Money has been gold, silver, paper — it has changed a lot of forms but has never been a code yet.
From Golden Coins to Bitcoins
The importance of money usability through the ages cannot be overstated. Centuries ago, people carried their money in heavy bags, but in 2018, you don’t even need to have your wallet with you, as you can pay for your purchase with a little plastic card.
Moreover, with Google Pay or PayPass, you don’t even need the card, just your phone with you. Online banking has also contributed to making fiat digital by increasing its usability.
You might think this is everything we could ever dream about, but wait — money development doesn’t stop at this stage. Fiat currency turned out not to be enough for us, and now we stand as witnesses to the future of cryptocurrency.
What Is Cryptocurrency?
In 2016, virtual currencies occupied the minds of almost everyone in the world. There was almost no bank, government, or financial firm that wasn’t researching the crypto market. All of them understood the importance of cryptocurrencies for their fields. Some of them thought of investing in it, and a few even started blockchain projects. However, as it is still a young technology, only a few companies fully understand the principle of cryptocurrency and blockchain work.
To understand whether blockchain can solve certain issues in your sphere or work directly for your company, it is crucial to become aware of its basic concepts.
Like Sir Fleming, who accidentally came up with the medical breakthrough penicillin, Satoshi Nakamoto didn’t start out with the intention to create virtual money. In his press release announcing Bitcoin, he mentioned that his goal was to create a new electronic cash system with a peer-to-peer network to prevent double-spending. Satoshi said that it was a completely decentralized platform with no server or central authority.
Seeing that all centralized decisions had failed, Satoshi came up with a decentralized solution that gave the world cryptocurrencies.
Blockchain technology is exactly what Satoshi Nakamoto wanted to invent. It is a network of nodes that follows consensus. Users own private keys to the addresses storing their cryptocurrencies. Each node becomes a server, which makes the network decentralized and allows the building of a non-third-party-dependent payment system. All nodes have a list of transactions that users upload to the network.
Here’s the most interesting part: the nodes have to confirm each transaction by solving an NP-class problem. The first node that manages to do it gets the reward in coins. This emits a new coin-based reward and commission from the transaction, depending upon the network. The coin goes directly to the node’s wallet. This process is the process of mining. Mining includes emission of new coins, storage of new balances, ownership distribution, and commission transfers to nodes.
Blockchain consensus protocol made proof of balances and transactions possible without third parties. Satoshi Nakamoto offered the proof-of-work consensus for the process of transaction confirmation.
Now we are aware of how nodes get their Bitcoins. They can also buy them, however. The questions are as follows: what is the value of Bitcoin, where does it come from, and what does it depend on?
As we all know, fiat currencies stand for the golden reserves of any country. The image below illustrates factors that fiat currency depends on:
Regarding Bitcoin, Nakamoto designed the network to generate new coins. Unlike Ethereum, there is a certain number of Bitcoins, and it halves every four years, ceasing emission at 21 million. On Ethereum, emission is unlimited.
Money itself has no intrinsic value. We put the colorful pieces of paper into our wallets only because society has accepted their value as the way to pay for real goods (people also call it economic consensus). After the launch, Bitcoin had to wait for merchants to accept it as digital money. As Hyman Minsky said: “Anyone can issue their own money. The key problem is who will accept it.” When this happened, Bitcoin’s value grew exponentially.
What Does Bitcoin’s Value Depend On
In the process of mining, there is an exchange: a node gets a Bitcoin when the network gets computational powers. Consequently, the mining process becomes harder. This is the first feature affecting the price of bitcoin.
Fiat currencies may fluctuate or rise in value according to the economic and/or political situation in any given country. Cryptocurrency is fully dependent upon market conditions.
Some of these factors appear in the image below:
As there was a limited number of coins issued, people became victims of a physiological factor: FOMO (fear of missing out). When miners activate the network, it fuels demand — which, consequently, forces the price to increase.
In addition, demand for Bitcoin is determined by the level of people’s awareness of the cryptocurrency, its popularity, and its trustworthiness.
