Is a lack of regulation stunting the growth of Bitcoin?

Bitcoin has only existed since 2009 but now plays a role in international trade, so how should lawyers advise a business that wants to use it? Angus McFadyen, a lawyer specialising in payment and technology at Pinsent Masons, explains more about this new type of money.

Backstory

Earlier this month, the price of Bitcoin fell by 8.6% to $128 after the US federal authorities seized over $3m of the online currency after shutting down Silk Road, an online marketplace which allegedly allowed over $1bn of illegal services and drugs to be bought with the currency.

What is Bitcoin?

Bitcoin is a transparent, peer-to-peer payment network, and is now accepted by some real-life businesses as well as popular online services such as WordPress and Reddit. However, it is still very much in its early stages, and can be strongly affected by relatively small events.

It’s a digital currency based on cryptic formulae and rules. It has been around for a few years but is still pretty niche in the UK. The basis of it is that a Bitcoin is created every time a computer solves a mathematical puzzle, so more and more are issued, but every time a puzzle is solved it gets harder and harder. You could make a comparison with gold, in that gold can be mined but it gets harder to find it and get it out of the ground as more is extracted.

Where can it be spent, and how do you translate it into money?

There are a relatively limited number of places where it can be spent. It’s often used in gambling.

One of the key benefits is it allows you to send money (or its equivalent) internationally quickly and without paying bank fees, so its seen as a great way of moving money around the globe. However, it has been seized on by criminals and has a reputation of being a hotbed of untraceable payments and potential money laundering.

There are a handful of exchange houses, which can convert Bitcoins into mainstream currency.

What are the risks?

The main issue is that it’s not regulated so you use it at your own risk, and the value shoots up and down. Businesses generally want to be paid in something they can trust, and this doesn’t have that trust because it can double or halve in value overnight.

Theoretically, people shouldn’t be able to steal your Bitcoins unless they somehow hack into your account. They are quite secure. If your account is hacked into, however, then there is no way of getting them back. It’s not like having your credit card stolen—there is not a Bitcoin bank that can reimburse you.

What about accounting and tax?

I assume you have to account for it, in which case you would have to somehow place a value on it. VAT applies, in theory, in which case it would have to be valued.

There is the issue of whether this is a currency at all. It is not recognised everywhere. Germany has recognised it as a form of currency, and a Texas judge has said it should be treated as money.

Is it likely to become mainstream in the future?

In the absence of regulation it is going to struggle to become mainstream. The New York financial regulator has said it is interested in looking into this, and some Bitcoin organisations went to the Financial Services Authority and asked them to look into the possibility of regulation.

It is interesting
that the Payments Services Directive 2007/64/EC (PSD) used to talk about ‘currencies in member states’ but the new one, PSD2, talks about ‘any currencies’—is this a sign that it is trying to broaden its reach?

Part of the benefit of Bitcoin is that it’s not regulated or subject to restrictions, but that is also what is holding it back because big organisations with brands to protect are scared of using something that is not regulated. For big organisations, integrity and reputation is key and they don’t want to go into areas where it is like the Wild West.

There was an exchange house in Thailand, for example, that was applying to the authorities to become registered and regulated, but the authorities then about-faced and banned it overnight.

On the other hand, there will be individuals who use it because they like the technology behind it, and some small, forward-looking organisations are using it.

How would you advise a business thinking of using Bitcoins as a method of payment?

I would warn them that there are risks, and explain what those risks are. It comes down to trust—can you convert it back into a form in which you can use it?

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The views expressed by Legal Analysis interviewees are not necessarily those of the proprietor.

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