How the World's Richest Nations Are Regulating Bitcoin
The wealthiest nations in the world have widely divergent approaches to regulating Bitcoin, and some of them aren't regulating digital currencies at all, according to a report on 40 nations plus the European Union that was prepared by the Law Library of Congress last month.
The report, which was released Monday afternoon by Sen. Tom Carper, chairman of the U.S. Senate Homeland Security and Governmental Affairs Committee, details how a few countries, such as China and Brazil, have laid down rules on how Bitcoin should be treated, while many are still playing a wait-and-see game.
"The United States may not be as far behind the curve on virtual currencies as some have argued," said Sen. Carper in an email. "In fact, the United States might be leading the way for a number of nations when it comes to addressing this growing technology."
Around the world, countries are struggling with how to define and police a new form of money that is also a speculative asset and a payment transfer system all rolled into one. "The debate over how to deal with this new virtual currency is still in its infancy," the Law Library says in its report.
Regardless, it's worth taking a look at how the six wealthiest nations, after the U.S., are dealing with Bitcoin and its offspring, because the current situation could forecast how digital currency markets will develop in the coming months and years.
Highly developed nations have the most capital to risk on new technologies: Venture capital firms and angel investors can finance the entrepreneurs whose businesses shore up the Bitcoin economy; major retailers will adopt it as its popularity grows; tech-savvy consumers will hold and spend it. So it's a good bet that the G7 will continue to lead the way on digital currencies.
Some people think Bitcoin's greatest benefit will be to developing nations, however. It allows users to make an end-run around Western Union and other services now commonly used to send remittances to family members in other countries, and it can function as a non-governmental store of value for people living with an unpredictable national currency. Indeed, digital wealth may flow to the so-called Global South -- that is, Africa, Latin America and much of Asia -- if the U.S. and other developed nations place too many restrictions on its use.
America's neighbor to the north is known for its friendliness, and with Bitcoin it's no exception. Last year, the Financial Transactions and Reports Analysis Centre of Canada, a financial intelligence unit that reports to the country's finance minister, told Bitcoin companies that they were not classified as money services businesses under Canadian law, and would not have to register as such or abide by the rules that apply to those businesses. Bitcoin proponents cheered.
But there is a catch: Bitcoins are not tax-exempt in Canada. Although digital currencies are not considered legal tender in the Great White North, transactions in digital currencies fall under tax rules that apply to barter and speculative assets. Still, Canada is staying mostly hands-off now. A representative of the country's central bank told The Wall Street Journal last month that Bitcoin and other alternative currencies "should generally require much less intensive oversight and regulation because they pose much less risk to the Canadian financial system as a whole."
France does not regulate the Bitcoin economy in any way. However, the Banque de France, the nation's central bank, released a report in December 2013 that sharply criticized digital currencies. The report says that Bitcoin can't be considered a real currency in France, but further says that the conversion between bitcoins and fiat currencies should be considered a payment service, to be performed only by authorized payment service providers. It may be only a matter of time before French lawmakers and regulators heed the bank's advice.
In Deutschland, Bitcoin payments and mining don't currently require licensing, but Bitcoin itself does have a classification. Although not legal tender in Germany, it is considered a financial instrument similar to a foreign currency that can be used in private transactions or traded for other currencies. Essentially, it is a private form of money. The German Federal Financial Supervisory Authority has signaled that it may require certain Bitcoin businesses to obtain licenses in the future.
Italy follows the European Union in its treatment of Bitcoin. The E.U., and Italy with it, regulates electronic money, but a report in 2012 by the European Central Bank found that Bitcoin met only two of the three legal criteria that define electronic money. Therefore, although the European Commission's Payments Committee has discussed Bitcoin, and the European Banking Authority, a regulatory agency, has warned against it, Bitcoin seems to be in a legal gray area as far as E.U. law is concerned. As well, according to the Law Library report, Italy does not regulate Bitcoin trade among individuals, and it leaves it up to the E.U. to enforce electronic currency regulations.
The Land of the Rising Sun has yet to regulate Bitcoin or alternative digital currencies in any way. It should be no surprise, then, that one of the world's largest online Bitcoin exchanges, Mt. Gox, is based in Tokyo. However, Haruhiko Kuroda, governor of the Bank of Japan, said this past December that the nation's central bank was researching issues related to Bitcoin. The digital currency's proponents, of course, are hoping that no new restrictions are put into place.
Bitcoin is unregulated in the U.K., at least for now. A government review took place last summer, and officials are clearly worried by the relative anonymity it affords its users, but no regulation came out of the review.
According to the Law Library report, however, Her Majesty's Revenue and Customs, a department of the U.K. government whose duties include tax collection and administering the national minimum wage, has reportedly classified bitcoins as "single purchase vouchers," which means a 10 to 20 percent value-added tax would apply to all sales of bitcoin. The British digital-currency community, unsurprisingly, is livid.
Outside the G7, approaches to Bitcoin are even more diverse. "While there is no consistent or clear definition or treatment of digital currencies throughout the world, this report underscores that Bitcoin and other virtual currencies are present and growing in major economies," Sen. Carper said in his statement.
Sen. Carper added that his committee would "continue to work closely" with the U.S. Internal Revenue Service to develop tax policy for digital currencies. "At the end of the day, I think this report is an important reminder to those of us in Congress as well as federal agencies that this technology continues to play an increasing role in our economy here in the United States as well as around the world," he said, "and we need to ensure that our policy making in this area is thoughtful, effective and timely."