While it is now considered too late for hobbyists without expensive ASIC processors to start mining bitcoins, many of the alternative digital currencies are still well suited for mining on your home PC.
In this guide, we’ll take you through all you need to know to start digging up a few litecoins, feathercoins or dogecoins without any costly extra equipment.
For the most part, cryptocurrencies employ either SHA-256 or scrypt as their proof-of-work hashing algorithm, but many of the newer currencies have opted for scrypt.
Scrypt tends to be the more memory intensive of the two – however, home PCs with reasonably powerful graphics cards can still mine those cryptocurrencies quite effectively, as there are no dedicated ASICs to compete with – yet.
Perhaps surprisingly, it’s still possible to use just your computer’s CPU to mine some of the digital currencies. This holds true, even if you have only a laptop with integrated graphics; though this may not prove terribly effective and is not a set-up we would recommend.
Wallets at the ready
Before you start mining, you will need a wallet to keep your hard-earned coins in (see our guide to storing bitcoin). A good option is to head to the homepage of the currency you intend to mine and seek out the download link for the default wallet app. If you would like to do more research into litecoin specifically, we have a guide on how to get started.
If you find yourself in need of help and advice, most altcoins have community forums, as well as their own subreddit. The majority of wallets are based on the original Bitcoin-Qt client. Be warned, though, that before these wallets are truly usable, you may face a lengthy wait while the coin’s entire block chain downloads.
The need for speed
Unless you possess specific mining hardware, there are two ways to mine cryptocurrencies: with your central processing unit (CPU) or with your graphics processing unit (GPU) – the latter being sited, of course, on your graphics card.
Of the two, a GPU offers far better performance for the cryptographic calculations required. However, if you are making your first foray into mining and don’t possess a souped-up gaming computer – a laptop with Intel integrated graphics, perhaps – it will still be possible to mine those altcoins, but at a far slower rate.
The catch with GPU mining is that it requires a dedicated graphics processor, such as you may have fitted inside your desktop PC – the Intel integrated graphics cards found in most laptops are just not suitable for the task. To keep speeds up to a respectable level, most altcoin miners build dedicated machines using motherboards that can house multiple graphics cards, usually via riser cables.
Be aware, too, that mining digital coins is very system intensive and can reduce the lifespan of your electronic components. It’s a good idea to make sure you have adequate cooling in place, keep an eye on those temperatures and keep hold of any warranties – just in case.
Solo, or with the crowd?
It can be helpful to think of mining pools as joining a lottery syndicate – the pros and cons are exactly the same. Going solo means you get to keep the full rewards of your efforts, but accepting reduced odds of being successful. Conversely, joining a pool means that the members, as a whole, will have a much larger chance of solving a block, but the reward will be split between all pool members, based on the number of ‘shares’ earned.
If you are thinking of going it alone, it’s worth noting that configuring your software for solo mining can be more complicated than with a pool, and beginners would probably be better off taking the latter route. This option also creates a steadier stream of income, even if each payment is modest compared to the full block reward.
Installing your CPU miner
A handy piece of software called cpuminer is the easiest way to start mining, but does require the ability to use the command line on your computer. The program can bedownloaded from SourceForge and is available for Windows (32 and 64 bit), OS X and Linux. For the purposes of this guide, though, we are making the assumption that you are using the Windows OS.
First, download the appropriate file for your operating system. The zip file can be extracted to anywhere on your hard drive, as long as you remember where it went. A good idea would be to create a ‘cpuminer’ folder on your desktop.
Writing your script
So, how to set up cpuminer with the parameters needed for your mining pool? Well, it’s usually simplest to write a one-line script (known as a ‘batch file’ in Windows) to launch the miner with the correct instructions.
To do this you will need the following:
- The full path of the directory in which the mining program (“ “) is stored (eg: “C:\cpu-miner-pooler”).
- The ‘stratum’ URL of your mining pool server (eg: “stratum+tcp:// “).
- The port number of your mining server (eg: “3333”).
- Your mining pool username (eg: “username”).
- Your worker name or number (eg: “1”).
- Your worker password (eg: “x”).
Now, open Notepad or your preferred text editor. Do not, however, use a word processor such as MS Word. Next, enter the script using the following formula (note that this method assumes you are mining a currency that uses the scrypt algorithm):
start “path”– -url URL:PORT –a scrypt – – userpass USERNAME.WORKER:PASSWORD
So, using the example details above, you would have produced the following text:
start “C:\cpu-miner-pooler”–url stratum+tcp:// -a scrypt –userpass username.1:x
Save this file with a “.bat” extension; for example: ““.
Once the batch file is saved, double click it to activate the miner program. Your mining pool will most likely have a web-based interface and, within a few minutes, the website should show that your mining worker is active.
Now that you know how to mine with the CPU, let’s have a look at using your GPU.
Setting up your GPU miner
For those that intend to mine with GPUs, or USB mining devices, cgminer is the program to use and can be downloaded from the developer’s website – unless, that is, you’re a Mac user, in which case you will find some unofficial binaries here.
Versions of cgminer following version 3.72 do not support scrypt mining, and support for GPUs was removed in version 3.82. Therefore, the latest version isn’t necessarily the one to download. Instead, seek out the version appropriate for your needs.
Again, in this example, we are making the assumption that you are using the Windows OS. However, if you are using Linux or OS X, the command line arguments (ie: the parameters) are the same. Furthermore, the instructions below once again assume you will be mining a scrypt currency.
Extract the software into a folder that can easily be found, eg: “c:\cgminer\”.
Before going any further, make sure that your graphics drivers are up to date.
Next, press the Windows key together with the “R” key, type in “cmd”, and press “enter”. This will open the command terminal. Use the “cd” command to change the directory to the one housing the cgminer zip file.
Then, type in “–n”. This will list all recognised devices on your PC. If your graphics card is detected, you should be good to go. If not, you’ll have research the steps required to properly set up your specific graphics card.
You will now need your mining pool details, just as with the CPU mining section above:
- The full path of the directory in which the mining program (“ “) is stored (eg: “C:\cpu-miner-pooler”).
- The ‘stratum’ URL of your mining pool server (eg: “stratum+tcp:// “).
- The port number of your mining server (eg: “3333”).
- Your mining pool username (eg: “username”).
- Your worker name or number (eg: “1”).
- Your worker password (eg: “x”).
Now we’ll make a batch file again, in order to start cgminer up with the correct parameters. In this case, the command structure is:
Start “path” cgminer — scrypt -o URL:PORT -u USERNAME.WORKER -p PASSWORD
Start “C:\cgminer\” — scrypt –o stratum+tcp://–userpass username.1:x
Watching your miner
Now the mining software of choice is set up, you will see various statistics scrolling across your command line terminal. If you are using cgminer, you will see more information than you would with cpuminer. In the case of the former, you will see information about the currency and the mining pool, as well as about your mining hardware. If you’re running cpuminer, you will only see references to blocks that your PC has solved; although, it does, at least, show your hashing speed.
Maximising your power
Good news for miners who own PCs with dedicated graphics cards: it is possible to run both cpuminer and cgminer at the same time. To make this possible, add a “– threads n” argument to the minerd command. Here, “n” stands for the number of CPU cores that you wish to employ for mining.
Remember to leave one or two cores free to control your GPUs, though. Setting minerd to use all CPU cores will mean that the CPU will be too busy to send data to the GPU for processing. For example, if you have a quad core CPU, try setting the “–threads” argument to “2” or “3”.
