Bitcoin – The Virtual Currency

Bitcoin seems to be the buzz word that everyone is talking about right now. Cryptocurrencies are forms of money with no physical presence. Bitcoin is the most popular cryptocurrency today with a steady stream of about 3,600 new bitcoins a day and about 16.5 million now in circulation. At present there seems to be a confusion of where bitcoin legally stands.

What is Bitcoin? There are two key traits of Bitcoin: First of all, it is digital and it is seen as an alternative currency. Unlike the notes or coins in your pocket, it largely exists online. Although there are some specialist ATMs which issue bitcoins, it may be best to think of them as being more like virtual tokens. Secondly, Bitcoin is not printed by governments or traditional banks. This means that it is not a legal tender, you can’t use it to pay your taxes or settle debts.

Bitcoin and other cryptocurrency is a new technological innovation that has not yet been fully implemented into the legal framework of many countries across the globe. There are many legal aspects of Bitcoin and cryptocurrency in general to consider. The laws that apply to Bitcoin typically apply to other cryptocurrency, the umbrella term Virtual Currency is often used.

Bitcoin and cryptocurrency has various legal aspects to consider depending on the country. Some countries class Bitcoin and other virtual currency as money and legal, some class it as an asset and legal, some class it as neither illegal nor legal, with no legal frameworks in place.

Bitcoin is a controversial currency. In Russia, Ecuador and Bangladesh, Bitcoin is banned outright. In other countries such as China, Bitcoin is illegal for commercial use but legal for private individuals to hold, trade, mine, buy and sell. Some countries Bitcoin is banned due to already existing laws, such as Iceland.

In the United Kingdom however like many countries, Bitcoin is unregulated with no legal framework in place. However, a recent ruling in the EU court system meant Bitcoin was exempt from VAT taxes in any EU member state. A number of regulatory gaps currently exist as the law has not been able to keep up with the technology.

Key legal issues of recent times include the following:

• Large thefts of Bitcoins prompting industry action
• EU court hearings on weather VAT applies to Bitcoin, the courts ruled Bitcoin is VAT free.
• Banning of Bitcoin in certain countries.
• Bitcoin taxation in the US, eventually declared Bitcoin as an asset.
• Loss of Bitcoin private keys hard to prove.
• Online drugs marketplaces.
• Chargeback ability and scams.
• Hiding assets.
• Lack of legal protections

Most Bitcoin use around the world is legal and unregulated at present. Some countries have incorporated it into their financial system, but very few have outright banned it. Bitcoin has therefore got a great potential to become a global currency. Even in countries where it is banned, it is very difficult to regulate the use fully without internet censorship. It shows there is a great potential for growth and incorporation into legal frameworks and to the existing financial system. The key legal issues surrounding Bitcoin have been discussed and these are the main issues to consider when considering legislation for Bitcoin.

There are likely to be more legal precedents set in the next few years surrounding digital currencies. Lawyers in the US have already filed or are considering filing lawsuits that are intended to ask the courts to impose some guidelines and regulatory mandates on cryptocurrencies. Further legal developments over the next several years are likely to occur, for both good and ill of Bitcoin and other cryptocurrency.

The laws around Bitcoin are yet to be developed. As an innovative law firm, we will be closely watching developments in this area at Nayyars Solicitors and tackling any legal challenges that arise as a result.

Lucy Kusumah

Paralegal