backtop


Print 30 comment(s) - last by BansheeX.. on Feb 5 at 9:05 PM

No federal licenses required to mine or trade, although state licenses may soon be necessary

Bitcoins are a popular decentralized digital "cryptocurrency", an encryption-based form of virtual currency.  Based on proof-of-work on the SHA-256d hash, the digital payment form pioneered the field for later cryptocurrency, when it was launched by a programmer or group of programmers calling themself "Satoshi Nakamoto".  Even with the emergence of several competitors, Bitcoins remain the world's most-used cryptocurrency, with the current global pool of Bitcoins estimated to be worth $10.89B USD at current exchange rates.

For all the excitment, it's a rather confusing time for those who mine or invest in Bitcoin, in terms of what to expect in the U.S. in terms of taxation and regulation.

I. "Clairifications" Answer Some Questions, Raise Others

Currently federal taxation of Bitcoin income is anything but clear.  Bitcoins' backers are still in the dark in the U.S. as to whether the U.S. will treat the popular cryptocurrency like a foreign currency (less taxes) or like capital gains from investment (more taxes). 

Regulation on a federal level is a bit more clear.  The U.S. Senate scrutinized the cryptocurrency late last year in Nov. 2013, but declined to regulate it.

This week the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) release a pair of announcements following in the Senate's line, stating that it would not regulate the majority of Bitcoin users.  Comments the federal agency:

The first ruling states that, to the extent a user creates or "mines" a convertible virtual currency solely for a user’s own purposes, the user is not a money transmitter under the BSA.

The second states that a company purchasing and selling convertible virtual currency as an investment exclusively for the company’s benefit is not a money transmitter.

The rulings further interpret FinCEN's March 18, 2013 Guidance to address these business models.

FinCEN Bitcoin Jan Press Release by jasonmick



FinCEN Bitcoin Jan Clarification Release 1 by jasonmick



FinCEN Bitcoin Jan Clarification Release 2 by jasonmick



The releases contain some mistakes.  For example the second release says at one point:

Virtual currency does not have legal tender status in any jurisdiction.

...which appears to be misinformation, as Germany does regard Bitcoins as "a currency".

Bitcoin w/ USD
Bitcoins are recognized as legal tender in Germany, but are considered speculative capital investments in other regions.  Some nations have moved to band Bitcoins entirely.
[Image Source: Bit-Square]

What makes this statement more ironic is that a government report already noted that Bitcoin enjoys "legal tender" status as a "foreign currency" in several countries, including Germany.  The report was ordered by Sen. Thomas Richard "Tom" Carper (D-Dele.) and the U.S. Senate Governmental Affairs Committee.  Performed by the Law Library of Congress's Congressional Research Service, the study [not yet released to the public] surveyed 40+ countries on their Bitcoin-related laws, policies, and other forms of regulation (or lack thereof).

In response to the results Sen. Carper stated in a comment to Forbes:

Of those countries surveyed, only a very few, notably China and Brazil, have specific regulations applicable to bitcoin use.  There is widespread concern about the Bitcoin system’s possible impact on national currencies, its potential for criminal misuse, and the implications of its use for taxation. Overall, the findings of this report reveal that the debate over how to deal with this new virtual currency is still in its infancy.

This report has some good news – namely that the United States may not be as far behind the curve on virtual currencies as some have argued.  In fact, the United States might be leading the way for a number of nations when it comes to addressing this growing technology. 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, supporting the call for increased global cooperation.

It is unclear why the FinCEN was unaware of Germany's Bitcoin status in light of the recent, salient report.

The "clarifications" also leave some questions open.  For example, it says that mining individuals and corporations are exempt from having to register as money traders.  But what about nonprofits?

It would seem they too would be exempt from having to file, but such a policy was not explicitly stated.

II. Recent Arrests Highlight Money Laundering Concerns

Currently it is clear that Bitcoin exchanges must register with the FinCEN and obey federal laws, including not accept business transactions used for money laundering.  That policy was highlighted earlier in the week when Robert "BTCKing" Faiella, 52, was arrested and accused of running an unregistered, illegal exchange to launder criminal cash for Bitcoins.  The underground exchange was affiliated with the black market site Silk Road, a site which saw several prolonged service outages due to law enforcement pressure last year.

United States vs. Charles Shrem and Robert M. Faiella by timestaff



A second man, Charlie "Yankee" Shrem, 24, chief executive officer and compliance officer at the Bitcoin exchange company BitInstant.com, was also arrested.  The arrest sent shockwaves through the Bitcoin enthusiast community as Mr. Shrem was a vice president of The Bitcoin Foundation, an independent group who handles the evangelizing of Bitcoin worldwide.

