Bitcoin: a brief overview on the current standing

The bitcoin reality

Bitcoin is an electronic currency created in 2009 by an unidentified person, known under the pseudonym Satoshi Nakamoto, developing an idea presented to the web by the same author at the end of 2008.

Bitcoin can be defined as a virtual crypto-currency. Cryptic, because in order to ensure the integrity of transactions, it is created through cryptographic algorithms, the same devices guarantying the safeness of the current banking transactions. Virtual, as it doesn’t have any material consideration,  being a mere information travelling through the net that can either be memorized on personal computers (as a “digital wallet”) or stored at third parties acting as a bank or a common intermediary.

Unlike the majority of the traditional currencies, the bitcoins’ market is not regulated by a central entity. This function is carried out through a distributed database connecting the dots of the web, enabling to track the transactions and process the related functions, such as: creation of new currency, guarantee of exclusive legitimate use by the owner and control over the use of the bitcoin to prevent duplication of transactions utilising the same currency. Lack of a central entity makes it impossible, for governmental and non-governmental authorities, to prevent the use or to seize bitcoins to illegitimate owners, as well as to manage the currency issue, its devaluations and revaluations.

Looking at the bitcoins’ evolution trends, a speculative element clearly appears; however, bitcoins are able to ensure countless advantages, including taxwise, to their users as well. In particular, transactions are anonymous and open to the entire web; moreover, their costs are negligible if compared to the current standards. Furthermore, the attractiveness of bitcoins lies in their capability to greatly simplify the e-commerce transactions.

However, the enthusiasm towards the crypto currencies is not generally shared, serious doubts have been expressed and the debate is currently open. There is a widespread fear of bitcoins being used for unlawful activities, by virtue of the full anonymity of the transaction. In this regard, bitcoins reputation has been fostered after the closing down by FBI of Silk Road, a totally anonymous online market for drugs working with the electronic currency. Despite the expectations of a collapse in bitcoins’ use and value, this event ended up in a reinforcement of the currency, proving a vast majority of the bitcoins users being extraneous to any illegal use.

Bitcoins’ increasing spread

Anyhow, the number of online legal platform accepting bitcoins as a mean of payment is continuously increasing. Also, more and more large commercial operators announce the adoption  of digital payment systems, thus responding to a growing demand by their customers. Microsoft showed an opening adding bitcoins in the currency convertor provided by Bing. Furthermore, the English division of eBay, the world biggest virtual store, also showed an interest as it recently started accepting bitcoins; however, strict rules have been issued not unexpectedly: purchases are restricted to the “announcements” section, where transactions don’t involve an intermediation of the portal, and the electronic currency will not be admitted at the online auctions.

Purchases through bitcoins are destined to  increasingly affect the world  of material transactions as well. As of today, Berlin is the city with the highest number of shops and facilities accepting payment through electronic currencies. Across the United States stores are beginning to appear indicating the value of goods in bitcoin, in lieu of the traditional price. In Switzerland the first automatic distributor of virtual currency has been set few weeks ago. By mid-March Singapore residents will be able to access the first bitcoins of the Asian continent. In Italy, the majority of retailers accepting bitcoins transactions is concentrated in the North of the country, particularly in Lombardy and Veneto regions; Rome comes in second place and then Sicily, outstanding among the South regions. Tourism activities, such as hotels and Bed&Breakfasts, are the most favourable to the virtual currency.

Legal aspects

The increasing expansion of bitcoins phenomenon has caused the majority of national governmental authorities to analyse and study its implications. However, only few countries have actually adopted specific deed of law regulating the electronic currencies, namely only Brazil and China. As a matter of fact, the two governments showed completely opposite approaches. The Brazilian authorities openly welcomed the concept of electronic currency: during last October a law was enacted enabling mobile e-payment systems with the creation of virtual currencies. Conversely, at the end of 2013, the Chinese National Bank has cancelled the validity of bitcoms, issuing a warning about the risks envisaged in the use of the virtual currency. Following this decision by the second world economic power the bitcoin has undergone a sudden loss of about 50% of its original value. Shortly after, Russia has also banned the virtual currency.

In the United States, the Treasury Department released a string of guidelines ob bitcoins regulatory aspects; furthermore, in a recent hearing at  the U.S. Senate the Government has shown interest for the electronic currencies by ratifying their validity as a lawful means of payment for every transaction.

In the European context, on the 13th of December 2013, the European Banking Authority (EBA) delivered a warning in which it expressed doubtfulness towards the use of bitcoins. Doubts focus on three major aspects, in line with what expressed by other international government authorities. Namely:

  • The excessive and uncontrolled fluctuation in bitcoins’ value, potentially able to affect the value of national material currencies;
  • The potential misuse of bitcoins for illegitimate uses and criminal activities;
  • The impact of the use bitcoins on taxation.

The EBA also outlined that, should the misuse of bitcoins continue, it might lead to the closing down of exchange platforms at short notice by the national authorities, thus implying the loss of bitcoins owned by consumers without possibility of retrieving funds held on the platform.

With specific regard to taxation issues, the jurisdiction lies in the single national authorities, some of which have already issued rules. Germany, for example, decided to treat bitcoins with the same tax regime applied to goods and services (similar actions are being taken by Canada, Singapore and Finland).

In Italy, some members of the Democratic Party have submitted, on the 31st of January 2013, a formal interrogation to the Parliament Commission concerning legal aspects of crypto currencies, expressing the same doubts for potential misuses already raised at European level.

On the 24th of November 2013, the Italian Bitcoin Foundation was created with an aim of diffusing the use of the new currency and promoting widespread and accessible information on the subject. In cooperation with a number of Italian politicians, the association is working on a shared scheme of law able to eliminate legal uncertainties without discouraging the use of bitcoins.

Concerning the tax regime, the Italian Bitcoin Foundation is considering submitting a direct request for clarification to the Italian Revenue Agency. The association expressed its concerns in relation to the new 20% withdrawal tax on money transfers originating abroad; it seems that the tax might be applicable to bitcoins transfers as well. However this provision, initially retroactive, has been modified as to its entering into force, due to  a mounting opposition in the public opinion. On the 19th of February 2014, after an official request of the Minister of Economy and Finance, the law enforcement was suspended, and the amounts withheld immediately credited.

As of today, we are far from a massive diffusion of bitcoins. Anyhow, as history teaches, it’s not the means being negative or illegal per se but the use thereof which is actually made. Currencies have been used for unlawful or morally wrong purposes well before crypto-currencies have appeared on the web; certainly the risk of misuse is potentially real, but just to the same extent as for the traditional currencies. The facts remains that the States have a right and a duty to continue analysing the phenomenon with an aim of adopting all possible measures to prevent any  illegitimate use of bitcoins.

Gianluca Bellino, Chiara Novelli

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