Mining with both GPU and CPU concurrently reveals just how much better GPUs are at mining than the CPU. Compare the hash rates shown in the terminal windows for each of your mining programs and you should see at least a five-times difference in hashing speed.
In 2009, Satoshi Nakamoto launched bitcoin as the world’s first cryptocurrency. The code is open source, which means it can be modified by anyone and freely used for other projects. Many cryptocurrencies have launched with modified versions of this code, with varying levels of success.
Here’s our guide to show you the crucial difference betweenbitcoin and litecoin.
|Coin limit||21 Million||84 Million|
|Mean block time||10 minutes||2.5 minutes|
|Difficulty retarget||2016 block||2016 blocks|
|Block reward details||Halved every 210,000 blocks.||Halved every 840,000 blocks|
|Initial reward||50 BTC||50 LTC|
|Current block reward||25 BTC||50 LTC|
|Created by||Satoshi Nakamoto||Charles Lee|
|Creation date||January 3rd, 2009||October 7th, 2011|
|Bitcoin Statistics||Litecoin Statistics|
Just like bitcoin, litecoin is a crytocurrency that is generated by mining. Litecoin was created in October 2011 by former Google engineer Charles Lee. The motivation behind its creation was to improve upon bitcoin. The key difference for end-users being the 2.5 minute time to generate a block, as opposed to bitcoin’s 10 minutes. Charles Lee nowworks for Coinbase, one of the most popular online bitcoin wallets.
For miners and enthusiasts though, litecoin holds a much more important difference to bitcoin, and that is its different proof of work algorithm. Bitcoin uses the SHA-256 hashing algorithm, which involves calculations that can be greatly accelerated in parallel processing. It is this characteristic that has given rise to the intense race in ASIC technology, and has caused an exponential increase in bitcoin’s difficulty level.
Litecoin, however, uses the scrypt algorithm – originally named as s-crypt, but pronounced as ‘script’. This algorithm incorporates the SHA-256 algorithm, but its calculations are much more serialised than those of SHA-256 in bitcoin. Scrypt favours large amounts of high-speed RAM, rather than raw processing power alone. As a result, scrypt is known as a ‘memory hard problem‘.
The consequences of using scrypt mean that there has not been as much of an ‘arms race’ in litecoin (and other scrypt currencies), because there is (so far) no ASIC technology available for this algorithm. However, this is soon to change, thanks to companies like Alpha Technologies, which is now taking preorders.
To highlight the difference in hashing power, at the time of writing, the total hashing rate of the bitcoin network is over 20,000 Terra Hashes per second, while litecoin is just 95,642 Mega Hashes per second.
For the time being, ‘state of the art’ litecoin mining rigs come in the form of custom PCs fitted with multiple graphics cards (ie: GPUs). These devices can handle the calculations needed for scrypt and have access to blisteringly fast memory built into their own circuit boards.
There was a time when people could use GPU mining for bitcoin, but ASICs have made this method not worth the effort.
The main difference is that litecoin can confirm transactions must faster than bitcoin. The implications of that are as follows:
- Litecoin can handle a higher volume of transactions thanks to its faster block generation. If bitcoin were to try to match this, it would require significant updates to the code that everyone on the bitcoin network is currently running.
- The disadvantage of this higher volume of blocks is that the litecoin blockchain will be proportionately larger than bitcoin’s, with more orphaned blocks.
- The faster block time of litecoin reduces the risk of double spending attacks – this is theoretical in the case of both networks having the same hashing power.
- A merchant who waited for a minimum of two confirmations would only need to wait five minutes, whereas they would have to wait 10 minutes for just one confirmation with bitcoin.
Transaction speed (or faster block time) and confirmation speed are often touted as moot points by many involved in bitcoin, as most merchants would allow zero-confirmation transactions for most purchases. It is necessary to bear in mind that a transaction is instant, it is just confirmed by the network as it propagates.
Are you serious about mining cryptocurrencies? If so, you need to know how to make the best use of your money and equipment. In this guide, we’ll show you how to mine your digital treasure in the most profitable way.
Obviously, the big money is going into costly bitcoin ASICs. If you are already in that position, you probably know how the process works and are intending to mine bitcoin. However, those of you on a more moderate budget are probably looking at building a GPU miner for scrypt currencies, or a buying a small ASIC machine for bitcoin or other SHA-256 currencies. In that case, you have come to the right place.
How do I start?
Choose your currency
The process of mining digital currencies involves solving complex cryptographic puzzles. By doing this, miners are providing ’proof of work’ that is rewarded with digital currency. Broadly speaking, there are two proof-of-work hashing algorithms in use today: SHA-256 and scrypt. Note that there are some lesser-used alternatives, which we will not be looking at in this guide (for example, Primecoin).
The SHA-256 algorithm favours raw processing power. In bitcoin’s very early days, one could mine effectively with the CPUs and GPUs (graphics processing units) that you find in a normal home PC. That time has passed, however, and the difficulty level of bitcoin is so high that specialised processors known as ‘Application Specific Integrated Chips’ (ASICs) are needed to mine it. The use of such powerful processors, along with bitcoin’s exponential increase in difficulty level, have created a technological arms race, which means that even quite recently designed chips can quickly become obsolete.
The scrypt algorithm favours greater amounts of RAM and parallel processing ability, which is why GPU-based rigs are still the way to go. Furthermore, ASICs for scrypt have yet to take off, so the difficulty level of those currencies has not been pushed up as dramatically as has been the case with bitcoin.
The right rig
- DIY mining rig
These can be built from your own PC, with as many graphics cards (ie: GPUs) as you can fit or afford. While some people may use a standard PC case, many use unusual casings, such as beer crates, which allow for increased air flow around the components. A bonus of DIY systems is that you can carry out both CPU and GPU mining at the same time (see our guide to mining altcoin).
ASICs are self-contained units (power adapters not withstanding), which come with a USB and/or Ethernet port, and are usually ready made by manufacturers. ASIC miners are usually more expensive than DIY rigs and are mostly produced in the USA, which means those of us in other parts of the world will have to spend a little extra to get them imported.
Mining requires electricity – lots of electricity. If you are building a DIY rig, you’ll be getting an ATX power supply unit (PSU) anyway, so it’s worth investing in the most efficient supply you can get.
Consider the following two cases, for example: A PSU that is guaranteed to supply 860W and is 93% efficient would actually draw 925W (860W/0.93). By contrast, a 750W power supply that is only 80% efficient would actually draw 937.5 W (750/0.8) – thus using more power, but supplying less.
When building a mining rig, you will need to take account of the power requirements of all the components you are using – especially all those graphics cards. Plus it’s a good idea to provide some excess capacity to deal with unexpected events and provide the potential to overclock your system.
ASICs, on the other hand, can do far more calculations with far less power because they are highly specialised devices. And since they ship with an appropriate power adapter, you won’t have to worry about doing all the maths to find one that is up to the task.
The mining efficiency of different systems can be compared by taking the ratio of the number of hashes it can perform in a second, divided by the power it consumes:
Hashing speed / power consumption = mining efficiency
Check your bills
After the initial expense of your rig, the essential thing you need to know to calculate your ongoing profitability is the cost of your electricity. Check with your provider, or take a look at your last bill. If the power charges add up to more then you earn, it obviously isn’t a good business model.
Pool your efforts
Rather than go it alone, it usually makes more sense to join a pool, where you combine resources with other miners. By joining a pool, you earn a share of the coins mined by all members of the pool and stand a greater chance of solving a block.
