Will lack of regulation kill Bitcoin?

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Bitcoin has continued to rise in price, if not in adoption. Other than small services here and there, commerce is justifiably sceptical about using it as a means of exchange. Where BTC has been generating news is in its price, and there it has shown that some people will invest in it, hoping to get some return at some point.

There have been a couple of interesting regulatory developments recently that are worthy of mention. First the good news is that Her Majesty’s Revenue and  Customs (HMRC) in the UK has issued a briefing paper detailing the position on the tax treatment of income received from, and charges made in connection with, activities involving Bitcoin and other similar cryptocurrencies. The HMRC recognises that this is an evolving regulatory area, and is expecting that at some point there will be some sort of EU-wide effort to define and clarify cryptocurrencies in general. Taking that into account, HMRC has decided to treat income from sales of goods and services through Bitcoin in the same manner as it does any other sales. With regards to other income, they issued the following guidelines for the time being:

  1. “Income received from Bitcoin mining activities will generally be outside the scope of VAT on the basis that the activity does not constitute an economic activity for VAT purposes because there is an insufficient link between any services provided and any consideration received.
  2. Income received by miners for other activities, such as for the provision of services in connection with the verification of specific transactions for which specific charges are made, will be exempt from VAT under Article 135(1)(d) of the EU VAT Directive as falling within the definition of ‘transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments.’
  3. When Bitcoin is exchanged for Sterling or for foreign currencies, such as Euros or Dollars, no VAT will be due on the value of the Bitcoins themselves.
  4. Charges (in whatever form) made over and above the value of the Bitcoin for arranging or carrying out any transactions in Bitcoin will be exempt from VAT under Article 135(1)(d) as outlined at 2 above.

This brings it in line with other foreign currencies, and has been seen as a positive development that has boosted BTC prices once again. However, it seems to me that the new rally fails to see that regulatory developments like the above do not consist of a concise regulatory approach from financial authorities. This is just a recognition that there is a BTC economy, and gives rules until long-lasting measures are adopted.

And Bitcoin really needs some regulatory help, because the bad news is that the cryptocurrency continues to be plagued by security problems.  The largest has been the demise of Mt.Gox, the once mighty Bitcoin exchange, which has just filed for bankruptcy after hackers managed to get into their system and steal a grand total of $446 million USD worth. Imagine a normal bank where such a thing had happened, the cops would be immediately notified and probably a large international law enforcement operation would ensue.

Why should we expect less from the police when it comes to Internet issues?

The answer may be the lack of regulation, as law enforcement may simply not understand the technology, and may not consider that this is worthy of persecution. Until there are some arrests related to BTC fraud and hacking, I am afraid that serious investors might decide to stay away from Bitcoin because it simply is not safe enough, and it draws hackers like no other payment system at the moment.

Bitcoin might therefore be suffering from lack of regulation, something that could be considered ironic, as one of its selling points is the distributed nature of the network, which makes it difficult to regulate in the first place.

Stay tuned…

Edit:

This is a very interesting post in the Bitocin Forums that paints a different picture of what may have happened with Mt.Gox, and I tend to agree with the analysis. This is precisely the type of conduct that regulation of financial institutions is supposed to avoid. How can anyone trust a currency where there is no regulation to stop this from happening?

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