Because Bitcoin is designed in such a way that it will never exceed the amount of 21 million, its price is expected to increase in the future.
Another important issue is the network effect. Acceptance of Bitcoin will lead to a decrease in transactional costs (both financial and time-related) associated with its use. For now, it is hard to use Bitcoin in day-to-day economic activity, as a lot of economic stakeholders (especially legal entities) are not accepting cryptocurrencies directly. Another reason is that it requires exchange of cryptocurrency to fiat, which requires a commission for exchanges.
Legal regulations also have an influence on the price of Bitcoin, especially in the case of payment platforms that popularize the use of cryptocurrencies.
Let’s get closer to the legal aspect of the crypto market, as it is the object of interest for many investors.
Is Bitcoin Legal?
Governments as a third controlling and verifying party aren’t ready to leave off the opportunity to gain awareness of all financial transactions. Unfortunately, today, democratization means only the ability to choose the leader. With blockchain, we have the opportunity to democratize almost all spheres of our lives.
To answer the question, “Is Bitcoin legal?” we can only say two things:
- Bitcoin is not legal (because most governments haven’t accepted it).
- Bitcoin is not illegal (as there are no regulations forbidding the use of this technology)
However, some countries have already reacted to this innovation and issued their own laws.
It’s worth mentioning that there is a very low probability that all governments will forbid the use of blockchain, cryptocurrencies, and the decentralized running of businesses. Even if most countries do so, it won’t create any difficulties in continuing work with a different IP address. Moreover, claiming cryptocurrency is illegal doesn’t mean you cannot use it. This is about investor and merchant rights that the law doesn’t protect.
Probability of Bitcoin’s Global Acceptance
It had been a long time since technology was booming in all spheres. What are governments waiting for? The official reason is the same as not accepting Canadian Tire money. The government successfully establishes fiat’s value so we can exchange this money for the goods we need. They have the power to control money flow and usage. Asking for judicial acceptance of cryptocurrencies is like asking for Monopoly money to be legal.
However, if governments eventually accept the crypto market, they won’t have to make Bitcoin legal tender. They could start their own blockchain and issue their own coins, as well.
Because of the fact that Bitcoin is already in the flow within a decentralized platform, it becomes an absolutely incredible phenomenon.
Since there is no law forbidding the use of Bitcoin, people are presenting more and more ICOs, which promise to create apps for using cryptocurrencies as a means of payment.
There are very few countries that have made any movement for or against Bitcoin. Most of them are waiting for the reaction of those surrounding them. Others don’t even see the future of cryptocurrencies, and still others are probably afraid of the consequences they will have to face after Bitcoin acceptance.
Let’s look at some countries, where bitcoin is considered legal:
The only country that has accepted Bitcoin as legal tender is Japan. No wonder, as it is one of the most innovative countries. The economy of Japan had its major drop in the 90s, and it has been struggling to level off.
Yoshitaka Kitao, CEO of SBI Holdings, claimed that blockchain technology and Bitcoin as legal tender will fuel a skyrocketing economy. 5G technology, computational power upturn, and artificial intelligence for machine learning also promise a technological revolution.
As Yoshitaka Kitao said, there is huge speculative demand for any cryptocurrency, especially Bitcoin. This eventually increases its price. Fortunately for Japan, he expects a technological boom to happen in the coming years.
There already are several Bitcoin ATMs around Japan, but that’s not even the best news. GMO Internet, a Japanese company, will provide the opportunity to receive salaries in Bitcoin — if employees wish, of course. Isn’t that forward-thinking, indeed?
Verdict: Bitcoin, Ethereum, and other cryptocurrencies are totally legit in Japan.
The issue about Bitcoin legitimacy in the U.S. hinges on this question: should it be regulated on the national level, or separately, by individual states?
For now, some states are more progressive in their relations with cryptocurrencies than others. For example, New York gave an official ‘yes’ to businesses built on the blockchain by issuing BitLicense in 2015.
