3.1 GOVERNMENT REGULATIONS

While the expanding cryptocurrency market has the potential to revolutionize the way
money is exchanged, its introduction into global venues is fraught with challenges and
potential pitfalls. Because virtual currencies are not universally recognized as official
means of paying for goods and services, developing standardized systems for their use is
critical. For the currencies to be sustainable, their legal status must be established.
Regulatory systems are burgeoning, with myriad approaches being
takenby various governments.

Current regulatory measures are in their infancy and continue to evolve
with the rapidly expanding industry.
Regulations will offer greater legitimacy to a currency struggling to gain mass
acceptance. They will standardize elements of the market and minimize at least some of
the volatility. While governments are testing an amalgam of regulatory steps, their end
goal is the same: to limit fraud, protect consumers, respect economic sanctions, and
institute viable taxation methods.

A brief detail of current cryptocurrency policy in
various states will offer clarity and a broad overview of contemporary regulation
attempts.

Because of the infancy of virtual currency, available data is in flux and subject
to frequent change.

The United States takes a permissive, slightly neutral stance on cryptocurrencies. The
current challenge faced by regulators is expanding existing laws to allow for the unique
aspects and challenges of the virtual currency world. For taxation purposes, virtual
currencies are handled as property rather than as currency, and transactions are
subject to the same taxation norms as other types of property.
At a federal level, the Financial Crimes Enforcement Network (FINCEN) has taken the
forefront on implementing regulatory methods. The FINCEN’s early attempts to clarify
cryptocurrencies’ place in the financial market came in 2013 with its announcement that
while individual use of virtual currencies is not to be considered a money service
business (MSB), exchanges and conversion of virtual currencies do fall under the
definition of a money service business. As such, virtual currency transmitters must
follow the government requirements already established for MSBs, including reporting
techniques, record
keeping and abiding by the Bank Secr
ecy Act of 1970.
This is significant in that it demands a degree of accountability from virtual currency
transmitters, as well as one more layer of security against fraud.
Individual U.S. states also have a large role in establishing regulations for the
emerging
currency. As of April 2015, 12 states and Puerto Rico have instituted licensing protocol
for virtual coin operations. Currently, California has more cryptocurrency activity
than any other
state, and has been proactive in incorporating digital currencies into
existing financial frameworks. In January of 2015, cryptocurrency gained legal
status in California, leading to predictions th
at other states would follow suit New York has also taken note of the emerging market, currently in the final stages of
instituting its own regulatory framework Australia, whose citizens account for roughly 7% of Bitcoin users, has not formally
adopted regulations for virtual currency, but has established a system of taxation for the
coinage. Trading done in the form of cryptocurrency is subject to the country’s pre-
existing tax rules relating to goods and services. While the Australian government has
been clear that “Bitcoin is not a legally recognized universa
l means of exchange and form
of payment by the laws of Australia or the laws of any other country it has provided
space for the cryptocurrency to comfortably exist
Canada perhaps has the most cohesive and developed system of regulation, being the first
country in the world to establish a tax on virtual currencies. This taxation system seeks to
minimize the risks most frequently associated with cryptocurrencies: money-laundering
and terrorist funding.
 
The Bank of Canada has expressed a willingness to acknowledge
the developing virtual currency market, but currently recognizes cryptocurrencies as
investments rather than currency

Russia has reacted less favorably to the emergence of cryptocurrencies. The Bank of
Russia shared concerns that the currency could facilitate money-laundering attempts, as
well as be convenient means to transport funds to terrorist organizations. Additionally,
the bank argued that virtual currency violates federal law mandating one central bank and
currency
Last year, the Ministry of Finance announced its intent to restrict use of
cryptocurrency as
a means of payment. In February of 2015, Russia’s Prosecutor
General’s Office claimed that Bitcoin “cannot be used by individuals or legal entities.”
And in April, Deputy Minister of Finance Alexei Moiseev reiterated that position, stating
“The law, which
provides measures for penalizing the usage of monetary surrogates, wil l
finally be passed this year
Indeed, Russia’s crackdown on the currency is already
evident, with at least half a dozen
cryptocurrency websites blocked at the beginning of  2015

This skepticism towards “money surrogates” is shared by China, which has also taken
steps to restrict the use of virtual coinage. In
December of 2013, China’s Central Bank
prohibited financial institutions from handling Bitcoin transactions, limiting legal trade of
the coin to individuals and private parties
Citizens are being encouraged to treat
bitcoins and other cryptocurrencies as a good rather than a viable currency.
The trend towards restriction is mirrored in other countries. Vietnam has firmly cautioned
its citizens on the use of cryptocurrencies. While there is no regu
lation specifically relating to virtual currency usage, the Bank of Vietnam has warned that Vietnam does not
consider virtual currency to be a legitimate form of currency.
Transactions utilizing
forms of cryptocurrency are not covered by legal protections.