Are cryptocurrencies legal?
Some investors new to cryptocurrencies continue to wrestle with the concepts that underlie their usage. Many people believe that crypto currencies are simply a tool for criminal elements or tax dodgers to shield their identities from the relevant authorities. However, it is not true. In any case, is Bitcoin legal? And what about other cryptocurrencies?
The new Treasury Secretary Janet Yellen (formerly the FOMC chairwoman) voiced her doubts about the usage of cryptocurrencies before taking her new post in the Biden cabinet.
On January 19th, when she appeared before the Senate Finance Committee, Yellen stated, “Cryptocurrencies are a particular concern when it comes to criminal activity and terrorist financing. I think many (cryptocurrencies) are used, at least in a transaction sense, mainly for illicit financing. And I think we really need to examine ways in which we can curtail their use, and make sure that anti-money laundering (sic) doesn’t occur through those channels.”
In an article in Forbes magazine published in January, Hailey Lennon, a contributor for matters concerning Crypto & Blockchain, described this as a “false narrative.”
So, are cryptocurrencies just fueling illicit transactions on the dark web and helping evade oversight from legal and tax authorities? Or do they represent a more straightforward way of accommodating global transactions without the cumbersome mediation of banks,, through which individuals incur exchange fees and for people traveling, overseas usage fees?
Let’s start at the beginning.
Seriously, are cryptocurrencies legal?
Cryptocurrencies are fully accepted in over 110 countries, and these jurisdictions include some of the wealthiest nations on the planet. While cryptocurrencies are legal in most countries, others do not sanction their use.
In the Middle East, for example, Algeria, Egypt, and Morocco are countries that do not allow any usage of cryptocurrencies. Iran allows usage but only for external transactions, Iraq, however, does sanction the use of Bitcoin, and you can purchase Bitcoin at exchanges there.
In Asia, China, Nepal, and Pakistan have completely banned cryptocurrencies. However, in Indonesia and in Vietnam, cryptocurrencies cannot be used for domestic payments or transactions BUT holding cryptocurrencies for investment purposes has not been defined.
In Malaysia and the Philippines, crypto is legal, BUT dealers have to register with the central banking authorities. In South America, Bolivia, Colombia, and Ecuador have banned digital currencies but Brazil has no regulations. Mexico sanctions cryptocurrency dealing but enforces oversight on transactions above a certain threshold.
Neither Turkey nor Russia have specifically addressed the issue of digital assets but in essence, cryptocurrencies do not meet Turkey’s definition of “electronic money,” so whether they’re legal or not remains a fuzzy area. Russia hasn’t addressed the issue directly either but neither does it seem to have defined “electronic money” so the legal status of cryptocurrency remains ambiguous.
So the answer to our question, “are crypto currencies legal?,” is yes in most countries within the G25 with certain exceptions. So referring back to Janet Yellen’s view that “I think many (cryptocurrencies) are used, at least in a transaction sense, mainly for illicit financing” is not endorsed by her peers in most of the world’s leading financial centers. Amsterdam, Berlin, London, Madrid, Paris, Rome, Tokyo, Zurich and most of the largest financial centers in the world have embraced the concept of cryptocurrencies.
More cryptocurrencies are coming; even some government-backed coins
While members of the Eastern Caribbean Central Bank are looking to develop their own cryptocurrency, Bermuda is looking to become a central player for cryptocurrencies, whilst Venezuela has launched its own crypto currency “the petro” backed by oil production to tackle the shortage of hard currency in the country.
It hardly stands to reason that all of these central banking authorities would be willing to sanction cryptocurrency trading if Janet Yellen’s crypto views were mainstream.
Looking at those countries that have barred cryptocurrency trading, with the exception of China, the primary concern appears to be the potential for facilitating capital flight from within those nations. Many of these countries have vulnerable economies and their governments wish to retain control of capital outflows or constrain pressure on their local currencies during bouts of speculative pressure.
Iceland, for instance, bans the use of cryptocurrencies, having had a bout of severe speculation in 2008 that forced the Icelandic Krona to devalue by almost 60%. Countries that are more financially secure are less concerned about the risk of capital flight.
How much crypto volume is thought to be related to illegal activities?
In Hailey Lennon’s article in Forbes, she cited research by the Rand Corporation, a not-for-profit research organization that conducted a study on how cryptocurrency and privacy coins are used. “The report noted despite the “perceived attractiveness of cryptocurrencies for money laundering purposes … an estimated 99 percent of cryptocurrency transactions are performed through centralized exchanges, which can be subject to AML/CFT regulation similar to traditional banks or exchange.”
The report addressed the usage of “Privacy Coins,” specifically Zcash because they frequently use “zero knowledge protocols.” According to Ms. Lennon’s article, zero-knowledge protocols shield customer information from other parties in transactions. She notes that Zcash operates in an ‘opt-in’ privacy feature where users can decide if funds information is transparent or shielded.
She noted that “Zcash is a cryptocurrency that uses zero-knowledge proofs to provide enhanced privacy for its users, however, there is little evidence that this is exploited by malicious actors.”
