The recent captivation with virtual currencies raises uncertainties for our markets as well as our legal system. Cryptocurrencies, block-chain initiatives and digital currency technologies have rattled nearly every industry with a rippling effect. While digital currencies, such as Bitcoin, have attained rapid success seemingly overnight, many legal questions and concerns are left in its wake. The lack of clarity surrounding the regulation and legality of digital currencies lends itself to unlawful conduct. Additionally, global forces have adopted different approaches to digital currencies, from legalization to outright banning its usage. The lack of a universal approach to virtual currencies only contributes to the confusion. As a result, industries, regulators and lawmakers are tasked with implementing new rules in order to account for the new-age currency. As markets and investors continue to capitalize on the market success of cryptocurrencies, the debate over necessary over sight and potential legal dilemmas continues.
The first issue that law makers, regulators and major market players are tasked with is defining digital currencies. Digital currency is the common term used to describe cryptocurrencies, such as Bitcoin. While these currencies constitute the building blocks of a technological phenomenon, its legal definition is not fully formed throughout the world. Based on its new role in the marketplace, economic forces also struggle with characterizing this innovative currency. In an effort to clarify the role of virtual currency, the Commodity Futures Trading Commission (“CFTC”) recently designated Bitcoin as a “commodity” for trading purposes. Additionally, the Internal Revenue Service (“IRS”) has labeled the virtual currency as “property” for tax purposes. Thus, Bitcoin must be treated as property for any capital gain or loss associated with the currency. If Bitcoin is used for payment purposes, it must be treated as a currency and subsequently converted to its fair market value. Otherwise, an undefined fair market value can lead to confusion and misrepresentation for its users. As different players attempt to define the nature of virtual currency, the question of legality remains open for interpretation.
Globally, the legal status of virtual currencies varies per country. The majority of countries have not completely banned the use of cryptocurrencies. On the other hand, most countries have yet to declare these currencies as legal tender. Without the designation of legal tender, virtual currencies remain discretionary forms of payment. Unfortunately, consumers and merchants lack vital protections as a result. In light of these concerns, some countries have banned the use of cryptocurrencies within its borders. For example, Bangladesh and Ecuador have declared virtual currencies illegal. Similarly, Bitcoin is also illegal in Iceland under existing law. While Russia had banned virtual currencies, the country has become lax in its regulation. China has also banned Bitcoin from commercial usage, but allows individuals to independently trade and hold the virtual currency. Some countries have chosen not to ban the currency, but regulate its usage. Such nations include France, Germany, Japan, Spain, Canada and Mexico. In other countries, such as the United Kingdom, the currency remains largely unregulated. However, as of November 2017, United Kingdom’s Lloyds Bank, as well as Citigroup, Chase Bank, and Bank of America, have all banned customers from buying Bitcoins with credit cards. As a result, individuals and entities have enjoyed the use of virtual currencies in limited capacities. As the popularity of virtual currency continues to surge, it is likely that the global economy will see an increase in its regulation.
Until we introduce greater regulation for virtual currencies, legal concerns remain imminent. Since virtual currencies operate outside of the prevailing financial framework, the currency is prone to illegal usage. Financial experts suggest that a lack of monitoring will lead to money laundering, tax evasion and especially fraud. First, regulators are concerned that virtual currencies are prone to money laundering due to its effortless transferability. Without monitoring, the currency can be quickly transmitted across international borders without a trace. While the public block-chain ledger does offer some insight into the transfer of funds, tracing methods can go virtually unnoticed on a smaller scale. Second, virtual currencies are vulnerable to tax issues. A lack of regulation makes it easier for criminals to hide these assets and avoid taxation. Additionally, through virtual currencies, individuals can avoid the hefty international taxes associated with importing foreign currency. Thus, individuals may evade border checkpoints and international duties. Finally, virtual currency also raises issues involving fraud. Individuals can be induced to buy and sell virtual currencies to fraudulent players without the necessary protections that regulation provides. Unless we see an increase in regulation over virtual currencies, this innovative commodity remains exposed to legal dilemmas.
While regulation remains vital, the future for virtual currencies appears far from bleak. Since very few countries have completely banned its use, virtual currency has the potential to evolve into global tender. As long as its legal issues are dealt with promptly and appropriately, virtual currencies can successfully integrate into both financial and legal frameworks. Financial institutions continue to account for the listing and trading of virtual currencies. The United States has already taken a proactive approach to the legality of block-chain technology. For example, legislatures have begun to incorporate block-chain technology into laws at the state level while judiciaries have accounted for block-chain technology within its case law. In November of 2017, the U.S. Treasury Department announced plans to review virtual currencies in relation to financial risks, such as money laundering. With the full cooperation of regulators and market players, we are bound to see legal developments that will secure the validity of virtual currency. Only time will tell whether or not such developments will contribute to the success of the virtual currency phenomenon.