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Bitcoin - A digital currency for a digital age, but what are the legal implications?

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Bitcoin is a crypto-currency, so called because it uses public key cryptography for security, and is a peer-to-peer version of electronic cash. Users send payments by broadcasting digitally signed messages to the network. Transactions are verified, time-stamped, and recorded by specialised computers into a shared public transaction history database called the block chain.

The purpose of Bitcoin is to allow currency transaction online to take place without a central organisation, for example a bank, controlling what happens which can add cost and delays to transactions.

So, how do Bitcoins come into existence? When you send a Bitcoin to someone, you create a message, attaching the new owner’s ‘public key’ to the amount of coins, and sign it with your ‘private key’. When this transaction is broadcast to the Bitcoin network, this lets everyone know that the new owner of these coins is the new owner of the new key. Your signature on the message verifies that the message is authentic.

There is a fixed number of Bitcoins, at present it is estimated that there are about 11 million and the maximum possible is 21 million. New Bitcoins are created through “mining,” a complicated process which requires difficult mathematical puzzles to be solved. It is interesting to note in particular that your Bitcoin account cannot be frozen and, also, that after a few minutes the transaction is verified by a miner and permanently and anonymously stored in the network.

As things currently stand in the UK, Bitcoin is completely unregulated and there is a lack of clarity about the VAT position. As far as the legal implications are concerned, it is likely that the Police could allege the use of Bitcoins as a means of money laundering and/or buying and selling illicit goods. There is a strong assumption that regulation of Bitcoins will be introduced at some point, but how easy that will be to enforce is another question.

By Adam Pennington, Trainee solicitor in the regulatory department