99% of cryptocurrency transactions are performed through centralized exchanges, and buyers store digital assets in coin wallets attached to bank accounts.
The Rand Corporation’s observation that 99% of cryptocurrency transactions are performed through centralized exchanges is supported by the fact that most individual cryptocurrency buyers store their digital assets in coin wallets. Those coin wallets have to be attached to a bank account, and the exchanges have to adhere to strict “know your customer” rules (KYC) and anti-money laundering rules (AML).
Ironically, the evolution of cryptocurrency trading has largely nullified most of the traits that attracted the criminal elements to Bitcoin in its infancy. The fact that the coin wallets have to be attached to bank accounts renders them thoroughly identifiable to the authorities, so the quest for total anonymity via digital payments has become highly elusive.
A premium Bitcoin gift card such as BitCard® offers FDIC-backed custodial accounts with bank-grade security and a transparent, reliable crypto platform which also supports cold storage for digital assets. You must comply with KYC practices as any other regulated financial firm does in the United States.
There are some ways to obfuscate the specific Bitcoin (or cryptocurrency) owner by mixing coins from different wallets (known as coin tumbling). Alternately through certain intermediaries, you can meet people in person to exchange cash for Bitcoin, thus making ownership anonymous.
However, the latter incorporates significant risks as to verifying the Bitcoin being purchased is indeed genuine (potential fraud) or even potential personal security issues (possible criminal activities, robbery, or abduction), so the vast majority of Bitcoin users would eschew such an approach.
Criminal share of cryptocurrency activity almost eradicated
According to Hailey Lennon’s article, the majority of cryptocurrency is not used for criminal activity. She noted, “according to an excerpt from Chainalysis’ 2021 report, in 2019, criminal activity represented 2.1% of all cryptocurrency transaction volume (roughly $21.4 billion worth of transfers).” In 2020, the criminal share of all cryptocurrency activity fell to just 0.34% ($10.0 billion in transaction volume), says Hailey Lennon.
In 2020, the criminal share of all cryptocurrency activity fell to just 0.34% ($10.0 billion in transaction volume), says Hailey Lennon.
In a report released by the U.N. last September 24th, global money laundering accounted for 2.7% of global GDP (Tax abuse, money laundering and corruption plague global finance (www.un.org). There’s $7 trillion in private wealth hidden in haven countries with 10% of global GDP held offshore.
If the above Chain analysis data is correct, then you’ve got a significantly lower chance of encountering illegal activities via cryptocurrencies than you have in fiat currencies, precious metals, or gems.
The Taxman’s Taken All My Dough…
Let’s not forget the various taxation authorities in the 110 plus jurisdictions that welcome cryptocurrencies. There’s nothing else that puts the official stamp of approval on a product like a good old-fashioned split of the profits with the taxman.
Most of these tax authorities do not recognize cryptocurrencies or, for that matter, any digital representation of currencies as actually being a currency. They are generally deemed to be either a commodity, a digital asset, a digital store of value or a “property.”
Even those countries that ban the use of digital currencies or cryptocurrencies or “Tokens” reserve the right to tax any profit you make trading those digital assets and absolve themselves of any losses incurred by the individual if they end up on the wrong end of the trade.
The United States IRS calls cryptocurrencies “virtual currencies.”
“Virtual currency transactions are taxable by law just like transactions in any other property. Taxpayers transacting in virtual currency may have to report those transactions on their tax returns.”
“The sale or other exchange of virtual currencies, or the use of virtual currencies to pay for goods or services, or holding virtual currencies as an investment, generally has tax consequences that could result in tax liability.”
The Crypto Tax Consequences
“If you held the virtual currency for one year or less before selling or exchanging the virtual money, then you will have a short-term capital gain or loss. If you held the virtual currency for more than one year before selling or exchanging it, then you will have a long-term capital gain or loss.
The period during which you held the virtual currency (known as the “holding period”) begins on the day after acquiring the virtual currency and ends on the day you sell or exchange the virtual currency. For more information on short-term and long-term capital gains and losses, see Publication 544, Sales and Other Dispositions of Asset.”
The tax consequences on long-term capital gains vary from “0” to 20%, whereas short-term gains (less than 1 year) should be treated as “ordinary income.” The IRS is beefing up its efforts to bring crypto traders into compliance, and there are reports that the IRS is developing new tools to help monitor and record those trades to corroborate crypto traders’ records.
Time to buy legal Bitcoins
Cryptocurrencies are indeed legal in most jurisdictions, and they’re now part of the mainstream of taxable events in those jurisdictions. The previous interpretation that they were merely the milieu of minions on the dark web, money launderers, or tax cheats is undoubtedly now far off the mark.
Once the IRS can tax your crypto trading profits, it’s affirmation everything is legal and above board. Perhaps some of the legacy coin generation from the early years could have been associated with some of the more nefarious elements, however nowadays, the evolution of cryptocurrency trading practices and regulation has almost completely eliminated those concerns.
Ready to buy cryptos? Or even prepared to buy some Bitcoin gift cards for your loved ones? The time has surely come!