LEGAL
Bitcoin has repeatedly made headlines since its creation. Nevertheless, the digital currency remains relatively misunderstood by the general public.
That being the case, here’s a quick history:
Created in 2009, bitcoin is a currency that exists only electronically. It operates completely independently of any government or bank. All transactions are conducted “peer-to-peer” – that is, without middlemen – and without any fees.
The bitcoin platform is completely decentralized and continuously updated by a network of over 10,000 computers across the globe.
Every transaction is encrypted, and each transaction is recorded and constantly synchronized across bitcoin’s network of thousands of computers, ensuring that each bitcoin was never copied, making the currency purportedly “impossible to counterfeit.”
The first bitcoin transaction occurred in May 2010, when a programmer paid 10,000 bitcoin to buy two pizzas. The current bitcoin price in U.S. dollars is now substantially higher: As of this writing, each bitcoin is worth around $5,800. (You can quickly discover the current value of the currency by Googling “bitcoin.”)
One of bitcoin’s greatest advantages – at least according to its proponents – is also the source of one of its most significant legal issues: its lack of regulation.
Although the term “regulation” carries something of a stigma nowadays, the fact remains that official oversight by a governmental agency or other organization often instills an air of legitimacy.
In other words, consumers would view bitcoin and other digital currencies as less risky and with less skepticism if there was an established agency monitoring its activities.
The problem with bitcoin is that it is effectively unregulatable by design. The currency has no central authority managing it. It has no owner. And it is not constrained by national borders. The most effective means that a government has to regulate bitcoin is to simply ban its use within its borders – a strategy with a mediocre effectiveness, at best.
Unfortunately, it is this lack of regulation that has made bitcoin and other digital currencies a favorite for illegal activity, including drug dealing and money laundering – and bitcoin’s association therewith has further damaged its reputation.
Bitcoin’s lack of regulation isn’t alone in making it the preferred currency in illicit transactions. It’s also bitcoin’s inherent anonymity that attracts the more unsavory sorts.
Of course, because the platform maintains a full record of every bitcoin and every bitcoin user’s encrypted identity on the public ledger, bitcoin transactions are not truly anonymous.
Nevertheless, this level of anonymity in digital money transactions is arguably unprecedented.
What’s the legal issue?
Laws like the Bank Secrecy Act require financial institutions to collect identifying information about their customers to help prevent money laundering. And compliance with these laws is a non-negotiable for any financial institution to be considered legitimate.
Bitcoin’s platform is designed to maintain anonymity between users. Although it is possible for bitcoin exchanges to obtain identifying information about the individuals behind the transactions, it isn’t nearly as easy as it is for traditional financial institutions.
Thus, if bitcoin exchanges are ever held to the same regulatory standards as traditional financial institutions, compliance will likely be a more onerous – and expensive – undertaking.
Bitcoin is almost always referred to as a “currency” of some sort or another.
But it isn’t a currency in the traditional sense. Aside from its obvious distinguishing trait of being completely digital, bitcoin is further set apart by its cap of 21 million units. That is, only 21 million bitcoin are allowed to exist, creating a level of scarcity that one would not expect from a purely electronic currency.
This scarcity has caused a surge in bitcoin’s value relative to the U.S. dollar, which sparked the creation of other cryptocurrencies.
This wave of digital currency activity has drawn the attention of the Securities and Exchange Commission, who just this past summer began regulating “initial coin offerings.” These “ICOs” are used by cryptocurrency startup firms seeking to raise money to fund the establishment of the new digital currency.
Backers invest legal tender in exchange for the startup’s virtual currency, and if the ICO is unsuccessful (i.e. not enough money is raised), the investments are returned.
The SEC has declared the digital coins offered as part of these ICOs to be “securities,” and thus subject to the agency’s jurisdiction.
Traditional currencies, however, are decidedly not securities. In fact, the Securities Exchange Act of 1934 specifically excludes “currency or any note, draft, bill of exchange, or banker's acceptance” from its definition of “security.”i
So is bitcoin a currency, a security, or something else entirely?
Depending on who you ask, it could be any or all of the above.
This point may seem a trivial semantics squabble, but our entire legal system is built on the foundation of definitions and the rules that extend therefrom.
Bitcoin’s system is truly revolutionary and beyond the scope of anything existing systems had previously contemplated.
However, because of that, bitcoin’s identity remains decidedly uncertain. Before it can find its place in the larger legal framework, bitcoin’s legal status must reach a more settled state – or our existing systems must adapt to deal with the change represented by bitcoin.
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