Chris Grundy is a self-confessed bitcoin obsessive and avid tech fan. He works for bitcoin lending platform Bitbond and has written for a variety of online publications. In this article, he speaks to a number of European bitcoin companies about why the future of cryptocurrency and blockchain technology could lie in their home continent, not the US.
Innovation is the primary distinction between leaders and followers. It represents disruption and a challenge to our way of life.
Bitcoin is an important innovation, and it needs progressive legislation to unlock its full potential. Clear and progressive legislative guidance will give aspiring bitcoin entrepreneurs the confidence they need to find new use cases and bring bitcoin to the masses.
Despite this, bitcoin regulation in the US remains unfriendly.
Action in the US
Released in April, the deadline for BitLicence applications passed on 8th August 2015. The result has been 22 applications (confirmed so far) and 15 bitcoin companies ceasing their operations in New York State. Poloniex, BitFinex and Kraken are just some of the important players that have left, with BTC Guid deciding to shut down completely.
Only a few hours drive away, Connecticut has passed questionable bitcoin legislation, giving individual state regulators the ability to deny or accept applications for a money transmission licence by an otherwise qualified applicant, if digital currencies are involved.
Additionally, in March 2014, the Texas State Securities Board served a cease and desist letter to Balanced Energy LLC, an oil and gas exploration company. The company’s acceptance of bitcoin as payment method was regarded as such a risk to investors, that it was shut down.
On the West Coast, a bill has been proposed in California,which would result in a $5,000 non-refundable registration fee for any digital currency business. This bill comes with no guarantees, from banks or legislators.
For small, un-established innovators, the fee could make the difference between getting into business or not.
“The barrier of entry for newcomers to financial services is too high.”
Thus, Europe is becoming more attractive for bitcoin entrepreneurs.
Why bitcoin needs progressive legislation
A recent article on CoinDesk by Jean-Louis Schlitz described Luxembourg’s approach to bitcoin legislation. He explained how the Commission de Surveillance du Secteur Financier (CSSF), has provided bitcoin companies with “the basic regulatory recipe for success”.
By doing so, the CSSF has provided legislative clarity and given entrepreneurs the basic principles they need to run their business with confidence.
Luxembourg is by no means alone in Europe for providing actionable legislative frameworks for bitcoin companies.
German financial regulator BaFin confirmed in 2013 that it classified bitcoin as a “financial instrument”, which gave companies operating in the space a better idea of where they stood in regards to the law.
Kaja Ribnikar, executive assistant at Bitstamp, said her company has had positive experiences with European regulators, adding:
“It goes without saying that they are open for dialogue, they are receptive and have a more balanced view on bitcoin. It is evident that the US is a much tougher environment to run a bitcoin business.”
The prevailing regulatory insecurity and the necessary legal bills incumbent in the US made entrepreneurs wary even prior to the BitLicence.
Henrik Hjelte, co-founder of ChromaWay, a Stockholm-based open-source coloured coins wallet, explained his company was close to moving to the US around a year ago. However, the thought of expensive legal bills “scared” the team, so it decided to settle in Europe instead. “So far we have not regretted it,” he added.
LedgerWallet, a provider of smartcard security for bitcoins, is based in France and manages to largely sidestep regulation because of the nature of the service it provides. However, CEO Eric Larchevêque believes that, by being in Europe (and especially France), the company enjoys “major benefits”.
“We … have access to a large range of state-sponsored grants, helping us fund R&D or develop production facilities,” he added.
The US’s resilience to progressive bitcoin legislation is puzzling, considering the tax and revenue implications. Some 77% of all bitcoin currency conversions are denominated in US dollar, yet the US does not officially consider bitcoin a currency.
In early 2014, the IRS ruled bitcoin must be treated as property for tax purposes, yet the federal judge presiding over the Silk Road case, as well as Judge Frank Fletcher, have ruled that bitcoin should be treated as a currency.
Impartial observers point towards the willingness of European governments to see bitcoin as an opportunity rather than a threat. In 2013, the United Kingdom issued a Revenue & Customs Brief, outlining levied taxes for bitcoin-generated income.
Additionally, Spain’s tax office, Ministerio de Hacienda, confirmed in April that bitcoin is exempt from value-added tax (VAT). Following this decision, the the Advocate General of the European Court of Justice, said digital currencies like bitcoin should be exempt from VAT.
ChromaWay’s Hjelte welcomed these regulations, stating: “The most important thing for innovation here is the legal aspects. It is up to our governments to stimulate innovation by being responsive, fast, cheap.”
Europe as the center of bitcoin
Despite these positive developments in Europe, media coverage has been thin on the ground. The waves European startups are making are often neglected for their US counterparts. With only 25% of the bitcoin network located on European soil, you might be forgiven for putting America first.
However, Europe has been instrumental in shaping bitcoin. Bitstamp, for example, comes from the first generation of bitcoin exchanges. It has enforced full KYC processes and implemented hot wallet multisig technology.
Other Europe-based companies in the space include bitcoin wallet providers Trezor and LedgerWallet; Bitbond and coloured coin creator ChromaWay, which is implementing an open-source protocol for creating digital assets on the bitcoin blockchain.
Additionally, Berlin-based SatoshiPay, an open transaction-focused nanopayments provider, enables the payment of “thousands, hundreds or even single satoshis”. The company has also built a cross-website content payment mechanism that works without the user having to sign up or download.
Bitcoin is disruption. Bitcoin is innovation. Bitcoin is truly global. Its success will be based on the use cases found and invented for it. In order for innovation to take place, progressive legislation is required.
Bitcoin needs governments to see its potential and let it grow at its own pace.
As Bitstamp’s Kaja Ribnikar said, regulators in Europe have realised that clamping down on bitcoin would mean “killing a very powerful and productive ecosystem”.
Many entrepreneurs point towards the incomparable level of venture capital available in the US, as a palliative for the unfriendly legislation. As Meinhard Benn, CEO of SatoshiPay, has stated, however, US legislation “gives advantage to well-funded companies, which in turn dampens innovation”.
What we should take away from this is that progressive legislation can open the door to innovation. By providing a legal framework, many European countries are giving bitcoin entrepreneurs the confidence they need to create and find new use cases for bitcoin and the blockchain.
Europe image via Shutterstock