While traditional fiat currencies are issued by central mints or treasures and are usually heavily regulated by governments, Bitcoin is not regulated by governments. Rather, it is regulated by the peer-to-peer model on which it operates, deriving its value from the laws of supply and demand. However, there have been many instances, both in the United States and around the world, in which governments have intervened and even attempted to regulate Bitcoin. There are other ways that governments have been involved, as well, including prosecuting criminal cases involving Bitcoin cryptocurrency, seizing Bitcoin assets, and providing the framework on which Bitcoin can operate. Let’s take a brief look at How Does The Government Get Involved in Cryptocurrency?
On August 18, 2008, Neal King, Vladimir Oksman, and Charles Bry applied to the US Patent Office for an encryption software. While the men deny any connection to Satoshi Nakamoto, the mysterious figure behind the creation of Bitcoin, the software that they designed bore a strong resemblance to the blockchain model on which Bitcoin would operate. Eighteen months after they made their application, on February 18, 2010, the US Patent Office approved the encryption software that they had created. This provided a degree of legal protection for blockchain and Bitcoin.
The Financial Action Task Force is an international intergovernmental agency founded in 1989 by G7 countries to help establish policies to prevent financial crimes such as money laundering and financing terrorists. In October 2010, it issued a report highlighting what it saw to be the dangers of Bitcoin. The dangers included the anonymity of users, which could allow individuals to user Bitcoin to fund terrorism without detection; the lack of governmental regulation and oversight, which allowed the currency to grow at a rate that could be inconsistent with fiat currency and also kept it from being taxed; and the potential for monetary abuse, including money laundering. The report was not an issuance of a regulatory policy, but it did advise governments around the world of potential challenges associated with Bitcoin that they may face.
In January 2011, Ross Ulbricht launched the website Silk Road, an illicit market for trading illegal drugs named after the ancient trade route that connected China with the rest of the world. Ulbricht intended for the website to accept Bitcoin so that users could remain entirely anonymous. Ulbricht would be arrested and the FBI would seize the website, along with all of its Bitcoin assets, in October 2013. Shaun Bridges, an FBI investigator tasked with attempting to crack the Silk Road network, engaged in corrupt, fraudulent activity when he used his FBI credentials — issued by the US government — to steal nearly one million Bitcoin. Ulbricht was charged with trafficking of narcotics and money laundering, amongst other things, and sentenced to life in prison without the possibility of parole. In connection with the FBI shutting down the website, $3.6 million worth of Bitcoin assets were seized by the US government. The Silk Road case showed that the United States government would intervene in Bitcoin affairs, that Bitcoin could not be used as a guise for trafficking and other illegal activities, and that it recognized Bitcoin as assets that could be seized.
On April 16, 2011, a journalist named Jerry Brito wrote was possibly the first article about Bitcoin to be featured in a mainstream media outlet. The article, entitled “Online Cash Bitcoin Could Challenge Governments, Banks,” appeared in Time Magazine and featured the potential that Bitcoin, as a peer-to-peer currency not under regulation by a government body, could be used to fund Wikileaks. It also highlighted some of the challenges associated with Bitcoin that are facing governments, as well as possible regulatory efforts that may soon be implemented.
In November 2011, pirateat40, aka Trendon Shavers, opened Bitcoin Savings and Trust, a wallet in which users could deposit their Bitcoins. Pirateat40 advertised an interest rate of 7%, which would allow investors’ Bitcoin funds to double every 10 weeks. However, the scheme was too good to be true and was shown to be a Ponzi scheme, which defrauded investors out of 700,000 Bitcoins, damages estimated to be valued at $40 million. Three years later, Shavers was arrested when his company was found to be a Ponzi scheme. Shavers protested that because Bitcoin is not a “security” and is not regulated by the US government, his actions were not illegal and could not come under the purview of the Securities and Exchange Commission. However, the United States government disagreed. Shavers went on to be imprisoned for 18 months and forced to repay his customers’ losses. This event indicated that the US government will take steps to regulate the exchange of Bitcoins, especially when fraudulent activity is occurring, in order to protect people.
