Bitcoin: the Napster of currency.

• Author: Small, Stephen
• Position: III. International Response through VI. Conclusion, with footnotes, p. 611-641

3. International Response

   Until recently, there was a major concern that the United States was lagging behind other countries in addressing the Bitcoin phenomenon. (183) Fortunately, an early February report from the Law Library of Congress quelled these concerns. The comprehensive study examined the regulatory responses of forty nations to Bitcoin and concluded that only a few countries had officially addressed the currency from a regulatory standpoint. (184) Following the publication, several members of Congress hastily renewed discussion of the subject in the hopes that the United States could establish itself as an international leader on the matter of virtual currencies. (185) While the regulatory debate continues to take place at the Capitol, other world powers like Canada, China, and Germany have already implemented some form of a government-wide regulatory strategy. It is paramount that Congress and other high-ranking government officials closely monitor these countries' policies when designing the United States' regulatory strategy on virtual currencies.

   1. China

      The evolution of the Chinese government's reaction to Bitcoin offers an insightful analysis into the difficulties countries face when developing a regulatory framework for a cryptocurrency. Initially, it appeared that China was going to establish itself as the largest supporter of Bitcoin by allowing it to exist unburdened by regulation. In May 2013, the government unofficially gave its blessing to the currency when the Chinese government sponsored a documentary that aired on the state owned television broadcaster, CCTV, to inform the public of Bitcoin. (186) After this unprecedented public showing of government support, Bitcoin experienced a huge boost in popularity within the country; in fact, more Bitcoin clients were downloaded in China over the last seven months of 2013 than in any other country. (187)

      The Bitcoin economy in China is different than most other countries due to the fact that the relatively successful consumer market has been overshadowed by the massive investment and mining markets. (188) The immense size of the Chinese Bitcoin investment market is best demonstrated by the historic rise of over 500% in global value Bitcoin experienced solely in the month of November 2013. (189) This unprecedented rapid rise in value has been attributed to a large number of high net-worth individuals who invested millions of dollars into Bitcoin because they viewed Bitcoin as a more profitable venture than either the oversaturated property market or the stagnant stock market. (190) Out of fear that Bitcoin could disrupt currency controls, the Chinese government concluded that a regulatory strategy needed to be implemented. (191)

      In early December, the Peoples' Bank of China released a report discussing the regulatory framework that was necessary concerning Bitcoin. (192) The major takeaways from the report were that China would not officially endorse the currency as a legitimate form of payment and banks along with payment companies were prohibited from accepting the virtual currency. (193) In addition, the Chinese government announced that online Bitcoin exchanges were now required to file trading records, as well as adopt measures that would actively mitigate money-laundering risks associated with the virtual currency. (194) The government made it clear that citizens could still buy and sell Bitcoin, but the shockwave from this announcement resulted in Bitcoin's value plummeting nearly twenty percent in a single day. (195) As expected, many Chinese companies that had previously accepted Bitcoin announced they would no longer accept the currency as a means of payment. (196) In early January, the Chinese government's anti-Bitcoin stance finally reached the Bitcoin miners when China's largest online marketplace, Taobao, announced it was no longer selling any hardware, software, or tutorials that could be used in the mining of cryptocurrencies. (197)

      In the wake of the new crippling government regulations, the Chinese Bitcoin exchanges are certainly struggling. (198) In order to survive, one Chinese Bitcoin exchange, BTC China, has reinstated its initial policy of charging a fee on every transaction. (199) It is a widely held belief throughout the Bitcoin community that the primary reason behind the historic November 2013 rise in prices and subsequent government crackdown, is the fact that many of these exchanges had previously ceased charging these transactions fees, and there was no sufficient deterrent to prevent speculation. (200) As with any legitimate financial institution, a system of checks and balances is necessary. (201) Through the reimplementation of these trading fees, there is hope that it will stabilize the Bitcoin market and allow the cryptocurrency to escape the ire of the government. (202)

