The Government’s Response to Virtual Currencies

The Government’s Response to Virtual Currencies

Virtual currency is a type of currency that is digital, unregulated and used by members of a virtual community. This type of money is controlled by its developers. Banking authorities view it as a digital representation of value which is naturally and legally accepted. This form of currency is not issued by a public authority such as a central bank but can be used as a form of payment and can be transferred and stored by electronic means.

The emergence of virtual currencies has instilled different kinds of reactions in different people. For some, they have feared it while others have developed deep interest and even ventured into dealing with the currency. However, fundamental questions about what the currency entails and how it can sustain an individual in the future emerge from time to time especially about the common virtual currency, Bitcoin. From the opinion of some individuals, it’s clear that some are in agreement with the currency while others are against it. Those who have a positive attitude towards virtual currencies believe that it can aid developing countries independent of stable financial systems. Moreover, it has the potential of being a payment system for online and physical retailers in the future. Those who oppose the emergence of this new currency reason out that it is a tool that can be easily used to traffic illegal drugs and launder money. (Brito J et al, 2010)

Different nations hold different perspectives on Bitcoin. They have contradictory interpretations of Bitcoin to represent property or money. For instance, Australia considers Bitcoin as a representation of property that is liable to capital gains in terms of tax. This is the same view in the United States. This view is similar in Canada where Bitcoin is subject to the same tax laws that govern barter transactions.

Other stakeholders such as law enforcement, entrepreneurs, investors, and regulators have taken part in matters concerning Bitcoin so as to resolve issues arising from the virtual currency. However, unanswered questions still arise concerning the virtual currency. Bitcoin was created in 2008 and it raised from being a hobby among internet enthusiasts to being a powerful force in the business and government sector. It became the most widely circulated and the most scrutinized digital currency. It is also the main original resource used in the experimenting of digital money.

The rise of Bitcoin attracted tax authorities to be involved in its dealings thus incurring a series of tax consequences. As much as its dealings are tied down to small markets, Bitcoin is likely to have subtleties of taxation with taxpayers and tax authorities. This is due to the limited and inconsistent guidelines available to taxpayers between countries. This should not be the case since Bitcoins need a cohesive address through a specific OECD project. This will enable it to have a tax framework which can be internationally adopted by member nati ons to ensure sturdiness in Bitcoin taxation. (Paramati S. et al, 2107)

According to a report by the inter-governmental financial action task Force, Bitcoin was vulnerable to be used in money laundering activities and funding of counter-terrorism. This was due to the decentralized nature of the system with poor financing regulation. (Vaughan G, 2014) Despite this, a few jurisdictions use their regimes of anti-money laundering to regulate Bitcoin. For instance, the US Financial Crimes enforcement network (FinCEN) that recently issued rulings to be applied in anti-money laundering. This was especially applied to digital currency service providers.

An agency in Australia called Austrac gave several opinions in relation to the future of digital currencies. One of them was the lack of accountability for Bitcoins, especially under anti-money laundering international standards. This same comment was highlighted in a report published in 2012. The CEO of Austrac, John Schmidt considered Bitcoin as the least priorities in the company. He stated his reason as ‘at this point in time when you consider all of the existing threats that we face from a criminal perspective, they are not top of the list.’

It becomes uncertain when functioning consumer protection mechanisms are able to provide recourse to consumers. The consumer protection mechanisms include financial regulatory authorities and oversights by the central banks. The Australian Securities and Investments Commission and New Zealand financial market authority are examples of consumer protection agencies.

The governments of various countries have played a key role in averting criminal activities related to Bitcoin and its assets. For example, the law enforcement of the United States captured 30,000 Bitcoins from Silk Road marketplace. In Australia, Victoria captured several million dollars’ worth of Bitcoin. (Cook H, 2014). The Victorian government sought help on how to handle transfer ownership of the Bitcoin to the state when the owner’s original identity was undetectable.

Owing to the rapid growth and use of Bitcoin, there is a need for greater public protection around its ecosystem. (Thompson C, 2014) Due to its decentralization, it is impossible to apply the regulation of Bitcoin and its production process. Regulation can apply to the use and storage of Bitcoin globally. However, traditional regulatory practices can assist in applying an appropriate regulatory mechanism to digital currencies but will be irrelevant. This is because the definition of a Bitcoin, roles of users, administrators and exchangers will be the main factors to be considered regulatory mechanisms.