Charlie Shrem
Charlie Shrem has been accused of assisting in money laundering via his Bitcoin business.
[Image Source: Reuters]

Mr. Shrem used "his position in both the old banking world and new, alternative currency world to help pave the way for the Bitcoin economy to emerge in early 2011," according to a biography posted previously on the Bitcoin Foundation's website.

In a statement Jinyoung Lee Englund, a spokeswoman for The Bitcoin Foundation remarked:

We are both surprised and saddened to learn of these allegations. The
foundation does not condone illegal activities and values transparency, accountability and a high level of responsibility towards its members and overall community.

Sen. Carper, commented:

We've seen all too clearly that digital currencies can be an effective tool for individuals seeking to engage in illicit activities and this recent arrest underscores that vulnerability. As we learned from our hearing late last year, law enforcement, including the FBI, Drug Enforcement Agency, and others are focused on ensuring that those who want to use digital currencies for harm are stopped.  I commend their tireless work to protect our citizens and the rule of law. 

That being said, there are many who believe that digital currencies are an important and valuable new technology, and who want the opportunity to play by the rules in bringing potentially valuable products to the marketplace.

That’s why it’s critical that the federal government, including Congress, takes notice and learns more about the potential promises and risks of this emerging technology and develop thoughtful and sensible policies that protect the public without stifling innovation and economic growth.

Mr. Shrem resigned his post at The Bitcoin Foundation.

III. New York and California Eye "BitLicenses"

Bitcoin has elicited mixed reaction from regulators, both in the U.S. and abroad.  Germany, Turkey, and India regard the Bitcoin as a currency (of sorts) in terms of taxation, and hence due not charge capital gains taxes on casual trading.  Other regions -- including Canada and Norway -- say that Bitcoins are more of a speculative investment than a true "currency".  This allows these regions to treat proceeds of Bitcoin sales as capital gains income, and tax Bitcoin enthusiasts at a higher rate.

In May California's Department of Financial Institutions sent a cease-and-desist letter to The Bitcoin Foundation, which was planning to hold a conference in the state.  Californian authorities are currently meeting in a series of closed-door sessions to try to figure out whether Bitcoin transactions constitute money transmissions.

Bitlicense
Calif. and New York are deciding whether you should need a license to do business related to Bitcoin. [Image Source: Bitcoin Examiner]

At issues is the "announcement" process associated with mining and peer-to-peer Bitcoin transfers.  The harshest critics argue for a very strict interpretation, in which every user is viewed as a money-transmitter and must seek a license.  Such an intrepretation would basically kill the Bitcoin.

Slightly more measured critics argue that companies, at least, constitute money transmissions if they deal with Bitcoin, regardless of if they exchange the cryptocurrency for other forms of payment.  Such a policy would likely stymie, but not flat-out kill the Bitcoin.

Lastly, Bitcoin advocates argue that individuals and companies should be exempt of onerous and expensive money transmitter licensing.  They argue such a policy would lead to more local business.


Bitcoin transactions
Some want anyone involved with Bitcoin to have to be licensed by U.S. states.
[Image Source: Josh Romero, et al.]

The state of New York is also cracking down on Bitcoin.  New York's superintendent of financial services, Benjamin Lawsky, last year issued subpoenas to Bitcoin mining and investing startups, forcing them to spend their scarce seed money on hiring lawyers to craft legal replies.  His office is discussing requiring "BitLicenses" -- money transmission licenses -- for any company that mines, invests in, or develops software to work with Bitcoins.

Bitcoin advocates aren't wholly opposed to the BitLicense idea, but in a recent hearing they argued that it is vital to give "safe harbor" to new startups and offer them help and understanding when navigating through the licensing process.  Some -- such as Cyrus Vance, a New York County district attorney -- are arguing against safe harbor, saying that regulators should solely be focused on cracking down on the currency, not assisting businesses seeking licenses.

IV. Bitcoin Has Won Some Powerful Allies

Whi
le Bitcoin is a disruptive force in the payment market, challenging traditional credit card firms like Visa Inc. (V), it does have some high profile backers.  Sir Richard Branson, owner of the UK's Virgin Group, has come out as a supporter of the Bitcoin. And the Winklevoss twins of Facebook Inc. (FB) fame/infamy have invested in a number of Bitcoin startups -- including BitInstant.

At the New York state hearing last Friday, Cameron Winklevoss acknowledge the "Wild West" analogy often used to describe Bitcoin was somewhat apt, commenting:

The Wild West attracts cowboys. A sheriff would be good thing... [but] over-regulation could cripple its development.

Fred Ehrsam, a former Goldman Sachs Group Inc. (GS) trader turned heads when he left the financial powerhouse to cofound a San Francisco, Calif.-based Bitcoin startup, Coinbase.  His company helps users buy and sell Bitcoins.  He's been carefully following the regulation efforts.  he says that whatever example New York and California set, other states are likely to follow.

