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Is Bitcoin legal?

by | Mar 26, 2018

By now, most of you are probably able to provide a basic answer to the generic question: what is Bitcoin? Why, it’s a distributed peer-to-peer digital currency, of course!  But do you find it more difficult to explain how that definition translates into the real world? And definition aside, is Bitcoin actually money? Moreover, is it even legal? Although the case law addressing many of the questions surrounding Bitcoin is still evolving, there are aspects of the currency that are mostly settled, legally. Still, not all jurisdictions agree on the same conclusions.

Location Matters

To better understand why the question of whether bitcoin is legal does not have one simple answer, we can use the Campagna T-Rex analogy. The 16S T-Rex is street legal in all 50 states and is marketed on the company’s website as a Legendary or Ultimate 3-Wheel Car. You can find the T-Rex on eBay in the motorcycle section. It’s a two-seat, three-wheeled motor vehicle. The interior can accommodate the driver and a single passenger, seated side-by-side, like a car. The drivetrain is from a BMW 6-cylinder motorcycle. When you drive it, you are exposed like a motorcycle rider is. So, what is it — a car or a motorcycle? The answer depends on your location. In 24 states, the driver of the T-Rex must have a valid motorcycle license.  In the other 26 states, the driver is required to have a valid driver’s license. So, in 24 states, the T-Rex is a street legal motorcycle, as declared by the regulating authority.  In 26 states, it is a car.

With that analogy in mind, let’s revisit the questions: Is Bitcoin actually money?  Is Bitcoin legal?

In the United States, Bitcoin and other virtual currencies are legal and are regulated as commodities, similar to gold, oil, beef, and orange juice futures. This applies to US transactions in virtual currency. Though the particulars of Bitcoin’s status in other jurisdictions is decided independently by those jurisdictions, Bitcoin has been declared legal in all, but a few smaller countries. Click here for a link to a complete list of the legality of Bitcoin by country.

Scandals Precede Regulation

The basic purpose of regulation is to provide protection, be it for individuals, businesses, or environments. Ideally, regulations would be informed and proactive measures, but often, regulations are reactive measures, taken after a party has already suffered harm in the absence of a regulation.

Although Bitcoin and other virtual currencies are not inherently illegal, there have been many cases of Bitcoin being tied to illicit activity. One of the most well-known scandals was the Silk Road case. Silk Road was a website created by Ross Ulbricht in 2011. It was marketed and operated on the dark web. The site allowed visitors to buy drugs and other contraband with Bitcoin. In 2013, Ulbricht was charged with money laundering, computer hacking, and conspiracy to traffic narcotics. Ultimately, Ulbricht was sentenced to life in prison with no chance of parole.

The founder of BitInstant, Charlie Shrem, experienced a similar fate as Ulbricht. BitInstant was created in 2011, in an effort be a more user-friendly Bitcoin exchange. Shrem was an early bitcoin advocate and a founding member of the Bitcoin Foundation. In 2014, he was accused of money laundering, conspiracy, and other crimes. On September 4, 2014, he accepted a reduced charge and pled guilty to aiding and abetting unlicensed money transmission.

In direct response to the BitInstant scandal, the state of New York created BitLicense, a set of regulations regarding Bitcoin transactions. Put forward by the New York State Department of Financial Services (NYSDFS), BitLicense applies to Bitcoin companies operating in the state of New York or serving New York residents. As of September 2017, only five licenses have been granted. The companies which obtained the licenses spent in excess of $100,000 to receive them.

Is Bitcoin a Ponzi Scheme?

You hear “no-coiners” (people who don’t own any crypto) say it all the time: “Bitcoin is a Ponzi scheme.”  Immediately you think of Bernie Madoff’s $65 million, movie-worthy financial fraud and wonder, “Are they right?”  Could Bitcoin be a Ponzi scheme that is bamboozling naive investors out of their hard-earned dough? Maybe and it’s a fair question to ask.  So let’s get to the bottom of this. First of all, what is a Ponzi scheme? And second, why do people think Bitcoin deserves to be classified as one?

What is a Ponzi Scheme?

A Ponzi scheme is an investment scam that promises unusually high returns with supposedly very little risk.  Now, anyone who knows anything about investing knows that, generally, risk and reward run in parallel; the higher the reward, the higher the risk.  So any investment that promises high reward with low risk is probably too good to be true. This is your first tip.

Another element of a Ponzi scheme is that the organizers must bring in new clients in order to remain afloat and pay back the original investors.  When the constant flow of newbies runs out and not enough money from new investors flows into the system to be able to pay out old investors (or old investors start to withdraw more money from the system than is raised from new investors), the scheme collapses. This is distinct from a real business where investors are paid on legitimate business revenues rather than by the constant flow of new investments.  The phrase, “Rob Peter to pay Paul” summarizes the underlying strategy.

In the meantime, original investors are often provided with fictitious earning reports to convince them to remain in the scheme and provide positive word of mouth feedback that will lure more new investors in, because it “really works”.  What is offered as a short-term investment turns into a long-term hold based on the supposedly high return the investor receives. Scheme operators don’t want investors to take their money out so they often make it difficult to withdraw funds and make it appear very lucrative to re-invest the gains and thus not withdrawing.

Because they are fraudulent, Ponzi schemes are typically not registered with government regulators such as the SEC.  Without registration, investors may not have access to important company information such as their management team, services, products, and finances.

