Author(s):Surbi Ver

In this interesting Article, Surbhi questions the legal standing of the cryptocurrency Bitcoin and the challenges it has posed for both ﬁnancial institutions and regulators at large.

Historically, finance has always been international in character; capital has rarely been mobile. Money has moved freely across borders for all of the civilization with gold and silver being global currencies for millennia. With the passage of time, money has been reverting to its natural state with the removal of capital controls and the gradual re-integration of the national capital and banking markets but now on a global scale.

Rapid advancements in the field of technology, free movement of capital globally, and need to service an increasingly global clientele have created the opportunity for money to have a virtual form. The Bitcoin was introduced in the year 2009 and is the first widely recognized currency that is not issued by a government. Although Bitcoin and other cryptocurrencies represent a future for money and payments, it has taken the time to get integrated within commercial transactions as there is a range of concerns that have been raised about this new form of currency. What is a cryptocurrency has been discussed in greater detail here. In this article, we are going to examine the legal status of this money and the concerns surrounding its regulation which have prevented it from becoming the currency of the future.

For this article, we will discuss the legal standing of the Bitcoin as it is the center of attention and contention and be the first and largest cryptocurrency. The government, the tax authorities and legal regulators across the world are attempting to understand the implications of this ‘currency’ and how it fits within the existing legal and regulatory frameworks. The Bitcoin is legal, but its legality depends on where you live and what you are doing with the Bitcoin.

Several countries have restricted the use of Bitcoin and considered it an illegal currency or have taken reasonable steps towards controlling its usage by taxing it as foreign income. Several other sovereign nations have allowed the use of Bitcoin’s within their borders as they do not consider it to be legal tender. The growing use of bitcoins in multi-level marketing (the MLM) and Ponzi schemes have raised elevated levels of alert. China, for instance, has barred financial institutions from handling and/or dealing in bitcoins. Within UAE, regulatory authorities have maintained silence till date. The concept of MLM can be traced back to the year 1979 in the matter of Amway Corporation, Inc. Et Al (Docket 9023. The complaint, March 25, 1975 - Final Order, May 8, 1979. Although the understanding of term MLM back in 1979 was narrow and limited, the current precise definition of MLM as defined by FTC reads as under:-

"In multilevel or network marketing, individuals sell products to the public — often by word of mouth and direct sales . Typically, distributors earn commissions, not only for their own sales but also for sales made by the people they recruit . Not all multilevel marketing plans are legitimate. If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan. If the money you make is based on the number of people you recruit and your sales to them, it’s not. It’s a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money."

In a recent judgment in the United States, the Internal Revenue Service (IRS) ruled that Bitcoin would attract capital gains tax and would be considered as property for tax purposes as opposed to it being currency. This ruling has clarified the legal standing for the Bitcoin in the US and has given investors peace of mind when investing and reaping profits from Bitcoin as they can now be reported to the IRS for tax purposes. In China, the handling of Bitcoin has been banned. Despite cryptocurrencies being legal, it is illegal to purchase goods with any other currency than in Russian ruble in Russia. In Australia, buying or mining Bitcoins is not illegal, and the Australian government has welcomed Bitcoin usage and has also released tax guidelines for this currency. Several countries that have clarified by various legislations the legal standing of the Bitcoin within their jurisdictions. Countries like Brazil, Norway, Finland, and Germany have followed the direction taken by the United States and attached capital gains and wealth tax to the Bitcoin again establishing it as an asset or a commodity rather than currency. In Bulgaria, it is considered a financial instrument and taxed as thus. The Canadian government has determined that Bitcoin will be heavily regulated by anti-money laundering and counter terrorist financing legislation. Her Majesty’s Revenue and Customs (HMRC), UK does not explicitly denounce recognition to Bitcoin as currency, but its tax approach treats it as any other form of payment. In the United Kingdom, VAT is due from suppliers of any goods or services who accept Bitcoin for remuneration. In Singapore, Bitcoin is treated not as a currency, but as either a good or asset. When traded for goods, it attracts VAT or Sales tax. If the Bitcoin is being used as an investment asset, there is no tax levied as Singapore does not have capital gains tax.