CoinBase
Coinbase cofounders Brian Armstrong (left) and Fred Ehrsam [Image Source: Brittany Mclaren]

He comments to The SFGate:

We think California and New York will set the tone for everything else.  When that tone is established, we're ready to hand in licensing applications immediately.

Mr. Ehrsam's work to legitimize and promote Bitcoin recently won him the distinction of being listed one of TIME magazine's "30 Under 30", which honors influential people worldwide under the age of 30.

Meanwhile, at the federal level, the biggest unanswered question is whether taxpayers should anticipate Bitcoins being reclassified as an investment.  For now, in the absence of clear policy from the U.S. Internal Revenue Service (IRS), large Bitcoin investors would be wise to pay taxes on their Bitcoin earnings similar to what they would from currency trading (not the higher capital gains rates paid for day trading stocks).  Tax professionals should be able to help large investors with doing this.

Sources: U.S. Department of Treasury - FinCEN, [2]



Comments     Threshold


This article is over a month old, voting and posting comments is disabled

RE: Wonder when the next crash is coming
By rsmech on 2/2/2014 12:49:43 PM , Rating: 2
They may not have been created by any government but I do recall hearing news stories about how different governments decided to treat Bitcoins did have an impact on their value. It was in the last couple months Chinas' policies impacted their value.

Like you said it's market driven as far as their value. If the market becomes to restrictive they have less value.


RE: Wonder when the next crash is coming
By Solandri on 2/2/2014 2:36:19 PM , Rating: 3
That's because most of the people driving its price right now are treating it as an investment vehicle, not a currency. As an investment, how your government will tax any profits you make off it makes a big difference in its value. So its value will fluctuate a lot with government decisions on how to treat it.

As a currency, it's doomed because it has a limit of 21 million bitcoins which can be mined, and mining them becomes asymptotically harder. Any time you have something which becomes harder to obtain over time, its price will go up. Which is precisely what you don't want a currency to do. People start hoarding it as an investment (which is what's going on right now), rather than spending it as a currency. The ideal currency will increase in supply to match economic growth, keeping e.g. the price of milk in that currency relatively constant. That's what governments attempt to do with a fiat currency when they're not abusing it.

This also means it's doomed long-term as an investment vehicle. Once it fails as a currency and stores stop accepting it as payment, its investment value will plummet to zero because the only way to cash it out will be to sell it to another investor. In the meantime though, you can hop on for a pretty good (if wild) ride. Just don't do something stupid like dump your entire life savings or your kids' college fund into it.


RE: Wonder when the next crash is coming
By ritualm on 2/2/2014 10:13:20 PM , Rating: 2
Not only that. If the data containing some amount of BTC is deleted and no longer recoverable, that amount is gone forever.


RE: Wonder when the next crash is coming
By Firebat5 on 2/2/2014 11:42:28 PM , Rating: 2
quote:
Not only that. If the data containing some amount of BTC is deleted and no longer recoverable, that amount is gone forever.


Can anyone comment on the correctness of the above statement? Is it any different from say a bank's database?


RE: Wonder when the next crash is coming
By The Von Matrices on 2/3/2014 12:54:49 AM , Rating: 2
You would have to simultaneously wipe the hard drives of millions of computers containing the block chain. For all practical purposes it's impossible.


RE: Wonder when the next crash is coming
By ritualm on 2/3/2014 10:56:40 AM , Rating: 2
quote:
You would have to simultaneously wipe the hard drives of millions of computers containing the block chain. For all practical purposes it's impossible.

NSA wiretapped every airport in Canada, despite us having naught to do with terrorism. There is no such thing as impossible.


By FITCamaro on 2/3/2014 12:37:08 PM , Rating: 2
I'm not defending the wiretapping but the idea that Canada has nothing to do with terrorism is false. Plenty of Islamic extremists are flying into Canada and then illegally immigrating into the US through the US-Canada border.


RE: Wonder when the next crash is coming
By twhittet on 2/3/2014 6:59:18 PM , Rating: 2
You would also have to have a giant EMP erase all offline hard drives and flash drives the world over while you are at it. So unless someone has one of those that can penetrate all materials the world over, I wouldn't be too worried.


By ritualm on 2/3/2014 10:44:16 PM , Rating: 2
quote:
You would also have to have a giant EMP erase all offline hard drives and flash drives the world over while you are at it.

Nukes detonated in LEO = EMP attacks on ground level. That's maybe a hundred nukes tops, blanketing most of the populated landmass. Problem is, EMP doesn't just affect storage systems...


RE: Wonder when the next crash is coming
By BansheeX on 2/3/2014 12:31:09 AM , Rating: 2
I'm not here to defend bitcoin, but rather to poke some holes in your Keynesian statement that appreciating currency is bad because falling prices makes people "wait infinitely" rather than spend.

