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Is Bitcoin mining illegal?

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.

Conclusion

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.

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22 comments on “Is Bitcoin mining illegal?”

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  1. Christopher Cole

    I am in concurrence with saif, these people are destroying the gaming market by skyrocketing GPU costs. I kind of dismissed the bitcoin market until I recently tried to purchase a machine with capable graphics, and found the prices had shot way up. This will turn out poorly for everyone involved – GPU producers, computer manufacturers, and any user looking for a gaming quality system. Most of them are not happy about it, myself included.

    Second, the article points out why governments are against bitcoins, they very well do undermine economies, and bypass tax laws. While some people may say this is a good thing, what it also means is everyone else has to pay to make up for it. The governments do not like currencies outside of their control for a large number of reasons, including unfairly weighting taxation, and stagnating the valid competing currencies.

    Finally, bitcoins are also extremely volatile. Many people who have invested in them lost much of their value when the rate shifted. The only value reinforcing them is not a government entity, or similar value in something tangible, but just a mathematical formula against someone releasing slots somewhere. If they were to suddenly release a large number of slots, then the value would plummet like a stock market crash – which is effectively what they are right now – stocks with nothing behind them.

    1. Putting this here as I am only able to post as a reply. There is a problem with the captcha on the main comment form.

      Great article. However, my limited understanding of bitcoin is that the miners serve two purposes: 1) secure the blockchain which is the purpose of the computationally hard task, 2) process transactions.

      Are bitcoin miners at risk from regulations concerning legal requirements of payment processors, for instance anti-money laundering regulations? If you can comment on this topic from the perspective of a bitcoin miner as a payment processing service provider I would be very interested in your opinion.

      1. Hey Conor,

        You are correct in your understanding of points 1 & 2, there’s also a third function which incentivizes miners: each time they mine a block of transactions into the chain, they’re awarded with a reward of bitcoins (currently 12.5 BTC). This is how new bitcoins are brought into existence. Every 4 years or so, the reward halves until the maximum supply of 21 million BTC is reached.

        The only place where mining Bitcoin is illegal is Venezuela, as far as I’m aware. It seems thati n certain parts of China, the authorities are trying to slowly decrease the amount of power which is channeled to Bitcoin mines.

        As for acting as money transmitters, no, this is not what miners do. They have no knowledge of where transactions are coming from or where they’re going to – and they can’t be expected to know this information due to the pseudonymous nature of the Bitcoin system… All miners see are Bitcoin addresses, amounts, timestamps and a few other technical details which reveal nothing about the payment’s originator or recipient. As such, miners don’t fall under the same AML / KYC requirements as traditional money transmitters would. There are certain parts of the Bitcoin ecosystem, such as exchanges, which do however fall under such regulations.

        Also, transactions aren’t ever sent to a particular miner – it’s mostly down to blind luck (weighted by hashpower) which miner ends up mining a particular block of transactions. While certain legislation may be passed in some countries specifically for miners, it will have to be something new as money transmitter rules don’t apply with any logical consistency in the case of miners.

    2. Hey Christopher,

      Well, you have to balance the relative importance of gaming as entertainment against the possibility of a new, technologically superior, more efficient, free and fair form of money…

      As for changing the code of Bitcoin to release a bunch of coins at once, it just doesn’t work that way… at least not in Bitcoin, where such a change would be strongly opposed and lead to a split.

  2. i am a hard video gammer, you people make it costly to play with graphic card. No good card is available in less price in the market, please leave this bullshit crypto currency. so that we can enjoy the video games.

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