So an obvious question is – is Bitcoin legal? Well, like so very many things, that depends on where you live.
At the time of writing, most of the world’s largest economies; including the EU, USA, Canada, Russia, Japan, Brazil and South Africa; allow Bitcoin transfers without restriction.
One important warning. None of these countries consider Bitcoin to be legal tender; that is they do not require businesses to accept Bitcoin payments (although businesses and individuals can opt to do so). Nor do any of these countries offer consumer protection for Bitcoin transfers, so Bitcoin payments do not benefit from the laws that protect credit card transfers or bank deposits. Most of these countries consider Bitcoins as eligible for taxation – so if you mine Bitcoins, or receive payment in Bitcoins you may have to pay tax on them.
There are a small number of countries: Ecuador, Bolivia, Vietnam and Iceland; where Bitcoins are either explicitly or effectively outlawed. Using the currency in these countries could attract serious penalties. China, Taiwan, India, Mexico and Kazakhstan have placed certain restrictions on Bitcoin and have warned citizens about the risks of using the currency.
Many other countries, including most of Africa, the Balkan countries, the Gulf states and Central America have not come to any decision about the legality of Bitcoin payments.
Does Bitcoin offer privacy and anonymity?
Bitcoin is often described as a method of making anonymous payments which is the main reason it was so appealing to users of the Silk Road. While Bitcoin offers much greater levels of anonymity than conventional payment systems, it is not truly anonymous.
Bitcoin transactions are sent from and to ‘addresses’ which do not in themselves reveal user details, but which can be tied to individuals by examining network traffic. The flow of Bitcoins from one address to another can be traced by examining the public block chain which retains a complete history of every transaction. Exchanges require even more information about users and may be required to register with government bodies, and of course, if you use Bitcoin to buy goods and services, it is possible to link the transaction to an email account, phone number or physical address.
Users wishing to hide their tracks can use so-called ‘mixing services’ (also known as mixnets or tumblers) in which Bitcoins from several sources are pooled before being delivered in small batches to their final destination. This makes the process of tracing a payment from source to final destination extremely difficult. Tumblers have something of a shady reputation, most charge hefty transaction fees and may not be able to guarantee delivery of the final payment. In addition, some tumblers have been linked to money laundering schemes which are illegal in most countries.
In more than five years no one has been able to break Bitcoin’s basic architecture and create false transactions, or amend or delete transactions. Bitcoin’s distributed design with millions of computers constantly checking copies of the block chain and coming to a consensual view of transactions prevents anyone from creating false records. The real targets of fraudsters have been the Bitcoin exchanges. These have seen repeated attacks that have resulted in Bitcoins being stolen or lost. Some exchanges have been forcibly closed by law enforcement agencies on suspicion of money laundering or defrauding their customers. The largest such closure was of Liberty Reserve in May 2013 where assets worth $40 million were held by authorities after the company was accused of laundering more than $6 billion.
The largest of all Bitcoin exchanges was the Japan-based Mt. Gox, at one point, Mt. Gox processed more than 70% of all Bitcoin transactions, but from late 2013 onwards customers began reporting long delays on payments. Shortly afterwards, Mt. Gox put strict limits on the amount of money that could be exchanged each day and then stopped processing payments entirely. Mt. Gox stopped trading in late February 2014. After the company closed it was disclosed that thieves had stolen nearly 850,000 Bitcoins from Mt. Gox, some were later found but more than 650,000 are still missing. Mt. Gox was finally declared bankrupt and closed in April 2014. Thousands of its customers were left penniless.
Even if you don’t use Bitcoins you might be affected by Bitcoin-related crime. A number of malicious computer programs have been created which infect personal computers and steal small amounts of processing time in order to mine new Bitcoins. A single PC can’t mine very many Bitcoins these days, but when the same malware infects thousands or even millions of machines it adds up to a formidable mining operation that can generate considerable amounts of money for the program’s creator. You can defend yourself against this malicious software by installing an anti-virus program on your PC and keeping it up to date – it will also protect you against all sorts of other threats.