One of the first questions that every newcomer to the crypto industry has is whether or not it is even legal to deal with cryptocurrencies. After all, this is digital money that is not controlled by banks, it is not regulated, and there are still ways to use it and stay completely anonymous while doing it, if you are willing to take a risk and use unregulated exchanges that don’t require account verification, such as LocalBitcoins. This exchange, for example, allows you to buy Bitcoin peer-to-peer, which does come at a risk of becoming a victim of a scam.
With all of that combined, it hardly seems like something the governments would allow. It simply sounds like you get a lot of benefits by using cryptocurrencies, and it all just sounds too good to be true.
Indeed, many have been wondering why the governments don’t just simply ban Bitcoin and be done with it. This is what we will explore this time, along with the question of Bitcoin’s legality and what it might lie in the future of cryptocurrencies.
The legality of Bitcoin
The simple answer to this is: yes, Bitcoin is legal. You can legally own it, and you won’t go to jail for using it.
The equally short, but more complicated answer would be that Bitcoin is not illegal. Think of it this way: Bitcoin is as illegal as fiat money — you won’t get punished for using it unless if you get caught using it in an illegal way, such as for purchasing illegal goods and services. Even then, a lot of it depends on the laws of the country you live in.
For now, Bitcoin’s role in physical world remains rather limited, since most people still mainly use it for investing and trading, hoping to make a profit (which could happen if you do it right and have a bit of luck).
Why do governments allow Bitcoin?
As mentioned, the governments never straight out banned the use of Bitcoin. You can own it and use it in the US, Europe, and even in China, although the situation in China is even more complicated than in other areas of the world. China sees Bitcoin as property, while the majority of the world view it as a financial asset — unregulated one, perhaps, but still a financial asset.
Basically, governments are aware that banning Bitcoin would not do much good. Since it is decentralized and the government cannot control it, all that a direct ban would lead to is illegal use. People wouldn’t just stop using BTC just because the governments decided to ban it. Many other things are banned, and are still used heavily around the world.
All that the governments would create is a new wave of criminals from all circles of society, because people tend to follow the money. Because there is a lot of money to be found in Bitcoin, governments decided to take the high road and try to regulate it, in hopes that they too would benefit from this asset.
Proof that the governments are after their own cut of the spoils is the fact that Bitcoin is not regulated, and it is still subjected to taxation. Governments have forced the exchanges to introduce KYC and AML procedures, which require their users to register and verify their identities. In other words, if you use a major, safe exchange, you need to prove your identity by uploading a document, such as a photo of your ID.
That exchange will then assign all of your trading data to your identity, as well as the address of your wallet, once you transfer your funds. The government and its services, such as the IRS, would then collect this data and know exactly how much BTC you have. After that, they would demand that you pay taxes on your coins, and especially on any profit that you have made by trading them.
Regulations and taxes
Of course, this is a bit more complicated than paying your regular taxes, at least for now. It all goes back to the fact that BTC is not regulated. Not only that, but its price is quite volatile. As such, it goes up and down, often by thousands of dollars. When calculating your taxes, you would have to provide BTC price on the day when you purchased the coins, which might be challenging if you tend to trade on several different exchanges.
This is why it is important to keep a records in order to calculate your taxes properly. Luckily, the governments around the world are moving towards legalizing Bitcoin, meaning that you will be able to simply pay your taxes and cash out without having to worry or feel like you are trying to hide it from the government. The only thing missing right now are proper regulations.
Bitcoin is also difficult to regulate, as it doesn’t act like any other asset out there. Not only that, but cryptocurrencies are still considered quite young, and their evolution and technological development are still on-going. As such, changes tend to happen constantly, and that makes it even more difficult to regulate them.
The US Securities and Exchange Commission already sees most altcoins as securities, and as such, they should be subjected to securities laws, and they cannot be taken into calculation when regulating utility cryptocurrencies. A lot of it remains uncertain, and the entire situation is quite messy. In fact, the US government is still trying to understand them properly.
Many other governments did try to introduce regulations, and they either only partially succeeded, or failed completely. So far, countries like Japan and South Korea are among the most advanced ones in terms of regulating cryptocurrencies. There are also countries like Malta, France, Switzerland, and alike, which are known for being open to new technologies and concepts, and they tend to attract businesses.
This is another reason why the governments don’t just ban coins — it opens up new areas of business, which means more money, greater economic and financial development, and more.
Cryptocurrencies can bring positive things to the market
Everything mentioned so far still represents only a small portion of the benefits, mostly acting as advantages that the governments see for themselves. However, there are many changes that the crypto market can bring once it matures and stabilizes.
For example, decentralization and transparency allow you to view the entire history of Bitcoin payments from the moment it was launched. Then, the fact that Bitcoin and most other cryptocurrencies use blockchain technology also makes them much safer than any other system out there.
Blockchain has maybe even more potential than Bitcoin, and you can read more about it in our blockchain article. For now, it is enough to understand that it can store records, and that those records will be completely safe forever, after being stored. They cannot be falsified, manipulated, forged, or anything of the sort.
With that in mind, it is possible that, once the proper technology is developed, taxes on cryptocurrencies may become much easier to calculate. There are many difficulties now, but things do seem to be moving towards a more positive state.
Of course, Bitcoin itself is tied to criminal activities, such as the black market, money laundering, and other unethical activities and behavior. However, that was his heavily unregulated past, when no one but criminals and tech geeks used it anyway. With the regulation likely coming in the near future, the true potential for a positive change is becoming a reality, and Bitcoin could be the vehicle that will get us there.
If you are interested in learning more about it and its history, read up on our Bitcoin guide, where we dedicate all of our attention to the first and largest coin.
Bahrain-based cryptocurrency exchange Rain has received regulatory approval from the Central Bank of Bahrain (CBB). The exchange launched after raising $2.5 million in a seed funding round led by BitMEX Ventures and Blockwater, a Kuwait-based cryptocurrency fund.
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