An Overview of Bitcoin Regulation
Bitcoin is the world’s first decentralised digital currency, which utilises a form of cryptography to secure payments and control the creation of units of currency. Although discussion of cryptocurrency models has been floating around the web since the late 90s, Bitcoin has become the leading player since its development in 2009 and subsequent release in 2010. In the UK, it's rapidly gaining legitimacy and is now accepted at a number of big-name retailers and charities, including CeX and the Royal National Lifeboat Institution. However, regulation of Bitcoin remains a murky grey area, despite these gains.
Due to Bitcoin's decentralised nature, it doesn't belong to any single government, bank or company. Instead, it relies on a peer-to-peer (P2P) network of nodes to manage and maintain its infrastructure – these nodes are used to broadcast messages across the network and facilitate transactions. In order to validate and process these transactions, Bitcoin also requires a network of 'miners': computers which add transaction records (known as blocks) to a digital ledger (known as the block chain), which contains details of all past transactions. The people who have set up nodes on their computers and bought specialised hardware for Bitcoin mining therefore help the currency to thrive.
While there are clear benefits to this mode of operation (for example, the reduction of merchant fees and bank fees for international transfers, as well as speedier transactions and receipt of funds), it does make Bitcoin difficult to regulate. For example, because of its relatively young economy, the value of the currency can rapidly increase or decrease – with no ability for national banks to intervene to stabilise it.
Also, as transactions aren't processed by a bank or other accountable institution, there's no facility for reversing or getting a refund on transactions. That means that only the person receiving the funds can refund the sender, if they choose to do so – which is why it's so important to only deal in Bitcoins with trusted businesses and individuals, as it's more challenging to enforce consumer and statutory rights in this digital environment. It also complicates the refund process, as the volatile nature of the currency means that a refunded sum of bitcoins may not have the same value as the original purchase.
Although Bitcoin sometimes gets a bad rap from the press in terms of being associated with illegal activities, it's important to remember that, in most places around the world, trading and using the currency is perfectly legal. Currently, there are only a handful of countries that have declared a ban on the usage of Bitcoin, including Bolivia, Ecuador, Thailand and Indonesia. Many other countries have expressed statements of concern about the currency, including China and Russia, although these have not (as yet) resulted in blanket legislative bans. In China, regulations were brought into effect that prevent banks and other financial entities from trading in Bitcoin, but private individuals and companies are still free to do so.
Elsewhere, both the US and UK take a laissez faire attitude to Bitcoin and haven't imposed any regulations, while the story is the same throughout much of Europe and the rest of the world, with countries either imposing no regulation, or applying the same rules to Bitcoin as other forms of tender, with special measures around money-laundering and counter-terrorism applied in some jurisdictions.
As mentioned, Bitcoin is largely unregulated around the world, and accountancy firm Deloitte has even suggested it may be too soon in the currency's life to try and regulate it, contending "strong historical evidence suggests that allowing new technologies to develop without interference is initially the best course of action".
While a number of Bitcoin organisations have teamed up with law enforcement agencies in the US to create a new forum on the subject, there are almost no legislative measures in place yet. One of the few exceptions is the New York BitLicence, which was released in 2015 after two years of research and discussion. However, the final regulatory framework was not well received by those using and advocating the currency, and many companies ceased trading Bitcoin in New York state rather than apply for the licence.
However, it's worth noting that, while specific legislation for Bitcoin is thin on the ground, businesses and individuals trading in Bitcoin must still comply with local financial law, which does apply to cryptocurrency dealings. This means that illegal practices like Ponzi schemes are still illegal in a Bitcoin context, and the currency still typically counts as an asset for the purposes of tax declaration.
When it comes to online gambling, casino operators that accept Bitcoin must also be fully licensed and comply with industry standards – Bitcoin casinos operating in the UK, for example, must hold a valid licence from the UK Gambling Commission.
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