Introduction on Bitcoin Regulation
What is worthy to know about Bitcoin Regulation? Bitcoin is probably the best-known cryptocurrency on the market. The foundations were laid in 2008 when the idea for Bitcoin was first published in a white paper.
Since then, the currency was introduced and able to achieve steady growth. Because of this, the cryptocurrency began to become the focus of public attention. By the end of 2017, Bitcoin had become a familiar entity to both those in the know and the wider population.
However, this increased interest has also increased the risk of regulation by governments and supervisory authorities. That being said, the independence of states and intermediaries is one of the most important features of blockchain technology.
In particular, there’s the so-called decentralization of things, which results from the underlying peer-to-peer network at play. This technological basis prevents traditional state intervention. The following article deals with the topic of Bitcoin regulation and serves to analyze the potential for state intervention.
Bitcoin regulation and BaFin
The German Federal Financial Supervisory Authority (otherwise known as BaFin) is tasked with ensuring the functioning of the financial system. One of its key focus areas is protecting consumers from fraudsters.
It’s little surprise that BaFin has shown an interest in the emergence of cryptocurrencies. The authority made an initial statement on the matter in 2013, with several questions filed. In addition, the European Banking Supervisory Authority has published information on digital currencies.
In particular, the supervisory body addressed the private investor. However, the EBA’s statement is rather vague and serves to address fundamental risks arising from acquisition, holding and trading of currencies. It focuses on information more at the legal and tax level.
A particular risk highlighted by the EBA is that of dubious trading platforms. This is because there’s the possibility of loss of an entire deposit if the provider becomes active without commitment from authorities. In this instance, the provider would fall within the scope of the Money Laundering Act.
According to BaFin, Bitcoin is not a currency either. In order to meet the requirements of a currency, it must be issued by a central bank. Bitcoin isn't issued by a central bank. Bitcoin is therefore not a currency or e-money. Rather, it is referred to as a unit of measurement, with characteristics similar to that of a foreign exchange.
Bitcoin Regulation for use as a substitute currency
Basically, customers who pay their bills through Bitcoin do not have to fear legal consequences. Since no BaFin license is required for use as a substitute currency, sales through the use of Bitcoin are also possible. This means that classical buying and selling is not affected by a lack of a BaFin license. Buying and selling actions can be carried out by users without hesitation.
The entire situation becomes more dubious if the seller does not engage in a direct exchange of information with customers. In other words, if the seller relies solely on the use of a payment provider.
If the payment provider accepts the corresponding Bitcoins and forwards them to the recipient in euros, BaFin approval is required. Thus, there is a possibility that regulation by BaFin might occur.
Bitcoin regulation in commercial businesses
If a legal entity uses other service elements within the scope of Bitcoins and other cryptocurrencies, the need for a BaFin license can arise. In short, the mining, buying and selling of Bitcoins does not require a BaFin license.
However if an amount is independently supplied to maintain the market, a license is mandatory. A trading volume of more than 20 individual transactions per month is already included in market-preserving measures.
This means that mining pools in particular are affected by regulation. Several proceedings have already been initiated against mining pools because they did not have a BaFin license.
However, the operation of an online trading platform is also subject to Bitcoin regulations. Bitcoin is traded as an industrial commodity within the framework of stock exchanges, meaning BaFin would seek to regulate these cases of Bitcoin Regulation.
In this context, specific definition of the business model has to be taken into account. This is due to the fact various permissions under the German Banking Act need to be addressed. It is irrelevant whether the merging of buyers and sellers is automated or manual. This is because the business purpose alone leads to a BaFin license obligation for the transaction.
What happens with Bitcoin Regulation if a license is missing?
In principle, financial services require the approval of a financial supervisory authority. If one is missing, a criminal offense has been committed. This applies even if it is a case of negligence. As a result, Bitcoin is threatened by regulation due to the closure of the business and civil lawsuits.
In order to avoid possible regulations, it is necessary to deal with the legal framework of the new market as quickly as possible.
Bitcoin regulations in an international context
Market regulation is not only increasing in Europe, but also abroad. In China for example, the government has banned the use of the currency. Due to the strong role of the state, such regulation is possible in China.
Other countries such as Germany or the USA, seek only to reduce the current anonymity of Bitcoin. This is due to the fact anonymity can encourage acts of money laundering. Cryptocurrencies enjoy a particularly good reputation among criminals, as they allow for large amounts of money to be moved around.
This is a particular problem for governments as it avoids tax levies and prevents intervention. However, according to experts, the chances of Bitcoin regulation is small as it would require many states to cooperate.
The USA will play the most important role in Bitcoin Regulation in the future. This is due to its leading economy accounting for more payment transactions. A more detailed view can be developed over the next few months when the supervisory authorities provide a final conclusion on cryptocurrencies.