Last updated on August 5th, 2016 at 04:04 pm
The short answer: In most cases, bitcoin mining is perfectly legal. In a few countries, however, bitcoin mining, as well as the possession and use of bitcoin is illegal. If you live in North America and most of Western Europe, bitcoin mining, as well as possession, is not only legal, but local regulatory frameworks actually provide certain protections and basic oversight.
In many cases, bitcoin is not treated as a currency by governments, but instead as an asset or property. As such, bitcoin is afforded some legal protection, just like any other type of property. In most cases, national governments that have not outlawed bitcoin, have not passed laws regarding bitcoin mining. Globally, with only a few exceptions, bitcoin mining is generally considered to be legal.
Before digging into the legal issues, I’m going to offer a brief overview of bitcoin mining. If you’re already familiar with the mining process, feel free to skip ahead.
The Short Story: What is bitcoin mining
Bitcoin mining refers to the process of adding transaction records to the public ledger. Basically, every bitcoin transaction ever conducted is recorded in the public ledger, although actual users can remain hidden behind anonymous names. This ledger is called the blockchain, and transactions are organized into blocks.
The mining process refers to the creation of new blocks of transactions. Once a new block is created, it is added to the blockchain, AKA public ledger. This block is created through solving algorithms with computer processors.
Over time, the algorithms have grown progressively more difficult, meaning more computing power and time is now needed to create a block. Further, approximately every four years, the number of bitcoins rewarded for creating a new block is cut in half. Originally 50 bitcoins were rewarded for mining a block, then 25, and now 12.5. This makes mining more difficult and restricts the bitcoin money supply, and over time should lead to bitcoin gradually gaining value.
Essentially, any processor can be used to mine bitcoins, but without a powerful processor, you won’t have much success. Now-a-days, there are bitcoin-specific machines called bitcoin “mining rigs.” Bitcoin mining rigs are machines that are designed specifically to mine new bitcoins, or in other words, solve the algorithms needed to create a new block. In order for mining to be economically feasible, it’s important for the rigs to run on as little energy as possible, and to solve the algorithms as quickly as possible.
So Why Would Bitcoin Mining Ever Be Considered Illegal?
This is a complex subject, and the reasoning can vary from jurisdiction to jurisdiction. Sometimes, people falsely believe that bitcoin mining is like counterfeiting money, but this simply isn’t true. You’re not creating fake duplicates of a national currency, but instead creating an entirely new currency.
This last bit is also why some governments oppose bitcoin, and thus bitcoin mining. Some governments view bitcoin as a threat because it competes with national currencies. Some governments believe that bitcoin actually undermines the government itself by offering a non-state currency.
Bitcoin can also be mined illegally. Perhaps the most common example has been the use of malicious viruses to hijack people’s computers and to then use their processors to mine bitcoins. This can slow down computers, and also run up energy bills. This is illegal in essentially every jurisdiction.
Where is Bitcoin Mining Illegal?
Bitcoin mining, as well as the possession and use of bitcoin, is illegal in a few countries. In other countries, bitcoin use and mining is more ambiguous with the government sending mixed messages.
Bitcoin is currently banned in Russia, although the most recent legislation to ban bitcoin use and mining was actually withdrawn. The reason for the withdrawal seems less about outlawing bitcoin, and more over the extent of punishment. Some Russian authorities want people who use bitcoin to face multi-year sentences in jail. Others are advocating for a softer touch. The legal status around bitcoin mining is a bit ambiguous since no formal laws have been passed, but for now mining in Russia is a high risk proposition, at the very least.
No other country is as anti-bitcoin as Russia. Of course, Russia is known for being a relatively authoritarian country. On top of that, Russia has been struggling through an economic crisis caused by low oil prices, and sanctions instituted because of Russian activities in Ukraine. Part of the strong anti-bitcoin sentiments in the country may be due to efforts to protect the ruble, which has suffered massive inflation over the past few years.
In South America, Ecuador explicitly outlaws the production of digital currencies, but interestingly enough, has launched its own digital currency. The electronic currency is linked to the U.S. dollar (which is Ecuador’s official currency), and has been designed to decrease dependence on physical money, and the associated costs, such as wear and tear of the bills themselves. Ecuador apparently doesn’t want other digital currencies, such as bitcoin, competing with their own.
The reasons for outlawing bitcoin aren’t always authoritarian in nature. For example, Iceland currently prohibits trading the local kroner for bitcoins. This is because the Icelandic economy struggled in the years following the Great Recession, and authorities instituted capital controls in order to protect the kroner. Authorities were worried that people would essentially flee the kroner, and that the currency would be adversely affected. Iceland does not, however, prohibit the mining of bitcoin.
Other governments, like the Indian government, have made negative remarks against bitcoin but have not launched any official bans on ownership or mining. For now, mining bitcoin in said countries is generally legal and safe, but the regulatory environment could change quickly.
Legal bitcoin mining
In most countries, bitcoin mining is legal. Of course, there are legal ways to mine bitcoin, which generally means using your own resources, such as electricity and processing power. On the other hand, there are illegal ways to mine bitcoin, such as stealing said resources. In this case, mining bitcoins is legal, but you’re stealing the resources needed to mine them, which is illegal.
Also, prosecutors in various countries, such as the United States and South Korea, have made it clear that they will prosecute people who use bitcoin for illicit purposes. This should come as no surprise, and anyone who mines bitcoin or uses it should know not to conduct illegal activities.
By and large bitcoin mining is a perfectly legal activity. Even in a few countries that do regulate the use of bitcoin, such as Iceland, mining bitcoin is still legal. Many countries, including most African countries, have not passed any legislation for or against bitcoin, and have generally remained silent on the issue. It’s important to keep a close eye on these countries, because the regulatory environment could change at the drop of a hat.
Please keep in mind that this post does not substitute legal advise and you should consult a lawyer for your specific case and jurisdiction.