#1 Legal Analysis of Bitcoin (BTC)

This is the final part of our article series on top 12 cryptocurrencies and their legal framework within the U.S. and the EU. Last time we wrote about Ethereum (ETH), the undisputed king of altcoins, and this time we close the chapter with a legal analysis of Bitcoin (BTC), the undisputed king of all cryptocurrencies.

BTC in a Nutshell

BTC was launched in 2009 by Satoshi Nakamoto – an anonymous person or group. BTC is a decentralized peer-to-peer blockchain-based value, which may be used like a currency, and all its transactions happen directly between equal and independent network participants, without the need for permits or facilitation. Please see BTC’s whitepaper for more information.

It has been viewed that BTC’s main advantage in the cryptocurrency market is that it was the first (modern age) cryptocurrency in the market, without forgetting that it is decentralized and has sound technology behind it. While nowadays BTC might not be considered revolutionary anymore, it has inspired countless projects and has been the starting point to a new industry now worth more than 2 trillion dollars.

U.S. Regulation of BTC

As we have already mentioned in our earlier articles, it is hard to find a uniform regulatory approach to cryptocurrencies in the U.S, where each State has their own regulation on money transmission and cryptocurrency. As cryptocurrency exchanges are usually involved in fiat-money transmissions, they are obligated to follow money transmission regulations. In addition and for example, New York and Louisiana have their own cryptocurrency licences, which are a stricter way of regulating cryptocurrency exchange operations.

The different interpretations of U.S. authorities do not either pave the way for regulatory clarity. For example, the Internal Revenue Service (IRS) sees cryptocurrencies as property and has issued tax guidance on the matter, whereas the Commodities Futures Trading Commission (CFTC) encompasses cryptocurrencies to be commodities as described in the Commodity Exchange Act. Meanwhile, the Securities and Exchange Commission (SEC) has been indicating that it considers certain cryptocurrencies to be securities by applying the so-called Howey Test, despite its origin in traditional investment contracts, e.g., securities. Under the Howey test, the following questions determine the legal nature of a transaction:

1. Did purchasers of a financial instrument contribute money (or valuable goods or services)?
2. Did purchasers invest in a common enterprise?
3. Were purchasers reasonably expecting to earn profits through that enterprise?
4. Were the expected profits derived from the efforts of others (e.g., a third party)?

As stated in our article on ETH, the former SEC director William Hinman has stated that ETH and BTC are not considered to be securities. Still, in an interview published earlier this December the current SEC Chair Gary Gensler called all cryptocurrency platforms to register and cooperate with the SEC to ensure investor protection. At the same time SEC approved BTC ETFs this autumn. It is clear that the SEC (and the CFTC) have a significant interest to regulate trading platforms and other cryptocurrency service providers to improve investor protection as well as transparency, but the scale of the regulations remains to be seen.

EU Regulation of BTC

Based on the Fifth Anti-Money Laundering Directive of the EU (5AMLD), cryptocurrency is as a digital representation of value i) that is not issued or guaranteed by a central bank or a public authority, ii) is not necessarily attached to a legally established currency and does not possess a legal status of currency or money but is accepted by natural or legal persons as a means of exchange and iii) which can be transferred, stored, and traded electronically. Hence, as with all other cryptocurrencies, BTC falls within the 5AMLD’s definition of cryptocurrency.

The 5AMLD obligated the EU Member States to ensure in their national legislations that cryptocurrency service providers (e.g. exchanges and wallet service providers) are subject to similar anti-money laundering, Fit & Proper and customer funds obligations as other financial actors (e.g. payment institutions or electronic money institutions). Hence, the national laws of EU Member States regulate on the obligations related to cryptocurrency service providers.

As currently the national legislations of EU Member States regulate on the obligations related to cryptocurrencies, there remain certain discrepancies between the EU Member States crypto-legislations – though the legal regime can be described as quite uniform if compared to the situation in the U.S.

Certain Member States have established a stricter license system for cryptocurrency providers, whereas other Member States just require cryptocurrency providers to comply with general anti-money laundering obligations. From a longevity standpoint, it is recommendable to comply with the stricter legal regime, as approximately within 2 to 4 years’ time the upcoming EU regulation on cryptocurrencies (MiCa) is going to force the stricter obligations on to all EU Member States (similarly as the GDPR did for data protection).

End Note

With the end of this article series, we may say that all good things must come to an end. However, this does not mean that there is not room for new good things.

We found the writing of these articles so fascinating that we are currently on the drawing board planning on a new crypto related article series for 2022. As a lot happened in the cryptomarket in 2021, there are a wide range of topics to choose from – let’s see what we eventually come up with.

Stay tuned!

04.01.2022 MAX