Since Bitcoin reached the $3,000 mark this year, it has gained a good amount of attention. And since
then, a lot of people are looking into the possibility of investing in one. In fact, even businesses are
taking a closer look at the possibility of accepting Bitcoin in exchange for goods and services.
But if you are one of those still hesitating to jump into the cryptocurrency bandwagon, you might be
asking if Bitcoin is legal?
Bitcoin is an interesting discussion for a lot of law makers and law enforcement agencies all over the
world. In fact, a lot of them are looking at its nature how it could actually fit in the current legal
So far, the legality of the bitcoin will depend on different factors. It includes:
- Who you are?
- Where you live?
- What you are actually doing with your Bitcoin?
The reality is that Bitcoin and cryptocurrency is still in its infancy. However, the question still stands if it
is actually legal? By definition, yes, Bitcoin IS LEGAL. However, it is not far from possibility that you could
still get into legal trouble using Bitcoin.
Seems confusing? Before we discuss what makes it legal, and what could get you into trouble, let’s take
a closer look at what it really is.
How Bitcoin and Cryptocurrencies work?
Bitcoin is a virtual currency. Transactions made on Bitcoin are then recorded on a public ledger that is
called a block chain. In order to verify the transactions made using Bitcoin, blockchain technology makes
use of miners. Unlike other traditional currencies such as the US dollar and Euros, it is not bound by a
country or an institution.
Bitcoin was conceptualized based from the idea that people can transact freely and instantly without
the intermediary bodies. If you will look at the essence of what Bitcoin and blockchain technology is, it is
a reversion towards a much purer form of trade. And for this reason, it has gained the interest of both
speculators and investors that are looking to benefit from Bitcoin in the long haul.
It also seeks solution towards a more stable form of currency especially in an event of recession such as
the 2008 financial crisis.
Why is the government looking into Bitcoin and Virtual Currencies?
Because of the decentralized nature of Bitcoin and its cryptography, what it also offers is anonymity to
its users. And for the same reasons, Governments are worried of its implications given the possibility of
Bitcoin’s application in money laundering and other illegal activities.
As early as 2012, FBI already released a document that summarizes its fears when it comes to Bitcoin.
FBI made a distinction between Bitcoin and centralized digital currencies. According to FBI, though
exchanges in the US are regulated, it is a totally different story off-shore which makes Bitcoin a potential
haven for transactions from illicit activities.
And it isn’t just the FBI that showed concerns over Bitcoin. In August 2013, US senate wrote to different
law enforcement agencies regarding the risks of using virtual currency. It has sent a letter including the
Department of Homeland Security, more particularly concerns regarding the lack of paper trail to follow
the transactions made using the virtual currency. US Senate also requested policies and guidelines
regarding the treatment of crytptocurrencies.
The Department of Homeland replied to the US senate by November2013 and is most worried about the
possible illicit use of Bitcoin.
Bitcoin and Silk Road
One of the things that gave Bitcoin a negative reputation was its use in the Silk Road. Ross Ulbricht was
allegedly the founder and owner of Silk Road. He was believed to be the person behind the pseudonym
Dread Pirate Roberts. By the time of his arrest in 2013, he was indicted on charges of money laundering,
computer hacking, and conspiracy to traffic narcotics in addition to charges of attempting to kill six
The Silk Road was an online black market where transactions of illegal drugs and other illegal activities
are made. The FBI initially seized 26,000 bitcoins from accounts on Silk Road. Its worth during that time
was at $3.6 million. According to the FBI spokesperson, the agency would hold on to the bitcoins until
the trial was finished. After which, the bitcoins would be liquidated. It later followed that FBI seized
144,000 bitcoins worth $28.5 million that belonged to Ulbricht.
Because of Bitcoin’s popularity and how it can be used in trade, regulators from different countries
reacted differently. For instance, you have the Financial Crimes Enforcement Network (FinCEN) which is
the agency in the US treasury department. FinCEN released guidelines not only for Bitcoin but also for
other virtual currencies that could be categorized as money services business or more popularly known
as money transmitting business or MTBs. MTBs enforce Anti-Money Laundering and Know Your Client
laws in order to identify people that they are doing business with. Using this measure, it reduces the
anonymity of using virtual currencies.
Like what we mentioned earlier, the legality of Bitcoin may greatly depend on who you are. Based on
the FinCEN guidelines, users that are using the Bitcoin for goods and services are using it legally. As for
the miners, they fall in a grey area. According to FinCEN, Miners are considered a Money Transmitter
Business (MTB) the same as exchanges. This means that they are going to be governed by special laws.
However, those laws have not been used to crackdown the use of Bitcoin.
State laws and Bitcoin
US state laws are allowed to have their own financial regulators. Both New York and California have
been aggressive when it comes to having a bitcoin-related organization. In 2013, California’s state
financial regulator even issued a letter to the Bitcoin Foundation, which is an organization designed to
promote Bitcoin. California’s state financial regulator warned the organization that it might be a money
transmission business and even threatened them with jail time.
