Bitcoin has managed to challenge the customs of the global financial system by proposing a new economic model, where the dependency on central banks and governments is irrelevant. As a result, banks, financial regulators, and even governments can no longer exercise violence through monetary control in the financially decentralized system.
As Bitcoin is not issued by any government or any central bank, the way through which governments choose whether to accept or limit the use of Bitcoin can cause a great deal of controversy. Governments don't lack the means to control a decentralized currency; however, they have a hard time tackling and subjugating the network expansion process.
This article will analyze why countries decide to make Bitcoin legal or illegal and how the legality of a new financial model is defined and reshaped to meet existing economic standards.
What Is it Meant By Legal And Illegal?
Legality entails a set of rules following the law, while illegality is against the law. As Bitcoin does not belong to any system, in the current state, it is not legal nor illegal. Nevertheless, cryptocurrency regulation is a topic on most governments' agendas because it requires multiple sectors to create laws and regulations to help determine its status.
Bitcoin's network effect and price growth have gained the attention of governments since 2014 or even sooner. Moreover, as a speculative asset, Bitcoin behaves similarly to the stock market. As a result, governments can benefit from capital gains taxation, a standard introduced by many countries, including the U.S., which has between 10% to 37% short-term capital gains taxes.
Governments can enforce cryptocurrency laws on exchange platforms or prohibit financial institutions from transacting or accept any crypto payment. Regardless, the open nature of the internet and the decentralized status of Bitcoin make it impossible to enforce regulation fully.
What Are The Differences In Bitcoin Legality?
In the case of Bitcoin, legality is defined by the extent to which Bitcoin can be used freely, without any limitations or constraints. Each country defines the legal status of Bitcoin, and its legal status is determined by how the law is stated, and whether it is included in the current financial system or defined outside of it. Thus, this article considers Bitcoin legal if people can transact it freely despite Central Banks trying to restrict access to digital assets.
Countries That Legally Support Bitcoin
As Bitcoin gains widespread attention from both popular and institutional investors, nation-states are expected to create legal frameworks through which financial entities can operate and offer services to their clients. As a result, Bitcoin's legality is most often than not tied to the extent to which individuals can buy Bitcoin using exchanges and accepted by financial institutions.
Bitcoin is partly regulated in the United States and is a taxable commodity according to the IRS. Exchanges and financial services that offer cryptocurrency services need to register with the SEC. The 2021 infrastructure Bill also mentions digital assets such as Bitcoin and aims to increase financial tracking to prevent money laundering.
Several states are warming up towards Bitcoin and other cryptocurrencies as they recognize its benefits to the yearly taxation turnover. For example, Texas is incentivizing Bitcoin mining after the Chinese mining exodus. Additionally, Wyoming is developing cryptocurrency-friendly state regulations to promote innovation, such as establishing DAOs and offering banking licenses to cryptocurrency exchanges in the USA.
Bitcoin is regulated in Canada, and policymakers are working together with Canadian exchanges and crypto service providers to create better legal frameworks for the user. Relaxed outlooks from regulators offer mainstream investors better exposure to cryptocurrency assets while also approving digital exchange-traded funds (ETF), which was an unprecedented event for any other nation-state.
According to the Canada Revenue Agency, Bitcoin and digital assets are catalogued as a commodity in Canada, which has prevented the unfavorable misreporting of taxes. Additionally, profit generated from cryptocurrencies needs to be declared and taxed as Capital Gains tax.
There are no specific laws in the United Kingdom that define digital assets as legal and integrated into the financial sector. Nonetheless, the UK had defined Bitcoin as property without applying additional regulatory measures.
Crypto exchanges in the U.K. have to register with the FCA and are subject to AML laws. After leaving the European Union, the U.K. has created its financial framework; however, no plans exist to regulate cryptocurrencies. Thus, owning and transacting Bitcoin by individuals is not restricted; however, banks can implement their terms.
Cryptocurrencies in the European Union are legal. Individuals are allowed to own Bitcoin, transact it, and store it. However, each country is imposing its laws regarding taxation and capital gains tax. In addition, the E.U is exploring additional regulatory measures for money laundering and anti-terrorism laws, meaning exchanges that operate in the E.U must conduct CDD/KYC on customers to meet the regimentations.
Bitcoin is regulated and added into the law in Japan and has certain characteristics which define its use cases. For example, Japan has no capital gains tax regardless of the length of keeping the asset in a digital form. Instead, taxes are involved only when a purchase is converted into fiat and generates profit.
As Bitcoin is included in a specific asset class within the law, cryptocurrency exchanges that operate in the country need to follow regulatory input, including delisting unapproved assets from their holding, such as Monero.
Bitcoin is legal in India however cryptocurrencies are not highly regulated which limits investor protection against fraudulent actions and crypto exchange hacks. Moreover, there are no rules on crypto taxation in the country as RBI does not recognize the currency as legal tender.
India's Supreme Court March 2020 resolution on the RBI case reinforced Bitcoin's status in the country after RBI could no longer enforce restrictions on RBI clients for conducting transactions with cryptocurrency entities. In 2021, India proposed to apply a Bitcoin ban in the country as it seeks to develop government back digital currencies. However, there is no clear definition of what the ban could entail.
In 2017, the Australian government declared cryptocurrencies legal to invest in. This includes mining Bitcoin and trading on platforms. Although, the Government increased its integration efforts into the financial circuit. However, their legality entails those using and transacting Bitcoin are subject to the Anti-Money Laundering and Counter-Terrorism Financing Act 2006. Additionally, cryptocurrencies incur a capital gain tax as they are interpreted as property.