Miners earn a share of the rewards if the difficulty level of the blocks they solve is greater than the level set by the pool operator. That level is always somewhere between 1 and the difficulty level of the currency.
Problems to be aware of
Spend to earn
Inevitably, the difficulty level of all currencies increase with time – a fact that will reduce the chances of your equipment earning coins or mining shares. As a result, it is important to start with the best equipment you can afford, in order to mine profitably over the longest period of time.
The volatility of the currency being mined also affects your long-term profitability. If the price suddenly drops, you will be faced with the choice of either selling at a low price or hanging onto your coins until their value increases. In the former case, you would have to keep mining for longer to recoup your expenditure on equipment and electricity.
Whichever way you mine, it’s a computationally intensive operation that creates lots of excess heat. Mining efficiency decreases as temperature increases, so make sure your rig has adequate ventilation and cooling. As mentioned above, this is why some mining rig builders use beer crates rather than PC cases – to maximise airflow around their components. Even a standalone desktop fan can help to keep your kit cool.
When building a DIY mining rig, it doesn’t make sense to save money by buying a cheap PSU. Any instability in the power supply could hit performance, or even cause a system crash that will lead to downtime, so do invest in a high-quality unit.
If your hardware isn’t mining, you are losing money. Here are some ways to minimise downtime:
- Get the best power supply you can afford.
- Consider using an uninterruptible power supply (UPS), so that, if your electricity supply cuts out for a moment, it won’t affect your miner.
- Configure your mining computer to automatically start mining on start-up, so that if the system crashes and reboots, it will automatically start mining again. (This applies to DIY rigs and computers hosting an ASIC.)
- Delivery and customs
We imported a Jalapeno ASIC miner from Butterfly Labs to the UK. The delivery cost £53 ($88), and UK customs charged £46.09 in duty (around $76). These costs are significant, and if you’re importing an item, try to work out beforehand what costs it might incur.
Will you need cables, adapters, etc, for what you are planning to use and/or build?
- Cooling costs
It’s not just the cost of your miner’s power use. What about the electricity of running any extra cooling system, such as fans or air conditioning?
Doing the sums
For assistance with some of the calculations miners need to make, there are several websites that provide profitability calculators. You can input parameters such as equipment cost, hash rate, power consumption, and the current bitcoin price, to see how long it will take to pay back your investment.
As a test, we entered the specifications of two mining systems into the calculators below. For our Scrypt GPU mining rig, we used the system described, and for our SHAS-256 ASIC miner we used the specifications of a Butterfly Labs miner.
With a UK electricity price set at £0.20 per KWh (which equated to $0.33), these are the recommendations and profits that the following sites presented:
(Note that these figures were correct as of January 21st, 2014, and that they are all subject to currency volatility and shifts in difficulty level.)
SHA-256: Freicoin at $1.43 per day
Scrypt: Dogecoin at $31.05 per day
SHA-256: Bitcoin at $1.14 per day
Scrypt: Dogecoin at $39.13 per day
Bitcoin specific calculators:
Bitcoin at $1.20 per day
Bitcoin at $1.42 per day
Hopefully, this gives you an idea of the spread of results across these services, given the same data at the same time.
One of the first questions that anyone interested in mining cryptocurrencies faces is whether to mine solo or join a ‘pool’. There are a multitude of reasons both for and against mining pools. However, if the hash rate distribution across the bitcoin network is anything to go by (and it is) then most miners are opting to join a pool. Here’s what you need to know.
Pros and cons
If you’re deciding whether to join a mining pool or not, it can be helpful to think of it like a lottery syndicate – the pros and cons are exactly the same. Going solo means you won’t have to share the reward, but your odds of getting a reward are significantly decreased. Although a pool has a much larger chance of solving a block and winning the reward, that reward will be split between all the pool members.
Therefore, joining a pool creates a steady stream of income, even if each payment is modest compared to the full block reward (which currently stands at 25 XBTC).
It is important to note that it is important for a mining pool to not exceed over 51% of the hashing power of the network. If a single entity ends up controlling more than 50% of a cryptocurrency network’s computing power, it could – theoretically – wreak havoc on the whole network. In early 2014, many voiced concerns that the GHash.io bitcoin mining pool was approaching this threshold, and miners were urged to leave the pool.
In bitcoin’s case, the current difficulty level is so high that it’s practically impossible for soloists to make a profit mining. Unless, of course, you happen to have a garage full of ASICs sitting in Arctic conditions. If you’re a beginner, joining a mining pool is a great way to reap a small reward over a short period of time. Indeed, pools are a way to encourage small-scale miners to stay involved.
What to mine?
Of course, bitcoin is not the only currency out there – it’s easy to find lists of mining poolsfor your chosen cryptocurrency.
One method of mining that bitcoin facilitates is “merged mining”. This is where blocks solved for bitcoin can be used for other currencies that use the same proof of work algorithm (for example, namecoin anddevcoin). A useful analogy for merged mining is to think of it like entering the same set of numbers into several lotteries.
First-time miners who lack particularly powerful hardware should look at altcoins over bitcoin – especially currencies based on the scrypt algorithm rather than SHA256. This is because the difficulty of bitcoin calculations is far too high for the processors found in regular PCs.
If you’re not sure which currency to mine, there is a pool called ‘Multipool’ which will automatically switch your mining hardware between the most profitable altcoin. Multipool updates every 30 minutes, and over time you’ll see balance grow in multiple altcurrencies. If required, the pool does allow you to fix your hardware on just one altcurrency too.
However, Mark from nut2pools.com said of this type of switching pool: “Loyal coin followers hate them because as soon as the difficulty of a coin drops, the profitability of it rises. Then all the multipools swing round, push the difficulty through the roof in a few hours, then leave again. It leaves the loyal coin followers having to mine the difficulty back down again at very low profitability.”
There are many schemes by which pools can divide payments. Most of which concentrate of the amount of ‘shares’ which a miner has submitted to the pool as ‘proof of work’.
Shares are a tricky concept to grasp. Keep two things in mind: firstly, mining is a process of solving cryptographic puzzles; secondly, mining has a difficulty level. When a miner ‘solves a block’ there is a corresponding difficulty level for the solution. Think of it as a measure of quality. If the difficulty rating of the miner’s solution is above the difficulty level of the entire currency, it is added to that currency’s block chain and coins are rewarded.
Additionally, a mining pool sets a difficulty level between 1 and the currency’s difficulty. If a miner returns a block which scores a difficulty level between the pool’s difficulty level and the currency’s difficulty level, the block is recorded as a ‘share’. There is no use whatsoever for these share blocks, but they are recorded as proof of work to show that miners are trying to solve blocks. They also indicate how much processing power they are contributing to the pool – the better the hardware, the more shares are generated.
The most basic version of dividing payments this way is the ‘pay per share’ (PPS) model. Variations on this puts limits on the rate paid per share; for example, equalised shared maximum pay per share (ESMPPS), or shared maximum pay per share (SMPPS). Pools may or may not prioritise payments for how recently miners have submitted shares: for example, recent shared maximum pay per share (RSMPPS). More examples can be found on the bitcoin wiki.
The other factor to consider is how much the pool will deduct from your mining payments. Typical values range from 1% to 10%. However, some pools do not deduct anything.
