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Bitcoins and the Law: Bitcoin Legitimacy

  • Published: July 3, 2018

Bitcoins and the Law, Part III

“Bitcoin Legitimacy”

By: Raphael Qiu

Are bitcoins legal? The answer is generally yes as long as you are using it for legal purposes though a few countries have banned it outright. In the US, bitcoins are currently regulated by the Financial Crimes Enforcement Network and at the state level. Here in Texas, the general trend has been to apply existing financial law to bitcoins as opposed to New York which is the only state to develop specific bitcoin laws. Furthermore, there is a split in the case law concerning whether bitcoin qualifies as funds and can thus be regulated under certain federal laws.

Bitcoin has already been accepted at the state government level as the US Federal Election Commission has allowed politicians to take bitcoin donations as long as they are not anonymous. Furthermore, on March 18, 2013, the US Financial Crimes Enforcement Network clarified the application of the Bank Secrecy Act to people dealing in virtual currencies. According to the FinCEN Virtual Guidance, currency is defined as “coin and paper money of the US or of any other country that is designated as legal tender and that circulates and is customarily used and accepted as a medium of exchange in the country of issuance.” While users of virtual currencies are not required to register as money service businesses, administrators and exchangers are required to do so and comply with the reporting requirements. FinCEN defines an administrator as a person engaged as a business in issuing a virtual currency and who has the authority to redeem it while an exchanger is a person engaged as a business in the exchange of virtual currency for real currency or other virtual currency. This Guidance stated that these two groups would be considered money transmitters and would be required to obtain all proper licenses to conduct business in the US. This process would include federal registration as a money service business as well as registration in each state the Bitcoin company has customers.

Therefore, Bitcoin exchanges and users who buy or sell Bitcoins would have to register with FinCEN, implement anti-money laundering programs, and file regular reports in compliance with federal law. Along with regular reports, a complete copy of all records on US customers must be maintained. In addition, foreign companies engaged in US business must have a registered agent permanently present in the US.

This Guidance has presented a significant burden for fledgling Bitcoin companies and may push some Bitcoin merchants to continue doing business incognito online through the dark net. According to Jeremy Allaire, a Bitcoin company owner, a money services business needs at least $2 million to start operations. This is partly due to expensive state licensing requirements such as posting a surety bond that ranges from $25,000 to $1 million and maintaining a specified level of net worth that would range from $5,000 to $100,000 depending on the number of agents or offices.

However, due to confusion concerning the applications of this ruling, FinCEN had to issue two additional rulings in January of 2014. The first ruling specified that Bitcoin miners were not MSBs as long as they mined Bitcoins for their own benefit and not another. The second ruling stated that the purchase or sale of Bitcoin software did not constitute transmission or sale of virtual currency and would thus not subject the company to MSB regulation. On October 27, 2014, the Department of Treasury Financial Crimes Enforcement Network (FinCEN) issued a new ruling that clarified the definition of “money transmitter” to essentially include all Bitcoin exchanges even if they only match up buyers and sellers and do not actually exchange any money themselves.

The IRS has taken a divergent approach by declaring virtual currencies to be assets rather than currency. Therefore, the IRS treats Bitcoin users as stock investors now while miners are required to report their Bitcoin earnings as taxable income. Although this has cleared some of the fears that Bitcoin would allow for tax evasion, the IRS ruling has created new questions for Bitcoin users and companies.


Hern, Alex. “US politicians can accept bitcoin donations”. HTTP://WWW.THEGUARDIAN.COM/TECHNOLOGY/2014/MAY/09/US-POLITICIANS-CAN-ACCEPT-BITCOIN-DONATIONS

Department of the Treasury Financial Crimes Enforcement Network. HTTP://WWW.FINCEN.GOV/STATUTES_REGS/GUIDANCE/PDF/FIN-2013-G001.PDF

Mullan, P. Carl. The Digital Currency Challenge. (2014). P.122.

Nicolas Wenker, Online Currencies, Real-World Chaos: The Struggle to Regulate the Rise of Bitcoin, 19 Tex. Rev. L. & Pol. 145, 185 (2014)

Gregory W. Marcum

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