What are the legal processes that someone would have to go through in order to get a Bitcoin exchange operational?

One of the main perceived difficulties in getting started with Bitcoin is obtaining some in the first place.

Naturally, for an exchange to be accepted into the mainstream it needs to be a recognised and approved legal entity within the country it is operating in.

So my question is this - what are the legal processes that someone would have to go through in order to get a Bitcoin exchange operational?

If possible, it would be useful to have each answer target a particular country with suitable edits to become a solid reference.

Gary Rowe

Posted 2011-09-01T08:12:13.500

Reputation: 7 175

Interesting update to this open question: https://bitcointalk.org/index.php?topic=49862.0

– Gary Rowe – 2011-10-26T12:49:04.047

+1, despite disagreeing with the premise "The more exchanges there are worldwide then the easier this becomes for people" – o0'. – 2012-02-08T17:24:53.113

sorry for spamming a question of mine, but I think it's related enough to be worth a mention here: http://bitcoin.stackexchange.com/questions/2783/do-you-have-to-pay-taxes-on-bitcoin-revenues

– o0'. – 2012-02-08T17:29:34.463

I started a discussion on Meta to try to decide whether questions like this should be specific for a country or not. http://meta.bitcoin.stackexchange.com/questions/47/questions-with-different-answers-depending-on-country-region

– D.H. - bitcoin.se – 2011-09-01T17:51:08.327

@Lohoris I like the referential links but prefer a friendly link like this Do you have to pay taxes on Bitcoin revenues?

– goodguys_activate – 2013-02-01T20:29:22.233

@makerofthings7 how to do that, i.e. which syntax? – o0'. – 2013-02-01T20:30:07.043

Answers

At the present moment, no country recognizes bitcoin as actual "currency" so the laws for exchanging, buying, selling or trading in bitcoin are exactly as they would be for simply setting up a shop. For legal purposes, pretend bitcoins are any other object, let's say a chair...

If you set up a web site that exchanges chairs for USD and you sell enough chairs, you'll probably need a business license, it would probably be smart to incorporate your chair-selling business at some point as well. If you "mine" (assemble?) chairs then you have a cost of production and you make a profit. If the profit exceeds some amount which your state/country has established then you must pay taxes on those profits. Transactions which take place using bitcoin are essentially barter transactions: whatever laws would apply if you traded an equally-valued number of chairs for that XBox 360 apply to purchasing it with bitcoins as well.

I qualify all of this with "at the present moment" because it's all quite likely to change at some point. Bitcoin is only unregulated at the present time because lawmakers are, for the most part, unaware of its presence. Once they become aware, wheels turn slowly but eventually new legalities will inevitably spring up around the bitcoin community. If you intend for your exchange to last for more than a few years it may be worthwhile to set up shop offshore in a country like Panama, where the laws are more favorable to exchanging currency.

Edit: I must also mention that bitcoins may be recognized as a "value store" without being recognized as a currency. I am not a lawyer so this should not be taken as legal advice. If you have concerns about the legality of any service you wish to run, you should contact a lawyer - though even this is of questionably little help since at present there is not (to my knowledge) any precedent for just about anything we do with Bitcoin. As with all young technologies, expect legislation to spring up around it and expect things to change soon and often.

David Perry

Posted 2011-09-01T08:12:13.500

Reputation: 13 848

As commented on MaxSan's answer, this advice may not be current because bitcoins can be subject to certain laws without being recognised as currency. See https://bitcointalk.org/index.php?topic=5627.msg82745#msg82745

– eMansipater – 2011-09-01T15:30:01.960

1@eMansipater: Edited for clarity and completeness. Hopefully my extra paragraph clears up your concerns. – David Perry – 2011-09-01T15:55:19.903

The biggest problem is the whole "the laws for exchanging, buying, selling or trading in bitcoin are exactly as they would be for simply setting up a shop. For legal purposes, pretend bitcoins are any other object" part. It's simply wrong. – eMansipater – 2011-09-01T16:05:24.133

There is not yet any legal precedent to declare Bitcoin anything other than a digital item, manufactured at some cost and resold at a markup. When the first court case has a final judgement we can revisit the issue, but at present moment there are no "simply wrong" answers, only good guesses and bad guesses. – David Perry – 2011-09-01T16:09:24.667

2Go back and read that link carefully. Since the question is specifically about setting up an exchange (as opposed to merely accepting bitcoins at your business) there is an explicit FinCen suggestion that money service bureau rules apply in the U.S. once transactions exceed a value of $1000. So just like for a gold exchange, there are "legal processes someone would have to go through" (quoting from the question). – eMansipater – 2011-09-01T16:16:43.897

And I can find a dozen other threads on the forum which say the exact opposite. The forums have been cluttered with discussion of Bitcoin's legality since day one and there is no educated concensus so I fall back on a basic tenet of the American legal system: Things are legal by default until otherwise specified. There is no legal precedent regarding Bitcoin just yet. – David Perry – 2011-09-01T16:30:36.003

The issue is not so much with the exchange itself but with the national currency bank accounts and payment mechanisms that provide for the two-way conversion into and out of the exchange. We must distinguish between floating-rate and fixed-rate exchanges. In the former, customers are placing funds to be held at the exchange. In the latter, customers are making an immediate one-time purchase. It is similar to the difference on eBay between auction bids and the "Buy It Now" button.

