HANDBOOK OF DIGITAL CURRENCY HANDBOOK OF DIGITAL CURRENCY Bitcoin, Innovation, Financial Instruments, and Big Data Edited by DAVID LEE KUO CHUEN Sim Kee Boon Institute for Financial Economics, Singapore Management University, Singapore AMSTERDAM • BOSTON • HEIDELBERG • LONDON NEW YORK • OXFORD • PARIS • SAN DIEGO SAN FRANCISCO • SINGAPORE • SYDNEY • TOKYO Academic Press is an imprint of Elsevier Academic Press is an imprint of Elsevier 125 London Wall, London, EC2Y 5AS, UK 525 B Street, Suite 1800, San Diego, CA 92101-4495, USA 225 Wyman Street, Waltham, MA 02451, USA The Boulevard, Langford Lane, Kidlington, Oxford OX5 1GB, UK © 2015 Elsevier Inc. All rights reserved. Chapter 14, How to Tax Bitcoin? © 2015 Aleksandra Bal. Published by Elsevier Inc. All rights reserved. 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Birch Consult Hyperion, Guildford, Surrey, UK Aeron Buchanan Ethereum Foundation, Switzerland Kim-Kwang Raymond Choo University of South Australia, Adelaide, South Australia, Australia Anton Cruysheer ABN AMRO Bank, Amsterdam, The Netherlands Primavera De Filippi CERSA/CNRS/Universite´ Paris II–Berkman Center for Internet & Society at Harvard Law School, Cambridge, Massachusetts, USA Christian Jaag Swiss Economics, Zurich, Switzerland Alyse Killeen March Capital Partners, Santa Monica, California, USA Andras Kristof Tembusu Terminals, Singapore David LEE Kuo Chuen Sim Kee Boon Institute for Financial Economics, Singapore Management University, Singapore Teik Ming Lee Sim Kee Boon Institute for Financial Economics, Singapore Management University, Singapore Richard B. Levin Bryan Cave, LLP, Denver, Colorado, USA Guo Li Sim Kee Boon Institute for Financial Economics, Singapore Management University, Singapore xvii xviii Contributors Jonathan W. Lim National University of Singapore Centre for Banking and Financial Law, Singapore, and Wilmer Cutler Pickering Hale & Dorr (WilmerHale) LLP, London, UK Ignacio Mas Saı¨d Business School, University of Oxford, Oxford, UK Ralph E. McKinney, Jr. College of Business at Marshall University in Huntington, West Virginia, USA Andrew Newman University of New South Wales, Sydney, New South Wales, Australia Lam Pak Nian Sim Kee Boon Institute for Financial Economics, Singapore Management University, Singapore Pierre Noizat Co-founder of Paymium, Bitcoin Exchange and provider of e-commerce solutions, Paris, France Aaron A. O’Brien Baker & Hostetler, LLP, PNC Center, Cleveland, Ohio, USA Bobby Ong Sim Kee Boon Institute for Financial Economics, Singapore Management University, Singapore Georgios Papadopoulos Erasmus University Rotterdam, Rotterdam, The Netherlands Duane C. Rosenlieb, Jr. Rosenlieb Law Office, St. Albans, West Virginia, USA Tetsuya Saito Nihon University, Tokyo, Japan Gideon Samid Case Western Reserve University, Cleveland, Ohio, USA Vrajlal Sapovadia Shanti Business School, Ahmedabad, India Dale H. Shao College of Business at Marshall University in Huntington, West Virginia, USA Lawrence P. Shao College of Business at Marshall University in Huntington, West Virginia, USA Matthias Tarasiewicz University of Applied Arts Vienna, Vienna, Austria Ernie G.S. Teo Sim Kee Boon Institute for Financial Economics, Singapore Management University, Singapore Nicolas Wesner Mazars Actuariat, Paris, France Gavin Wood Ethereum Foundation, Switzerland Contributors xix David Yermack New York University Stern School of Business, New York, New York, and National Bureau of Economic Research, Cambridge, Massachusetts, USA Madiha M. Zuberi Baker & Hostetler, LLP, New York, New York, USA PREFACE AND ACKNOWLEDGMENTS The year 2008 has left a deep and lasting impression on the Millennials, also known as the Millennial Generation who are born in the early 1980s to early 2000s. It was the year of the financial market crash that started in the United States and soon spilled over to Europe and Asia, thereby triggering the global financial crisis in a time-compressed manner. While governments responded with unprecedented monetary policy expansion and fiscal stimulus, many Millennials have to contend with high unemployment and scarce eco- nomic opportunities at a time when they are establishing their careers. But few realize their lives have been shaped not only by happenings in Wall Street and Main Street but also by technology. They will remember 2008 as the beginning of the peer-to-peer decentralized cryptocurrency called the Bitcoin protocol. The white paper by Satoshi Nakamoto first appeared on the Internet via the Cryptography Mailing List in November 2008 (archived in http://www.mail-archive.com/cryptography%40metzdowd.com/ msg09959.html) after the global financial crisis as a significant contribution to the world without actually first being published in an academic journal. Since then, the white paper (https://bitcoin.org/bitcoin.pdf) has generated a lot of interest. First, the timing of the release was a direct response to a crisis of confidence in a reserve currency, and there was no better time than 2008. Faced with an era of dis- quiet and a gradual loss of trust in the fiat currency system introduced in 1971, as well as the prospect of massive printing of money known as quantitative easing, the white paper offers a set of feasible alternative solutions to those who have little faith in a centralized monetary system. Cryptocurrency was first introduced in the early 1990s by an academic entrepreneur David Chaum in the form of eCash and DigiCash. The National Security Agency released an analytic report of great significance on the same subject over the Internet in 1996. But few in the financial world paid much attention to the development of cryptocurrency until the global financial crisis. It only caught the attention of many financial experts when successive quantitative easings pushed up asset prices. Given that the reversal of quantitative easing has unknown consequences and that China has started its bilateral swap agreements, the BRICS Development Bank and the Asian Infrastructure Investment Bank begin to challenge the conventional international institutions, and interest has begun to center on alternative monetary systems that include the digital cur- rency system. Cryptocurrency, a special class of digital currency, continues to generate interest among those who are uncomfortable with national currency beleaguered by huge liability, rather than backed by assets, of some central governments. Second, the white paper of Satoshi was the first paper that proposed a distributed monetary system and challenged the central authority that controlled money supply. xxi xxii Preface and Acknowledgments The proposed system was designed to address some of the issues that a centralized system could not. In particular, the control was decentralized and the supply of money was pre- determined. Given the open-source nature of the Bitcoin protocol, there are too many participants for anyone to effectively monitor and regulate single-handedly. For the first time, governments realize the decentralized nature poses great problems for anyone who intends to regulate a legal entity or small