Buying Bitcoins: legal aspects

Buying bitcoins is the easiest way of procuring them. But before you do that it is a good idea to find out more about the legal aspects surrounding this purchase.

Across the globe, various government agencies and authorities ( related to law enforcement, taxation, and legal regulations ) are trying to comprehend how cryptocurrency fits into existing frameworks. Bitcoin activities and their legality depends on your identity, geographical location of residence and what you are doing with the bitcoin in particular.

What concerns the authorities?

  • Bitcoin as decentralized currency may be used anonymously and can be used for money laundering or even terrorism funding.
  • FBI in a special report ( published in 2012 ) also spoke about the fact that while US-based exchanges are regulated, offshore services may not be and could be a safe space for criminals.
  • Silk Road, an anonymous marketplace over TOR anonymous browsing network only accepted bitcoins and sold goods illegal in several countries including drugs. In 2013, the FBI closed the site and bitcoin was referred to as a “surrogate currency” and seized.
  • The effect that large-scale bitcoin adoption is a concern of many Governments for the effect it may have on the stability of the financial system, especially if prices are volatile.

There are three main categories of bitcoin stakeholder. Someone may fall under more than one of these categories, and each category has its own legal considerations.

Buying Bitcoins

There are three players when it comes to buying bitcoins – users, miners and exchanges. Here is their current legal standing.

  • Users obtain bitcoins and may choose to hoard them or spend them. It is deemed legal by the Financial Crimes Enforcement Network (FinCEN), USA for users to exchange bitcoins for goods and services.
  • However, the same FinCEN are not in favor of miners- those who create bitcoins and exchange them for fiat currency and label them as money transmitters thereby becoming a business entity.
  • Exchanges too, as per FinCEN are Money Transmitting Businesses (MTB).

So, essentially only the users are completely legal entities in themselves and the rest come under some very tough MTB regulations.

The Industry response and where you can buy bitcoins

The industry has responded in the following ways:

  • Self regularity body formed to engage with regulators
  • Bitcoin Foundation formed committees to offer legal support, liaison and better policies
  • Exchanges have attempted to secure MTB licenses and some are avoiding business with US customers till this issue is resolved.

Iceland, Bolivia, Ecuador, Kyrgyzstan, Mexico and Vietnam have a bitcoin ban in place so do not use any exchanges related to these countries. Bitcoin friendly country markets to buy from include Cyprus, Denmark, Germany, Slovenia, Sweden.