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Bitcoin Regulatory Update- 02/07/14

Op-ed - Bitcoin Regulatory Update- 02/07/14

This week’s regulatory update continues the trend cited last week, with American officials primarily concerned with Bitcoin’s money laundering potential and other countries with Bitcoin as a driver of tax revenue. However, there seems to be no convincing evidence indicating that criminals and terrorists have migrated en masse from the use of cash to virtual currencies or intend to do so in the near future. At least a handful of US officials have appeared friendly to Bitcoin in public interviews. The initial hysteria associated with the cryptocurrency may be evolving into understanding and acceptance as technical awareness grows.

Bitcoin ATM machines are popping up all over the world, but not in the United States. This week, Australia claimed its first machine. While the number in operation is undoubtedly still well below 100, many developed countries have at least one, with more on the way. US anti-money laundering regulations require money service businesses to positively identify customers with whom they conduct business, tough to do with an unmanned public machine. Regulators fear that the machines could be used by terrorists or drug lords to convert large amounts of undeclared cash into bitcoins.

The New York department of Financial Services scheduled two days’ worth of hearings during the last week of January to consider how the state might regulate businesses dealing in Bitcoin. The hearings, presided over by New York Department of Financial Services superintendent Benjamin Lawsky, included stakeholders with expertise covering a variety of aspects of the Bitcoin economy. Not surprisingly, the tone of the meeting was generally said to be positive, but law enforcement officials expressed concern over allegations that Bitcoin is being used to facilitate criminal activity. As the de-facto financial capital of the United States, the State of New York is well known for aggressive regulation that often goes beyond federal standards.

Marijuana shops and dispensaries in the United States are reportedly turning to Bitcoin as the answer to their cash management problems. While several states and localities have decriminalized or legalized sale, possession and consumption of marijuana for medicinal or recreational use, the plant is still illegal under US federal law. As a result, banks (including state chartered banks that are subject to FDIC, OCC and Federal Reserve oversight) will not accept deposits from businesses that sell marijuana and will not process credit card or debit card transactions on their behalf. With nowhere to go besides the proverbial mattress, the shops are left with the question of where to securely store physical cash amounting to their entire daily sales receipts. By accepting Bitcoin, these shops decrease their risk by limiting the volume of cash on hand and also save money on interchange fees.

The Australian Tax Office announced on its website that itis currently preparing a tax ruling that outlines whether Bitcoin is “a foreign currency” under the definition of the Income Tax Assessment Act of 1997. The ruling should be released by the end of the first quarter of 2014. The Income Tax Assessment Act of 1997 is the basic governing document for the current system of income taxation in Australia. Under the law, foreign currency gains are assessable and foreign currency losses are deductible in the year incurred. Foreign currency treatment is often cited as one of the possible positions that could be taken by the US Internal Revenue Service with regard to US tax law in the future.

Auction site eBay’s 2013 annual report filed with the SEC cited competition from Bitcoin (specifically Coinbase and BitPay) as possible threats in the management’s discussion and analysis section. EBay owns and operates PayPal, to which Bitcoin has been seen by some as a direct competitor in the online payments industry. While PayPal is subject to federal and state laws governing both financial institutions and money service businesses, as a peer-to-peer network, Bitcoin largely operates without regulation. Many Bitcoiners have cited PayPal’s fee structure as one of the reasons that merchants should begin accepting Bitcoin exclusively. On a related note, Entrepreneur magazine reported this week that PayPal seems to be targeting the accounts of users with Bitcoin related activity for adverse treatment, including seller bans and account closures.

The US Postal Service is reportedly considering offering Bitcoin exchanges to the public. According to, the USPS Office of the Inspector General hosted a webinar attended by representatives of the Universal Postal Union and the World Bank that “sought to explore the possibility of a potential role for Bitcoin at post offices around the globe.” Many countries outside the United States offer low cost savings accounts, money transfers, and a variety of other services through local post offices, while US Postal Service post offices offer only US Postal Money Orders. The US Postal Service has struggled in recent years as e-mail has supplanted traditional letters as the communications medium among businesses and consumers alike.

Treasury officials in the United Kingdom are considering whether Bitcoin transactions might be subject to Value Added Tax (VAT). The VAT rate under consideration for Bitcoin is thought to be between ten and twenty percent. “There is a VAT exemption for currency transactions but the currency in question must be legal tender,” said an official with the British government’s tax agency. PF Hub pointed out that, since assets other than currency purchased for personal use outside the UK are already subject to capital gains tax, the additional of VAT would result in double taxation of Bitcoin transactions.

Finally, the German Federal Financial Supervisory Authority issued a comprehensive statement this week detailing how existing and planned regulations will apply to Bitcoin. Bitcoin Magazine ran a detailed story, which can be found here.