The law surrounding bitcoin is as ever-changing as the cryptocurrency itself. This internet currency isn’t the first of it’s kind; however, it certainly has caught the attention of many and is becoming increasingly popular.
Like any currency, there are legal risks and regulations surrounding Bitcoin that you should be aware of. For instance, it’s important to be aware that Bitcoin’s laws differ depending on which country you reside in. Hence an experienced Bitcoin lawyer will be able to offer accurate legal advice on the matter.
The Fundamentals of Bitcoin
What is Bitcoin?
Bitcoin is a digital currency in which transactions can be performed without the need for a credit card or a central bank. Bitcoin is essentially internet currency; it’s designed to enable users to send money over the internet in a very simple and efficient way. Nevertheless, Bitcoin is far more complex than that, and it’s recommended you do your research before trading in Bitcoin.
How Does Bitcoin Work?
Bitcoins are essentially computer files that are stored in a digital wallet app on a PC or mobile. Every Bitcoin transaction sent from your digital wallet to other people, and vice versa, is recorded in a public list called the blockchain. A blockchain allows the user’s history to be traced to prevent people from spending other users’ Bitcoins or attempting to make copies.
Is There a Limit to the Number of Bitcoins Generated?
The number of Bitcoins in existence will never exceed 21 million. See here for how many Bitcoins are in circulation.
How Much Does a Bitcoin Cost?
The current market price for a Bitcoin is always changing due to supply and demand. Bitcoins are traded at Bitcoin Exchanges. See the following for a historical Bitcoin price chart.
What are the Benefits of Bitcoin?
If you’re looking to invest in Bitcoin, you have the peace of mind that your transactions have added security. As Bitcoin is a peer-to-peer cryptocurrency, there are built-in preventative measures against identity theft, such as your personal information is hidden from others.
- Transparency and availability of resources
The knowledge behind Bitcoin is developing each day; therefore, it’s easy to acquire the resources you need. Although the blockchain is a public resource, the technology behind the blockchain ensures transactions won’t be traced back to you.
There are very low transaction fees for buying and selling Bitcoin. Fees can increase or decrease, but both parties must agree to a set fee before any transactions are made.
Like any bank transaction, it’s easy to withdraw Bitcoin into your registered bank account to use as legal tender. This transaction may occur instantly or within five working days.
What are the Disadvantages of Bitcoin?
Before dealing in Bitcoin, it’s vital that you do your research to understand what you are committing to. Like any type of investment, you should always ensure that you understand the process and any potential risks involved.
- Risk of losing investment
Similar to when investing in stocks or shares, there is a risk that the Bitcoin value will decrease. For instance, as Bitcoin isn’t a tangible asset, the value rises and falls as it mirrors the interest of investors.
- Bitcoin is only regulated in the UK in terms of money laundering
Although it’s a positive that Bitcoin falls under money laundering regulations in the UK, it also means that there isn’t an authoritative board or body to report any issues to, such as if someone is buying or selling Bitcoin illegally. If you have been accused of money laundering through this cryptocurrency, please seek Bitcoin legal advice.
There are many scams out there that promise a ‘get rich quick’ solution by investing in Bitcoin. Scammers take advantage of the fact that Bitcoin is a relatively new concept, and there’s still confusion surrounding how it functions.
What are the Laws Surrounding Bitcoin?
Bitcoin is a global cryptocurrency. Therefore it is less affected by an individual country’s financial situation or stability, whether good or bad. Each country has it’s own law regarding Bitcoin. Let’s delve into this further.
Is Bitcoin Legal?
Bitcoin is a legal crypto-currency in the following countries:
- United Kingdom
- The United States of America
Where is Bitcoin Illegal?
- Saudi Arabia
Do You Have to Pay Taxes on Bitcoin?
In short, yes. In the UK, cryptocurrency as a whole isn’t viewed as a form of currency by HMRC. However, Bitcoin is still taxed on a personal basis.
For example, if your employer gives you Bitcoin instead of a traditional payment, you will be liable to pay income tax and, in turn, national insurance contributions. This is also the case if the Bitcoin has been airdropped into your account or has gone through the mining process.
How Does this Compare to American Bitcoin Taxes?
Since 2014, the IRS has viewed Bitcoin and other cryptocurrencies as property. Therefore, capital gains tax must be paid on any profit incurred from a sale of Bitcoin. However, this depends on how long you’ve owned the Bitcoin.
You will pay your average income tax rate following the short-term capital gains tax if you’ve owned the Bitcoin for less than a year. In contrast, you will pay a lower tax rate if you’ve owned the Bitcoin for more than a year.
The Risks of Bitcoin
Many concerns have been raised in governments worldwide regarding the decentralised and anonymous nature of Bitcoin, as transactions cannot be fully controlled or regulated.
The issue with Bitcoin is that it can allow users to remain semi-anonymous as the records only consist of the funds transferred and the public keys. As a result of this, bitcoin law is a legal grey area in many parts of the world due to the challenge of preventing criminal transactions, such as money laundering and tax evasion.
A Background to Bitcoin
Who Invented Bitcoin?
The identity of the individual or individuals who created Bitcoin is a mystery. If you search for ‘Bitcoin Inventor’ on Google, you will see a reoccurring name popping up in your search results – ‘Satoshi Nakamoto’. This name is an alias utilised by the inventor of Bitcoin to conceal their true identity.
Why is the Bitcoin Founder Anonymous?
