As bitcoin has become more popular, many people have begun to wonder about its legality. Is bitcoin legal? It is a fair question, and it is one that even government agencies have been asking themselves.
The issue stems from the lack of regulation that governments can put on bitcoin, as it is not a currency that they have created. It has baffled legal professionals for a time, but the running answer is that yes, bitcoin is completely legal. Provided you aren’t doing anything illegal with it.
How does this work?
Legal concern about bitcoin comes from the fact that bitcoin is largely able to be used anonymously. This means that it could easily lend itself to being used for illegal activities like money laundering. This reality has understandably raised some alarm among law enforcement professionals.
Another concern is that while bitcoin exchanges are regulated in the US, this is not necessarily the case for all other countries. This raised alarm that bitcoin may potentially be used for illegal activity in offshore accounts, since it is so difficult to track and is not always monitored closely.
Many of these fears were realized in 2013, when an online black market called Silk Road was shut down. Silk Road was an anonymous market where people could buy illegal substances online, including drugs.
Additionally, bitcoin was Silk Road’s only currency because of its inherent anonymity, which caused the FBI great alarm. When Silk Road was shut down, it took with it a lot of bitcoin’s credibility as a legal currency.
Another growing concern about bitcoin is the lack of regulation. After all, it is not like paper currencies which are printed out in numbers determined by a government department. In the US, there have been very specific measures taken to regulate bitcoin wherever possible.
The Financial Crimes Enforcement Network, or FinCEN, was the first US agency to begin regulating bitcoins. In 2013, FinCEN published guidelines about how virtual currencies, namely bitcoin, can be regulated.
This includes measures that prevent against money-laundering, and has taken some of the anonymity away from bitcoin by requiring certain information during business transactions, at least in the US.
State Attitudes Toward Bitcoin
Like so many things, bitcoin regulation can largely depend on what state the user is in. California and New York, for example, have spearheaded a drive to regulate bitcoin as much as possible. On the flip side, several states like New Mexico and Montana have not done anything to regulate virtual currencies.
California displayed their mistrust of bitcoin when in 2013, their state financial regulator sent a letter to the Bitcoin Foundation, a nonprofit group dedicated to the promotion of bitcoin. The letter stated that the Bitcoin Foundation was a money transmission business, and threatened the employees with various fines and even jail time.
New York, while it has sought to regulate bitcoin at the state level, has overall viewed bitcoin far more positively. New York’s Superintendent of Financial Services announced that the state of New York would accept applications to exchange paper money for digital currency.
While New York has been viewed as viewing bitcoin positively, it should be noted that it is also one of the states with the most regulation of bitcoin.
Some banks have frozen accounts which used bitcoins, particularly when the company involved was not a money transmitting business. While legal proceedings about this have remained inconclusive, and no final ruling has been declared, preliminary findings indicate that banks do not have the right to freeze the accounts of bitcoin users.
What Does All of This Mean?
This is a lot of information, but what does it all boil down to? Well, that depends on what you are doing with Bitcoin.
Users are the people that either spend or store bitcoin. If you are only using bitcoin in exchange for goods or services, like a regular currency, then you are in the clear. There is nothing illegal with using bitcoin in this fashion.
Miners are not as protected, however. According to FinCEN, it is illegal to create virtual currency and sell it for paper currency. Bitcoin miners have asked for clarification, as they would seem to fall into this category, but there have been no legal rulings on this matter.
Like any other legal currency, there has been an expectation that bitcoin can be taxed. At present, though, the IRS has issued no rulings on this, so this is something of a legal grey area. The IRS claims to be examining the possibility of taxing bitcoin, but they have issued no statement thus far.
For most users, bitcoin is perfectly legal. If you only wish to use bitcoin as regular currency, then you are legally in the clear.