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Even as the taxman cometh internationally, a more crucial debate of regulation v. laissez-faire plays out

The U.S. dollar may be the true "world currency" in today's global economy, but Bitcoins -- a math-based "cryptocurrency" -- are offering a unique alternative to users worldwide.  Relatively secure and anonymous, the coins are controlled by hard and fast mathematical rules, not privately held banks.  As a result, they are emerging as a fast growing method of payment on the internet -- and even offline.

I. Federal Judge Says Ponzi Schemes Mandate Bitcoin Regulation

States -- particularly the U.S. -- are eyeing Bitcoins warily.  The anonymity is one concern, but officials are less worried about that because it only really disguises the path of money online; whenever an individual cashes out their bitcoins or uses them for online purchases, a trackable money/activity trail is created.  

Still, the extra anonymity (along with the inability of the federal government to regulate Bitcoin trading) prompted the Senate Committee on Homeland Security to write a letter [PDF] to the U.S. Department of Homeland Security (DHS).  In a letter they write that they don't want to "stifle a potentially valuable technology", but add that the government must "make sure that potential threats and risks are dealt with swiftly."

BitcoinAs Bitcoins grow more popular worldwide for both online and offline payments, U.S. regulators are cranking up the pressure on the cryptocurrency. [Image Source: GSM Solutions]

A major federal court case is exploring the legality of the Bitcoin.  The case involves Bitcoin Savings and Trust (BTCST), a Bitcoin hedge fund of sorts created by a man named Trendon Shavers.  Mr. Shavers is no stranger to high technology -- he cofounded Business Cogition, a Dallas, Tex. IT consulting firm.  

But when BTCST's hedge fund collapsed, Trendon "PirateAt40" Shavers was accused in court by his clients of running one of Bitcoin's first Ponzi schemes.  Earlier this month Federal Judge Amos Mazzant of the U.S. District Court for the Eastern District of Texas ruled that "Bitcoins can be used as money" and hence a Ponzi scheme lawsuit filed against Mr. Shavers by the U.S. Securities and Exchange Commission (SEC) can proceed.

Trendon Shavers
The SEC has charged Bitcoin "hedge fund" operator Trendon Shavers (right) with operating a Ponzi scheme. [Image Source: BitcoinTalk]

Aside from protecting investors, politicians are also warily eyeing Bitcoin as a tool for potential tax evasion.  Both state and federal U.S. regulators have recently started cracking down on cybercurrency exchanges that had not properly paid the fees to become a licensed money trader (and agreed to the bookkeeping necessary to get that license).  Most recently New York state regulators subpoenaed 22 different Bitcoin exchange operators, looking to make sure they were holding their users responsible for taxed income.  

Tax collectors in both Canada and the U.S. are starting to keep a more careful eye out for unreported Bitcoin income, although few individuals are believed to have been audited yet.

II. Germany Takes Libertarian Stance on the Bitcoin

The latest state to tackle these tough economic and fiscal questions is Germany, a member of the European Union.  The European Union has not issued a clear position on Bitcoin, so Germany started the debate itself.

German Finance Ministry laid out an argument that the Bitcoin should be taxed, but otherwise lightly regulated, in a recent reply to a question by a member of Parliament.  It argues that Bitcoins are a type of "private money" and that Bitcoin mining (the method by which Bitcoins algorithms slowly "seed" a stock of global currency, while rewarding users for putting computation power towards supporting the global Bitcoin cryptographic transactions)  is "private money creation".

Bitcoin smaller
Germany's Finance Minister says Bitcoins are taxable. [Image Source: Getty Images]

As a result, if you're a Bitcoin miner or day trader and you profit, you are subject to Germany's capital gains tax rate of 25 percent.  An important exception is if you horde the coins for more than a year, in which case they are viewed as a long term currency investment, and hence not subject to the capital gains tax.

This approach isn't all bad news for the traders and miners.  If you buy hardware to mine, you may now be able to write that off in part as a capital investment.  And if you lose money on trading, you may be able to reduce your taxes by claiming capital losses.

It appears that Germany is adopting a looser regulatory policy towards Bitcoins than the U.S. -- an approach that carries both additional opportunity and additional investor responsibility (due to the lighter protections).

Germany beer girl
Known for its high tech automobiles and classically produced brews, Germany appears to be adopting a more loose regulatory policy w.r.t. Bitcoins. [Image Source: Getty Images]

Parliamentarian Frank Schäffler—a member of the Free Democratic Party (FDP), a pro-business, center-right party— was pleased with this direction, commenting on Twitter:
Friedrich Hayek was among Austria's most prominent economists, who in the 20th century was a driving proponent of mostly laissez-faire regulation of capitalism, a regulatory philosophy which arose as early as 200 B.C. in China and later became popular in Europe and North America in the 18th century.  It's hard to put a label on Mr. Hayek, who billed himself as a "classic liberal", but today is viewed as more of a libertarian in American political terminology.  Despite doing some things to expand regulation, President Ronald Reagan (R) cited Mr. Hayek as a key source of inspiration.  Mr. Hayek's most vocal rival was John Maynard Keynes who condemned his opponent's philosophy in his seminal 1926 work The End of Laissez-faire.

Sources: Federal Judge Amos Mazzant [Texas], German Finance Minister

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RE: Germany has the right idea
By drycrust3 on 8/20/2013 5:08:06 PM , Rating: 2
Instead of battling this thing to a losing end (like the RIAA did to online music) just find a way to make money off with loose regulation.

As I understand it, "cash" can be anything that is commonly traded for goods and services. For example, in post-WW2 Germany cigarettes were used as a currency for a while, and legend has it that tobacco leaf was used as a currency in 19th century America.
So Bitcoin could easily be used as cash in the right environment. I think it is too highly valued to be used for commonly traded items, but for valuable items, like property, large quantities of oil, a hundred thousand tons of wheat, etc, then Bitcoin (or some equivalent) could well become the currency of choice, especially now that many countries have anti-money laundering laws that require banks to ask questions when large amounts of money are transacted.
The thing about Bitcoin is that it is a private currency, just like a cheque made out to "cash" is, so when a person receives some they don't have to run straight to the bank to cash them in, they can also use them themselves.
So it will only be a matter of time before nations start their own version of Bitcoin.
Of course, all the regular problems that happen with a regular state currency will also happen with state issued cryptocurrencies, but a whole lot faster. For example, say you had a thousand "Eurocoins" that were worth a tidy amount, then one night while you were asleep the EU Central Bank did some quantitative easing, and when you woke up in the morning you heard the news that Eurocoins were half the value they were the night before.

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