Accepting Bitcoin and other cryptocurrencies comes at a cost, as the government can issue new laws, forcing exchanges to take preventive actions. In 2020, regulators forced cryptocurrency exchanges in Australia to delist privacy coins from their holdings.
Bitcoin in Brazil is an unregulated asset where individuals can own it and transact using it without any guarantee or protection from the government. However, although it is not regulated, in 2019, the Special Department of Federal Revenue of Brazil published a document in 2019 listing a series of rules regarding crypto taxation. As of June 2021, a new bill was added to regulate cryptocurrencies in the country. If approved, the government will have 180 days to divide and create a concise framework to regulate crypto transactions.
Bitcoin is considered legal in Argentina and the government has issued rules and laws regarding taxation and the prevention of money laundering in the country. While the Argentinian government is not directing exchanges or individuals on how to act in the market, they are observing and planning on creating a new bill based on their findings.
As of August 2021, the current president of Argentina, Alberto Fernandez, suggested he might be inclined to adopt Bitcoin as legal tender in the country. However, to this date, the president did not take further action.
Cryptocurrencies are intangible assets in South Africa as of 2014; however, the country wants to increase crypto regulation and embrace cryptocurrencies. Owning and transacting cryptocurrencies in South Africa using an exchange is not illegal and is not fully regulated. Specifically, South Africa wants to increase regulation to avoid using Bitcoin for criminal activities and guard against money laundering and terrorism. The South African Reserve Bank plans to limit banks' exposure to crypto-assets as they can create financial instability in the long run.
Nigeria has become silent regarding regulating and making Bitcoin legal or illegal. While owning and transacting Bitcoin is not a criminal offense, Nigeria's Central bank issued a document reaffirming their stance on Bitcoin financial transactions. Specifically, dealing and facilitating payments by banks will attract penalties. The Central Bank of Nigeria also directed all banks to find clients dealing with cryptocurrencies or crypto exchanges and banning or cancelling their accounts. Despite the banking ban, Bitcoin usage within Nigeria is still on the increase.
Countries Where Bitcoin Is Legally Accepted
El Salvador is the only country that made history after it embraced Bitcoin as a legal tender. That means that it creates more avenues for Bitcoin to increase mass exposure as companies such as McDonalds are obligated to accept Bitcoin as payment. The Bitcoin Law was passed on June 8th, 2021, and fully into effect after September 7th, 2021.
Ukraine is the second country that plans to make Bitcoin a legal tender. In September 2021, the parliament voted to legalize Bitcoin. President Zelensky intends to create a dual currency system similar to El Salvador and create a crypto mecca by 2023. Moreover, Ukraine plans to make bitcoin mining a new reality, using green mining through nuclear power sources.
Countries That Have Banned Crypto
China has been at the forefront of Bitcoin dismissal since 2017 when it banned cryptocurrency exchange operations and crypto crowdfunding (ICOs). In 2021, China has intensified its crypto crusade, reiterating its 2017 memo of banning crypto-financial activities. Furthermore, the country went a step further, making Bitcoin companies illegal, causing a hashrate drop and an exodus of Bitcoin farms and mining pools from the country.
The People's Bank of China has been experimenting with CBDC's or Central Bank Digital Currency (e-yuan) and plans to become the first country to make it a reality. While China does not accept Bitcoin, it does accept the underlying technology as long as s centralized and controlled. Still, people can transact Bitcoin and cryptocurrencies in China, but they need to use overseas accounts and exchanges.
In 2014, Bolivia issued a decree banning unregulated digital assets, including Bitcoin.
Bitcoin has been banned as a transaction tool as of January 2018 in Indonesia. Individuals can purchase and hold Bitcoin and other digital assets, but they cannot use it to pay for goods and services within the country.
Bitcoin purchases are banned from Morocco starting November 2017. Furthermore, Morocco's Foreign Exchange Office announced that any divergences from the law violate the foreign exchange regulations and are punishable with fines. Still, data shows that Bitcoin transactions on LocalBitcoins are gaining momentum despite the imposed ban.
Holding, owning, using, and transacting Bitcoin and other digital assets were made illegal in 2018. According to Financial Law, any violation of the provision is punishable in law according to the country's regulations.
Bitcoin is prohibited in Egypt where by the Egypt Central Bank issued a statement claiming issuing, promoting, transacting, and creating a platform designed to transact Bitcoin are forbidden. On March 28th, the Central Bank reiterated that Egypt works only with currencies approved by the bank to diminish Bitcoin investments. Those in violation of Article 206 from the Banking System Law are subjected to prison or fines up to 10 million Egyptian pounds.
Vietnam has banned the use of Bitcoin and other digital assets as a payment tool in the country. Individuals and businesses caught transacting Bitcoin can be fined up to 200 million VND. However, Bitcoin can be transacted as a virtual good or digital asset, meaning individuals can trade it on any open exchange. In 2021, Vietnam's Ministry of Finance appointed a workgroup to research a mechanism for integrating and accepting Bitcoin.
Bitcoin's status in the global financial context is still not thoroughly understood by many nation-states. Increased regulation in the field will allow cryptocurrencies like Bitcoin and others to function in a risk-free environment while also servicing the financial needs of the many.
While Bitcoin might still be banned in certain countries, digital assets in other various forms will still be accepted. Currently, countries are banning and interdicting Bitcoin because they fear losing control of the payment system, while others identify new opportunities to increase the capital inflow through taxation.