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Bitcoin Regulation Update- 03/07/14

Op-ed - Bitcoin Regulation Update- 03/07/14

This week saw the outing (or not) of Satoshi Nakamoto, Bitcoin’s alleged inventor, who is said to have abruptly disappeared from the online forums he was known to frequent in Bitcoin’s early days. Though the man alleged to be Nakamoto, who was living under a different name in the United States, denied involvement with Bitcoin, Newsweek, the publication that broke the story, stands behind their work. The early response from the online Bitcoin community could best be described as a low grade form of moral outrage, combined with a dash of horror. What seems to have upset Bitcoiners most is the fact that a media outlet was able to identify and publicly name a person who clearly was not interested in being identified, using little more than public information and basic detective work. To the extent that the majority of crypto enthusiasts value privacy, if not anonymity, the Satoshi Nakamoto affair does not bode well.

Canada-based Bitcoin exchange Vault of Satoshi announced via Facebook on Thursday that it would discontinue support for US customers due to an “increasingly hostile” regulatory environment. The exchange, which connects users with others looking to trade crypto currencies for fiat currencies, claimed to be facing considerable difficulties complying with FinCEN’s anti-money laundering rules, not the least of which was FinCEN’s policy disallowing the filing of paper reports by money service businesses and the seeming incompatibility of the online reporting system with foreign businesses. The decision to abandon the US market entirely seems to be a fairly drastic response to US law, which could rightly be described as overly complicated. Vault of Satoshi is neither the first nor the only non-US based company to face US regulatory requirements, so it isn’t clear why it seems to be having unusual difficulty in this area. The company’s Bitcoin to US dollar volume on Friday stood at 280 coins as of 5:00 PM CST, compared to 314 for Bitcoin to Canadian dollars. Under the new policy, US traders will be unable to deposit or withdraw cash from the exchange, but will be permitted to trade coins.

Yet another exchange, this time Canadian company Flexcoin, informed customers this week that it is insolvent as the result of a hack induced theft and would have no choice but to cease operations. The exchange lost an estimated $500,000 worth of coins in its hot wallet, but a spokesman said that customer coins in cold storage would be returned to their owners. Flexcoin referred to its terms of service, reminding its customers that they agreed not to hold Flexcoin liable for theft, while informing everyone else that they were out of luck. The operative verbiage states that “Flexcoin is not responsible for insuring any bitcoins stored in the Flexcoin system.” Whether this will be sufficient to ward off civil liability remains to be seen.

Her Majesty’s Revenue and Customs service in the United Kingdom has reportedly dropped a plan to apply value added taxes to mined bitcoins and Bitcoin exchange transactions. However, the treasury maintained in a brief delivered to British lawmakers that the 20 VAT still applies to goods and services purchased with bitcoins, just the same as it would if those same goods and services were purchased with Pounds. After a careful review, HM Treasury was more likely to have discovered the near impossibility of taxing Bitcoin at the point of exchange or the point of creation, than to have determined that it falls outside the scope of transactions subject to the tax. Merchants, on the other hand, are already accustomed to collecting VAT and equipped with the infrastructure both to report it and to comply with the audit requirements of the British government. The UK has developed a reputation in the Bitcoin community of late for being comparatively friendly to crypto currency from a regulatory standpoint and more accessible than US regulators.

Vietnam’s Communist government has officially banned all Bitcoin transactions. The Vietnamese central bank announced the policy, citing Bitcoin’s alleged role in promoting money laundering and other criminal activity. The bank did not specify how the ban would be enforced or what the penalties for non-compliance would be. The Vietnamese government maintains restrictive capital controls (ostensibly to protect the Dong against speculators), that Bitcoin could be used to subvert. Few exchanges offer the ability to convert from Bitcoin to the Vietnamese Dong. However, other currencies, such as the US dollar, are in common use on Vietnam’s streets, especially in urban centers.

Japan has announced that it will not attempt to regulate Bitcoin transactions carried out within its borders on the grounds that bitcoins are not considered a currency. However, Japanese banks will be prohibited from buying or selling bitcoins. The Japanese government also clarified that it intends to treat Bitcoin as a commodity and subject it to the applicable taxation regime. Japan is the home of Mt. Gox, the collapsed Bitcoin exchange which is currently the subject of a bankruptcy filing in that country, along with at least one criminal probe and numerous civil suits.