On May 15, 2013, the Department of Homeland Security issued a warrant against Mt. Gox, which at the time was the world’s largest Bitcoin exchange and wallet, processing as much as 70% of Bitcoin transactions globally. The warrant suggested, amongst other things, that Mt. Gox’s payment processor Dwolla was not properly licensed and was, therefore, operating unlawfully. The Department of Homeland Security went on to seize over five million dollars from Dwolla. This was yet another example of the United States government taking steps that, while not regulating Bitcoin, ensured that transactions involving Bitcoin were held to the same standards as traditional financial transactions.
On December 5, 2013, China’s central bank, the Bank of China, took drastic regulatory action against Bitcoin by banning any transactions using Bitcoin. At the time, China was the country with the largest share of Bitcoins. Over the following days, the exchange value of Bitcoin dropped from a peak of $1030 on December 5 to $730 on December 8, a decline of nearly 30%. This event showed that the value of Bitcoin was susceptible to government regulations; it could be severely affected. Less than two weeks later, on December 17, 2013, China banned any further deposits made using Bitcoins.
On January 27, 2014, Charlie Shrem the CEO and co-founder of BitInstant, was arrested for conspiracy to commit money laundering. While his partner, Gareth Nelson, was aware of the need to comply with financial regulations as if they were engaging in traditional financial exchanges, Charlie Shrem insisted on doing business with a man named Robert Faiella, who went by the username BTCKing and bought Bitcoins to sell at a markup. Shrem and Faiella developed a cozy relationship in which Faiella, who had never registered as a financial provider, purchased tens of thousands of dollars worth of Bitcoins from BitInstant on a weekly basis, in exchange for protection by Shrem. The two were arrested in January 2014; Shrem was convicted and sentenced to two years in prison. Again, the United States government showed that Bitcoin transactions were subject to the same financial laws as other transactions, and that money laundering is money laundering, no matter what currency is used.
In March of 2014, the Internal Revenue Service declared that Bitcoin would be taxed as property. This move fell short of recognizing Bitcoin as currency but was a major step towards regulating the booming Bitcoin economy. Amongst other things, the move meant that any wages paid in Bitcoin had to be reported as taxable income. The biggest effort in the United States towards governmental regulation of Bitcoin would come three months later, in July 2014, when the State of New York issued a draft of proposed legislation that would require businesses to obtain a license before being able to accept virtual currencies. The license, referred to as a “bitlicense,” would cost $5000 in initial fees and would be required by any company that accepted, stored, or otherwise engaged in business ventures involving Bitcoin. However, some companies that applied for the bitlicense said that the total cost, including legal fees, was closer to $10,000. This was the first time that a US-based government would attempt to regulate virtual currency. The law was implemented just over a year later, in August 2015. As a result of the measure, at least a dozen Bitcoin-based operators declined to do business in New York. Six weeks later, the Bitcoin exchange known as Circle became the first company to receive a New York Bitlicense.
On September 18, 2015, the US Commodities Future Trading Commission declared that Bitcoin was a commodity, similar to any consumer good, and therefore under the purview of the Commodity Exchange Act. While this move did not recognize Bitcoin as a form of money, it was a blatant step by the US government towards regulating it.
While regulation attempts made by the United States government were clearly efforts to impinge on Bitcoin’s ability to operate as a peer-to-peer currency, other countries took different approaches as they realized that they needed to recognize the Bitcoin revolution. On October 22, 2015, the European Union declared that Bitcoin and other virtual currencies could be exchanged without taxes, thereby giving it the same legal standing as traditional fiat currency. The move showed that while not being regulated, Bitcoin has the same function as regulated currency. It also gave the currency an opportunity for sizeable growth in European markets. However, some Bitcoin enthusiasts worried that even this seemingly positive step was an underhanded effort for the European Union to be able to meddle in the Bitcoin economy. Helping pave the way for Bitcoin to enter the mainstream economy could lead to Bitcoin being regulated as fiat currency is regulated.
