What is a Cryptocurrency?
Bitcoin, Ethereum and Ripple are just a few examples of so called cryptocurrencies. But what are they? The world of cryptocurrencies is a rapidly developing area. Along with its development, there have been multiple questions raised in regard to its legal position. Is it a currency? Is it property? Hopefully this article should give some form of idea.
Firstly, I would like to address the fact that nobody knows who created bitcoin. It’s an elusive group or individual known as “Satoshi Nakamoto” who developed the code which has been adopted by many and shunned by others. In essence a cryptocurrency, such as bitcoin, is a form of digital asset. Its purpose is to cut out the middle man and is used as a way of eradicating transaction fees and exchange fees. All of this while remaining completely anonymous!
There are legal implications which arise from this form of idea however. People don’t like the idea of a currency that cannot be tracked (especially as it can be used for unsavoury dealings). On the other hand, it must be remembered that with this new technology and it’s growing value there is a huge opportunity for this to become a more popular use of trading. This was made clear to me at an event run by Legal Cheek and hosted by Norton Rose Fulbright. Victoria Birch gave a fantastic talk about how the future of fintech and cryptocurrency was something to keep our eyes on.
Some of the key issues we need to look at are how bitcoin and other cryptocurrencies fit in around current legal systems and their laws and regulations. The USA (IRS) sees bitcoin as a taxable asset under the guise of property. The UK (HMRC) has viewed it as a more complex area in the Revenue and Customs Brief 9/2014: Bitcoin and Other Cryptocurrencies. No VAT is required when bitcoin is exchanged for some other currency. Trading for a form of goods renders the value of bitcoin at the time of transaction open to VAT as any regular transaction would be. The usage by corporations works the same as any foreign currency, allowing for taxable gains and deductible losses. Any form of trading must be documented in business accounts. If the bitcoin is collected by an individual then it is not privy to capital gains tax, and is not subject to the standard rules of trading.
This leads us to the European Union ruling on the matter. 2015 saw the EU explain that it is tax exempt stating “The exchange of traditional currencies for units of the ‘bitcoin’ virtual currency is exempt from VAT” and “Member States must exempt, inter alia, transactions relating to ‘currency, bank notes and coins used as legal tender”. This shows the EU’s position that Bitcoin remains a decentralised currency rather than a commodity. As of 2016 the EU has established a task force to try and monitor cryptocurrencies in order to restrict money laundering.
With this growing field however, we need to understand that this is subject to change and new developments are sure to come within the few days after this is posted. Watch this space for the latest in cryptocurrency developments.
1 Bitcoin = £2773.23 = $3742.75
As of: Saturday 23rd September 2017.