Is it Even Possible to Ban Bitcoin?
The idea that bitcoin will eventually be banned by all governments is one of the main arguments made by those who do not see long-term potential in the digital asset. This argument has been made by a number of different individuals, from legendary investor Ray Dalio to JPMorgan CEO Jamie Dimon. That said, the current state of bitcoin’s regulatory environment is that it is completely legal to use in most parts of the world, including the United States.
At the end of the day, there are a number of reasons that it would be difficult to outlaw bitcoin in places where individual rights are respected and there does not exist an authoritarian regime in control of every aspect of the local people’s lives. A ban on bitcoin would face issues similar to the bans on encryption that various governments were ready to implement in the 1990s. In the case of a potential ban on end-to-end encryption, many legal experts pointed out that this is effectively a ban on certain types of speech. This became clear to everyone when people started publishing encryption software code on t-shirts and books.
Due to the respect for free speech that still exists in the United States, it would be difficult for lawmakers to change the law in order to ban the use of bitcoin. After all, the Bitcoin network is nothing more than computer code that is running on thousands of computers around the world, so a ban on bitcoin would require an authoritarian view on how the global financial system should work. While various departments of the U.S. government have been tinkering with the idea of a central bank digital currency for some time now, it is unlikely that this will also lead to a potential bank on bitcoin. Instead, these two competing monetary systems will continue to exist alongside each other.
While the regulatory situation around bitcoin has become more clear over time, the reality is there are still 50 different states in the country that are all able to pass their own laws and regulations around local usage of bitcoin and other crypto assets. While most states are currently operating with a similar, mostly-friendly view of the bitcoin market, there are a few differences in terms of how bitcoin and the cryptocurrency industry more generally is regulated in some states. Let’s take a closer look at the different regulatory environments that exist on a state-by-state basis around the country.
Pro-Cryptocurrency with Bitcoin Banking on the Way
In terms of states that are friendliest to bitcoin and crypto assets, it’s difficult for anyone else to compete with Wyoming. In 2020, it became clear that Wyoming is becoming a new playground for those who are looking to merge the worlds of cryptocurrency and traditional banking institutions. After two years of work from parties interested in turning Wyoming into a new hub of innovation for the crypto industry, Kraken Financial eventually became the first new entity to receive a special purpose depository institution (SPDI) charter from state regulators. This effectively turned Kraken, which is a cryptocurrency exchange, into a regulated bank in the United States.
While there have been regulations specifically focused around banks or cryptocurrency services companies in the past, it is becoming clear that there is going to be an eventual merger between traditional banks and digital assets. In other words, more banks are going to want to offer bitcoin-related services to their customers, and more cryptocurrency exchanges and other crypto-related companies are going to want to offer traditional banking services to their customers as well. Instead of bitcoin simply taking over the traditional banking system overnight, it’s likely that these two worlds will first come together as more people are operating in both financial realms rather than one or the other.
So far, the benefits of this sort of regulatory stance is more obvious for cryptocurrency exchanges than it is for traditional banks. That is because most banks still haven’t made a public move into the bitcoin space quite yet. But for cryptocurrency services providers, the ability to operate as a bank has a number of advantages. For example, this gives Kraken the ability to offer savings accounts, debit cards, and other types of services that are usually found at traditional banking institutions rather than bitcoin exchanges. It should be noted that the SPDIs operating in Wyoming cannot do all of the things that traditional banks can do. For example, one of the stipulations of this charter is that SPDIs must operate on a 100% reserve basis.
Of course, Wyoming does not exist in a bubble, so federal regulations will still be relevant as well. In fact, the SEC has already made it clear that they’re taking a look at these new rules in Wyoming to see if they are practical from a federal perspective as well. But for now, if you’re someone who is interested in operating in both the cryptocurrency and traditional banking worlds at the same time, then you’ll definitely be interested in getting an account at one of the newly created entities coming online in Wyoming in 2020.
States 100% Open to Cryptocurrency
For most states throughout the country, a simple, open stance to bitcoin and other cryptocurrencies has been taken. While these states may have offered some guidance in terms of regulatory clarity, these are mostly alterations to existing laws in order for them to apply to a new form of digital money.
For example, Alabama has defined virtual currency as an instrument for transmitting value. This is the sort of stance that has been taken in most states. The use of this regulatory classification is to point out that businesses that handle cryptocurrency on the behalf of others are operating as money transmitters. There are a wide range of regulatory and licensing restrictions that come with operating this sort of business, and a large number of laws are already in place for this sort of activity when it comes to traditional fiat currencies. By simply applying these old laws to cryptocurrencies, regulators are able to quickly give these companies some guidance in terms of what they need to do to stay compliant with existing laws. Of course, there may come a time for more specifics to be added to the law for cryptocurrencies specifically, as the possibilities around how bitcoin and other crypto assets can be used are still very much in the early days. For example, the clarity around the definition of a custodian of funds is still somewhat unclear when things like multisignature addresses are considered. Is a business a custodian if they only hold one of the keys associated with a user’s Bitcoin address? These are the sorts of questions that lawmakers and regulators around the country will need to address in time.
