Written by Richard Lyons via the Digital Currency Council.

As the awareness and popularity of digital currency advances there are a number of barriers emerging, which in the short term may limit how and where Bitcoin may be used. While the understanding of digital currency is increasing, many of these hurdles relate to public acceptance, perceived security and legal remedies for Bitcoin transactions.

Bitcoin’s very simplicity and lack of need for third party involvement in the transaction is now the main source of resistance by both financial and governmental agencies. Of course these concerns are expressed in the interest of protecting the public in this new decentralized currency. However, it seems some regulations are designed to primarily preserve the governmental role in all types of currencies and financial transactions.

Regulation by State Governments and Foreign Countries

The New York “Bitlicense”

One of the most current regulatory issues is that of ad hoc regulation of digital currency by states as well as other countries. The recent statutory proposal by New York State to create a “Bitlicense” is a prime example of how state governments are diving into this area in an attempt to place some type of regulatory structure around the currency usage. As with many state laws, Bitcoin rules could be determined simply by the jurisdiction where you live and do business, absent any federal guidelines.

While some see this as a needed advance in promoting widespread acceptance of Bitcoin, the concern is that early laws and regulations at a state level may be poorly crafted or lack the research and contribution of the digital currency companies that would be subject to regulation. In an effort to protect consumers, lawmakers may be undermining the very value of digital currency as a means of transacting business.

As an example, elements of the proposed New York “Bitlicense” will require every business that transacts in Bitcoin to obtain a formal license, place a bond of unspecified amount and collect customer data for each transaction. Under this sweeping proposal, Bitcoin loses many of the advantages it holds over other currencies, namely privacy and ease of use without third party involvement.

Foreign Laws and Regulation

Related to this issue is the varied response by foreign governments to Bitcoin. A few have joined the US in attempting to formulate an approach to digital currency, while others are waiting to see the direction it takes. For now Bitcoin use is primarily limited to developed countries, and its varied legal status among jurisdictions may limit transactions to countries that have passed specific laws regarding Bitcoin and how it will be regulated. Bitcoin could be an ideal solution in developing countries for low-cost transactions without needing a bank account, but still it faces problems of funding, technology use and conversion into local currency.

Taxation / Criminal Law / Civil Liability

Federal Tax Classification

For users of digital currency there are a number of potential legal pitfalls. For example, the way that Bitcoin is now classified as “property” rather than currency for federal tax purposes is one area of contention. This subjects any gain in Bitcoin value from the point of purchase to sale as a capital gain, so each Bitcoin transaction must be recorded and reported. Of course, the anonymous nature of Bitcoin transactions make enforcement unlikely at this stage, but it does demonstrate the willingness of the IRS to discourage the use of bitcoin as a digital currency by creating tax disadvantages for everyday consumer use. Several foreign countries have joined the US in this classification, resisting the call to name Bitcoin as a formal currency, and instead naming it an asset.

Criminal Activity

Another problem is the fact that in case of suspected criminal activity, Bitcoins’ reputation makes them subject to quick confiscation by law enforcement while the outcome of a case is pending. This underscores the concern by law enforcement that Bitcoin’s appeal in criminal activity could increase, which may lead to more regulation to reduce the anonymity of transactions for ease of seizure and identification.

Civil Liability

There is also the new subject of civil liability when a Bitcoin transaction somehow goes wrong. The standards for duty of care and breach of that duty are far from clear, and places digital currency in unknown legal terrain. The risks of a Bitcoin transaction are few but thefts do occur, so it seems consumers could be absorbing most of those risks with little recourse in seeking liability for losses.

Regulatory Motives

Resolution of these legal concerns is central to widespread acceptance and usage of Bitcoin for business or personal transactions. The degree of personal financial protection appears low to the average consumer, and the potential costs and downsides loom large. This perception has been amplified by the price volatility of Bitcoin value, and well-publicized criminal cases involving the digital currency. Increased regulatory action could easily stem from negative public perception, as lawmakers seize on consumer fears to pass more restrictive rules for digital currency.

Originally appeared on Digital Currency Council.