As we have been commenting on Bitcoin’s lack of regulation in different jurisdictions, there are different actions and developments in the crypto currency world these days that might begin to spark some debate among those interested in the legal aspects. In particular, the idea of defining Bitcoin is fundamental to provide a clear legal viewpoint. Recent events may indicate that such definition may start to take shape and become a reality.
Until now, the ideas of Bitcoin as an asset and its function to transmit value (vs. currency) are preferred over the concept of means of payment. However, important market partakers are the ones who are pushing the boundaries and we believe that their actions are having and will have a very significant and final say on what Bitcoin will be from a legal viewpoint.
Widespread opinion has accepted Bitcoin as an asset that can be transmitted as value. Such is the case of Australia, where Bitcoin purchases and transactions follow the regulations of barter. This is also true for Canada, where barter transaction rules are applied to Bitcoin. Norway has clearly indicated that Bitcoin is not money but an asset, and is subject to wealth tax or sales tax depending on the matter. There is a special issue relating the U.S.A., since the IRS has stated that virtual currency must be treated as property for U.S. Federal Tax purposes. Meanwhile, the European Union has defined Bitcoin as a convertible decentralized virtual currency and as a digital representation of value.
Many of the aforementioned jurisdictions also accept Bitcoin as a means of payment; however, consensus has not been reached for this matter. Even more worrying is the fact that within the European Union, there are varying definitions for Bitcoin among the different member states. This creates insecurity for all users of Bitcoin, as Bitcoin havens may emerge, causing the appearance of illegal or fraud activities. For what concerns to Spain and Bitcoin regulation, the authorities are beginning to establish the rules that may draft what will come ahead.
The latest Decision from Dirección General de Tributos (March 30, 2015) ruled that Bitcoin transactions are VAT-exempt. The reason for that is that such transactions are interpreted as a financial service, and are therefore covered by the 2006/112/EC of 28 November 2006 (Common system of value added tax).
Technically Spain is, today, a tax haven for Bitcoin transactions, which is applicable to all those transfers of value (money) from one person to another. Although this tax authority statement was meant to clarify a fundamental question about Bitcoin and its taxation, there are issues that remain unclear and unanswered. Such concerns rely on the purchase of services and products, as it is not clear whether they would be taxed or not, as such operations are performed as if it were a currency when there is wide consensus that Bitcoin is not currency, but an asset. And all this claims a critical question: Considering that both FIAT currencies and crypto currencies are assets, as they can appear in company books and can be used as means of payment, are they the same?
Legally, in both barter and currency a transaction, value is transmitted, however their nature varies. FinCEN has even stated that Bitcoin is “a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency”.
Though Bitcoin transfers may imply a barter act, there are third parties that by allowing the exchange of Bitcoin for legal tender create a new definition for such capital gain.
Such third parties include exchangers or wallet services, providing users and merchants to use Bitcoin as a means of payment, by means of a transaction of Bitcoin for regular currency, just like a coupon or token from a mainstream retail corporation such as Walmart.
This implies the use of Bitcoin as a means of payment that is consumer oriented. Its increase in use will not only open the regulators eyes into creating security measures to protect and tax such transactions but it would also imply less volatility in Bitcoin prices.
After careful consideration, we must try to realize that “asset” and “means of payment” are concepts that do not oppose each other. In fact, we believe they can coexist and are mutually supportive. While many different voices from diverse sectors may be speculating on defining Bitcoin, it will be the business community who will ultimately have a powerful stand in what it will become.
Sure, regulators will have the last say on how Bitcoin will finally materialize, but the global market may provide them the lead.