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The Legality of Bitcoin


As the first and most popular cryptocurrency, Bitcoin has always been considered as an entryway for someone investing in crypto. This is because Bitcoin is readily accepted in any exchange and offers a lot of trading pairs which opens up avenues of purchase for other crypto assets.

One question in any investors mind is the legality of owning Bitcoin; this text aims to shed some light on what is considered a grey area.

There is historical precedent for private tender as long as it is not meant to replace or look like the US Dollar, examples of which are tokens used in amusement parks.

One big question is whether the government should regulate Bitcoin.  Bitcoin purists argue that since Bitcoin is decentralized, it does not need regulation.  A more traditional view though is of regulation that helps Bitcoin integrate with the current financial system and its laws.


There are 5 Possible Regulatory approaches:

1.)  Regulation through Money Transmitter Laws. A Money transmitter is an entity or business that facilitates the transmission of funds from one party to another. A Money Service Business must register for a Money Service Business Licence under FinCEN and comply with reporting requirements of the Bank Secrecy Act. Such reporting requirements are put in place to deter money laundering, and applicants need to report suspicious transactions, collect customer information and transaction amounts and other information.

FinCEN published a guideline  clarifying its stance on cryptocurrencies. The guide classified cryptocurrency users into three classes:

User – a person that obtains virtual currency to purchase goods or services

Exchanger –  a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency. Exchangers will have to register for a license.

Administrator –  a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circulation) such virtual currency. Administrators have to register for a license.

Under the FinCEN guidelines, a person buying BTC  or any cryptocurrency will be classified as a user, but nothing is said about purchasing Bitcoin as an investment or for speculation.

Miners are in a grey area because they provide a service of maintaining the network and are paid for their service in cryptocurrency and subsequently sell cryptocurrency on the open market to pay for operating costs and may be termed as a business.

2.) CFTC Regulation – There are proposals to regulate Bitcoin as a commodity under the CFTC. For Bitcoin to be regulated under the CFTC, it must qualify as a commodity or a foreign currency.

The CFTC released a primer on virtual currencies which clarified its stance and provides helpful tips and hints to would-be buyers of Bitcoin.

The primer on virtual currencies defines Bitcoin as a commodity, and this classification as a commodity has allowed Bitcoin futures trading to take place starting with CBOE Bitcoin Futures in Q4 2017.

The CFTC could also regulate Bitcoin as a Foreign Currency. Though for Bitcoin to be regulated as a foreign currency it must be a currency issued by a foreign nation. Since Bitcoin is not issued by any foreign country, it stands that it cannot be classified as a foreign currency.


3.) Electronic Funds Transfer Act Regulation – The Electronic Funds Transfer Act was passed in 1978 due to the increasing popularity of electronic fund transfers and transactions which includes bank to bank and ATM usage. EFTA will probably not apply to Bitcoin itself since the EFTA has to do with regulating financial institutions that participate in electronic fund transfer.  Bitcoin by design is not reliant on centralized institutions because it is decentralized. The EFTA might still apply to institutions handling storage, sale, and transfer of Bitcoin.


4.) Regulation by state –  The legality of usage of Bitcoin for business use may differ by state. One example is New York’s BitLicense which a business needs to secure before doing any cryptocurrency activities in New York.  It is however legal to buy and own Bitcoin for personal use in New York and any US state.


5.) Regulation  according to the IRS – Virtual Currency of which Bitcoin is one, is defined as a property for US Federal Tax purposes. The IRS put out a notice detailing its stance and definitions.Of note is that Bitcoin is defined as a property and as such capital gains tax applies. Miners are also included in the document and it clearly says cryptocurrency gains from mining are a form of taxable gross income.


What we can see here is a constant progression of government agencies attempting to clarify their stance on Bitcoin and virtual currencies/cryptocurrencies. The big take home here is that it is not illegal to buy and own Bitcoin or other virtual currencies provided that they are for personal use and that their acquisition and sale are reported to tax authorities as capital gain/loss. If an individual is engaging in business with Bitcoin then it will be wise to consider registering with the various agencies or states to obtain legal status.