Bitcoin legitimacy in the U.S. is just a question of time. A good reason for this is that the Wall Street titan and securities and investment firm Goldman Sachs is moving toward allowing clients to sell Bitcoin via one of their New York desks. This was presaged by the fact that several hedge funds received donations from Bitcoin millionaires. Therefore, by implementing acceptance, they are literally predicting a future Bitcoin price increase.
The State of Washington, for instance, started supporting money transfers in Bitcoin in 2017.
New Hampshire is making its first steps toward accepting Bitcoin transfers.
In Texas, the situation becomes somewhat more intense. The Security Board has taken measures against investing in the mining process provided by the Dubai-based company.
Unlike New York accepting Bitcoin as legal tender and Texas banning it, California is somewhere in the middle. The state has been freezing the process over time.
Verdict: Bitcoin is accepted on the level of separate states, but is not yet accepted on the federal level.
The chairman of Malaysia’s Security Commission has publicly disclosed plans for the agency to implement digital currencies in the Malaysian financial market.
Verdict: Bitcoin is legit in Malaysia.
There is no law that forbids or allows mining, investing, or paying with Bitcoin in India, but the Central Bank has warned citizens and judicial parties about Bitcoin. Furthermore, the minister of finance has claimed that cryptocurrency is not legal tender.
This is not to say that Bitcoin is illegal in India, as this is difficult to claim due to the absence of relevant laws. However, banks are not able to provide the exchange service.
Verdict: Bitcoin is legal in India, but banks have a ban on exchange.
The question of whether or not Bitcoin is legit in South Africa will be resolved in the near future. The South Africa Reserve Bank has decided to start testing regulations affecting cryptocurrencies.
Moreover, the government has issued a white paper stating that the cryptocurrency is not legal tender unless the coin is officially issued and accepted by the government. With regard to this approach, the authorities created a department in December 2016 meant to manage the private sector and monitor development.
Later, in 2017, the Central Bank revealed its intention to work on the question of blockchain technology implementation within the country.
Verdict: Bitcoin has legal status in South Africa.
The Monetary Authority is willing to protect the rights of cryptocurrency investors. They are referring to a set of rules that would be required in order to provide legit bitcoin investment process. Additionally, the authorities are willing to adopt laws that will play against money-laundering and financial terrorism.
Additionally, the Singapore Monetary Fund and Singapore Exchange have established a partnership in order to allow financial institutions and corporate investors to establish a cryptocurrency exchange.
According to the information posted in this press release, the partnership of the Monetary Authorities and the Singapore Exchange will allow institutions using DvP (Delivery versus Payment) the opportunity to issue their token on different blockchain platforms legally. This move would include rights protection.
Verdict: Bitcoin has legal status in Singapore.
Germany is considered one of the most forward-thinking countries compared to those listed above. In August 2013, the German government announced that cryptocurrencies could be used for tax payment and trade. However, purchases paid in Bitcoin must include a value-added tax (VAT). Also, Bundesbank is offering the use of the term “crypto token” instead of “cryptocurrency” or “digital money.”
Crypto tokens don’t have a status of foreign currency, but personal money.
Verdict: Bitcoin is totally legit in Germany.
With regard to Bitcoin use, the U.K. is following a path similar to the German treatment of cryptocurrency.
If you want to exchange Bitcoin for fiat currency (pounds sterling, euro, dollar, etc.), there is no VAT included, unlike when a purchase is made with Bitcoin payment. The same is true for receiving services.
The U.K. government has established a department called CryptoUK, which works to address issues regarding the crypto market. This body ensures security measures and is building an anti-money-laundering approach.
Verdict: the U.K. government proves Bitcoin legitimacy
In December 2013, a representative of the Reserve Bank of Australia claimed that there is no law against bitcoin use in the country. Moreover, nothing will prevent people from paying with bitcoins, mining or transmitting them.
In July 2017, Australia started following Japan and accepted cryptocurrency as legit money.
Verdict: Cryptocurrencies are completely legit in Australia.
