Legal The European Union has passed no specific legislation relative to the status of the bitcoin as a currency, but has stated that VAT/GST is not applicable to the conversion between traditional (fiat) currency and bitcoin.VAT/GST and other taxes (such as income tax) still apply to transactions made using bitcoins for goods and services.[1]:European Union In October 2015, the Court of Justice of the European Union ruled that "The exchange of traditional currencies for units of the ‘bitcoin’ virtual currency is exempt from VAT" and that "Member States must exempt, inter alia, transactions relating to ‘currency, bank notes and coins used as legal tender’", making bitcoin a currency as opposed to being a commodity.[2][3]According to judges, the tax shouldn’t be charged because bitcoins should be treated as a means of payment.[4]According to the European Central Bank, traditional financial sector regulation is not applicable to bitcoin because it does not involve traditional financial actors.[5]:5

Others in the EU have stated, however, that existing rules can be extended to include bitcoin and bitcoin companies.[6]The European Central Bank classifies bitcoin as a convertible decentralized virtual currency.[5]:6In July 2014 the European Banking Authority advised European banks not to deal in virtual currencies such as bitcoin until a regulatory regime was in place.[7]In 2016 the European Parliament's proposal to set up a taskforce to monitor virtual currencies to combat money laundering and terrorism, passed by 542 votes to 51, with 11 abstentions, has been sent to the European Commission for consideration.[8]The European Commission also notably presented a "parallel" proposal aimed at preventing tax evasion techniques as revealed in the Panama Papers.[9]In 2017 it was revealed that the proposal will require cryptocurrency exchanges and wallets to identify suspicious activity.[10]Bitcoin is within touching distance of its all-time high, having more than doubled its value for the year.

Traders are now bullish about an extended rally that could see it surpass its $1,165 peak, achieved in November 2013.But if history does repeat itself, crypto traders would do well to remember how that rally turned into a crash—starting with the intervention of China’s government.Let’s rewind the clock a bit.In 2013, bitcoin was on a legendary bull run.Its price nearly tripled that November alone: Bitcoin’s lightning fast appreciation, driven by its potential to perform free, or extremely cheap, global payments—and the novelty factor of a stateless digital cash for a public encountering it for the first time—made headlines globally.And it piqued the interest of Chinese investors, who began to pile in to the volatile cryptocurrency.The bitcoin markets, traditionally dominated by trade in the bitcoin-US dollar currency pair, was quickly being taken over by volume from bitcoin-yuan trading.The more bitcoin’s price rose, the more cryptocurrency and renminbi changed hands.

The bitcoin-yuan trade surpassed bitcoin-dollar volumes at the end of December 2013, and the yuan’s share of the global bitcoin trade would remain dominant in the years to come.litecoin payment processorAs the price peaked in those heady days, Chinese internet giant Baidu even announced it would begin accepting bitcoin payments for a cloud service.bitcoin oder litecoin miningAll well and good—until the Chinese central bank stepped in.bitcoin coinmarketcap5, the People’s Bank of China issued a notice banning financial institutions on the mainland from dealing in bitcoin.bitcoin mine ubuntuThis was the first time the Chinese government had intervened in the bitcoin economy and jittery traders were spooked.bitcoin btc etf

In one fell swoop, the promise of bitcoin payments taking off in China evaporated.The sell-off began, and bitcoin lost more than half its value in a matter of days.The crash triggered by the Chinese central bank’s restrictions would ultimately plunge bitcoin into a prolonged decline that bottomed out more than a year later.bitcoin mining setup youtubeThe saving grace for crypto traders was that Beijing stopped short of banning bitcoin use completely.Individuals were free to trade so long as they understood the risks, the central bank said.Still, the move shocked the bitcoin price out of its upward arc.Could it happen again?The rally today, as with three years ago, is marked by a sudden surge in the cryptocurrency’s price, led by Chinese trading.China is arguably even more influential over bitcoin now, as the most powerful miners of the cryptocurrency, responsible for processing transactions and releasing a steady supply of new coins into the monetary supply, are located on the mainland (paywall).

The government does not restrict mining.While Beijing hasn’t displayed any hint of a crackdown to date, that was also the case back in 2013.But if mom and pop investors start recklessly betting on bitcoin as the price continues to climb, the People’s Bank might deem it prudent to put the brakes on somehow.In its 2013 notice (unofficially translated from the Mandarin by BTCC, a bitcoin exchange based in Shanghai) it said “excessive speculation” was one of bitcoin’s dangers.“I think it’s a risk, absolutely,” says Adam White, who runs GDAX, a cryptocurrency exchange for professional traders owned by the reputable US-based startup Coinbase.“But if you now send bitcoin in China underground, it’s going to be even more difficult to regulate.” Naturally, the bitcoin industry is loathe to dwell on the prospect of another China crackdown.White, for instance, says the People’s Bank, like several other central banks around the world, has already shown an interest in blockchain technology, the technical ideas underpinning bitcoin.

It would be unlikely to take strong action for fear of missing out on all the innovation that might flow from experimenting with the tech, he said.Miners, who profit from a higher bitcoin price, are also quick to dispel the specter of a Chinese crackdown.Take GBMiner, responsible for more than 4% of all the computing power that processes bitcoin transactions, thanks to its servers which are largely located on the mainland.Its founder, Amit Bhardwaj, diplomatically urges patience and cautions against “misinterpreting” Chinese government actions, like a recent crackdown on stolen electricity for bitcoin mines by local authorities.Adopting a similar tone is Nishant Sharma, who runs marketing for Beijing-based mining chip manufacturer Bitmain Technologies.He points out that the Chinese government has been largely hands-off with regulations since its 2013 notice.The shakeout from an intervention by China would play out differently for miners and traders.While a hypothetical clampdown on miners would cause a severe drop in the computational power devoted to bitcoin transactions globally, it would be temporary at most.

Without the powerful Chinese miners to compete with, outfits outside the mainland would step in to fill the void in short order.For bitcoin exchanges, however, new restrictions could spark a stampede for the exits akin to a run on a bank.As volumes dry up in China, prices could come crashing down—along with all-important market sentiment.While bitcoin watchers like GDAX’s White say exchanges outside China can pick up the slack eventually, Chinese traders—subject to currency controls on their yuan—won’t be able to follow the market beyond the mainland, cutting off a major source of liquidity for the cryptocurrency.On the flipside, this bitcoin bull run could have legs—or so its boosters are hoping.One major event on the horizon next year is the possible approval of a bitcoin exchange-traded fund, or ETF.Two funds (one of them operated by the Winklevoss twins of “The Social Network” infamy) are currently being considered by the US Securities and Exchange Commission; market watchers expect a decision inside the second quarter of next year.

A successful ETF listing would make bitcoin more convenient to trade and could increase demand for the underlying asset.“People would now be able to buy bitcoin through their existing brokerage,” White said.“I do believe institutional [buyers] are factoring that information into the price of bitcoin now.” Underlying the question of bitcoin’s future price is whether such booms or busts aid adoption of the currency.After all, bitcoin can only justify its value if people use it.Within the bitcoin industry, there’s a widespread consensus that the current boom is good for the technology, because it’s been more measured and less intense, unlike the frenzied bidding up of its price in 2013.“I think this is a price rise coming purely out of natural demand for bitcoin as a safe store of value,” said GBMiners’ Goswami.“This is a huge indicator of mass trust in bitcoin, I don’t find anything unhealthy about the present causes for this price rise.” Still, if Beijing does decide to step in again, the market’s prognosticators won’t see it coming.