Are cryptocurrencies legal? The quick answer is they are legal in most countries, but some countries have placed blanket bans on their usage.
The very nature of cryptocurrencies means there is no centralised power monitoring, controlling, or regulating them. Instead, users in the network verify and monitor transactions. Compared to traditional banking, the process is virtually anonymous.
Traditional currencies (fiat currencies) rely on a legal framework and regulated banking institutions that are well established and can trace their origins back, in some cases, for hundreds of years. Those banking institutions are in turn monitored by governments and central banks.
All this monitoring means users reveal a lot of personal information, and banks know exactly what their customers are spending their money on. Some countries see cryptocurrency as a threat to this system and have banned the asset class to avoid it reducing the power of banks and the government. Other governments have placed limits on its usage to protect consumers from scams and to fight money laundering and the funding of terrorism.
The challenge for governments
Everyone involved in cryptocurrencies will know governments across the globe are trying to get to grips with it and to understand the benefits and the risks. Whilst governments generally want to promote innovation and the development of new industries and technologies, they also want to minimise risks to consumers and understand any potential related criminal activity.
It will be of little surprise that governments do not universally share the same ideas and opinions. So, what we have is a range of views that can change fairly frequently.
What also changes frequently is the number and form of cryptocurrencies. Since Bitcoin first arrived a decade ago, many cryptocurrencies have appeared, and each one works a little differently – which further complicates things for governments.
Finally, the rapid growth in value of digital currencies adds a further dimension, as the amount of speculation that can exist makes authorities wary.
The general consensus on legality
Generally, few countries have made Bitcoin (and by extension other cryptocurrencies) illegal. However, its status as money varies by country, which has its own regulatory implications. Some countries have explicitly allowed its use and trade. A small number of countries have banned or restricted it.
Western economies are taking a “soft touch” approach to regulation to encourage and allow innovation. Established economies on a global basis are taking a similar approach. It tends to be where there are emerging markets and economies where there is a heavy opinion either for or against.
The view of the European Union
The EU has some views about Bitcoin, but this can be seen as applying to all cryptocurrencies.
Whilst the EU has passed no specific legislation defining the status of Bitcoin as a currency, it has stated Value Added Tax (VAT) or Goods and Services Tax (GST) is not applicable to the conversion between traditional currency and Bitcoin. VAT/GST and other taxes still apply to transactions using Bitcoin.
The Court of Justice of the European Union ruled in October 2015 that “the exchange of traditional currencies for units of the ‘Bitcoin’ virtual currency is exempt from VAT”. It also stated that “Member States must exempt, inter alia, transactions relating to currency, banknotes, and coins used as legal tender”. In other words, Bitcoin is a currency.
The European Central Bank (ECB) has stated that traditional financial sector regulation is not applicable to Bitcoin because it does not use traditional financial sector resources. Others in the EU have suggested, however, that existing rules can be extended to include Bitcoin.
The ECB classifies Bitcoin as a convertible decentralised virtual currency.
So are cryptocurrencies legal?
Yes they are… Mostly. We can conclude that generally Bitcoin and cryptocurrencies are legal. Being legal doesn’t necessarily mean they are “legal tender”, but this doesn’t mean they cannot be used as payment for goods and services. It does mean though that there is little protection for the individual and the merchant/seller when the transaction takes place.
There are some countries that have expressly made them illegal – Algeria, Bolivia, and Bangladesh are three examples. The concerns here are regulation and money laundering.
There are also some countries where they are legal but there is some kind of banking ban or restriction in place. For example, in Canada, whilst cryptocurrencies are legal, there is a banking ban, and Canadian citizens cannot purchase cryptocurrencies on their credit cards.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.