When Bitcoin was created, it introduced a whole new way we look at currencies. Decentralized and not controlled by any single entity, governments worldwide have raised many questions about the legality of this new digital currency while trying to wrap their heads around its concept. While some countries have made it illegal to own, mine, and trade Bitcoin, the U.S. Treasury classified bitcoin as a convertible decentralized virtual currency in 2013. The Commodity Futures Trading Commission (CFTC) classified bitcoin as a commodity in September 2015, and the IRS says it will treat and tax bitcoin as property.
Legal But Regulated
The same anti-money laundering regulations that apply to transactions with traditional currencies apply to Bitcoin also. Most of the regulated U.S.-based exchanges must comply with the Know Your Customer (KYC) and other Anti-Money Laundering policies. It is legal for businesses to accept Bitcoin as a form of payment in most states and are required to pay taxes on any income generated.
MSB And Money Transmitters
If you own a business in the U.S. that deals with Bitcoin on a regular or frequent basis, you should get yourself familiar with “money service business” (MSB) and “money transmitter” that relate to federal and state anti-money laundering regulations.
Federal legislation in the U.S. views Bitcoin and other cryptocurrencies as a commodity which places it under the watch of federal regulators like the Financial Crimes Enforcement Network (FinCEN) and requires companies who deal with commodities to be registered as an MSB. Generally speaking, there are five types of MSBs:
- Check cashers
- Traveler’s check and money order sellers or redeemers
- Exchangers or currency dealers
- Money transmitters
- Traveler’s check and money order issuers
FinCEN defines a money transmitter as someone who is an intermediary between two parties that send or exchange money for another currency. Money transmitters are legally required to be registered on a federal level and licensed in every state it operates in. These regulatory requirements could apply to companies such as:
- Bitcoin ATMs
- Payment processors
- Certain wallet providers
The U.S. government has become more aggressive in recent years tracking down illegal money transmitters and there is a fine line that can be easily crossed if you are not careful when selling your Bitcoin to somebody for fiat that could get you in a lot of trouble. Anyone who exchanges or sells their bitcoin to someone else and charges a fee to do so or sells it at a higher price than what it is worth is considered a money transmitter and could face years in jail if caught. Most are caught because they used advertisements on web pages or posts while some are found by sheer luck. Even though Bitcoin is supposed to be private, governments have the understanding and tools to track bitcoin addresses to find computers that harbor wallets that might be used for illicit activity. Some have argued that this an over-reach of the government to have the authority to tell people how they can spend their money along with a person’s right to their property and the ability to do what they want with it. They believe that selling Bitcoin for more than what it is worth is like selling a gold coin or antique item with the buyer believing the item will go up in value in the future. Either way, you should expect more regulations from the federal snd state governments as Bitcoin becomes more mainstream.