There are many reasons why Bitcoin’s inventor could be keeping their identity concealed, such as:
- Desire to maintain their private lifestyle
Bitcoin became a worldwide phenomenon that gathered lots of attention from both media outlets and governments worldwide. The inventor may have predicted that their invention would succeed as a decentralised currency and wanted to avoid this affecting their personal life.
- Negative impact on the current banking system
If Bitcoin were to become part of the mainstream banking systems, governments could take legal action against the inventor to protect the current banks.
- Avoid becoming a target of criminals
Bitcoin has been known to be utilised by both legal and illegal services. In fact, the cryptocurrency’s association with the dark web marketplace, SilkRoad, brought its invention into disrepute.
Who Runs Bitcoin?
It is important to note that the mysterious inventor of Bitcoin does not run this cryptocurrency. In short, no one runs Bitcoin. Bitcoin is run collectively by the users who use the Bitcoin client. Any changes to the Bitcoin system have to be approved by the majority of users before they are implemented.
Bitcoin Technical Background
What is a Bitcoin address?
A Bitcoin address is a unique identifier that allows you to receive Bitcoins. With PayPal, you send funds to an email address, and, similarly, with Bitcoin, you send funds to a Bitcoin address.
The following is an example of a real Bitcoin address: 1JArS6jzE3AJ9sZ3aFij1BmTcpFGgN86hA.
What is a Private Key?
A private key is a secret code that allows the user to prove the ownership of their Bitcoins. Every Bitcoin address has a matching private key, saved in the wallet file of the person who owns the balance. The private key is mathematically related to the Bitcoin address and is designed so that the Bitcoin address can be calculated from the private key, but, importantly, the same cannot be done in reverse. This means that if the owner loses their private key, the bitcoins at their public address will be inaccessible.
Caution: Private keys are to be kept safe, with periodic backups made to prevent the loss of Bitcoins. Anyone with your private keys can spend your Bitcoins!
What is a Public Key?
The public key is a unique personal address used to ensure the owner of an address can receive their funds. The user’s public key is mathematically derived from their private key using extremely complex reverse mathematics. To ensure Bitcoin is legal, the pubic key is shared in the blockchain where everyone can view it and avoid complete anonymity.
What is the Blockchain?
The Bitcoin blockchain is a public ledger of all transactions in the Bitcoin network. This data is also open and accessible to others. As there isn’t a third party involved in the transactions between two parties, a blockchain is used as a secure wallet service. However, this type of blockchain differs from other forms of cryptocurrencies.
Investing in Bitcoins
What do you Need to Invest in Bitcoin?
Here is what you will need to get started in Bitcoin investment:
- A digital wallet to store Bitcoins
- Personal identification documents
- A secure internet connection
- A method of payment (e.g. credit card or debit card)
- An account at a cryptocurrency exchange
What Fees are Involved with Bitcoin?
The transaction is usually free if the sum transacted is greater than 0.01 BTC. A token sum is imposed to provide some incentive to the miners to include the blockchain transaction.
At the moment, many transactions are typically processed in a way where no fee is expected at all. Still, for transactions that draw coins from many Bitcoin addresses and have a large data size, a small transaction fee is usually expected.
What does ‘Unconfirmed’ Mean?
It means that the transaction has not yet been included in the blockchain and is still reversible. A transaction typically takes around 10 minutes to be confirmed. When that happens, it is said that a confirmation has occurred for the transaction. With each subsequent block that is found, the number of confirmations is increased by one. To protect against double-spending, a transaction should not be considered as confirmed until a certain number of confirmations is seen.
What is Bit Mining?
Miners are individuals who run computer systems to calculate hashes repeatedly. Miners have the intention to create a successful block to earn coins from transaction fees and new coins created with the block itself. The term references an analogy of gold miners who dig gold out of the ground and thus ‘discover’ new gold that can be used to create new coins, with a similar kind of discovery occurring with a successful hash to create new Bitcoins.
What is a Bitcoin Client?
Bitcoin clients are the base level of technology for conducting Bitcoin transactions, and they store the keys needed to conduct a Bitcoin transaction. They come with multiple features and are customised to fit different niches. The most popular Bitcoin clients include:
- The Bitcoin-QT Client is the original software written by Satoshi Nakamoto, the suspected project’s founder. If you aren’t sure which program to pick, this is a good bet. It is suited for enthusiasts, merchants, miners, developers and people who want to help support Bitcoin.
- The MultiBit Client is fast and easy to use, regardless of technical expertise. It is also able to import Blockchain.info’s wallet backups (Multibit version 5.17 and earlier), making it a versatile tool for all users.
- The Electrum Client focuses on speed, with low resource usage and simplified Bitcoin usage. Start-up times are instant because it operates in conjunction with high-performance servers that handle the most complicated parts of the Bitcoin system.
Legal Advice with St. Pauls Chambers Bitcoin Lawyers
The law surrounding Bitcoin can be quite a challenge if you don’t have the support of an experienced lawyer. If you’re representing a Bitcoin case or have questions regarding this area of law, please don’t hesitate to get in touch with our team of Bitcoin lawyers. At St. Paul Chambers, our specialist Bitcoin lawyers can offer legal advice and support.
With over 30 years’ experience, Jeremy Barnett is one of the UK’s leading cryptocurrency lawyers. For more information on the latest developments in blockchains, Bitcoin law and technology, Jeremy regularly shares his expertise on his blog.