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Are Bitcoins Legal? Facts About Cryptocurrency Regulation & Exchanges

FINANCE

MICHAEL OWEN, Lead Finance Writer

January 12, 2018

The recent news that South Korea was preparing legislation which would potentially make the trading of Bitcoin through “crypto exchanges” illegal sparked a huge drop in the price of the the currency.

Whilst interesting in itself, a more salient point lies in the question this raises around the legality of the various “crypto” systems, especially ones designed to act as a currency.

Fiat currencies are known as “legal” tender because they’re “recognized by law that can be used to extinguish a public or private debt, or meet a financial obligation”.

The key point being “by law” – only currency / “legal tender” recognized by a government is able to be ratified by law to provide a way for people to trade, settle debts, and purchase produce. Without this backing, any “currency” is the equivalent of a “black market”, not dissimilar to what was seen during the prohibition era in the US.

This tutorial aims to explain and divulge the reality about the ongoing “Bitcoin” phenomenon and the plethora of other decentralized financial networks, designed to either provide currency transfers or to remove the need for people to use regulated forms of exchange.

Before we proceed, it must be stated that this is not an endorsement or recommendation of any “crypto” system. Rather, it should give you information on what can be considered from the market, and how it should work. If you’re looking to “invest” into the crypto space, you must seek the support of a REGULATED financial adviser – who will be able to explain the overall investment market.

There is currently no regulation of cryptocurrency markets and trading.

Are Bitcoins Legal?

The legality of “crypto” systems – especially the currencies – is 100% valid (at present). The biggest problem is the lack of regulation in the market, which basically means that anything done in the market is entirely dependent on its participants (who don’t have any central legal framework to follow).

Banking and financial regulation has been in place for many decades, and has become even more prevalent in the wake of what happened leading up to the crash of 2008. The important thing to understand is that whilst “regulation” is designed to prevent predatory practices and other negative activities, it doesn’t stop human nature – which is still as greedy as ever.

If the people behind the global financial system were more reserved, and followed sound financial practices (instead of being speculative and looking to make profit by selling junk securities), the system wouldn’t have imploded. Unfortunately, it did and so regulation in banks have become even more stringent.

The point here is that whilst “banks” are regulated, “crypto” is not. It’s the equivalent of buying bootleg Ariana Grande tickets from “jennxo90” on eBay – you have absolutely no idea whether what you’re getting is 100% legitimate, and even then, you have to trust the “platform” through which the products can be bought.

The way the “crypto” space works at present is very much like eBay or Amazon – with what’s known as a “secondary market”, people are basically buying “coins” from each other in order to try and sell them at a later date for a higher price.

Secondary markets – which are basically where “peer to peer” trading occurs, as opposed to primary markets where an asset-owner will sell shares and securities directly to the public, work by allowing people to list-and-purchase products, securities, and assets from others.eBay is a secondary market, as is Amazon.

The point about those is because they are legal companies in the US and globally, they have to adhere to the laws of their respective countries. Whilst this only matters in the realm of retail, it’s also applicable to the financial world.

For example, you cannot provide commercial loans without being registered to do so by the local regulator (in the UK this is the FCA / Financial Conduct Authority). Being regulated means you have to adhere to the rules & stipulations outlined by the regulator, meaning if you don’t do so, they are legally obliged to sue you.

Thus, the “crypto” space is a very similar setup to these. At its core, you have a “crypto” asset which is being bought and sold by regular people. However, in order to make it all work, centralized “exchanges” are required (the equivalent of eBay, etc). These exchanges are currently being targeted by lawmakers predominantly because they are not regulated and are providing financial services.

To examine the legality of the “crypto” space, one must therefore examine the validity of the trade of “crypto” tokens in the various “exchanges”.

Decentralized Systems VS. Centralized Exchanges

The big point about “Bitcoin” and the other crypto systems is that they are entirely decentralized – meaning that people can “send” digital assets or currencies to each other without the need for a central clearing house.

The problem with this is that they still require a point of contact with “fiat” currency, in the form of either a digital “exchange”, or some other means of exchange.

This means that Bitcoin is not a “currency” in itself; more a “payments network”, much more akin to Visa/Mastercard than the USD. Therefore, when you hear that it’s “decentralized” and that “it cannot be regulated”, what you’re *really* seeing is the network being decentralized.

Ultimately, it means that whilst the government cannot really manage the “Bitcoin” infrastructure itself, it *can* regulate the various exchanges required to get fiat currency into the ecosystem. This is the contention most people have.

ANY company which provides “Bitcoin transaction” services (such as BitGo – the ability to “buy” products with the “currency”), has to manage their service from a regulated perspective, as it would class as either a financial exchange, or even as a banking system.

The agencies tasked with this process are the following:

FinCEN (US) – The “Financial Crimes Enforcement Network” is an agency within the US Treasury Department that published guidelines about the use of virtual currencies in 2013. 

On March 18th 2013, its guidance defined a number of circumstances under which virtual currency “exchanges” would be categorized as “money services businesses”.

 The document explained that MTBs must enforce Anti-Money Laundering (AML) and Know Your Client (KYC) measures; successfully & completely identifying the people that they’re doing business with (this is just part of the regulatory measures banks have to follow).


CFTC – 
The “Commodity Futures Trading Commission” manages financial derivatives in the US and has been coy about its stance on the “Bitcoin” craze. Most telling is that it actually approved two “Futures” exchanges to offer the system in December 2017, which have lead many people to speculate on their intentions.


SEC – 
Finally, the biggest of them all is the “Securities and Exchange Commission”. The SEC hasn’t issued any explicit regulations on virtual currencies, but its Office of Investor Education and Advocacy published an investor alert to warn people about fraudulent investment schemes in the space.

Of most note was the warning of Ponzi schemes, after charging Texas resident Trendon T Shavers (aka ‘pirateat40’), founder and operator of “Bitcoin Savings and Trust”, with running one – after raising 700,000 bitcoins by promising investors up to “7% weekly interest”.

Go Ahead And Buy Crypto…For Now

Ultimately, all this means that whilst Bitcoin is entirely legal, how it’s been used has lead to a large number of government agencies examining whether the various “exchanges” should be regulated.
This is where the South Korean legislation caused such contention – many people in the Bitcoin community were drawn to it because of its promise of a “completely” deregulated way to manage currency.

Apart from the obviously negative connotations this would bring, the one underlying factor that determined its growth was that most of the “good” uses for the system would eclipse the bad. Not only would it remove inflation but would allow for “global” payments to be handled relatively cheaply.
Unfortunately, as with all “financial” systems, the negative notions of the system caught up with it – leading to the regulation of some of its ecosystem. This is likely the only outcome from the uptake of the “crypto” systems, especially Bitcoin.

It’s entirely legal to use the “currency” but how you use it needs to be legal and ethical.