One of the best things about bitcoin – and one of the key drivers behind its sharp increase in popularity – is the supposed lack of regulation that surrounds the digital currency. While this is in some ways true – there is no central organisation that monitors and regulates bitcoin – there are already elements of both internal and external regulation that the vast majority of the bitcoin community consider sufficient.
Bitcoin, by nature, is self-regulating. We talked about this a little earlier in this educational course, when addressing the technical aspects of bitcoin mining. When it bitcoin transaction takes place, its hash is created from the hash of the previous block in the block chain. This means that we get a sort of digital confirmation that the transaction was legitimate. How does this work? Well, if anybody tried to fake the transaction using an altered block that currently exists in the book chain, that block’s hash would also alter. The bitcoin community regularly runs hashing functions on blocks that are already stored in the block chain, and so it is highly likely that any such tampering would flag up very quickly. Even without the community running these hashing functions, if the blog is changed earlier in the block chain them it would alter the hash of the next block (will not alter but render it incorrect). This would continue right down the chain until it was revealed that the most recent block.
As far as how bitcoin is perceived in the financial world, the majority of nations that have drafted rules and regulations view bitcoin as a financial instrument similar to gold or stocks. If an individual holds bitcoin and the value of that bitcoin increases, they must pay capital gains tax on the profits they derive from the increase. Conversely, if the value of their bitcoin decreases they can write off the losses when accounting for them tax purposes.
It is external regulation that is currently grabbing all the headlines in the bitcoin space. Some governments are pushing for tighter rules and regulations that will make it more difficult to obtain, store and spend bitcoin’s. As people expect, the wider bitcoin community is very much against the sorts of regulations, as they feel it would inhibit the organic growth of bitcoin as a viable alternative to traditional fiat currencies.
In order to stay abreast of the ever-changing bitcoin regulation landscape, be sure to check out our regulatory news section here.