Bitcoin - Calls for Regulation - Part Eight

by Dorsey & Whitney LLP
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“Virtual currencies”, and bitcoin in particular, continued to attract a lot of attention. The sudden shutdowns of Mt. Gox (Japan), a large bitcoin exchange, and Flexcoin (Canada), a bitcoin bank, led to renewed and intensified calls for government authorities from around the world to start regulating virtual currencies. This eUpdate is the eighth part in a series of eUpdates on bitcoin-related topics. The first part of the series described what bitcoin is. The second part explained the legal status of bitcoin and how it is approached in different countries. The third part analyzed the effects of the Chinese demand on bitcoin, as well as how bitcoin is approached in China. The fourth part analyzed risks which virtual currency users may encounter. The fifth part discussed further steps taken by the Chinese government towards regulating virtual currencies and their impact on the bitcoin market. The sixth part discussed continuing concerns about bitcoin and updated on developments in the bitcoin market. The seventh part discussed Mt. Gox’s demise and its effect on the bitcoin market.

Calls for regulation

The recent shutdowns of Mt. Gox (Japan) and Flexcoin (Canada) have led to renewed and intensified calls for government authorities in Japan, China, Hong Kong, India, the United States and other countries to start regulating virtual currencies.

Japan is considering regulation of bitcoin and other virtual currencies.1 In the beginning of March 2014, the Japanese Cabinet declared that bitcoin should be classified as a commodity rather than a currency, taxes on gains from trading in bitcoin should be introduced, and banks and securities firms should be prevented from entering into bitcoin-related businesses.2 “We haven’t yet thoroughly grasped the situation, but some kind of regulation is needed from the perspective of consumer protection, and we will also discuss [bitcoin] from the perspective of imposing an asset tax,” said Takuya Hirai, head of an IT panel in the ruling Liberal Democratic Party.3

In China, an erroneous post published on a large Chinese social network Sina Weibo (but since retracted) indicated that the People’s Bank of China (PBOC) set a deadline of April 15, 2014 for all firms to halt bitcoin trades. This caused bitcoin prices to tank on March 21, 2014.4 The PBOC later clarified that it did not issue any new statement, and Sina Weibo referred to the PBOC’s notice issued on December 5, 2013.5

The Hong Kong Financial Services & the Treasury Bureau (FSTB) joined regulatory authorities from around the world in issuing cautionary notices to the public against transacting in virtual currencies. The FSTB warned the public about trading in bitcoin as it may involve risks related to consumers’ protection, money laundering and illegal activities.6 The FSTB reiterated that virtual commodities are not regarded as legal tender in Hong Kong, and their prices are susceptible to significant fluctuation due to speculation. The FSTB added that virtual commodities pose considerable risks to consumers, and as they are not backed by any physical items, issuers or the real economy, their value is volatile and can cause significant monetary losses to consumers. It also said that the anonymous nature of virtual commodities poses potential risks with regard to money laundering or even terrorist financing. Consumers and businesses dealing in virtual commodities are also exposed to cyber-crime risks. The FSTB underlined that Hong Kong does not regulate virtual commodities specifically in terms of their safety or soundness, but the existing Hong Kong laws provide sanctions against money laundering, terrorist financing, fraud and cyber-crime. The FSTB further said that it will closely monitor developments in the world of virtual commodities, the evolving regulatory consensus at the international platforms, as well as regulatory and enforcement actions in other jurisdictions to consider further actions in protecting the public.

The Reserve Bank of India followed up with a public advisory warning that virtual currencies are risky and not part of the traditional banking system.7

The Monetary Authority of Singapore (MAS) recently announced that it will regulate virtual currency intermediaries in Singapore to address potential money laundering and terrorist financing risks. The MAS will introduce regulations to require virtual currency-related businesses, including bitcoin exchanges and other intermediaries, to verify identities of their customers and report suspicious transactions.8 Singapore’s decision to impose anti-money laundering regulation on bitcoin-related businesses marks a reversal from its previous stance, announced just a few weeks ago, coinciding with the installation of the first bitcoin ATMs in Singapore.

