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Bitcoin and other digital currencies are attracting a wide array of attempts to regulate and define their use in commerce. This is a natural response from governments to a new medium of exchange, which could end up competing with their own legal tender, commodities and other assets as a store of value and alternative method of transacting business. Predictions on Bitcoin’s future range from outright failure as a passing fad, to filling a role as a new global currency.   The answer probably lies somewhere between these extremes, and will depend on the legal and regulatory structure that ends up defining Bitcoin’s use in each country. At the moment, there are a few areas that could set that direction near term and form a regulatory basis for the coming years.

IRS Rules and Definitions

In March of 2014 the Internal Revenue Service came out with guidance on how digital currencies would be treated for tax purposes. The general rules are now well known, that Bitcoin will be considered to be ‘property’ for the federal tax purposes. The IRS ruling is an administrative action that reflects that agency’s approach using existing tax statutes, and is not a new law regarding digital currency.

There has been no definitive new tax law passed by Congress on Bitcoin, and so the IRS simply issued the ruling to remove Bitcoin from any currency treatment for tax purposes. This ruling is retroactive as well, meaning that it applies to any Bitcoin transactions prior to the IRS guidance. This action is recent, and any attempts to challenge the ruling or lobby for changes to the tax code could be central to the future of Bitcoin in the United States, since it would bring the debate to a national level. A federal law altering the IRS ruling and giving Bitcoin currency status could bring a dramatic increase in use and acceptance for all types of transactions.

 Non-U.S. Laws and Definitions

Governments across the globe have been setting their own rules and standards for taxation and treatment of Bitcoin as well. Norway, Singapore, and Finland have all followed the IRS approach and defined Bitcoin as property and not a currency. Other countries such as the United Kingdom and Germany have issued rules that focus on taxing transactions through VAT, capital gains or income taxes. These differences become problematic for those with international businesses or foreign accounts, and could set the stage for more comprehensive global regulations, such as the recent definitions set out by the G7 Financial Action Task Force (FATF).

 Proposed State Regulations

The most aggressive regulatory attempts are coming at the state level, such as the proposed New York “Bitlicense”. If this law were to pass as written, it would chill the use of digital currency in that state, and perhaps provide a template for other states to propose similar laws. This type of license requirement would eliminate many of the benefits of digital currency, decreasing the appeal of Bitcoin for some users. It would not be unusual for the federal government to watch and wait while states develop similar regulation like the Bitlicense, thereby avoiding any near-term federal legislation.

 Law Enforcement Approaches

Rightly or wrongly, though without question driven by the media, Bitcoin has earned a reputation as the medium of choice for criminal behavior and has the attention of law enforcement. It is easy to see that state and federal law enforcement, and even Homeland Security, could weigh in on the future regulation of digital currency and how it is tracked, transacted and subject to seizure. Any link of Bitcoin to ‘terrorism’ or other large-scale criminal enterprises could bring strict regulations on its use. Just as with the IRS, regulations could be issued through administrative agencies or executive order, bypassing the need for legislation based on reasons of national security.

All of these legal and regulatory developments will continue to take shape in the near future, but may not be consistent between state, federal and foreign jurisdictions – further clouding the landscape of digital currency use.

From an investor’s perspective, the greatest single risk to Bitcoin exposure is overreaching regulation. However, regardless of how regulators come down, there is value to certainty, something that will develop over time as the regulatory framework is solidified.

 

David Berger, CEO of the Digital Currency Council – an association that provides training, certification, and ongoing support for professionals in the digital currency economy.

* The Digital Currency Council (DCC) does not advocate on policy matters. Any policy positions taken by David Berger are his personal positions only and do not reflect the position of the DCC.

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