Starting to mine with a pool
Having decided which currency to mine and which pool you’ll work for, it’s time to get started. You need to create an account on the pool’s website, which is just like signing up for any other web service. Once you have an account, you’ll need to create a ‘worker’. You can create multiple workers for each piece of mining hardware you’ll use. The default settings on most pools are for workers to be assigned a number as their name, and ‘x’ as their password, but you can change these to whatever you like.
In traditional fiat money systems, governments simply print more money when they need to. But in bitcoin, money isn’t printed at all – it is discovered. Computers around the world ‘mine’ for coins by competing with each other.
How does mining take place?
People are sending bitcoins to each other over the bitcoin network all the time, but unless someone keeps a record of all these transactions, no-one would be able to keep track of who had paid what. The bitcoin network deals with this by collecting all of the transactions made during a set period into a list, called a block. It’s the miners’ job to confirm those transactions, and write them into a general ledger.
Making a hash of it
This general ledger is a long list of blocks, known as the ‘blockchain’. It can be used to explore any transaction made between any bitcoin addresses, at any point on the network. Whenever a new block of transactions is created, it is added to the blockchain, creating an increasingly lengthy list of all the transactions that ever took place on the bitcoin network. A constantly updated copy of the block is given to everyone who participates, so that they know what is going on.
But a general ledger has to be trusted, and all of this is held digitally. How can we be sure that the blockchain stays intact, and is never tampered with? This is where the miners come in.
When a block of transactions is created, miners put it through a process. They take the information in the block, and apply a mathematical formula to it, turning it into something else. That something else is a far shorter, seemingly random sequence of letters and numbers known as a hash. This hash is stored along with the block, at the end of the blockchain at that point in time.
Hashes have some interesting properties. It’s easy to produce a hash from a collection of data like a bitcoin block, but it’s practically impossible to work out what the data was just by looking at the hash. And while it is very easy to produce a hash from a large amount of data, each hash is unique. If you change just one character in a bitcoin block, its hash will change completely.
Miners don’t just use the transactions in a block to generate a hash. Some other pieces of data are used too. One of these pieces of data is the hash of the last block stored in the blockchain.
Because each block’s hash is produced using the hash of the block before it, it becomes a digital version of a wax seal. It confirms that this block – and every block after it – is legitimate, because if you tampered with it, everyone would know.
If you tried to fake a transaction by changing a block that had already been stored in the blockchain, that block’s hash would change. If someone checked the block’s authenticity by running the hashing function on it, they’d find that the hash was different from the one already stored along with that block in the blockchain. The block would be instantly spotted as a fake.
Because each block’s hash is used to help produce the hash of the next block in the chain, tampering with a block would also make the subsequent block’s hash wrong too. That would continue all the way down the chain, throwing everything out of whack.
Competing for coins
So, that’s how miners ‘seal off’ a block. They all compete with each other to do this, using software written specifically to mine blocks. Every time someone successfully creates a hash, they get a reward of 25 bitcoins, the blockchain is updated, and everyone on the network hears about it. That’s the incentive to keep mining, and keep the transactions working.
The problem is that it’s very easy to produce a hash from a collection of data. Computers are really good at this. The bitcoin network has to make it more difficult, otherwise everyone would be hashing hundreds of transaction blocks each second, and all of the bitcoins would be mined in minutes. The bitcoin protocol deliberately makes it more difficult, by introducing something called ‘proof of work’.
The bitcoin protocol won’t just accept any old hash. It demands that a block’s hash has to look a certain way; it must have a certain number of zeroes at the start. There’s no way of telling what a hash is going to look like before you produce it, and as soon as you include a new piece of data in the mix, the hash will be totally different.
Miners aren’t supposed to meddle with the transaction data in a block, but they must change the data they’re using to create a different hash. They do this using another, random piece of data called a ‘nonce’. This is used with the transaction data to create a hash. If the hash doesn’t fit the required format, the nonce is changed, and the whole thing is hashed again. It can take many attempts to find a nonce that works, and all the miners in the network are trying to do it at the same time. That’s how miners earn their bitcoins.
Bitcoin is of interest to law enforcement agencies, tax authorities, and legal regulators, all of which are trying to understand how the cryptocurrency fits into existing frameworks. The legality of your bitcoin activities will depend on who you are, where you live, and what you are doing with it.
Bitcoin has proven to be a contentious issue for regulators and law enforcers, both of which have targeted the digital currency in an attempt to control its use. We are still early on in the game, and many legal authorities are still struggling to understand the cryptocurrency, let alone make laws around it. Amid all this uncertainty, one question stands out: is bitcoin legal?
The answer is, yes, depending on what you’re doing with it.
Read on for our guide to the complex legal landscape surrounding bitcoin. Most of the discussion concerns the US, where many of the legal dramas are currently playing out. Alternatively, you can access our comprehensive Regulation Report for worldwide expert commentary here.
What are the concerns about bitcoin?
Government agencies are increasingly worried about the implications of bitcoin, as it has the ability to be used anonymously, and is therefore a potential instrument for money laundering. In particular, law enforcers seem to be concerned about the decentralized nature of the currency.
As early as April 2012, the FBI published a document highlighting its fears around bitcoin specifically, drawing a distinction between it and centralized digital currencies such as eGold and WebMoney. It voiced concerns that while US-based exchanges are regulated, offshore services may not be, and could be a haven for criminals to use bitcoin for illicit activities without being traced.
Bitcoin was the only form of currency accepted on Silk Road, an anonymous marketplace that was only accessible over the TOR anonymous browsing network, and which was closed by the FBI in October 2013. Silk Road was commonly used to sell goods that are illegal in many countries, including narcotics. This prompted US Senator Charles Schumer to call for the site to be shut down, explicitly linking it to bitcoin, which he called a “surrogate currency”. The US Drug Enforcement Administration seized bitcoins from a US resident for purchasing a controlled substance in June 2013.
Who regulates it?
Regulators will vary on a per-country basis, but you can expect to see national financial regulators interested in bitcoin and other virtual currencies, potentially along with regional regulators at a sub-country level.
In the US, the Financial Crimes Enforcement Network (FinCEN), which is an agency within the US Treasury Department, took the initiative. It published guidelines about the use of virtual currencies. FinCEN’s March 18, 2013 guidance defined the circumstances under which virtual currency users could be categorized as money services businesses (also commonly known as money transmitting businesses or MTBs). MTBs must enforce Anti-Money Laundering (AML) and Know Your Client (KYC) measures, identifying the people that they’re doing business with.
The US Securities and Exchange Commission (SEC) hasn’t issued solid regulations on virtual currencies, but its Office of Investor Education and Advocacy published an investor alert to warn people about fraudulent investment schemes involving bitcoin. In particular, it warned of Ponzi schemes, after charging Texas resident Trendon T Shavers (aka ‘pirateat40’), founder and operator of Bitcoin Savings and Trust, with allegedly raising 700,000 bitcoins by promising investors up to 7% weekly interest.
The SEC case has forced the legislative branch of government to consider bitcoin’s legal status. Shavers had claimed that he could not be prosecuted for securities fraud, as bitcoin wasn’t money. However, Judge Amos Mazzant issued a memorandum arguing that bitcoin can be used as money.
In August 2013, the US Senate wrote to several law enforcement agencies, inquiring about the threats and risks relating to virtual currency. The letters included this one to the Department Of Homeland Security, fretting about the lack of a paper trail for regulators and enforcement agencies to follow for virtual currency transactions. It requested policies and guidance related to the treatment of virtual currencies, and information about any ongoing strategic efforts in the area.