Of course, in other states like Alaska and Connecticut, the lawmakers have not even bothered to add clarifications around the use of cryptocurrencies like bitcoin to the existing laws. However, this does not mean that bitcoin is completely unregulated in these sorts of jurisdictions. Instead, the lawmakers and regulators are simply taking the view that the existing laws around money transmission so clearly also apply to bitcoin and other digital currencies that no alterations of the law are necessary at this time. While this is likely a fine approach to take over the short term, the reality is the sorts of problems mentioned above around multisig addresses and other sorts of advanced functionality built around programmable money will likely necessitate more specific regulations to be built around cryptocurrencies over the long term.
Other states that have come out to explicitly state that traditional laws around money transmission also apply to those working with crypto assets include:
- New Mexico
- North Carolina
It should be noted that those operating in states where no statements about how bitcoin applies to the existing laws have been shared by local government officials does not mean these states are operating in a lawless sector. For one, the federal guidelines shared by FinCEN and other regulatory bodies at the national level still apply in all 50 states around the country. Additionally, these states could decide to interpret the existing laws around traditional forms of money and currency to also cover bitcoin and other crypto assets.
States where there has not been much chatter around companies working with bitcoin include:
- New Jersey
- Rhode Island
- South Carolina
- South Dakota
- Utah, Virginia
- West Virginia
Obviously, this long list of states indicates that there is still plenty of regulatory uncertainty that exists throughout the United States. Of course, this hands-off approach to bitcoin regulation also means that the federal law effectively becomes the default terms that must be followed in these jurisdictions.
Some states, such as Illinois and Massachusetts, have come out in support of a regulatory model that limits the amount of regulation around cryptocurrency businesses that do not interact with fiat currency; however, this sort of stance is unlikely to stand the test of time, as it is at odds with federal guidance. For example, Bitmex and other exchanges that only operate in the cryptocurrency space and do not touch the traditional banking system have still become targets of federal law enforcement investigations. New Hampshire, North Dakota, Tennessee, Texas, and Pennsylvania have also adopted stances where businesses interacting with cryptocurrencies like bitcoin do not need to register as money transmitters if they are avoiding the traditional banking system.
More confusingly, states like Louisiana have left the language around bitcoin regulation so vague as to say existing laws may or may not be applied to cryptocurrencies in the future.
Another outlier in terms of the regulation of bitcoin at the state level is Montana, who does not have any laws on the books regarding money transmission at all. Of course, the lack of regulation at the state level does not mean much when federal law also still applies in this jurisdiction.
It should be noted that all of this regulatory language around bitcoin is focused around businesses rather than individuals. Individual use of bitcoin is still mostly unregulated throughout the United States. Of course, traditional laws around investing in assets other than U.S. dollars, such as capital gains taxes, still apply here. Just because you are using bitcoin does not mean you don’t have to pay your taxes.
Available But Regulated with Exchanges Needing License
It should be no surprise that some of the largest states in the United States, namely California and New York, have come up with their own regulations around bitcoin and the cryptocurrency industry.
New York is home to the most notorious piece of bitcoin regulation that has been passed, known as the Bitlicense. The adoption of this regulation led to some companies deciding it would not be worth it to offer their services to customers in New York. Many websites that cannot offer services in places like North Korea also note that they cannot offer their services in New York as a sort of critique of the high amount of regulation around bitcoin companies that exists in the state. The Bitlicense defines virtual currency businesses as entities that are different than businesses that operate in the traditional banking system. Businesses that wish to offer cryptocurrency-related services in the state of New York must acquire a Bitlicense in order to operate in the state. For companies like Shapeshift and Kraken, the requirements needed to gain access to a Bitlicense are simply not worth the associated costs.
While it looked like California was originally going to follow New York’s lead and adopt a Bitlicense of their own, the reality is that they were not able to get a similar bill in the state turned into actual law. For now, California operates in a regulatory unclear environment when it comes to bitcoin, so the laws found at the federal level are likely the most relevant regulations to follow at this time.
It should be noted that regulatory clarifications in Kansas involve a unique approach where cryptocurrency transactions made on a strictly peer-to-peer basis, meaning there is no third party between a transfer of funds from bitcoin to dollars (for example), does not meet the minimum requirements necessary in order for someone involved in the transaction to register as a money transmitter. The area of trades made on a P2P basis is still rather unclear at a national level. There have been cases where users of platforms like Paxful and LocalBitcoins have been charged for operating as money transmitters without following the proper regulatory and licensure requirements. Anyone who is trading large amounts of money on P2P trading platforms should definitely look more deeply into the specific laws and regulations around this sort of activity in their relevant jurisdictions.
Hawaii originally had extremely strict terms in terms of how a bitcoin exchange could operate in the state. Coinbase even saw leaving the state as a better option than trying to figure out how to operate in it at one point. Now, the terms are a bit less strict, but the level of participation by crypto exchanges in the state is still somewhat limited. In 2020, Hawaii invited 12 different exchanges to operate in a regulatory sandbox. Outside of these exchanges that were explicitly invited to operate in Hawaii, a large amount of regulatory uncertainty still exists in the state of Hawaii.