Ongoing fraudulent activities taking place under the guise of Bitcoin continued to be prosecuted by the United States government, consistently showing that financial crimes are financial crimes, no matter what currency they use. On December 1, 2015, the Securities and Exchange Commission declared that the Bitcoin mining companies GAWMiners and ZenMiner had engaged in fraudulent activities by operating a Ponzi scheme. Both companies were founded by Joshua Garza as a means of sharing the profits made by mining Bitcoins, and he made over $20 million. However, his computers did not have enough processing power to mine the necessary number of Bitcoins, leading the SEC to recognize his companies as Ponzi schemes. Joshua Garza initially disappeared, but would eventually be convicted of fraud and sentenced.
Another seemingly positive step made by non-United States governments towards accepting the Bitcoin movement came in March 2016. During this time, the Japanese Cabinet passed a number of laws that recognized the legitimacy of virtual currencies such as Bitcoin against traditional fiat currencies. They came to be considered an acceptable method of payment, including to governmental institutions, every bit as acceptable as fiat currencies. The move had mixed reactions; some Bitcoin enthusiasts felt that this was an underhanded attempt at regulation by a government, while others saw this as a step forward to ensuring Bitcoin’s continued growth and legitimacy. In April 2017, the Japanese Cabinet’s measures to fully recognize the legitimacy of Bitcoin as legal currency went into effect.
On April 6, 2016, the Bitcoin exchange company Circle, which was the first company to receive the bitlicense required by New York State, became the first company to receive the British virtual currency license. The license allowed Circle to do business with Barclay’s, the British bank that became the first major high street bank to recognize Bitcoins as currency. This event signaled changes underway in the British financial marketplace and set a precedent for future Bitcoin companies that want to expand their businesses in the United Kingdom. It signaled that the United Kingdom was becoming friendly to Bitcoin; however, the fact that a license was required was seen as an underhanded governmental attempt at regulation.
Six months later, in October 2016, the national railway operator for Switzerland, SBB, made an announcement that on its ticket machines, customers would be able to purchase or exchange Bitcoins using their Swiss francs. The move, which would test how viable cryptocurrency was among the Swiss population, would go into effect on November 11, 2016. This move essentially created a vast network of over 1000 Bitcoin ATM machines by adding the Bitcoin capacity to the already-existing ticket machines. Despite this success, concerns were raised that this was another underhanded move by a national government to regulate Bitcoin.
Even though the United States Patent Office approved an application for the software that would be used to develop Bitcoin, in March 2017, the Securities and Exchange Commission denied two patent application filed by Cameron and Tyler Winklevoss. The first patent was for a product that would allow their company, Winklevoss Bitcoin Trust, to trade in an exchange-traded fund. This would make trading in Bitcoin easier for investors. The second application was for a product that would allow tracking of Bitcoin transactions. In its decision, the SEC cited the lack of regulation surrounding Bitcoin, as well as markets connected to it, as a hindrance. It also said that it will review what steps can be taken to ensure that transactions using Bitcoin are ethical. Following this move, many speculate that the United States government will take stronger measures to attempt to regulate Bitcoin.
Meanwhile, in April 2017, Russian lawmakers began announcing that their longstanding opposition to Bitcoin may change as it may soon become accepted as legitimate currency. Currently, Russians face possible jail time if found to be using Bitcoin for a financial transaction. However, the move by the Kremlin would aim to help the Russian government regulate Bitcoin and prosecute individuals engaged in money laundering and other fraudulent financial activity. Russian markets could become open to Bitcoin sometime in 2018.
Governments around the world have taken varied approaches towards how they relate and interact with Bitcoin. Some countries, especially China and the United States, have made efforts that clearly demonstrate their intentions to decrease the influence of the Bitcoin economy and to be able to regulate it. Others, such as Japan and European countries, are opening their doors to try to incorporate the popular Bitcoin movement, while countries such as Russia are recognizing the need to recognize Bitcoin in order to prosecute financial crimes committed under the guise of Bitcoin.
