Is Mining Bitcoin Legal?

February 21st, 2018

Want to know whether bitcoin mining is legal or not? The simple answer is bitcoin mining is perfectly legal in most countries. However, there are some countries where bitcoin mining and possession of bitcoin is illegal. If you are living in North America and in Western Europe, bitcoin mining and possession is legal; however, local regulatory frameworks are providing basic oversight and certain protections.

The question of legality is important if you are considering investing in bitcoin mining, rather than buying bitcoin. However, bear in mind that in 2020 the options for mining have expanded significantly with the move away from private mining operations, to the latest bitcoin mining in the cloud. A good place to start is on a comparison service like CryptoCompare, which includes services from around the globe including the US. But for anyone tempted to invest time and money,  these services should be chosen carefully and by referencing authoritative sources. In many cases, digital currency is not treated as currency by authorities, but as a property or an asset. Because of which, bitcoin is provided legal protection like any other property. There are many cases where national governments have not outlawed bitcoin; no laws were passed regarding bitcoin mining therefore. On a global scale, with a few exceptions, bitcoin mining is considered to be legal in many places.

In the US the U.S. Treasury classified bitcoin as a “convertible decentralized virtual currency” in 2013. The Commodity Futures Trading Commission, (CFTC), classified bitcoin as a commodity in 2015, therefore the IRS taxes bitcoin as a property. According to Cointelegraph here are no specific restrictions on mining activity in the US, due in part to the nation’s history of mining. Just as US states have taken different policy approaches to cryptocurrencies, so there are state by state variations in regards to mining. However, the city of Plattsburgh in New York is reported to be the only place in America that has formally banned cryptocurrency mining back in March 2018, though even then the moratorium only affected new bitcoin mining operations, and exempted existing operations in the city. This action occurred after local residents complained of rising electricity bills as a result of the concentration of cryptocurrency mining in the area, businesses which had moved there due to the city’s hydroelectric dam which provided cheap electricity.

What is Bitcoin Mining?

Bitcoin mining refers to the process of adding a transaction record to a public ledger. All bitcoin transactions that are conducted are recorded in a public ledger, although users can use anonymous names. The ledger is named Blockchain. Mining refers to the creation of new blocks of transactions. As a new block is created, it is added to the blockchain. These blocks are created by solving algorithms with computer systems.

With bitcoin mining therefore it’s not just about the hardware, there is a need for special software to solve the complex math problems, what’s also called a “proof of work system”. In return for this the miners are rewarded in return with a number of bitcoins. The design of the reward structure for mining is an effective  way to issue the digital currency, as in turn it creates an incentive for more people to mine the currency. And since miners are required to approve bitcoin transactions, the resultant increase in miners means a more secure network, which is good for end users. Plus, as an added level of security, the bitcoin network automatically increases the difficulty of the math problems, depending on the speed they are being solved.

With time, algorithms are growing progressively difficult, which means it requires more computing power as well as time to create a block. What’s more, approximately every four years the number of bitcoin that is rewarded to miners for creating new blocks is halved. Initially, 50 bitcoins were rewarded for mining, then it was 25, down to 12.5 in 2016 and in May 2020, the reward size was halved again to 6.25 BTC. This halving event also cuts in half Bitcoin’s inflation rate, and the rate at which new Bitcoins enter circulation.

For people new to the concept Coindesk explains, “the halving was programmed into bitcoin’s original network programming as a bulwark against inflation when the cryptocurrency was created just over a decade ago. The idea was a predictable and ever-slowing pace of new supply of the cryptocurrency would help to stabilize bitcoin’s purchasing power — a contrast with government-backed currencies that can often be printed at will by human central bankers”. 


It’s therefore worth considering bitcoin mining as a competitive initiative. Just as the halving decreases the level of reward every four years, the pursuit of more efficient computing power by miners means reduced profitability using the existing technology. bitcoin-specific ASICs machines. “In turn the difficulty within the mining process involves self-adjusting to the network’s accumulated mining power,” according to Wikipedia.

Why is Bitcoin Mining Considered Illegal?

The legality of mining is is a complex subject, and the reasons may vary from one jurisdiction to another. There are times when people falsely believe bitcoin mining is similar to counterfeiting money but in reality, this is not the case. Mining is not about creating fake duplicates of the national currency, it is about creating a new currency altogether. This is why many authorities and governments around the world oppose this new digital currency and its mining. Many jurisdictions also view it as a threat because it is competing with national currencies. There are a few governments which believe bitcoin undermines government itself by offering an alternative to the national currency.

Such are the financial rewards of bitcoin mining, and the benefit of low cost electricity to run mining rigs, that a number of examples of illegal mining activity have been reported over recent years, though perhaps none more controversial than one found at a nuclear power plant in the Ukraine in 2019. As well as mining rigs in the offices of the facility, searches discovered mining equipment at the barracks of the National Guard tasked with protecting the plant.

Where is Bitcoin Mining Illegal?

Bitcoin mining and possession, as well as use, is considered illegal in many countries. Bitcoin is presently banned in Russia: no other country is as anti-bitcoin. While attempts to further reinforce laws against bitcoin have met opposition from the Russian Ministry of Economic Development which recently sent a letter to the State Duma, the lower house of the Federal Assembly of Russia, criticizing the bill that seeks to ban cryptocurrency in the country.

There are other governments and authorities around the world making negative remarks about bitcoin, but no new official bans on mining have been launched. As of now, bitcoin mining is considered legal in many countries, and it is safe, but such regulatory environments can change quickly. A striking example of how official attitudes to bitcoin mining  can change, came in Iran in June 2019 officials at the Ministry of Energy threatened to cut off power to crypto mining due to energy overconsumption. And in 2020, the Iranian President ordered the government to draw up a “renewed national approach” for the emerging crypto industry. In China, despite a government ban on many aspects of crypto currencies, it’s reported that China-based bitcoin mining pools accounted for up to 70% of the annual coin production. The global bitcoin online mining pools are also mainly Chinese, thanks to the country’s comparatively low cost of electricity.

Conclusion

By and large, bitcoin mining is considered a perfectly legal activity. Some countries regulate the use of bitcoin such as Iceland; mining bitcoin is not considered illegal. Many countries didn’t pass any legislation for or against digital currency; they are remaining silent on this issue, but governments are starting to wake up to the economic benefits of supporting crypto mining. But if you are interested in crypto mining it’s important to keep a close eye on the latest news whether in the US or internationally as the regulatory environment can change rapidly. Keep in mind that this post is no substitute for legal advice, make sure you consult a lawyer in your jurisdiction.

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