November saw responses from the various agencies. The Department of Homeland Security was the most worried about the criminal threat from illicit use of bitcoin, while the Department of Justice, the Federal Reserve and the Department of Justice all acknowledged the legitimate uses of virtual currencies. The SEC argued that “any interests issued by entities owning virtual currencies or providing returns based on assets such as virtual currencies” were considered securities and thus fell under its remit.
Each US state has their own financial regulators and laws, and each approaches bitcoin differently. California and New York have been particularly aggressive in their pursuit of bitcoin-related organizations, for example, while others, such as New Mexico, South Carolina, and Montana, don’t regulate money transmitting businesses. A list of state approaches to money transmitter laws can be found here.
In May 2013, California’s state financial regulator issued a letter to the Bitcoin Foundation, a nonprofit organization designed to promote bitcoin, warning it that it may be a money transmission business, and threatening people there with potential fines and jail time.
Then, in August 2013, the New York Department of Financial Services issued subpoenas to 22 bitcoin-related companies, although these letters were more conciliatory, asking for a dialogue to develop appropriate regulatory guidelines for the digital currency industry. Since then, New York has acted more positively, with the state’s Superintendent of Financial Services, Benjamin M. Lawsky, announcing that it willaccept applications for digital currency exchanges. Lawsky indicated that these businesses will be regulated under new New York regulation, which he committed to having in place by the end of the second quarter of 2014.
Private sector companies (banks)
Several banks have stopped accounts owned by people operating bitcoin exchanges. Inat least one case, this was because the bank was unhappy that the company involved did not have a money transmitting business (MTB) account.
The US Senate addressed the issue of banking and federal regulation in a set of hearings held in November. The hearings were exploratory in nature and may not lead to legislation, but feedback from agencies included acknowledgements that there were legitimate uses for the coin.
What this means to you
The legality of bitcoin depends on who you are, and what you’re doing with it.
There are three main categories of bitcoin stakeholder. Someone may fall under more than one of these categories, and each category has its own legal considerations.
These are individuals that obtain bitcoins, and either hoard them or spend them. Under the FinCEN guidance, users who simply exchange bitcoins for goods and services are using it legally.
FinCEN: “A person that creates units of this convertible virtual currency and uses it to purchase real or virtual goods and services is a user of the convertible virtual currency and not subject to regulation as a money transmitter.”
According to the FinCEN guidance, people creating bitcoins and exchanging them for fiat currency are not safe.
FinCEN: “By contrast, a person that creates units of convertible virtual currency and sells those units to another person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter.”
Miners seem to fall into this category, which could theoretically make them liable for MTB classification. This is a bone of contention for bitcoin miners, who have asked for clarification. This issue has not to our knowledge been tested in court.
Exchanges are defined as MTBs.
FinCEN: “In addition, a person is an exchanger and a money transmitter if the person accepts such de-centralized convertible virtual currency from one person and transmits it to another person as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency.”
In 2009, the US Internal Revenue Service (IRS) posted information about the tax applications of using virtual currencies inside virtual economies, arguing that taxpayers can receive income from a virtual economy and could be required to report it as taxable income. However, it based this largely on guidance related to bartering, gambling, business, and hobby income.
However, the IRS has not yet posted guidance on ‘open flow’ virtual currencies that can be used outside of virtual economies. In a 27-page report [PDF] published in May 2013, the US General Accounting Office (GAO) called for more guidance from the IRS on this issue.
The IRS responded that its guidance could now be taken to cover virtual currencies as used outside of virtual economies. It added that it was also looking at the potential tax compliance risks posed by anonymous electronic payment systems, and was working with other federal agencies on the topic.
In June 2013, the director of an IRS unit that investigates cyber threats also told theFinancial Times that the use of “cyber-based currency and payment systems” to hide unreported income from the IRS is a threat that it was “vigorously responding to”. And at Senate hearings in November, FinCEN director Jennifer Shasky Calvery confirmed that the IRS would be releasing more guidance on virtual currencies. In short, don’t expect to evade taxes by earning bitcoins instead of fiat currency.
What is the industry doing?
The industry has responded to growing regulator concerns in several ways.
- Several companies created a committee to form a self-regulatory body calledDATA, designed to encourage open conversation with regulators.
- The Bitcoin Foundation formed committees to offer legal guidance, steer policy, and liaise with regulators.
- Exchanges have been attempting to secure MTB licenses at the state and federal levels, and some have avoided doing business with US customers until this is resolved.
Few governments have announced any explicit intention to prevent bitcoin use completely. However, around the end of 2013 and start of 2014 there were a series of warnings and directives from central banks and regulators to varying degrees of severity. They ranged from the simple “be careful, bitcoin is neither regulated nor officially a currency”, to blocks on financial institutions and even raids on bitcoin businesses.
Many claim to be worried about the effect that large-scale bitcoin adoption might have on the stability of the financial system, especially if prices are volatile.
Currently, Iceland, Bolivia, Ecuador, Kyrgyzstan and Vietnam are the only countries that seem to have some level of bitcoin ban in place – see the list below for more details; while others such as Russia and Thailand seemed to have outlawed digital currencies then backtracked.
North America (non-US)
Canada has announced that it will tax bitcoins in two ways. Transactions made for goods or services will be treated under its barter transaction rules, while its “Transactions in Securities” document says that profits made on commodity transactions could be income or capital. It confirmed these rules in November 2013.
In late March 2014, the Canada Revenue Agency (CRA) published a new documentoutlining its position on the taxation of digital currencies, which highlighted out the differences between personal and business activities.
In essence, Canada will view the matter subjectively, on a case by case basis. When authorities deem the activities were undertaken for profit, the taxpayer’s income will be taxed with reference to the taxpayer’s inventory at the end of the year. Barter transactions are allowed, but the CRA states that the value of goods or services obtained by bartering digital currencies must be included into the taxpayer’s income, if business related. Losses through theft or embezzlement may be deductible.
El Banco Central de Bolivia, the central bank of the South American nation, has officially banned any currency or coins not issued or regulated by the government, including bitcoin and a list of other cryptocurrencies including namecoin, peercoin, Quark, primecoin and feathercoin.
Issued on 6th May 2014, the new policy states: “It is illegal to use any kind of currency that is not issued and controlled by a government or an authorized entity.” The bank went on to say that citizens are prohibited from denominating prices in any currency that is not previously approved by its national institutions.
In April 2014, the Receita Federal, Brazil’s tax authority, established how it would treat the holding and usage of bitcoin and other digital currencies. Taking a stance similar to the one announced by the US Internal Revenue Service in March, Brazil is treating digital currencies as financial assets, with the Receita Federal imposing a 15% capital gains tax at the time of sale, however, there are some key differences that have been generally viewed positively by bitcoin users in the country.
Those who sell less coins with a value of less than 35,000 reals (R$), which is almost $16,000, will not have to pay the tax. This means that bitcoin users in Brazil won’t have to calculate capital gains taxes when making small consumer purchases. The Receita Federal is also requiring annual account declarations from those who possess more than R$1,000 in digital currency holdings.
The Superintendencia Financiera de Colombia (SFC) may be close to outlawing bitcoin transactions in the South American country, a newspaper claimed on 20th March 2014. The report said that the SFC, in conjunction with Banco central de Colombia, Colombia’s central bank, and the Ministerio de Hacienda y Crédito Público, the executive body responsible for budgetary concerns, is preparing to issue a document outlining the government’s stance on bitcoin and bitcoin-related activities.