A floating-rate exchange has to become a licensed entity itself or it has to contract with a third-party entity that is licensed to hold and segregate the customer funds. Currently, a fixed-rate exchange does not have to worry about that because they are not holding customer funds and they are selling a harmless crypto "math puzzle" or RPOW at a certain price known in advance.

Regarding jurisdiction on floating-rate exchange operators, I can only speak to the US and EU jurisdictions. The US is covered by Money Service Business regulations under the Department of the Treasury http://www.fincen.gov/financial_institutions/msb/ whereas the EU is covered under the newly-revised e-Money Directive http://ec.europa.eu/internal_market/payments/emoney/index_en.htm

Also, bear in mind that test cases have not been brought forward that specifically deal with the bitcoin exchange issue; however, some preliminary statements and guidance have suggested that this is how floating-rate exchanges will be interpreted by the respective jurisdictions and the banks are following that guidance.

matonis

Posted 2011-09-01T08:12:13.500

Reputation: 221

Your answer is spot-on, except for the part mentioning the European e-Money directive, it doesn't apply in this particular case. It doesn't apply to the fiat side because the fiat balance seen on the exchange reflects an actual bank or payment account balance held with a regulated financial institution and it doesn't apply to the Bitcoin side because Bitcoin doesn't qualify as e-currency (e-currency being defined by the European regulations as an electronic claim on the issuer expressed in fiat). – David – 2013-02-01T21:00:03.617

As Bitcoin is not a legal tender there is very little you have to do.

You do not require to be authorized by the financial authority.
It would involve a regular tax rate no special rate as they are not defined as a special value by any government. (Even this may be difficult for them)
The exact same process would be involved as there would be for any other business operational in your country of choice.

This is correct at this time it may in time change. I cant speak for everywhere in the world but im rather positive this applies to the western world.

There is nothing to stop you registering a business and selling bitcoins as you would any other product.

Im UK.

MaxSan

Posted 2011-09-01T08:12:13.500

Reputation: 3 680

I'm not sure this is correct. I did a quick look against the FSA website in the UK and found this: http://www.fsa.gov.uk/Pages/About/What/International/emoney/index.shtml which seems to indicate that all forms of electronic money are regulated.

– Gary Rowe – 2011-09-01T09:51:17.160

1Yes, all forms of electronic money are regulated, but bitcoins are not legal tender. They are technically not money even though we decided they have a value. – MaxSan – 2011-09-01T10:04:05.657

That's a very interesting take on it. I'll go off and do some research in this area and feed it back. – Gary Rowe – 2011-09-01T10:06:09.960

@MaxSan this is not good advice. However you define "legal tender" there are plenty of regulations that can apply to something which is not legal tender. For example, there are some preliminary indications that the U.S. may treat bitcoins as a form of stored value and any buying and selling of more than $1000 worth per day makes the business involved a "money services bureau" subject to stringent requirements.

– eMansipater – 2011-09-01T15:28:05.487

2Well, I've just got off the phone with the UK FSA and they currently do not have any guidance regarding Bitcoins. They currently do not view it as e-money under their definition but this information is subject to change once they have reviewed it. They are aware of it's existence. – Gary Rowe – 2011-09-01T15:50:12.383

1@Gary does the UK have "stored value" laws as well, like the U.S., which apply to gold, etc. ? – eMansipater – 2011-09-01T16:07:09.323

1@eMansipater I have never herd of anything of the likes in the UK and was never aware of its existance. Its very much a grey area and as exchanges are not licenced I cant see this being the case (currently). We can only speak as the situation is at the moment. – MaxSan – 2011-09-01T16:17:30.860

1@eMansipater IANAL but I don't think there are any "stored value" laws. It certainly seems that right at this moment, in the UK, Bitcoins can be treated as "chairs" like David Perry alludes in his answer. I have written to the FSA (on their request) to get further information about their current position and will report back as I get more information. – Gary Rowe – 2011-09-01T16:24:17.107

It appears that the UK has something similar for gold at least, but with higher limits: http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageVAT_ShowContent&id=HMCE_CL_000104&propertyType=document#P280_22758 And this seems to suggest that dealing in any goods worth 15,000 euros or more invoke money laundering registration requirements: http://www.hmrc.gov.uk/mlr/getstarted/register/who.htm

– eMansipater – 2011-09-01T16:41:27.897

None, but in order to instill trust with the traders getting a proper business license and showing and aptitude for Internet security will help.

Buckhead_Comp_Ser_Co

Posted 2011-09-01T08:12:13.500

Reputation: 706