   2. Germany

      Fueled by both robust consumer and investment markets, Germany represents the country with the most progressive opinion of Bitcoin. In July 2013, Germany became the first country to officially legitimize Bitcoin when the popular exchange Bitcoin.de announced a partnership with Fidor Bank AG. (203) By virtue of this partnership, Bitcoin.de became the first Bitcoin exchange to formally demonstrate full compliance with German financial market regulations. (204) Just one month after the announcement of this partnership, Germany became the first government to endorse Bitcoin as private money when the German Ministry of Finance announced that the government recognized it as a "unit of account." (205) While this recognition does not bestow upon Bitcoin the same level of legitimacy afford to a nationally-backed currency, it does sanction the use of it in private transactions. (206) The only conceivable limitation placed on the currency occurs in the commercial realm, where a company must acquire permission from the Federal Financial Supervision Authority (BaFin) in order to use Bitcoin as a means of payment in a commercial transaction. (207)

      The landmark decision to classify Bitcoin as a "unit of account" had two key implications. First, it established a much-needed regulatory framework for Bitcoin exchanges, which substantially raised the regulatory standards. (208) By classifying Bitcoin as a unit of account, the German government elevated the exchanges to financial services companies, which are required to meet strict criteria in order to operate. (209) These criteria serve as a form of consumer protection by ensuring that the companies have a substantial amount of initial capital, that the company's management has fulfilled certain prescribed qualifications, that a detailed business plan has been filed with the government, and that all transaction reports are submitted to BaFin on a regular basis. (210)

      While these protections were designed to encourage investment through the guarantee of consumer protection, perhaps the largest benefit will be realized through the wealth of information now available to the government. Through this regulatory framework, the exchanges will now be required to implement anti-money laundering programs. (211) This declaration also brought the exchanges under the oversight of a special department of BaFin, the Money-Laundering Prevention Department. (212) This group does not supervise any single sector of the German economy, rather it works with the banking, finance, and insurance sectors to ensure that there are common standards, and that companies are in compliance with these standards. (213) As a result, the anti-money laundering programs require the Bitcoin exchanges to identify their customers, obtain information about the purpose of the business relationship, monitor their client accounts for suspicious activity, and implement a document retention program that ensures all information on accounts are retained for a reasonable amount of time after their creation. (214) By virtue of this ruling, Germany has also established itself as the leader in prescribing a regulatory framework for Bitcoin.

      The second major impact of the decision was that it answered the taxation questions surrounding Bitcoin's classification and applicable taxation rate. When a bitcoin is exchanged for fully recognized currency, it is classified as an asset and taxed at the flat capital gains rate. (215) However, if the bitcoins were held for more than a year before they were sold, then the transaction will be declared a nontaxable private sale. (216) In the case of Bitcoin miners, it was determined that since they are essentially creating value, the applicable taxation strategy is the normal income tax rate. (217) However, on the issue of taxing consumers for purchases when bitcoins are used as a means of payment, the Federal Ministry of Finance has voiced concerns that there is currently no income tax effect. (218)

   3. Canada

      Canada provides arguably the most intriguing case study of a national regulatory policy concerning Bitcoin. Initially, the country was labeled the "wild west" of Bitcoin because of its refusal to implement regulations concerning the currency. (219) In mid-January 2014, the Canadian government reinforced this moniker by adopting the official position that the currency was not recognized as legal tender, but was merely another type of payment system. (220) These systems are allowed to exist with little government oversight as long as they contain certain consumer protection characteristics. (221)

      While the government refused to address Bitcoin in any substantial regulatory capacity, the Canadian Bitcoin exchanges became a tremendous success. (222) This success was the result of a vacuum of regulation that was brought about because of a legal loophole found within the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA), where money was specifically defined as the "currency of another country." (223) Due to the precise wording of the legislation, the organization in charge of...