This is one of the goofiest beliefs taught in modern economics. For example, people KNOW technology products will be cheaper in the future and buy them anyway. Why? Because people will always want to enjoy their money, not hoard it in perpetuity until they die. Do you also think they're going to starve themselves, run around naked, etc? This is wacky stuff. People will spend and save as they see fit with no apocalyptic results.

It would, in fact, be a great boon to citizens for their currency to gain in value. Imports would become cheaper, they'd work less if they wanted, and it'd be easier to save for big expenditures. Look at record immigration and prosperity gains when America was on a gold standard for 100+ years. Are we to believe that was sorcery?

If I issued my own currency that everyone else had to work for, I would want to convince people that my authoritative counterfeiting was beneficial to the economy and was saving us from the scourge of deflation. So that's what the Fed did. Buy a clue.


RE: Wonder when the next crash is coming
By senecarr on 2/3/2014 12:30:54 PM , Rating: 2
quote:

This is one of the goofiest beliefs taught in modern economics. For example, people KNOW technology products will be cheaper in the future and buy them anyway. Why? Because people will always want to enjoy their money, not hoard it in perpetuity until they die. Do you also think they're going to starve themselves, run around naked, etc? This is wacky stuff. People will spend and save as they see fit with no apocalyptic results.

You state the issue for computers, but then try to use the example of products that are the exact opposite of computers - goods that lose value, that have no durability, and are a necessity.

quote:
It would, in fact, be a great boon to citizens for their currency to gain in value. Imports would become cheaper, they'd work less if they wanted, and it'd be easier to save for big expenditures.

Usually increasing exports is a boon to citizens, not increasing imports.

The biggest problem with your argument is that Keynesians don't just come up with the idea that deflation leads issues, unlike Austrians, they use EMPIRICISM, and actually have cases of what happens in deflationary situations.


By BansheeX on 2/5/2014 9:05:10 PM , Rating: 2
No, I am not using an opposite example, I am telling you the obvious: that if food and energy got cheaper, people wouldn't stop buying it. They would, in fact, buy MORE of it. Every product, regardless of necessity, is like this. There is no "won't spend" effect of appreciating currency. It's an absurd notion.

And no, exports are not a boon in and of themselves. Exporting in exchange for imports is a boon. The ideal situation is to work the least and get the most without borrowing to do it. That's what a strong currency gets you. Just exporting and getting nothing but paper in return is not a boon. China stuffing paper in a vault it can never spend so their citizens can slave away for a higher export number is not a boon. Once they figure out that their peg is keeping them from affording their own production, the party is over for the USA.


By Austinslay on 2/5/2014 1:56:25 AM , Rating: 2
To Solandri, you can't just come right out and say that is what is going to happen. No one even knows for sure what the true nature of Bitcoin is. You can try to apply these assumptions of yours to Bitcoin like you do regular fiat money (which is what I assume you're doing) but this is at the very core the hottest thing that has happened in finance (to me) since the Federal Reserve and banking system was conjured up on Jekyll Island, Georgia in 1913.

This technology and protocol language could be lightyears away from what we think it's worth. Or, it could be simply an inevitable death die to the possibility of heavily future regulation. Do not simply treat Bitcoin as you do fiat, investment, or any other currency completely. I think the core of it's conception lies with the ability to send money at the speed of light anywhere in the world for virtually nothing. It's what one would label 'disruptive innovation' .. It's what DVD's did to VHS.. It's what Netflix did to DVD's.. It's what live youtube feeds are doing to live Television.. It gives power to the average man. This is where the natural laws of existence are. Whatever supports the majority as a whole for better and more efficient progress, most likely will survive.

This is all 'hot air', I know.. So bear with me.. There was one payment of bitcoin worth 8million$ that was sent around the world for a fee of 6cents (I think).. This is the future of payment processing whether it takes shape in the form of Bitcoin or becomes more polished through an altcoin. Visa and Western Union charge 3% and 8% more or less (I think) and business as well as people would love to rid that.

Please know this is all just my opinion and that I believe the world needs it. That is why we shouldn't snuff out the idea it would be successful just because it is viewed currently as similar to regular currency issued by the government that tries to keep the price as consistent as possible. Who cares what it is as long as we can trade it for fiat and it carries inherent value .. e.g. Lightning fast payment transfers, security, ease of access, non-discriminatory, super liquidity. I urge you to challenge your perception and study more on what it truly is.

Bitcoin 101 blackboard is a great series on youtube to watch. Thanks! Slay out!!


"The whole principle [of censorship] is wrong. It's like demanding that grown men live on skim milk because the baby can't have steak." -- Robert Heinlein














botimage
Copyright 2014 DailyTech LLC. - RSS Feed | Advertise | About Us | Ethics | FAQ | Terms, Conditions & Privacy Information | Kristopher Kubicki