In New York in August 2013, it has issued subpoenas to 22 bitcon-related firms. However, it is more of
an effort for a dialogue in order to develop guidelines for the digital currencies. Since then, New York’s
state Superintendent of Financial Services, Benjamin M. Lawsky announced accepting applications for
digital currency exchanges. These exchange houses are then regulated under the new New York
regulation installed by 2014.
The very first virtual currency specific licensing regime that addresses virtual currencies was New York’s
BitLicense. It was developed by the New York State Department of Financial Services and was released in
2015. It is different from the decision of Texas and Vermont to apply existing financial law to the use of
Since 2009, the US Internal Revenue Service (IRS) has already posted information about the tax
application of using virtual currencies inside virtual economies. They have mentioned that individuals
that have received cryptocurrencies could be required to report it as a taxable income. However, it is
still in its early stages since the guidelines have only been related to bartering, gambling, business, and
There are only few countries that have explicitly announced an intention to prevent the use of Bitcoin in
their country completely. By the end of 2013, a number of central banks simply released warnings of
different intensities. It has ranged from reminders that Bitcoin is neither regulated nor an official
currency, to raids on Bitcoin related businesses.
What alarmed international central banks is the effect that Bitcoin has to their economy especially since
the prices are volatile. Among the countries that have Bitcoin banned are Iceland, Bolivia, Ecuador,
Vietnam, and Kyrgyzstan.
Russia and Thailand are two countries that have initially banned the use of virtual currencies but
Why governments are not going to ban Bitcoin
For the burning question, why are governments seemingly hesitant to make a move to ban Bitcoin? In
India, leading personalities in their Bitcoin community believe that a ban on the cryptocurrency can be
detrimental to the technologic development that could develop the financial ecosystem of the country.
In addition to this, there is no single organization or person that controls Bitcoin transactions. This
simply means that people can still send each other bitcoins as long as they have Bitcoin wallets. In fact,
there is even a possibility of sending each other Bitcoin via SMS.
Instead of banning Bitcoin, it seems that central banks have taken a hands-off approach to Bitcoin.
According to experts, a ban on Bitcoin is like going to fail miserably like how alcohol prohibition failed in
the 1920s. The demand for virtual currency will not be gone just because there is a law that bans it. You
may argue that a ban by central banks coming from a major country may even strengthen the Bitcoin
hype by making it a renegade currency.
Why is China not moving to ban Bitcoin?
If you will look at China, you might be wondering why one of the world’s biggest economies is not doing
enough to stop Bitcoin. For one, Chinese citizens that buy Bitcoin via Chinese exchange prevent the Yuan
from leaving the country. This means that there is no negative loss of Yuan.
In addition to this, a lot of Chinese citizens actually own Bitcoin. This only means that if Bitcoin succeeds
and continuous to increase in value, they actually succeed by having more rich citizens. And lastly, there
are a lot of Bitcoin miners in China.
The Future of Bitcoin in the next years?
Bitcoin has evolved rapidly since it has been developed in 2008. Because of its advantages, governments
and businesses are taking notice to what it could potentially bring. In a 2014 article published on
Entrepreneur, SecondMarket Holdings founder and CEO invested in 28 Bitcoin-based businesses via
Bitcoin Opportunity Corp. He mentioned that in the next decade, MoneyGram and Western Union could
potentially be decimated if they fail to adapt. He also predicts the possibility of paying for goods and
services online via cryptocurrency will become a standard. Wordpress, Expedia, and Microsoft are now
accepting Bitcoin as a mode of payment and have improved Bitcion’s recognition since.
Microsoft’s co-founder, Bill Gates has also spoken regarding the potential of Bitcoin as early as 2014.
According to his interview, he mentioned that “Bitcoin is better than currency in that you don’t have to
be physically in the same place and, of course, for large transactions, currency can get pretty
The likes of Blyth Masters, who is a former managing director at JP Morgan Chase & Co, also looked into
the application of blockchain technology. Blyth Masters is the current CEO of Digital Asset Holdings that
managed to come up with a $60 million funding and is now testing the application of Blockchain to
settle transactions faster.
Still a risk
Even if Bitcoin becomes legalized, there are still other risks that users will have to look into. For instance,
the biggest perceived threat is to have a parallel cryptocurrency that can be used as a substitute for
Bitcoin. Ethereum and Litecoin are among the top virtual currencies today that are starting to increase in
following. However, for its diehard supporters, they argue that Bitcoin enjoys the first-mover privilege.
There are a lot of potential benefits to what Blockchain technology and Bitcoin can offer to the table.
That is despite the fact that it is a direct challenge to the state’s monetary authority. However, is the
government really smart enough at this point to just regulate Bitcoin? It is of best interest of everyone
especially for regulators to avoid confrontations against Blockchain technology.
What Bitcoin offers is an idea that is outside the paradigm of your usual fiat currency. Though it
operates in a legal grey area in a lot of countries, it looks like it is here to stay.
However, if you have plans to use Bitcoin or if you ever plan to invest on this cryptocurrency, it is always
a wise idea to be aware of legalities. Keep in mind that laws may change across the border and
depending on the decision of law makers. For now, enjoy trading and transacting on Bitcoin since there
are no laws that can stop you from doing so.