A source connected to the Colombian Ministry of Finance told El Tiempo that the ban may very well focus on bitcoin handling activities, rather than outright purchase by consumers. CoinDesk is monitoring the situation and will update this guide as the story develops.
In July 2014, the National Assembly of Ecuador effectively banned bitcoin and other decentralized digital currencies while, in a novel move, establishing guidelines for the creation of a new, state-run currency. The law gives the government permission to make payments in ‘electronic money’, but digital currencies like bitcoin will now be prohibited
On 12th March 2014, the Bank of Mexico issued its first statementon the issue of cryptocurrencies. The bank warned the public via a statement on its website about the “the inherent risks of acquiring these assets and using them as substitutes for conventional methods of payment”. The warning was generally similar to those issued by many of the world’s central banks in recent months.
However, most notable were potential restrictions for domestic financial institutions, that some reports implied might strangle bitcoin businesses. Translations of the statements suggest that financial institutions regulated in Mexico “are not authorized to use or carry out any operations with [digital currencies]”. Whether that means banks may not deal directly in cryptocurrencies, or may not have relationships with companies that deal in them, is not yet clear.
The EU’s banking regulator, The European Banking Authority (EBA), issued a warning statement on 13th December 2013 warning of investment risk, but focusing mainly on issues of fraud, tax evasion and other crime connected to virtual currency use.
More recently, in July 2014, the EBA published an ‘opinion’ warning financial institutions to stay away from digital currencies until the industry is regulated. In the document, which was addressed to the EU council, European Commission and European Parliament, the EBA set out new requirements for the regulation of digital currencies and also instructed financial institutions not to buy, hold or sell digital currencies until new rules are in place.
The National Bank of Belgium has no intention of intervening in bitcoin business or regulating it, says the Belgium Bitcoin Association. On 16th January 2014, however, the central bank issued a joint warning with the Belgian Financial Services and Markets Authority (FSMA) that digital currencies are not issued by any central authority, and as such are at risk of volatility, fraud, and business non-acceptance.
Bulgaria’s National Revenue Agency (NRA), the government organisation in charge of administering state taxes and social security contributions in the eastern European nation, has issued new taxation guidelines for digital currency. In a post on 2nd April, the NRA indicated that income from the sale of digital currencies such as bitcoin will be treated as income from the sale of financial assets and taxed at a rate of 10%. Effectively, earnings from bitcoin trades will be taxed on the same level as ordinary income and corporate income in Bulgaria.
Long an offshore financial services hub, Cyprus has entered the bitcoin fray with enthusiasm and aims to be a hub for bitcoin business in the EU and surrounding territories. It is also home to the world’s first brick and mortar bitcoin savings institution, Neo(and its payment processing partner Bee). Still, the Central Bank of Cyprus issued a statement on 7th February 2014 warning about bitcoin’s volatility and reminding citizens it is not recognized as legal tender.
So far the Danish authorities have stopped short of regulating digital currencies, although a stern warning was issued in which bitcoin et al. were compared to “glass beads” – a reference presumably to an ancient method of trading baubles of little worth.
More significant is the nation’s stance on the taxation of bitcoin for general transactions. Because it is not considered “real”, physical money, bitcoin is considered a private asset and any gains are tax exempt; similarly, losses are not deductible. However, for companies whose sole business is related to trading or speculating in digital currencies, gains will be taxed. By how much remains to be seen.
Estonia’s central bank has not issued a formal statement on bitcoin but one of its managers wrote to Bloomberg on 31st January 2014 calling bitcoin a “problematic scheme”, warning investors assumed all risks and reminding people that bitcoin businesses have been known to disappear overnight with customers’ money.
In January 2014, bitcoin was classified as a commodity after the Scandinavian country’s central bank declared that it did not meet the definition of a currency.
The French Senate held hearings into bitcoin and digital currencies in mid-January 2014 that were considered mostly investigatory and positive in tone. The focus was mainly on the opportunities presented by the new technology and how existing laws and organizations could be used to catch wrongdoers. Making bitcoin illegal was not an option, according to observers, and France needed to catch up to neighboring countries in its approach.
More recently, on 5th April, the French Ministry of Economy and Finance said that, while bitcoin is not officially recognized by the state, revenues generated from digital currency transactions are subject to taxation.
“All taxpayers are required to declare all their revenues, including those originating from abroad. This said, there is a certain tolerance [from the state authorities] regarding minor and irregular revenues, for instance from occasional sales,” a spokesperson for the French ministry told Le Monde.
Germany is perhaps the most advanced country when it comes to regulating bitcoin and virtual currencies. Although some issues remain unresolved, the German government has exempted bitcoin transactions held for over one year from 25% capital gains tax. It also categorized bitcoin as a form of private money. In early January 2014 the Bundesbank repeated a warning that bitcoin was “not an alternative to national currencies”, and values were “highly speculative”.
Greece, quite remarkably, has also taken time out from its years-long government spending-related financial crisis to warn youabout the dangers of bitcoin.
One of only two countries to have instigated a ban on bitcoin and other digital currencies due to capital controls resulting from the banking crisis of 2008. Personal ownership does not seem to be an issue, rather buying (importing) bitcoins from outside the country is illegal because it constitutes a movement of capital out of the country. Furthermore, selling products or services for cryptocurrencies is also prohibited
The locally created digital currency auroracoin recently made headlines with its ‘Airdrop’ to all Icelandic citizens and is not illegal due to its provenance within the country.
However, Iceland’s Economic and Trade Committee of Parliament recently met to discuss taxation of auroracoin and to see whether it falls within the capital controls that restrict bitcoin. At the same time they warned of the risks of using the altcoin, which they said is not a currency or regulated by the central banking authorities. Frosti Sigurjónsson, Chairman of the committee, even went as far as to say: “There is evidence however that this is a case of [a money] scam and illegal” on his blog.
Lithuania, wedged between the European Union and its largest trading partner, Russia, issued a warning at the end of January and hinted at a ban on non-government currencies, but later tempered the statement by saying new regulation was “under discussion”.
Holland in typically liberal style has tacitly assented to the use of digital currencies by issuing guidelines on their tax status. Logically, bitcoin and other cryptocoins are treated as any other currency for tax purposes.
Slovenia is one of the more permissive governments towards digital currency use, though regulators there issued a statement on 24th December 2013 to remind people that bitcoin is considered neither a currency nor a financial instrument. The country’s Tax Administration and Ministry of Finance also said that bitcoin is subject to income tax like any other non-monetary income, and would be calculated based on the bitcoin-Euro exchange rate at the time of transaction. Selling bitcoin would not be subjected to capital gains tax.
Sweden’s Finansinspektionen financial regulator now considers bitcoin as a means of payment, following guidance issued last year. Exchanges must register with the regulator and meet the requirements faced by other financial institutions.
“The official Russian currency is the ruble. The use of any other monetary instruments or surrogates is forbidden,”announced Russia’s General Prosecutor’s Office in early February 2014. “The anonymous payment systems and crypto-currencies, including bitcoin […] are monetary surrogates. As such, their use by private citizens or legal entities is not allowed.” So, bitcoin and other digital currencies seemed to have been are banned in Russia to the shock of the bitcoin world.
However, on 6th March, Russia seemed to soften its stance in a letter from the central bank to an individual who had asked for clarification. In it they said that a meeting of top Russian financial authorities in February did not result in a bitcoin ban, but rather was devoted to “combating crimes in the sphere of the economy devoted to the use of anonymous payment systems and cryptocurrencies on the territory of Russia”. Furthermore, the goal of the meeting was also to “develop a unified approach to the determination of the legal status of cryptocurrencies”.