In the United States, Mt. Gox’s shutdown also shifted focus of bitcoin regulatory efforts from exclusively anti-money laundering to consumer protection. The New York State Department of Financial Services, headed by Ben Lawsky, announced that it will accept proposals to establish regulated exchanges in the state of New York. Ben Lawsky mentioned “the urgent need for stronger oversight […] including robust standards for consumer protection, cyber security, and anti-money laundering compliance” in his solicitation for applications and proposals.9 With respect to anti-money laundering regulation, the U.S. Department of the Treasury may have concluded, however, that bitcoin is unworthy of extra regulation for the time being. In a speech given on March 18, 2014, David Cohen, the U.S. Treasury Undersecretary for Terrorism and Financial Intelligence, said: “Terrorists generally need ‘real’ currency, not virtual currency, to pay their expenses.”10

In addition, on March 25, 2014, the U.S. Internal Revenue Service issued a notice11 providing information on the U.S. federal tax implications of transactions in, or transactions that use, virtual currencies. According to the notice, virtual currency is treated as property for U.S. federal tax purposes, and general rules for property transactions apply. Payments made using virtual currency are subject to information reporting requirements to the same extent as any other payment made in property. The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer. When a taxpayer successfully “mines” virtual currency, the fair market value of the virtual currency as of the date of receipt is to be included in the taxpayer’s gross income.

Bitcoin family growth

While bitcoin has been witnessing tremendous price volatility, operators and users are looking for newer and other alternatives that they perceive as safer.12 Notwithstanding the growing regulatory concerns about bitcoin and other virtual currencies, the world now has a larger number of virtual currencies than the total of 180 recognized currencies in different parts of the world. Within an earshot of the 200-member mark, a total of 193 virtual currencies are currently being traded across the internet, although none of them carries an official stamp from any government or banking regulator. For comparison, at the end of December 2013, there were 67 virtual currencies in total in the market, while their number was in single digits about four years ago, when virtual currencies could not strike a chord among users amid the global financial crisis. According to some market estimates, the current aggregate valuation of all virtual currencies is approximately US$10 billion, representing a drop by US$3 billion as compared to the beginning of 2014.

Apart from bitcoin, other virtual currencies such as ripple, litecoin, auroracoin, peercoin and dogecoin have been steadily picking up in volume as well as market value. Most recently introduced virtual currencies include teacoin, aliencoin, magic internet money and heisenberg.13 Steady growth of the “bitcoin family” indicates continuing support by enthusiasts who see the benefits of and the future in virtual currencies regardless of regulatory warnings.

1   http://www.euronews.com/2014/03/05/another-bitcoin-bank-bites-the-dust-flexcoin-blames-losses-on-hackers/
2   http://www.ft.com/intl/cms/s/0/a8381228-a5a0-11e3-8070-00144feab7de.html#axzz2wqn7oR2P
3   http://www.theguardian.com/technology/2014/mar/05/japan-considers-bitcoin-regulation-taxation-mtgox-closure
4   http://www.coindesk.com/bitcoin-price-declines-following-false-report-chinas-bitcoin-ban/ 
5   For details on the PBOC’s notice issued on December 5, 2013, see the third part in our series of eUpdates. 
6   http://www.news.gov.hk/en/categories/finance/html/2014/03/20140314_181916.shtml
7   http://profit.ndtv.com/news/forex/article-bitcoin-others-near-200-member-mark-real-currencies-outnumbered-383583 
8   http://www.mas.gov.sg/news-and-publications/press-releases/2014/mas-to-regulate-virtual-currency-intermediaries-for-money-laundering-and-terrorist-financing-risks.aspx 
9   http://www.coindesk.com/bitcoin-regulation-roundup-bankruptcy-derivatives-consumer-protection/ 
10  http://www.bloomberg.com/news/2014-03-18/treasury-s-cohen-says-regulation-helps-virtual-currencies.html
11  http://www.irs.gov/uac/Newsroom/IRS-Virtual-Currency-Guidance
12  http://profit.ndtv.com/news/forex/article-bitcoin-others-near-200-member-mark-real-currencies-outnumbered-383583
13  http://www.thehindu.com/business/Industry/bitcoin-gang-nears-200member-mark-outnumber-real-currencies/article5822290.ece

 

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