There isn’t much information posted regarding the Government of to crypto-market development. In April 2018, the Central Bank of Pakistan issued a statement warning financial institutions and firms about cooperation with cryptocurrencies.
Representatives of the Pakistani authorities refused to comment on this decision. One visible result was that this statement came out one day after banks had been warned about cooperation with cryptocurrency exchanges.
Verdict: Bitcoin is under an absolute ban and illegal in Pakistan.
Regulations on the International Level
It is too early to talk about international acceptance of Bitcoin legitimacy. However, we can consider the question from a union perspective.
In December 2017, European Parliament members gained a majority vote for the anti-money-laundering and anti-terrorism financial agreement.
According to the press release, the legislation is aimed at institutions that provide cryptocurrency services, such as exchanges, wallets, and platforms. The owners must register such entities and pass all legal procedures, including customer verification.
In the North and Central America, Bitcoin is legal, unlike Canada, which has put a banking ban on cryptocurrency exchanges in that country.
Regulations According to Role
Until quite recently, cryptocurrencies haven’t had any laws regulating their use. Even now, in the international arena, they haven’t been totally accepted. Some countries recognize cryptocurrencies as money; others don’t, and even ban their exchange services.
Additionally, even if a government has banned crypto exchange, it doesn’t mean that mining or transmitting are forbidden.
Let’s have a closer look at the regulations regarding crypto mining, trading, and investing.
Bitcoin Mining Legitimacy
In China, a specially developed firewall controls user’s internet activity. Even if you want to mine crypto illegally, you won’t be able to do so. However, countries like Russia don’t have a firewall, but consider cryptocurrency transmitting and mining illegal. In this case, you proceed at your own risk.
Applicature has prepared a list of countries that consider Bitcoin mining to be an illegal procedure vs. those currently accepting it.
Bitcoin mining is illegal in:
The following countries have established a positive attitude toward Bitcoin mining:
- Slovenia: Bitcoin is not only legit, there is even a tax on mining
- Ukraine: Bitcoin mining is a legal business
- Iceland: the government permits Bitcoin mining
- Belarus: Bitcoin mining is legal for both individuals and businesses
Is Bitcoin Trading Legit?
Issues of acceptance around Bitcoin are not really clear; however, what remains unambiguous is that selling or transmitting Bitcoins is NOT ILLEGAL. Of course, we are not counting China and Russia, where mining cryptocurrencies is, indeed, illegal.
All legal issues affecting cryptocurrencies depend upon individual countries. For example, in the U.S., several people have been charged for trading Bitcoins illegally. According to U.S. legislation, you need to have a license to sell Bitcoins as a business activity.
The Legitimacy of Bitcoin Investments
Investing in Bitcoin or other cryptocurrencies in not illegal. Many governments and monetary funds have warned potential investors about risk, money-laundering activities, and terrorist financing.
It is worth mentioning that when investing in any cryptocurrency, one should remember that everything is quite traceable. To transfer money as a physical party or business, one needs to indicate his/her bank account.
Bitcoin was the first representative of digital money, virtual currency, or crypto tokens, as some governments call them. It is being mined and transferred within a decentralized platform: blockchain.
As this concept represents a huge innovation, governments haven’t been prepared for these events. At present, there remain certain countries that haven’t yet reacted to the use of Bitcoin (these are located mostly on the continent of Africa).
Among countries that have accepted Bitcoin as a legal payment tool, the list includes Japan, Australia, the U.K., Ukraine, Belarus, countries of the European Union, some U.S. states, Germany, and Singapore.
Some countries have put Bitcoin under a partial ban: India, Canada, Jordan, Thailand, and Vietnam (banned as a payment tool). Mostly, these regulations cover currency exchange. In the age of the technical revolution, there are even those that have put an absolute ban on Bitcoin: China, Russia, Algeria, Egypt, Morocco, Bolivia, Cambodia, Ecuador, Saudi Arabia, Iran, Bangladesh, Pakistan, Taiwan, Indonesia, and Nepal.
In regards to any remaining questions, please, contact Applicature team.