United States: Virtual Currency Is Here To Stay – Bitcoin Is The Latest Evolution

Last Updated: April 7 2014
Article by Martin Mushkin, Joseph Sahid and Joseph Taub

The Legal Aspects1

Bitcoin is the latest and well-known form of digital currency in a long line of digital currencies. The basic premise of digital currencies is that they try to establish a medium of exchange based on immutable mathematics and not subject to the control or manipulation of any government. Not long after the computer was invented people started discussing the development of currency based on computer codes, that series of zeroes and ones, called bits. The idea was to develop a medium exchange without fiat money issues and not backed by a government and subject to its manipulation. The result so far has been to raise complex legal dilemmas which legal counsel have to work through.

A Cryptic History of Money

First, to understand the context of the legal problems we need to keep in mind how money has developed. Since the first cave men exchanged goods in a barter transaction there has been some medium of exchange. When A and B first exchanged goods, each was getting something from the other that he wanted. There came a point quickly that B really did not want that widget but knew that he could exchange it with C and also with D and E for some things B really wanted. Soon he had an inventory waiting to be bartered. And soon after that it B (or A) needed some means of storing his wealth other than in the goods he had bartered for. It might have been certain beads, special rocks or the like. Next came smelted metals, first copper and eventually gold, silver and other "precious metals". Then there was the problem of storage of this inventory of wealth. Banks, places of safe storage, were established. Coins with weights established by government mints came along. It is noteworthy that the words shekel and pound are measures of weight which we now think of as measures of value.

Finally we are in the age of paper or fiat money. Until that popularization of credit cards after World War II, there were two kinds of paper currency in circulation: checks, and dollar bills, which is a paper currency issued by a government. To this day checks say "Pay to the order of .....". In other words they are commands to one's bank to move wealth stored by them from the account of the maker of the check to the account of the person to whom it is to be paid. Instead of masses of paper moving through the banking system all this transferring - debiting and crediting – now takes places electronically. As soon as that is said we enter into a form of digital currency.

In the United States currency was measured in terms of ounces of gold until 1971 when it went off the gold standard. Now the value of a currency is purely dependent on the trust one has in the continuing acceptance of that currency with whom one wants to trade and that it will continue to buy you that certain value of goods you want to exchange it for. On the world stage the U.S. dollar has fulfilled that exchange role for half a century.

Digital Currency 's Resolution to a Perceived Problem

The white paper upon which the bitcoin is based has this introduction.

1. Introduction

Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model. Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make non-reversible payments for nonreversible services. With the possibility of reversal, the need for trust spreads. Merchants must be wary of their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable. These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party. What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party. Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers. In this paper, we propose a solution to the double-spending problem using a peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions. The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes. (underlining added.)

We have underlined what we see as the thrust of the white paper. Very simplistically the white paper wants to substitute a theoretical unbreakable mathematical formulation for the trust and subjective valuation inherent in prior mediums of exchange. Existing mediums of exchange obtain their status because their government issuers provide a regulatory framework trusted by their citizens. To be really useful, bitcoin requires people to be comfortable accepting them to buy and sell the commodities we use in our daily lives in place of government issued fiat money.

Bitcoin, that long algorithmic string of bits, zeroes and ones, is currently the most popular iteration of digital currency. Others exist, surely someone (anonymously possibly) will develop a new and better model. In the meantime here is where we are.

Now we get to the law part. For our purposes, law generally establishes the framework within which we conduct our daily life and provides penalties when one moves outside that framework. The framework is a practical method of going about one's business. We assume that except for the imprudent or the rogues, drivers will stop and go depending on whether the light is red or green. Law also provides a basic moral code within which we work.

Unfortunately digital currencies, including bitcoin, have found that they are subject to economic vagaries and human chicanery. A number of legal cases have already arisen. If you put the word "bitcoin" or "digital currency" into Westlaw, one of the two largest U.S. subscription legal research services, few cases show up. In other words the legal exposition of digital currency" and "bitcoin" has just begun.

