Oberheiden, P.C. have the experience and knowledge needed to advise you through all the unchartered territory of Bitcoin regulation and enforcement.
Call or contact our office online for a free consultation to help resolve these legal and regulatory challenges.