Some nations that do not recognize Bitcoin have quoted several reasons for their stand. Most of these relate to tax evasion, unregulated currency, money laundering. The Reserve Bank of India has cited legal, regulatory and operational concerns and maintained that it violates the Foreign Exchange Management Act and restricts the use of Bitcoin as currency. Other Asian countries like Malaysia, Indonesia, Japan, Lebanon, and Jordan consider trading and mining of Bitcoin illegal. In UAE, the country’s first Bitcoin ATM was established in Dubai. The advocates of the currency in the UAE say that this virtual currency has the potential to enable the city’s large migrant population to transfer money home at significantly lower rates than those offered by exchange houses.

The company that set up this Bitcoin ATM in Dubai has had no communication from the Central Bank about the regulation of this ATM. It would be interesting to see how the legal regulators will resolve this and the legality of the Bitcoin in the UAE. It is imperative to note that the UAE has no taxation and its financial industry is still in its youth when it comes to regulation of financial transactions.

The concerns raised by these nations are legitimate and well-founded. Silk Road, an anonymous online marketplace which was a platform for nefarious activities and allowing the sale of goods and contraband that was illegal in many countries was accepting only one form of currency, Bitcoin. The anonymous nature of Bitcoin means that it is an unregulated potentially dangerous instrument for money laundering. The decentralized character of the ‘currency’ means that though governments may regulate its use within its borders, a criminal could advantage from the anonymity of unregulated markets.

Speaking of bitcoins: - there's growing concern with regards to the legitimacy of bitcoin mining. Having discussed MLM and risks associated with cryptocurrencies and MLM, let's review and understand the legalities of bitcoin mining. Bitcoin Mining is the cumulative process of recording transactions into a public ledger covering past and current transactions. This process is done using advanced algorithms and software whereby a block chain of transaction acknowledges and communicates to the network as to the addition of new transaction. Wikipedia offers a unique and interesting introduction to bitcoin mining and is worth mentioning. It reads:-

The primary purpose of mining is to allow Bitcoin nodes to reach a secure, tamper-resistant consensus. Mining is also the mechanism used to introduce Bitcoins into the system: Miners are paid any transaction fees as well as a "subsidy" of newly created coins. This both serves the purpose of disseminating new coins in a decentralized manner as well as motivating people to provide security for the system.

Regulatory landscape as to bitcoin mining is and continues to be a gray area. At the same time, several Bitcoin miners continue to operate illegally through tax havens and offshore platforms. A typical bitcoin mine comprises of hundreds of computers shelved on rows. Miners or staff are tasked with finding and solving cryptographic problems that can efficiently find, verify and record other bitcoin transactions across the globe using algorithms. That said, a close review of some bitcoin mining websites explicitly calls for caution! An analysis of their location, the missing (or; at times long but deceptive) 'About Us' section, a look at their terms and conditions (including commercial terms, compliance and regulatory clauses, governing law, and several other provisions) raise and pose a serious question. From Spoondoolies to Butterfly Labs and from a recent ruling by Estonian Court (Albert Otto de Voogd) to other bitcoin legal miners (and MLM and Ponzi schemes) - it is evidently clear of a question - Will Bitcoin ever Overcome its Biggest Test? Every great change is preceded by chaos. The Bitcoin has indeed created chaos for the financial institutions and its regulators. A few decades ago, when millions of people went online, it was predicted that the internet would collapse. As the regulators and financial pundits unravel the predicaments revolving around the Bitcoin, even if it were to break down, it would not be long till another similar system would come forward.

Note from Editor: This article has been updated on 15 May 2016 to reflect the change in laws surrounding cryptocurrencies, cryptocurrencies MLM, Ponzi promoters, and legal developments. Please feel free to get in touch with our MLM Lawyers in Dubai.