Miners are rewarded with Bitcoins for their efforts in sealing off blocks with a hash. This process is competitive and arduous, but the reward creates an incentive to continue mining, and keep transactions flowing.
So how does the law deal with Bitcoin and other emergent cryptocurrencies? Several countries have taken steps to ban Bitcoin altogether, although in most jurisdictions it is legal. Its use, however, is not yet widely regulated.
The main concern of governments involves its widespread use in criminal acts, ranging from money laundering and drug trafficking to tax evasion and terrorism. Bitcoin exchanges in several countries are subject to their anti-money laundering (AML) laws.
The European Union has committed to tightening its digital currency rules, including Bitcoin, by the end of this year. In the US, various government agencies have been tasked to ensure that Bitcoin transactions are undertaken within the law. Last year, a Florida court ruled that Bitcoin should not be classified as money.
In the UK, there continues to be a distinct absence of regulation or judgments defining its status.
The collapse of Mt.Gox in 2014, a leading bitcoin exchange, did lead to litigation in the UK. The Tokyo-based exchange, which had handled 70 per cent of all Bitcoin transactions, suspended trading and was liquidated, after $450m (£333m) disappeared. Two smaller UK exchanges, Moolah and MintPal, have also led to disputes.
It is distinctly possible that UK consumers could be adversely affected by fraudulent platforms involving digital currencies: lack of regulation and effective monitoring leaves them wide open to potential fraudsters. Regulators could protect or enhance protection for UK consumers by introducing a system of licensing, reporting and auditing for businesses operating such platforms which could do much to help prevent this – as applies in other areas of financial services.
Nevertheless, domestic law surrounding Bitcoin-related litigation remains ill-defined, especially in relation to civil fraud. This produces inevitable uncertainty for consumers.
To limit their risk exposure in Bitcoin investment, there is no obvious remedy, save better regulation.
This year, as its value has surged, the need for regulatory frameworks to include Bitcoin and other cryptocurrencies has become more apparent in many countries. For example, China and Japan have announced their intention to regulate local Bitcoin exchanges, followed more recently by Australia.
Such is the popularity of Bitcoin online gambling in the UK that the Gambling Commission has had to regulate the operators and issue specific licences. But despite their overall popularity among UK users, the UK government and regulators have been remarkably silent on the subject of digital currencies.