Bitcoin is the first decentralised digital currency. It operates in a virtual world, run through a peer-to-peer network, independent of central control such as a bank or clearing house. Bitcoins can be bought using conventional currency and can also be accepted as payment for goods or services.
Another way of earning Bitcoins is online through a process known mining which involves solving algorithms to unlock blocks of Bitcoins. Bitcoins are attractive because they can be sent to anyone, anywhere in the world at any time with little or no fees. Bitcoin is also limited in supply and therefore its value cannot be devalued.
Exciting as the Bitcoin phenomenon is, there are legal complexities that are yet to be fully resolved.
The lack of backing by a government or a bank may prove to be Bitcoin’s major flaw. Some experts believe that currency must be backed by power for it to survive.
The lack of government control also carries security risks. If Bitcoin virtual wallets are hacked there is no depositors’ protection provided by traditional bank accounts. Furthermore, while traditional currencies are vigorously policed and monitored, the same cannot be said for the Bitcoin.
Bitcoin users can remain anonymous when making a transaction which could facilitate criminal activity such as money laundering and fraud. The FBI have recently seized $3.6m (£2.2m) worth of Bitcoins following the arrest of a suspect though to be involved with the illicit Silk Road website.
Lack of Global Consensus
There is little global consensus on the Bitcoin issue. In Germany, the Bitcoin has been granted legal status and is classified as “private money” rather than e-currency.
In the US, financial regulation varies in different states. California’s Department of Financial Institutions issued a cease and desist letter to the Bitcoin Foundation in June 2013 accusing it of engaging in a “money transmission business” without obtaining a licence. The Bitcoin Foundation denied the charge. Meanwhile, the US has begun to introduce regulation and does in fact recognise the Bitcoin as currency.
In France, a court has been unable to determine whether Bitcoin is a virtual currency under French law and thus subject to relevant legislation.
Thailand has banned the Bitcoin altogether.
Bitcoins in the UK
Bitcoin’s status in the UK remains uncertain, as it does not fit regulator’s definition of e-money, but it could amount to “issuing payment instruments” as long as Bitcoins count as money which is “if and when they become widely used” according to the FSA.
Bitcoin companies in the UK asked the government to introduce regulation to make business easier and help promote economic growth by following in the footsteps of Germany and the US. However, the future surrounding the Bitcoin is uncertain and whether it is the future of currency remains to be seen. There are a host of regulatory issues to iron out and reaching a consensus on the legal status of the Bitcoin could prove incredibly difficult.
For more information about using Bitcoins in your business please contact James Crichton via e-mail email@example.com or by telephone on 0207 611 4848.