Can the Government Take Your Bitcoins?
Reading the words can be chilling for Americans. On April 5, 1933, the government confiscated the gold of American citizens. It didn’t even require an extensive debate or an act of Congress. This action was taken under an executive order, President Franklin Roosevelt’s infamous Executive Order 6102.
The purpose of the order was clear from its name, “Requiring Gold Coin, Gold Bullion and Gold Certificates to Be Delivered to the Government.”
The words were also clear. “I, Franklin D. Roosevelt, President of the United States of America, do declare that said national emergency still continues to exist and pursuant to said section do hereby prohibit the hoarding of gold coin, gold bullion, and gold certificates within the continental United States by individuals, partnerships, associations and corporations…”
Citizens were required to turn over all gold to banks or government offices by May 1, just a few weeks after the order was issued. Violations, or the possession of gold, were subject to finds of up to $10,000 and up to ten years in prison.
Individuals were paid for their gold at the market price of $20.67 an ounce, equivalent to $398.03 in 2017 dollars.
Could It Happen Again?
Of course, the confiscation of gold happened more than eighty years ago. It seems unlikely that the government would repeat that process today. But, it is reasonable to consider whether or not the United States or other governments could confiscate bitcoins or other cryptocurrencies.
So far, several countries have threatened to regulate cryptocurrencies.
South Korea has been in the headlines with proposed regulations and rumors about the rules have sparked several bouts of selling in the global market. The country currently has no bitcoin regulation. But the government recently announced plans to deal with digital currencies including bitcoin and ether.
In August, a lawmaker introduced an amendment to the Electronic Financial Transaction Act that provides a regulatory framework for digital currencies. It outlines requirements and prohibited activities of anyone and entities dealing with digital currencies.
While bitcoin is not legalized, its use as a method of foreign exchange transfer for small amounts is. Financial technology companies in the country obtain a permit allowing them to legally offer Bitcoin international transfer services for small sums.
However, in a recent court case, traders received some good news that the coins cannot be confiscated. The court ruling said, “It is not appropriate to confiscate bitcoins because they are in the form of electronic files without physical entities, unlike cash…Virtual currency can not assume an objective standard value.”
In addition, the court continued, “it is difficult to calculate the value of the virtual currency even if it should be added. In some cases, even if virtual money is recognized as a criminal profit, it means that it should be calculated by calculating the corresponding amount instead of confiscation,” the publication conveyed the court’s explanation.
Regulation in the US
Obviously, a court ruling in South Korea is not binding on courts in the US. And, the US federal system adds a level of complexity to potential regulation.
The federal government has not yet claimed the right to regulate cryptocurrencies exclusively. The only concrete statements made about cryptocurrency from federal entities concern how people must report their profits (capital gains to the IRS), and how they’re taxed (as property).
In other words, the federal government, for now, is simply concerned about getting tax revenue.
Several states have jumped into the void and so far, New York, Arizona, Maine, Nevada, Vermont, and others have introduced bills to their state senates, mostly dealing with the acceptable use of blockchain ledgers and smart contracts for record keeping and other tasks.
The Securities and Exchange Commission (SEC) could also regulate cryptocurrencies. The agency has already reviewed requests to consider approving exchange traded funds (ETFs) based on cryptos. No approval has been granted and the SEC, in fact, has been asking important questions.
Specifically, in a recent letter, the SEC asked:
- What steps would funds investing in cryptocurrencies or cryptocurrency-related products take to assure that they would have sufficiently liquid assets to meet redemptions daily?
- How would funds classify the liquidity of cryptocurrency and cryptocurrency-related products for purposes of the new fund liquidity rule, rule 22e-4? For example, would any of these products be classified as other than illiquid under the rule?
- If so, why?
- How would funds take into account the trading history, price volatility and trading volume of cryptocurrency futures contracts, and would funds be able to conduct a meaningful market depth analysis in light of these factors?
- Similarly, given the fragmentation and volatility in the cryptocurrency markets, would funds need to assume an unusually sizable potential daily redemption amount in light of the potential for steep market declines in the value of underlying assets?
These are important questions and in many ways should offer investors some level of assurance that the government would not consider confiscating or outlawing cryptocurrencies at some point.
This Times Is Different
As we all know, it’s not 1933 anymore. If the current president were to issue an executive order like the one Roosevelt signed, it would be challenged in court. Experts could argue over the likelihood of the success of the challenge.
But, the challenge itself would at the very least delay any government takeover of a cryptocurrency.
It is also to remember that markets have evolved since 1933 and were truly within a global marketplace. That means if the government moved to confiscate a cryptocurrency, traders could most likely obtain market value for their investments or even transfer the security to a location where trading was legal.
Short of confiscation, there are other steps the government could take.
In Germany, for example, bitcoin is considered a “unit of account” and its citizens are free to trade it as they wish. However, it’s also taxable and must incur Value Added Tax (VAT) when traded with euros.
Taxes could be imposed in a variety of ways and at a variety of levels. That could be the gravest threat to bitcoin trading.
After all, “the power to tax is the power to destroy,” Chief Justice of the Supreme Court John Marshall wrote in an 1819 case that was later cited by Chief Justice John Roberts in a more recent case.
It is the power to tax that could harm cryptocurrencies rather than the threat of government confiscation. And, taxes should be an area of concern for all traders.
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