Bitcoin’s success hinges on the rule of law says Canadian think tank

The success or failure of the world's favourite cyrptocurrency depends on its legal status, according to a research note from the Montreal Economic Institute (MEI).

Examining a host of countries that have implemented regulatory frameworks regarding Bitcoin, MEI find there are three factors which are critical to the success of the digital currency.

First, users need to receive concrete benefits from using Bitcoin rather than some other currency, a state of affairs mostly related to mechanics of Bitcoin.

There also needs to be clear rules in place indicating how Bitcoin will be treated, both by the taxman and by regulators. Furthermore, these rules must not interfere with Bitcoin's role as a medium of exchange.

A regime with clear and predictable rules eliminates much of the uncertainty that holds investors back from taking a chance on Bitcoin. Cryptocurrencies will also require some form of governmental acceptance. However, this acceptance does not have to take the form of official recognition as a currency, simply that the fiscal status of Bitcoin should not prevent it being used in manner similar to that of conventional currency.

According to MEI, Germany seems to have done the best job of meeting the necessary criteria to secure a hospitable environment for Bitcoin. Recent developments in Canada also provide another friendly jurisdiction.

However, several countries have taken their hostility toward to Bitcoin to the extreme. The Chinese government and central bank have banned banks from carrying out commercial operations using Bitcoin, while individuals remain free to do so.

Russia stipulates that the ruble is the country's sole method of payment and no other monetary unit can be brought onto the market. Even though there are no regulations framing the use if Bitcoin, existing legislation makes it potentially illegal for individuals to use.

Excessive administrative rules, as well as burdensome taxes still have the potential to strangle Bitcoin at the point of birth in a swathe of countries.

However, MEI observe that there are existing legal regimes suitable to Bitcoin. One such regime is Canada, which includes Bitcoin exchanges within the definition of money services businesses. The report also also says the state of New York's BitLicenses experiment deserves evaluation.

However, while stable and predictable rules are important, MEI add a caveat:

While more precise rules are a precondition for the growing acceptance of Bitcoin, they can also have their drawbacks. Bitcoin is a technology that is constantly evolving, and that has multiple uses. The rules that regulate Bitcoin should ideally remain flexible and be adapted to this fluid character so as to give free rein to innovation.