Why would Germany legalize Bitcoin?

Daniel Webster said a disordered currency is one of the greatest political evils.

The question is whether the current currencies or the currencies like Bitcoin are disordered?

On 19th august 2013 the German Finance Ministry announced that Bitcoin is now essentially a ‘Unit of account’ and can be used for the purpose of tax and trading in the country. It is not classified as a foreign currency or e – money but stands as ‘private money’ which can be used in ‘multilateral clearing circles’, according to the ministry.

The announcement comes as a welcome reprise to the Bitcoin industry which has faced many pitfalls in the recent years. We should have competition in the production of money. I have long been a proponent of Friedrich August von Hayek scheme to denationalize money. Bitcoins are a first step in this direction says Frank Schaeffler, member of German parliament, Finance committee. The government has stated that this legal classification of the Bitcoin meant that profits arising from the use of the currency may be taxable.

Bitcoin is an anonymous virtual currency developed by cryptographic experts that allows users to exchange their online credits for goods and services. The concept of Bitcoin was introduced in 2008 by developer named ‘Sakoshi Nakamoto’. The virtual currency debuted with a value of zero in 2009 and was traded for the first time at 3/10th of a cent in 2010. Bitcoins can be obtained on computers through a process called ‘mining’ which involves solving complex mathematical problems with the consumption of a large amount of computer power. At present 1 Bitcoin is worth around $130.

While other countries are still struggling to wrap their heads around the concept of Bitcoin, Germany has been the frontrunner in the adoption of this free form of virtual currency. Kreuzberg, an area in Berlin has the highest concentration of businesses and merchants that accept Bitcoin. Customers are infact encouraged to pay in Bitcoins at many of the retail outlets. Kreuzberg is traditionally an area in which people are very politically aware, critical towards existing systems and are constantly discussing and looking for efficient alternatives. That makes it the perfect breeding ground for Bitcoin, said Joerg Platzer, Owner of Room 77, a bar in Graefestrasse, Berlin.

The adoption of the new rule shows that Germany is getting ready to tax Bitcoin transactions. This legal classification by the German government gives Bitcoin the legitimacy to be used as a settlement currency in one of the worlds largest economies, according to Kathleen Brooks, research director, 'I think it is interesting that Germany has gone ahead and given legal status to the bitcoin, as it could become an alternative to the euro if the single currency ever ceased to exist,' she stated..

The security issues involving potential money laundering and the Bitcoin’s used in funding illegal activities like trafficking and purchase of drugs is a cause of concern for most countries. Thailand has banned the sale, purchase and trade of Bitcoins altogether. According to Bitcoin Co. recently 22 digital currency companies and investors were subpoenaed by the New York State Department of Financial Services to enquire into the business practices of the Bitcoin industry.

LTP View: Germany’s acceptance of the Bitcoin shows an alternative way to gain tax revenues. Monitoring such transactions and adding necessary regulations may still be the way to go for checking growth of illegal currencies. The security concerns and issues over illicit money laundering by criminals through virtual currencies needs to be addressed at the earliest. The number of people using Bitcoins are still less but with increase in the merchants accepting Bitcoin, larger investment funds and production of Bitcoin ATMs, the interest seems to be growing among consumers.