China bans Bitcoin! Iran about to ban Bitcoin mining! These are only two examples of headlines we have seen over the last couple of years. Most of them are driven by the need to catch the readers attention and may or may not be overexaggerated. Aside from creating click bait Bitcoin falls under different jurisdiction mainly because each country has a different approach to regulate the financial market or a different monetary policy. In this article we like to dive a little bit deeper and take a closer look at Bitcoins legal status.

When Bitcoin started in early 2009 its legal status wasn’t really an issue. Only few people knew about Bitcoin and even fewer were using it. But that has most certainly changed with PayPal and MicroStrategy entering the market in late 2020. This shift was only possible, because Bitcoins legal status had changed over the years.

Is Bitcoin legal?

While this is a question that one would rather answer with yes or no, the correct answer is: It depends. Most countries in the world didn’t ban Bitcoin and its perfectly legal to buy, sell, and own BTC in all EU countries. While many Bitcoiners believe that BTC could overthrow the financial system completely, it had little or no impact in that perspective so far.

Most transactions and trades are done with Euros or US-Dollars. Visa, Mastercard and PayPal are dominating the market when it comes down to retail payments. While Bitcoin offers the possibility to serve as a peer-to-peer payment system, it is more used as a speculative asset. Only recently institutional investors discovered that Bitcoin has also a huge potential as a store of value.

But why is this so important for the legal aspects of Bitcoin? Simply, law makers and regulators are interested in a couple of things if they are about to figure a way to legally approach a new financial product. Namely its possible impact on the market, its features in comparison to already existing products, what it could be used for and in distinction from this what is it de facto used for.

BTC is a commodity in many countries

While Bitcoin is perceived as the money of the internet by many of its disciples, its legal status does not necessarily reflect that fact in many countries. Notably Bitcoin is classified in many countries worldwide as a commodity with a lot of legal implications that have an equal number of advantages and disadvantages at the same time. One of them is that Bitcoin is not a legal tender in these countries, but it is acknowledged as a means of payment in many of them.

This status quo leads to a lot of other legal aspects and not all of them have a negative outcome. One of them is the taxation that is different from other sources of income, because BTC is considered to be a commodity. Germany is a perfect example that the lack of acknowledgement as legal tender isn’t a bad thing at all. German citizens don’t have to pay taxes on their Bitcoin trades, if they hold BTC for one year without any interruptions by trading or lending. If planed carefully, one is able to create tax free income by playing the waiting game.

This is only one example and each country has a different approach to the taxation of income that is created by Bitcoin trading. But it serves as a reminder that regulation not only involves bans and limitations.

Legal status of Bitcoin mining

Bitcoins legal status is not necessarily connected to the legal status of Bitcoin mining. There are those countries in the world that ban Bitcoin trading, while at the same time allowing Bitcoin mining. Others allow both and other countries have at least a political discourse if mining should be banned in general.

Most of these discussions involve the question if mining as a business is to be considered a waste of energy. Some countries are regulating mining because there are too many cases of power theft, while others are regulating it, because they only have a small energy production and have to reassure that mining isn’t consuming precious power that is needed to keep cities running.

Of course, these are very generalized views of the situation. Still, the legal status of mining is dependent on many factors. The mining industry itself isn’t really affected by all those different shifts that have happened over the years. And this is because of the fact that miners will choose the best option available and simply move their facilities if they face legal obstacles or unfavourable conditions.

Bitcoin mining is perfectly legal in EU countries, but it is not profitable due to the fact that most EU countries have the highest price for energy costs in a worldwide comparison. Therefore, only a minority of miners are situated with their facilities in the EU.

Virtual currencies, crypto assets and securities

Bitcoin was the first cryptocurrency that was invented in 2009 by Satoshi Nakamoto. Since Bitcoins inception law makers and regulators had enough times to research the internet phenomenon of cryptocurrencies. Therefore, Bitcoin, Ethereum and a couple of other assets are already under a regulatory regime in most countries worldwide.

But there are those assets that leave a lot of open questions. Mainly because they act or function effectively as securities, but lack certain features of them. As we have showed earlier Bitcoin and most cryptocurrencies that are similar to it, are seen as a commodity. Per definition a commodity cannot be a security at the same time and vice versa.

These are regulatory and legal obstacles not only for developers, exchanges and investors, but for law makers and regulatory bodies as well. One example that caused a lot of hype and attention was the ICO market in the years 2017 and 2018. ICOs weren’t regulated at first and only when the hype started and companies were gathering money for their ventures regulatory bodies were looking into this. It became clear that a couple of things needed a new definition. Which in the end led to the fact that most ICOs until today are offering utility tokens, because they are not considered to be securities.

Legal and illegal use

Another topic that is closely connected to the question if Bitcoin is legal are those cases were BTC is used for illegal purposes. The most important thing for you to know is that you need to buy and sell your cryptocurrencies with a trusted exchange. LiteBit operates in a fully compliant and regulated environment.

One of the biggest risks for investors is to acquire Bitcoin on a non-regulated market and have no control over the sources that they’ve bought from. With blockchain analysis it is possible to identify funds that are connected to illicit activities. By making your investment with LiteBit you reassure that your BTC have a track record. Buying Bitcoin or any other cryptocurrency on unregulated peer-2-peer marketplaces always bears the risk of acquiring tainted funds.

There might be no direct consequences involved buying them accidentally, but many services in the cryptocurrency space are actively monitoring the network and could possibly refuse your tainted BTC or even shut down your account. By trading on LiteBit you avoid the hassle and stay on the safe side.

Disruptive technology meets old standards

As we have showed beforehand, regulators and law makers are busy with comparing new crypto asset to already existing financial products. This makes it a lot harder for them to approach Bitcoin and other cryptocurrencies as well as crypto assets. All of them are so disruptive that it is in question whether the rules can be applied or not.

One of the most recent examples is the US law suit between the Security and Exchange Commission and Ripple. The SEC basically claims that XRP is an unregistered security that has been offered by Ripple Labs and by part of its founders. Ripple on the other hand claims, that XRP is completely apart from the company that is building products on top of the XRP ledger and should been seen as a cryptocurrency.

It is not easy to judge any claims that have been made so far by both sides. However, it is very interesting to see, that both parties come to very different conclusions regarding the question in charge. Both parties are making their claims based on the same laws in question. This underlines the fact that regulation, not only in the US, is still unclear and many laws may need to be readvised in order to provide unambiguous rules. In the case of the SEC vs Ripple a court will have to decide how to apply the law properly. This seems to be just, but on the other hand it is a little bit of unfair for the whole cryptocurrency and blockchain industry, because companies rely on clear laws and regulations. They simply need them as a framework to run their businesses.

The situation within the EU is a little bit better. While a lot of regulations were missing in the past or varied in each membership state, there has been a lot of effort to establish a framework that offers more security for companies from a legal perspective.