Comparison to a Pyramid Scheme

Sometimes people use the terms “Ponzi scheme” and “pyramid scheme” interchangeably, but technically they are not the same, even though many Ponzi schemes use multi-level marketing (MLM), aka a pyramid scheme, structure to promote their scam to even more investors, which is why many people perceive them to be equal. A Ponzi scheme involves one central perpetrator who acts as the “hub” of the scheme and the profits that the investor receives are portrayed as the profits generated by the made up investment vehicle. A pyramid scheme, on the other hand, counts on all of the current participants to bring new participants into the venture. Also, most pyramid schemes don’t generally try to convince investors that they have a complex investment approach.  Participants are usually made aware that payoff requires attracting new participants for which that participant receives commissions multiple levels deep.

The now-defunct Bitconnect, an investment lending platform, was a combined Ponzi and pyramid scheme. Investors could invest their money/cryptocurrency in the Ponzi scheme investment platform that promised the unrealistic high returns. These investors were recruited by multi-level affiliate marketers, who could then work their way up beside their investment profits and also receive commissions in return for bringing in even more investors in the pyramid scheme commissions structure.  This is why you saw the Bitconnect army posting everywhere. They were loud and proud! And now likely broke. Bitconnect closed its operations after receiving cease and decease notices from Texas and North Carolina regulators.

Why Bitcoin is Not a Ponzi Scheme

Based on the elements of a Ponzi scheme, why do people think Bitcoin fits this definition?  To be honest, I’m not sure. Every time I hear someone refer to Bitcoin as a Ponzi scheme, I realize they don’t know what a Ponzi scheme is.

First of all, in Bitcoin there is no “hub” — a central perpetrator enticing folks to invest and redistributing those investments to all earlier investors.  Second, there is no one promising unusually high returns in exchange for the risk of buying Bitcoin itself. Yes, there is (social) media hype, rumors, speculation and scammers trying to use Bitcoin for THEIR Ponzi scheme (like Bitconnect), but I have yet to come across individuals offering to invest my money directly in Bitcoin and promising a specific high rate of return.  It just isn’t the same thing.

The only characteristic both have in common is the fact that early long-term investors benefit more from value appreciation than late investors. However, this not completely fair, because in a Ponzi scheme the profits for early investors come at the full expense of the late investors without them getting anything in return.  With Bitcoin, late investors may not profit as much from price appreciation as early adopters, but they can still use the technology and network for peer-to-peer payments and as a store of value. Early adopters did take a substantially higher risk when the technology and adoption were significantly less obvious by investing in Bitcoin for which a higher return can be seen as a reasonable compensation for putting their money at risk towards this technological investment.

That said, a higher reward for early investors alone, however, does not qualify for something to be a Ponzi Scheme, because basically all good asset investments have this characteristic. And just like normal investments, like stocks for example, the price is determined in public marketplaces (various cryptocurrency exchanges) where people trade more or less directly with each other on the basis of supply and demand, which also shows that the money new investors pay does not go to a central “bitcoin entity” that redistributes that money among all the older investors.

Economic Bubbles

Now, whether Bitcoin is an economic bubble is a different matter.  Yes, there are similarities between bubbles and Ponzi schemes, but they are not the same thing.  Collapsing the two concepts is probably why people refer to Bitcoin as a Ponzi scheme.

According to Wikipedia, an economic bubble is “similar to a Ponzi scheme in that one participant gets paid by contributions from a subsequent participant (until inevitable collapse).  A bubble involves ever-rising prices in an open market…where prices rise because buyers bid more, and buyers bid more because prices are rising.” Yes, this does sound more similar to what frequently happens in Bitcoin, but that is because the price is so volatile and can skyrocket at any moment.  We have seen parabolic increases in price — buyers want to get in when the price is climbing, thereby pushing the price even higher, followed by severe price crashes, multiple times.

However, I wouldn’t say that the first part of the description — where one participant gets paid by contributions from a subsequent participant — is necessarily accurate because it happens in an open market. Buyers and sellers meet and trade assets against pricesat which both parties are willing to agree and the price goes up irrationally by enormous demand for which there is simply not enough supply, but that is not caused by contributions to an organizing entity.  Nor is it distinct from what happens with traditional stock trading, or in fact in any kind of financial marketplace. A so-called bubble is a very common economic phenomenon and has nothing to do with Ponzi Schemes.

Delayed Regulations

The anonymous and decentralized nature of Bitcoin has proven difficult for regulators across the globe. At the G20 summit in March 2018, it was decided that it was too soon for the 20 economies represented at the event to create recommendations for regulations for Bitcoin and other cryptocurrencies. The Financial Stability Board (FSB), which coordinates regulation for the Group of 20 economies, encouraged waiting until July 2018, before they proceed with next steps.

In early February, the US Senate Federal Banking committee held a hearing where lawmakers recognized that current federal laws are not adequate to address a digital currency like Bitcoin. These delays and postponements further illustrate the challenge regulators have in creating policies for a nationless, digital asset.


The blockchain technology underlying bitcoin is an example of disruptive innovation, which on many fronts is ahead of its time. Bitcoin is a digital currency without a nation. It is a currency for the people, by the people. It has compelled financial institutions and countries across the globe to redefine the concept of money. Undoubtedly, regulations will continue to evolve as Bitcoin’s popularity, as a global currency, increases.

So what do you think?  Should crypto be regulated.  If so, how? And which does Bitcoin resemble more — a Ponzi scheme or an economic bubble?


This article was written to the best of our knowledge with the information available to us. We do not guarantee that every bit of information is completely accurate or up-to-date. Please use this information as a complement to your own research. Nothing we write in any of our articles is intended as investment advice nor as an endorsement to buy/sell/hold anything. Cryptocurrency investments are inherently risky so you should never invest more than you can afford to lose.

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