Bitcoin and state
Bitcoin and state
2013 can be considered as the beginning of Bitcoin explosion (during just the first four months exchange rate has risen from $20 to $200). Bitcoin was recognized by major investors (brothers Winklevoss, Andreessen Horowitz have invested more than $25 million in the Coinbase). More and more people were becoming involved in cryptocurrency system. By the end of 2013 the rapid growth of Bitcoin exchange rates has drawn the attention of the whole world. The amount of users started growing at even more fast rate. As such the phenomenon of cryptocurrencies could no longer be ignored by governments of the world.
In the U.S. Senate hearings on bitcoin started to take place. At the end of 2013 during one of such hearings on the topic of risks threats and prospects of virtual currencies Ben Bernanke the head of the U.S. Federal Reserve spoke in support of bitcoin and has outlined its benefits for the financial system as a cheaper alternative to the current system of international money transfers. Perhaps it was the only piece of news so good that it raised the price to $1000 for 1 BTC.
Bitcoin influences on the state
Bitcoin is disadvantageous to governments because of following principal reasons:
- It is a threat to national currencies
- Government loses control over cash flows
- Better conditions for illegal goods circulation are created
Threat to the national currencies
Bitcoin has a lot of advantages compared to national currencies:
- Bitcoin rotation will never fill the state treasury because the transaction commission isn’t issued to any of the banks and there’s currently no way of taxing cryptocurrency capital.
- Anonymity of cryptocurrencies allows citizens to avoid the ever-present control over money operations.
- Relative speed of bitcoin transfers from one person to another – usually within a few minutes. (Some interbank transfers may take up to several days)
Just these advantages of cryptocurrencies already adversely affect the national currencies, through which the state can control many aspects of society. And with the growing popularity of cryptocurrency the state control reduces.
Loss of control over cash flow
Bitcoin is somewhat anonymous and that prevents the state’s control of finance movement. This makes possible unchecked withdrawal of money away from the country.
Illegal goods circulation
It is very hard to find out who exactly sent and who received a bitcoin transaction. Thus it becomes much easier to buy and sell illegal goods inside a country. It is worth noting that guns and drugs aren’t the only things that can be prohibited by the government. Usual goods such as books, technical devices and others can be declared illegal if they don’t fit government’s agenda.
State’s attitude towards Bitcoin
The first general reaction of governments to Bitcoin was overwhelmingly negative. Representatives of almost all countries which stated their opinions on Bitcoin were informing population with one voice of caution of using Bitcoin which has no controlling organization above it and thus no money will be returned to investors in case of failure of the system. These warnings were obviously aimed forming a negative perception of cryptocurrency in uninformed people rather than at protection of citizen’s finances. Effort was made to protect government’s ability to control its economy and people’s wealth.
Some central banks (Central Bank of Russia for example) were mentioning in their press releases that Bitcoin can be used for purposes of funding terrorists and money laundering and that citizens using cryptocurrencies will be considered co-participants of such felonies.
Many governments were trying to create a negative image of cryptocurrencies.
China being a country going through a period of rapid growth and trying to impose its control on every sphere of citizen life has prohibited trading on one of the biggest cryptocurrency exchange BTCChina.
However no government has yet enshrined the cryptocurrencies status in law. And all the consequences of “warnings” are just people’s ignorance and panic. But not all countries were as negative in their reaction to Bitcoin. Some have refrained from commentary and some were more favorable than those mentioned above.
The regulation of Bitcoin
In USA the regulation of bitcoin in general is a prerogative of particular states. There’s currently an effort of creating a set of rules regarding cryptocurrencies going on in Silicon Valley and Wall Street.
The state Washington was first of all USA states to announce that digital currency is considered as money. Money which is not approved or recognized yet by any government. Now digital currency falls under the definition of money given in the law concerning currency transactions (UMSA) in this state. As a result the state of Washington now asks from the companies, which want to trade with citizens of this state, to check if they need a USMA license. If license is needed, companies must acquire it before the beginning of their activities.
The state of New York started to discuss the necessity of introducing special “BitLicenses” last year to make Bitcoin-using startups keep additional records of their operations. During hearings on cryptocurrency regulation issues the participants demonstrated open hostility toward Bitcoin.
The state of California demonstrates a more liberal approach. In this state those companies which conduct credit transferring have to receive their license from Department of Commerce. Though many questions still remain unanswered.
Officials of Luxemburg’s financial sector are offering their cooperation to the whose Bitcoin-using companies which want to operate in the country and also promising to employ a personal approach to every regulative decision. Michael Jackson a partner of Luxemburg-based Mangrove Capital Partners has noted that regulation authorities in this country (in contrast to other countries) treat businesses related to digital currency without any prejudice.
Regulators stated that they are ready to assist any companies that will provide a detailed description of their business practices and assure that Bitcoin-using companies will have no problems if their activities will meet the stated objectives .
Also Luxembourg’s officials note that digital currency is considered as money as they are accepted by "a sufficiently large group of persons". At the same time, the regulators do not consider digital currencies as "legal means of payment ".
Other European countries are more neutral towards Bitcoin and haven’t yet clearly express their position.
In the near future, the Japanese government will set the rules of taxation and operations in Bitcoin, and later they will be extended to other cryptocurrencies. General guideline from the Japanese Cabinet determines cryptocurrencies not as money, but as a commodity, with appropriate forms of taxation. Taxes will have to be paid for trading on exchanges, shopping with Bitcoin, as well as the profits earned for transactions (commissions, etc.). Banks as well as stockbrokers and broker services will not be allowed to carry out operations in bitcoins.
Methods of regulation
The main tool for regulating bitcoin is cryptocurrency exchanges since bitcoin is rarely used as a direct means of payment and is exchanged for the currency of user’s wish immediately after the transaction.
Adoption of Bitcoin as a commodity, makes it possible to tax all transactions, in particular exchange trading and profit earned for operations, as the Japanese government intends to do.
Liquidation of anonymity
The Government may require cryptocurrency exchanges to be registered in their territory, and also require a proof of identity of exchanges’ clients by providing copies of passports or other documents. Exchanges themselves may also introduce such a requirement. One of these exchanges – Bitstamp already requires identity confirmation to access all the features of Exchange.
Government influence on mining
Bitcoin mining wasn’t yet brought to official discussion by any state. Danger is presented by major miners, who mine bitcoins commercially. State regulators can find a way to affect the emission of bitcoin through the owners of such mines.
At the moment, no country has officially designated bitcoin status or cryptocurrencies as a whole. Creation of Bitcoin businesses is prevented by an unclear position of regulators or their unofficial ban. The most favorable to digital money are USA and some countries of Europe while China and Japan are reacting quite harsh to it.