The exact status of cryptocurrencies in Russia is still a grey area, however, on 1st August 2014 the Ministry of Finance announced proposals to ban the issuance of bitcoin and any operations involving cryptocurrency. If approved, the ban will likely see those who break the new laws end up in jail.
Despite the unstable political situation in early 2014, Ukraine’s central bank has still managed to issue statements on digital currencies, saying related businesses “must register with the agency and abide by existing laws related to the management of electronic money”.
Meetings with policymakers in the UK in September 2013 suggested that bitcoin-based businesses would not have to register with regulators, at least for the time being, while they consider their regulatory position. For a while, the UK suggested that bitcoins wouldn’t be treated as money, but would instead be classified as single-purpose vouchers, which could carry a value-added tax (sales tax) liability on any bitcoins that are sold.
However, this idea was reversed in guidance issued on 3rd March. Although the UK tax department, HMRC, stepped back from explicitly recognising bitcoin as a currency, its approach effectively treats it like any other form of payment for tax purposes: “In all instances, VAT will be due in the normal way from suppliers of any goods or services sold in exchange for bitcoin or other similar cryptocurrency.”
Most recently, on 6th August 2014, Chancellor George Osborne announced a new initiative that will explore the potential role of cryptocurrencies in Britain’s economy. Osborne said he has commissioned the Treasury to produce a programme of work on cryptocurrencies, examining their potential risks and benefits. The results, due to be published in the Autumn, could pave the way toward a new regulatory framework for cryptocurrencies in Britain.
As a UK Crown dependency, the Isle of Man is self-governing and has also made moves over recent months to set itself up as a regulated but bitcoin-friendly jurisdiction. In July 2014, the island’s Financial Supervision Commission clarified the application of existing regulations on bitcoin, indicating that digital currency businesses will not be subject to a conduct of business or prudential regime by the commission unless they engage in activities regulated under the Financial Services Act of 2008, such as money transmission services. The commission also said it is in the process of drafting a new bill that will provide it with the ability to oversee how digital currency operators comply with AML/CFT legislation.
China: People’s Republic of China
China’s authorities have had arguably the biggest impact on bitcoin adoption and values in the past months. In early December 2013, the People’s Bank of China (PBoC) issued a statementwarning of bitcoin risks and banning financial institutions from engaging in bitcoin business themselves or transferring funds to/from bitcoin exchanges. Another statement just days later also blocked third-party payment processors from dealing with exchanges, and the price of bitcoin worldwide crashed from its record high of over $1200 by about 50%. The moves have had adramatic effect on the market share of large bitcoin exchanges in the country.
In mid-January, a PBoC official claimed there is no move to suppress or discriminate against bitcoin in China, and exchanges have been allowed to remain open for business. There does seem to be an official campaign to limit bitcoin trade to the fringes, however, and China’s state-owned business TV channel broadcasted a documentary the same week full of dire warnings about risks to investors from price volatility.
China: Hong Kong
Hong Kong’s Secretary for Financial Services and the Treasuryissued a warning about risks associated with bitcoin on 9th January 2014. The Special Administrative Region (SAR) of China and financial hub has remained otherwise hands-off in its approach to bitcoin, saying it does not pose a risk to the financial system if it is not widely adopted.
Indonesia’s central bank, Bank Indonesia, issued a warning on 16th January 2014 that bitcoin was not regarded as a currency and accepting it as payment might even break national currency laws. No subsequent action against exchange businesses has been taken as yet, however.
India’s central bank is said to be “watching” bitcoin. In a series of dramatic moves, the Reserve Bank of India (RBI) issued a warning about bitcoin in late December 2013, which was followed almost immediately by exchanges choosing to suspend operations. One exchange had its premises raided and another was paid a “friendly” visit by tax officials to investigate how digital currencies could be managed and taxed. Some exchanges have since re-opened for business.
At present there are no laws covering cryptocurrencies in the country. However, since the collapse of bitcoin exchange Mt. Gox and the attention that garnered from the international media, Japan seems to have been pressurised into taking some action.
Initially it appealed for a coordinated effort from the international community to agree on regulation. More recently, Japan’s ruling party, the Liberal Democratic Party (LDP) has launched an committee to investigate cryptocurrencies, and issued a statement saying it is “not a currency, but taxable”. Currently the situation seems to be that bitcoin will be treated as a good and is subject to taxation if transactions fulfil standing tax requirements. Gains on exchange rates are taxable too.
The government has also blocked related banks from “brokering bitcoin transactions or opening accounts holding the virtual unit”. Exactly what constitutes a ‘bitcoin account’ remains unknown, but it presumably refers to one with a known bitcoin service likeor Coinbase.
The Japanese government is, however, generally curious about bitcoin and will not make any further statements on the matter until it has discussed matters with local bitcoin interests, a government representative has said.
The National Bank of the Kyrgyz Republic, the central bank of the Central Asian nation, has said that the use of bitcoin and other digital currencies as a form of payment is currently illegal under national law. Issued this July, the notice states that the only legal tender in Kyrgyzstan is the national currency, the som (KGS), and that as such, any use of bitcoin for payment violates this policy.
Malaysia’s central bank, Bank Negara Malaysia (BNM), issued one of the shortest statements of its kind on 4th January, cautioning people to be careful when investing in bitcoin but otherwise saying simply, “The Central Bank does not regulate the operations of bitcoin”.
Singapore is another major international financial services hub and appears to be one of the world’s most permissive environments for bitcoin. The Monetary Authority of Singapore has stated it “will not interfere” with bitcoin business, despite an earlier warning in September 2013 of the risks. In mid-January 2014 Singapore’s taxation authority, the Inland Revenue Authority of Singapore (IRAS) sent a statement to local brokerage Coin Republic with details on how bitcoin business would be taxed.
Bitcoin will be treated not as a currency, but as either a good or asset, said IRAS. As a good it would be subject to GST (VAT or sales tax) when traded to and from local currency by Singapore-resident businesses and goods purchased with bitcoin would also be subject to sales tax. As an investment asset, bitcoin would not be taxed as Singapore does not have a capital gains tax.
Most recently, on March 13th 2014, MAS announced it will regulate virtual currency exchanges and ATMs, in order to address potential money laundering and terrorist financing risks. Such intermediaries will have to verify the identities of their customers and report any suspicious transactions.
Taiwan (Republic of China)
The Financial Supervisory Commission of the Republic of China and the Central Bank of the ROC issued a joint statement at the very beginning of 2014 warning against bitcoin use in Taiwan. Regulators there have also said they will block any attempt to install Robocoin bitcoin ATMs.
On March 18th 2014, after flip-flopping on the issue for the last nine months, the Bank of Thailand issued its first clear statement on bitcoin, warning consumers that it is not a currency and that its use comes with inherent risks. The statement bears similarities to others issued from central banks around the world, but could be considered an improvement in the legal status of bitcoin users, as Thailand was widely considered to have implemented a bitcoin ban in the summer of 2013.
One issue in Thailand is not so much the legality of owning bitcoin, but whether exchanges qualify for a licence to trade in cryptocurrencies, which could be considered a foreign exchange activity and therefore illegal. Hopefully, the legal status of exchanges in the light of the new statement will become clear in coming days.
