Bitcoin – downfall of the virtual currency?

Earlier in August, in a Bitcoin-based fraud case the Eastern District of Texas federal court ruled that bitcoins are, in fact, “a currency or form of money,” and thus can be regulated under American law.

The fraud case involves founder of Bitcoin Savings and Trust (BCTST), Trendon Shavers, accused by Securities and Exchange Commission (SEC) of running a Ponzi scheme. According to the SEC, Shavers made a number of misrepresentations regarding the nature of the investments and defrauded investors out of roughly US$4.5 million worth of Bitcoins through his online hedge fund. Incidents like this raise the question of whether to invest in Bitcoin or not (just as the Germans say ob man in Bitcoin investieren sollte oder nicht) because of these risks. Shavers challenged the court`s subject matter jurisdiction claiming that BCTST investments are not securities as defined by Federal Securities Law, because bitcoins are not money and thus cannot be subject to regulation by the United States.

In a memorandum opinion issued on the 6th of August, 2013 Magistrate Judge Amos Maazant discussed the reasoning behind the ruling and concluded that: “It is clear that Bitcoin can be used as money. It can be used to purchase goods or services, and as Shavers stated, used to pay for individual living expenses. The only limitation of Bitcoin is that it is limited to those places that accept it as currency. However, it can also be exchanged for conventional currencies, such as the U.S. dollar, Euro, Yen, and Yuan. Therefore, Bitcoin is a currency or form of money, and investors wishing to invest in BTCST provided an investment of money.”

Taking it one step further than the U.S., the German Finance Ministry has ruled that bitcoin mining is a form of private money creation and any profit from them should be subject to a 25% capital gain tax, unless they are held for more than a year. The ruling came as a response to a parliamentary inquiry from Frank Schaeffler, a member of parliament’s Finance Committee. This means that the same rules would apply to Bitcoin as to any other currencies, and commercial activities carried out in bitcoins will not be exempt from tax.

Undoubtedly, regulating Bitcoins go against the very core of the idea behind the Bitcoin – a decentralised, unregulated currency that operates in the same manner in every country. Could this mean the downfall of the virtual currency as we know it?

While the legal framework will legitimise bitcoin as a true currency, the actual implementation of the tax laws will surely hit some technological barriers.

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