A:

The digital currency known as bitcoin was created in 2009 by a person called Satoshi Nakamoto, but whose true identity has never been established. It is legal to use bitcoin in the United States, and payments are subject to the same taxes and reporting requirements as any other currency.

There is no physical bitcoin currency the way there is a dollar, euro or pound. It exists only on the Internet, usually in a digital wallet, which is software that stores relevant information such as the private security key that enables transactions. Ledgers known as blockchains are used to keep track of the existence of bitcoin. It can be given directly to or received from anyone who has a bitcoin address via so-called peer-to-peer transactions. It is also traded on various exchanges around the world, which is how its value is established.

Legal and Regulatory Issues

Bitcoin exists in a deregulated marketplace; there is no centralized issuing authority and no way to track back to the company or individual who created the bitcoin. There is no personal information required to open a bitcoin account or to make a payment from an account as there is with a bank account. There is no oversight designed to ensure the information on the ledger is true and correct.

The Mt. Gox bankruptcy in July 2014 brought to the forefront the risk inherent in the system. Roughly $500 million worth of bitcoin listed on the company's ledgers did not exist. In addition to the money that account holders lost, the blow to confidence in the currency drove its global valuation down by $3 billion in a matter of weeks. The system had been established to eliminate the risk of involving third parties in transactions, but the bankruptcy highlighted the risks that exist in peer-to-peer transactions.

Bitcoin payments in the U.S. are subject to the same anti-money laundering regulations that apply to transactions in traditional currencies, and to payments by banks and other financial institutions. However, the anonymity of these transactions makes it far easier to flout the rules. There are concerns, voiced by former Federal Reserve Chairman Ben Bernanke, that terrorists may use bitcoin because of its anonymity. Drug traffickers are known to use it, with the best-known example being the Silk Road market. This was a section of the so-called dark Web where users could buy illicit drugs; all transactions on the Silk Road were done via bitcoin. It was eventually shut down by the FBI in October 2013, and its founder, Ross William Ulbricht, is serving multiple life sentences. However, numerous other dark Web bitcoin-based markets have reportedly taken its place.

International Acceptance

Bitcoin can be transferred from one country to another without limitation. However, the exchange rate against other currencies can be very volatile. This is partly because the price is often driven by speculation, but also because it is a fairly small market compared with other currencies.

Some countries explicitly permit the use of bitcoin, including Canada and Australia. It is prohibited in Iceland, which has had strict capital controls since the collapse of its banks during the 2008 financial crisis. China allows private individuals to hold and trade bitcoin, but participation by banks and other financial institutions is prohibited. The European Union does not have an overall position but may become restrictive in the wake of the November 2015 terror attacks in Paris.

RELATED FAQS
  1. What are the advantages of paying with Bitcoin?

    Learn how payments made with Bitcoins offer certain advantages over standard currency, including user anonymity, no taxation ... Read Answer >>
  2. What does a block chain record in a bitcoin exchange transaction?

    Read about the bitcoin blockchain, a public ledger shared among all bitcoin users that records the information of every single ... Read Answer >>
  3. How does a block chain prevent double-spending of Bitcoins?

    Find out how double-spending is prevented in the Bitcoin server and how transactions are posted and verified on the Bitcoin ... Read Answer >>
  4. How is a block chain network useful for trading goods and assets in virtual currencies?

    Find out how blockchain technology works and why it is so crucial for maintaining trading networks for virtual currencies ... Read Answer >>
  5. Will M1 ever become obsolete?

    Learn why the M1 money supply may evolve and transform into different mediums but will continue to remain in existence for ... Read Answer >>
  6. What methods are used to launder money?

    Learn about the methods that criminals use when they are looking to launder money. Many different methods are used, and they ... Read Answer >>
Related Articles
  1. Tech

    Countries Where Bitcoin Is Legal & Illegal (DISH, OTSK)

    Although bitcoin has been in existence for five years, most countries still do not have consistent laws regulating the cryptocurrency. However, a few countries have banned bitcoin altogether.
  2. Tech

    The Rise And Fall And Rise Of Bitcoin

    A look at the reasons behind the recent spectacular surge in bitcoin prices.
  3. Tech

    What Bitcoin Regulations Look Like Around The World

    Bitcoin is still so new that countries are struggling to make legislation catch up with technology. Some nations are more open to virtual currency than others.
  4. Tech

    Bitcoin Innovations And Obstacles

    Investopedia explains the development of the Bitcoin digital currency system and the risks associated with using and investing in it.
  5. Tech

    How Bitcoin Can Change The World

    Bitcoin has the potential to not only create savings for consumer, but also to transform global transactions.
  6. Tech

    Bitcoin's Price History

    Read about the volatility in the price of Bitcoin. Learn how the currency has seen major spikes and crashes, as well as differences in prices across exchanges.
  7. Tech

    If You Had Purchased $100 of Bitcoins in 2011

    Learn how an investment of $100 in bitcoin in 2011 would have performed over the years, and find out what your purchasing power would have been for each year.
  8. Tech

    Benefits & Risks of Trading Forex with Bitcoin

    Want to trade forex using bitcoins? Don’t jump on the bandwagon until you compare the risks to the benefits.
  9. Tech

    Top 6 Books to Learn About Bitcoin

    Bitcoin, which may be the future of money, is a digital currency with over $9 billion in circulation. Here are six books to learn more about bitcoin.
  10. Tech

    America Launches Its First Bitcoin ATMs : Q&A With Liberty Teller Co-Founder

    Investopedia interviewed one of the co-founders of Liberty Teller, a start-up company that launched the U.S.'s first Bitcoin ATMs.
RELATED TERMS
  1. Bitcoin

    Bitcoin is a digital or virtual currency that uses peer-to-peer ...
  2. Digital Copy

    A digital copy is a duplicate record of every Bitcoin transaction ...
  3. Mt. Gox

    One of the world's leading Bitcoin exchanges, launched in July ...
  4. Bitcoin Wallet

    A Bitcoin wallet is a software program where Bitcoins are stored. ...
  5. Silk Road

    A digital platform that was popular for hosting money laundering ...
  6. Bitomat

    A Polish-based bitcoin exchange. Bitomat was the first Bitcoin ...
Hot Definitions
  1. Five Cs Of Credit

    A method used by lenders to determine the credit worthiness of potential borrowers. The system weighs five characteristics ...
  2. Straddle

    An options strategy in which the investor holds a position in both a call and put with the same strike price and expiration ...
  3. Trickle-Down Theory

    An economic idea which states that decreasing marginal and capital gains tax rates - especially for corporations, investors ...
  4. North American Free Trade Agreement - NAFTA

    A regulation implemented on Jan. 1, 1994, that eventually eliminated tariffs to encourage economic activity between the United ...
  5. Agency Theory

    A supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving ...
  6. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations ...
Trading Center