The second country in this list (and the world) to have banned bitcoin: Vietnam’s central bank forbade financial institutions from using digital currencies as a means of payment or from offering services in exchange for them back in February 2014. The country had previously warned against their use, stating that the government and State Bank did not recognize bitcoin as a legitimate method of payment.
All that considered, some small bitcoin businesses are still plying their trade in the Southeast Asian country and a bitcoin conference is to be held there in May.
The Israeli Tax Authority was said to be considering a tax on bitcoin, but no further statements have been made at the time of writing. The Bank of Israel (BoI) and the Israeli Ministry of Finance issued a joint statement in February 2014 warning of investment risks as well as the dangers digital currencies posed as vehicles for fraud, money laundering and terror financing. However, the Israel Bar Association ruled in August 2013 that bitcoin “is an appropriate form of payment for attorneys” and authorized its members to accept it.
The Central Bank of Jordan has also issued a similar warning of digital currencies’ unregulated status in February 2014 and has prohibited banks, financial companies, payment processors and currency exchangers from dealing with them, particularly bitcoin.
The country’s central bank, the Bank of Lebanon, issued a warningstatement on 2nd January 2014 saying that bitcoin did not offer consumer protections, had a volatile price and was often used in criminal transactions. It advised people not to use digital currencies.
Both the Governor and Assistant Governor at the Reserve Bank of New Zealand (RBNZ) issued personal warnings in mid-December 2013, warning of risks associated with volatility, but also commenting that the technology was “interesting”.
While the Governor of the Reserve Bank of Australia has previously warned of “speculative excesses”, the Australian Tax Office (ATO) has now provided businesses with guidelines on how it intends to deal with bitcoin, stating that income and profits derived from bitcoin transactions are taxable.
In a letter to an individual, the ATO said that transferring bitcoins to a private company in return for shares would count as income, and that transferring bitcoins to another party would be subject to Goods and Services Tax (GST). Bitcoin profits would also be subject to capital gains tax, it said.
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One issue holding bitcoin back from wider adoption is the lack of businesses that accept the digital currency as payment. This is a chicken-and-egg problem. If more businesses had the ability to accept bitcoin, it might encourage consumers to start obtaining and spending it, and vice versa.
With this in mind, here is our guide to accepting bitcoin in a physical store.
The easiest way to accept bitcoin payments is in-person, simply by getting your customer to send the correct amount of bitcoin (BTC) to your digital wallet. This is similar to thinking of it as a cash-in-hand payment.
This can be done via many smartphone apps, such as the Bitcoin Wallet app by Andreas Schildbach, on Android. There are also options available on the Windows Phone app store for users of that OS.
Some months ago, Apple removed all bitcoin wallet apps from its App Store. However, on 2nd June, the company rescinded this policy, once again paving the way for wallet apps on iOS devices. These are already starting to appear, with Blockchain,Coinbase and others apps now available. We can expect many more to arrive in coming months too.
To find out more about bitcoin transactions, see our detailed guide.
Another alternative is CoinBox which is specifically designed for merchants wanting a straightforward option to receive payments. In these scenarios, the merchant enters the price of an item or service into the phone, which then presents a QR code containing the amount to be paid and the address the funds are sent to. The customer scans the QR code with their bitcoin wallet app and the payment is sent.
All of these simple systems are ideal for small businesses testing bitcoin acceptance or for those doing odd-jobs for small amounts. Businesses which are larger in scale will likely look into a dedicated solution that fits in with their existing POS systems.
Merchant bitcoin point-of-sale (POS) solutions
There is also a growing number of commerce-specific options that aim to streamline the process of taking bitcoin payments. The following services offer a variety of POS solutions for merchants, both online and off.
BIPS, short for the Bitcoin Internet Payment System, is a payment processor that allows merchants from all over the world to buy and sell bitcoin, and accept payments in bitcoin too. For bricks-and-mortar retail stores, BIPS offers a point of sale app for Android. BIPS also gives you the ability to store and archive invoices.
For integrating with your website, there are plugins to interface with e-commerce options, such as BigCommerce, WooCommerce, Shopify, and others. There is also API access for those coding their own solutions.
CoinKite is a new startup that offers a bitcoin payment terminal looking exactly like the over-the-counter chip-and-PIN terminals we are so used to using in stores today. This handset reads a bitcoin-based debit card, also offered by CoinKite. The handsets can also serve as a bitcoin and litecoin ATM, as well as offer the option to print QR codes for customers to scan with their smartphone apps.
Coinbase is another payment processor that provides a point of sale app (Android) for bricks-and-mortar retailers. While it currently only supports US bank accounts as a funding source, it offers extensive e-commerce support. Not only does it offer an HTML code segment for easily inserting payment buttons into your website, it also provides plugins for WordPress, WooCommerce, Megento, and ZenCart.
BitPay is an international payments processor for businesses and charities. It is integrated into the SoftTouch POS system for bricks-and-mortar retail stores. However,BitPay has an API which could be implemented into any other POS system with some coding work. BitPay has various tariffs that merchants can subscribe to, enabling features such as using the service on a custom domain (for online stores), exporting transactions to QuickBooks, etc.
Blockchain have also produced a merchant app for Android devices. Blockchain Merchant promises instant transactions, 0% fees on payments and it has multiple linguistic versions for use around the world.
As mentioned in our recent report: “Revel Systems offers a range of POS solutions for quick-service restaurants, self-service kiosks, grocery stores and retail outlets, among other merchants. POS packages start at $3,000 plus a monthly fee for an iPad, cash drawer and scanner.” It was recently announced that Revel will also include bitcoin as a method of payment in its POS software.
Germany-based startup BitXatm has announced the arrival of its Sumo Pro – a cryptocurrency ATM with a POS (point of sale) function that will appeal to merchants seeking to easily accept payments from customers in digital currencies.
Costing €2,900 (around $3,993), the stand-alone machine offers a generous 17-inch touchscreen and has the ability to accept any fiat currency. Additionally, it can accept or dispense any digital currency, according to the company’s website.
California-based online payment processor PayStand provides US-based websites and mobile applications another way to accept payments such e-checks, credit cards and bitcoin. Paystand have recieved $1m in investment as part of its initial seed-funding round.
Founded in 2009, PayStand aims to be a multi-payment gateway that eliminates merchant transaction fees, in part by supporting digital currency acceptance.
Coin of Sale
A new bitcoin POS system, Coin of Sale, is trying to make it easier for merchants to accept bitcoin payments for their goods and services.
The merchant must simply enter the amount of money that needs to be charged and the app will automatically generate a QR code for it. The customer then scans this QR code to complete the payment.
XBTerminal provides a bitcoin POS device that allows the merchant’s customers to pay from any mobile bitcoin wallet by NFC or QR code. Payment from offline mobile devices is supported by bluetooth. Payments take place through the company’s platform and, if desired, bitcoin can be converted instantly to fiat currency at the time of sale.
The company also provides web apps and an online interface for its payments solution for those that wish to invest in third-party hardware.
With bitcoin, it is possible to forego the fees of using a payment processor or provider, and simply integrate payments into your own custom system. Those with a technical background have achieved this, such as Stephen Early, who integrated bitcoin payments into the POS system of his UK pubs single-handedly.
Whether you have an online or a bricks-and-mortar store, if you accept bitcoin, you need to publicize the fact. You can find a ‘bitcoin accepted here’ sign at the bitcoin wiki.
Additionally, Coco Mats ’n More offers bitcoin-logoed doormats and ‘Bitcoin Accepted Here’ mats for merchants wanting to advertise the cryptocurrency as a payment option.