Published: December 18th, 2020
Bitcoin may be surging, but the legal status of the world’s most popular cryptocurrency in the world’s biggest market remains uncertain. Ten years after Bitcoin’s arrival, in many jurisdictions, legislation is ambiguous or patchy.
That’s down to the nature of the US political system and constitution. America is a collection of states, each with its own laws. Some places make Bitcoin trading explicitly legal; others are less clear. US regulators have reacted by being flexible in their approach to rule-setting.
Under Federal law, Bitcoin falls under the jurisdiction of the SEC (Securities and Exchange Commission), the agency that oversees American securities markets, and the CFTC (Commodity Futures Trading Commission), which enforces the rules around trading derivatives like futures, options, and swaps.
Each has its own ideas of the investment category BTC naturally falls into. The SEC says Bitcoin is not a security. The CFTC says its a commodity like oil or gold, and therefore subject to commodity trading regulation.
At the state level, the legal picture varies depending on where you are.
Delaware, Florida, New York, Hawaii, and Kansas have all adopted regulations, but the majority of states haven’t enacted specific cryptocurrency regulation. At one extreme, Hawaii placed a ban on all crypto activity back in 2014, but then repealed the law in 2018, replacing it with regulation instead.
At the other end, Wyoming has declared itself ‘The Blockchain State” and created laws that make crypto easier to use and clarify the rules for cryptocurrency businesses to operate in the state. Digital currencies now have the same legal status as fiat money, and Wyoming banks have been authorised to offer custody services for digital assets.
On the horizon is a new bill in the California legislature that will give the state Wyoming-like regulatory clarity, and set it up as a potential hub for crypto businesses alongside Silicon Valley.
Buying Bitcoin is legal in many states. The US Treasury Department issued guidelines in 2014 through its enforcement arm, stating that investing in Bitcoin is legal, and it can be used as a form of payment. The business selling the goods or service just has to be willing to accept it as a payment form.
However, at the state level, many legislatures take a hands-off approach. Bitcoin is neither legal nor illegal. California is an excellent example of this. By leaving Bitcoin’s legal status undefined, it's not subject to state regulation, a flexible approach that’s attracting exchanges and other crypto startups.
Colorado passed legislation in 2019 to exempt crypto broker-dealers from the state’s licensing requirements, making it easier for those businesses to operate in the state.
The Texas state legislature has gone so far as to declare that crypto businesses won’t be required to obtain a money transmitter license to sell digital currencies. However, Texas also shows how conflicted US lawmakers can be about crypto. In the same session, the legislature nearly passed a bill that would have banned cryptocurrency use between unidentified parties.
If you look at Connecticut, New York, Florida, New Hampshire, and New Mexico, those state legislatures have all demonstrated a less open attitude toward Bitcoin, requiring that crypto businesses obtain money transmitter licenses to operate in those states.
However, last September, 47 US states agreed on a single set of regulatory rules for crypto licensing. If a cryptocurrency business is already operating with a money transmitter license in one state, it will automatically be eligible for a license in another signatory state.
State by state the laws for operating Bitcoin ATMs can also vary. Some treat the electronic transmission of fiat money differently from cryptocurrencies, while others have a more nuanced approach.
Texas only requires a money transmitter license if an ATM is connected to a cryptocurrency exchange. Nevada, on the other hand, requires crypto ATM owners to obtain a transmission license.
New York requires that all digital currency financial intermediaries obtain its specialised BitLicense before operating.
In the UDS, securities regulators take a particularly firm line against ‘pump-and-dump’ schemes, where stockbrokers or other financial speculators stoke fake demand in an asset and then quickly sell it off in order to take advantage of the higher price they've created before the market gets wind of the scheme.
Promoting cryptocurrency markets in this manner is also illegal, as equally as risky with cryptocurrencies as it is with stocks and bonds.
Insider trading on Bitcoin matters is also illegal, and both SEC and CFTC have the power to prosecute crypto traders for either tipping off someone or acting on information not publicly available to all investors.
America has billed itself as a world leader in cryptocurrency regulation. However, its northern neighbour Canada was one of the first countries to enact specific Bitcoin legislation. While BTC isn’t considered legal tender in Canada, crypto dealers are licensed and regulated as part of the country’s money services sector.
Only Japan has explicitly stepped forward to declare Bitcoin a form of legal tender. On the other hand, Japanese financial regulators have taken a firm line on cryptocurrency exchanges and are pressing them to improve customer security and privacy.
In the rest of the world, most countries are still in the process of deciding if Bitcoin is good, bad, something to promote, or something they should simply try and manage. The UK isn’t in any rush to regulate, while Russia’s draft law on cryptocurrencies still being debated in the Duma.
China made Bitcoin legal for private use in 2018 but banned banks and investment houses from processing digital currency transactions.