Who has Legal Jurisdiction over Bitcoin Questions? To approach the legal issues we must first examine how bitcoin fits into the legal environment. To say it is a digital currency does not answer the question. Is bitcoin a currency, a commodity, some kind of hybrid or something else? It all depends on the context. What difference does it make? It makes a difference as to whether it is regulated, how it is regulated and who regulates it. Here is how it can break out.

It can be money, a currency, or a commodity. Some months ago, Japan's Financial Services Agency took the position "Bitcoin isn't a currency; it works as an alternative to currencies, like gold. ... The FSA is in charge of currency-based services. Therefore, bitcoin exchanges are not subject to our regulatory oversight." It appears that in Japan bitcoin is being treated as a commodity and subject to less regulation than currency or securities. Since the Mt. Gox bankruptcy the Japanese government is revisiting this issue. Canada has ruled bitcoin is not legal tender. That does not mean that Canada will not regulate it. Interestingly ATMs exchanging bitcoin for Canadian currency and vice versa are being installed in major Canadian cities. And they may soon appear in Los Angeles and elsewhere in the U.S.

What's happening in the U.S.? In SEC v. Shavers, decided by the U.S. District Court for the Eastern District of Texas, the court held that since bitcoin could be used to buy things other than bitcoin itself, it was money in this context. The court found that the investment was in an enterprise operated for profit, and therefore was a security. The court did not deal with the nature of what the enterprise was investing in. The investment was in bitcoin itself, and the court could have classified the investment as an investment in a commodity or alternatively a forex transaction. So here we have three ways of looking at bitcoin and several different regulatory schemes that might be involved: money, securities, commodities and forex. The CFTC has announced that it is investigating regulating bitcoin as a "derivative" or a commodity, both of which are within its jurisdiction. The U.S. Treasury has added a bitcoin representative to its Bank Secrecy Act Advisory Group (BSAAG). The BSAAG consists of representatives from regulatory and law enforcement agencies, financial institutions, and trade associations who advise Treasury on anti-money laundering and counter-terrorist financing policy. The Treasury's Financial Action Task Force (FATF) is expect to publish a guide on common definitions for the virtual currency world and describes the potential benefits and illicit finance vulnerabilities of virtual currencies New York State's Superintendent of Financial Services, Benjamin Lawsky, has said that virtual currency exchange operators should submit formal applications as a first step toward eventual regulation.

What Country Has Jurisdiction Over Whom? There is also the question of geographic jurisdiction. Suppose Company A which is physically in country X uses the internet to find an exchange upon which it can offer an investment opportunity and states it will only accept payment in bitcoin. The exchange is only virtual and Company A does not know where it is located. Company A makes its securities offering and investors pay for it by depositing bitcoin into Company A's bitcoin wallet; mind you a virtual electronic wallet. The wallet is administered by still another storage facility perhaps in a third country. Company A does not have the physical name and address of the investor. All it has is the email address of the investor. So the security the investor purchased is really an electronic entry. In the course of time Company A pays dividends to the investor by sending those dividends to the virtual wallet designated by the investor by use of his/hers/its email address. Any of these entities or people could be anywhere in the world. Is jurisdiction where the physical offices of the various participants are located, the location of their servers, or where the harm complained of hurt a physical entity? What government(s) can take jurisdiction? To what court can the complainant go for justice? It all depends on a number of factors that must be explored on a case by case basis.

How Does The Law Deal With Digital Currencies?

Assuming U.S. jurisdiction, here are some of the U.S. laws that have to be dealt with when dealing in digital currencies. - The penalties for non-compliance can be draconian; including seizure long before trial of all assets including bank accounts, websites and email addresses wherever located,.

Bank Secrecy Act and FinCEN The Treasury's Federal Crime Enforcement Network ("FinCEN") describes the Bank Secrecy Act as follows:

The Currency and Foreign Transactions Reporting Act of 1970 (which legislative framework is commonly referred to as the "Bank Secrecy Act" or "BSA") requires U.S. financial institutions to assist U.S. government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, file reports of cash transactions exceeding $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. It was passed by the Congress of the United States in 1970. The BSA is sometimes referred to as an "anti-money laundering" law ("AML") or jointly as "BSA/AML." Several AML acts, including provisions in Title III of the USA PATRIOT Act of 2001, have been enacted up to the present to amend the BSA.

In March 2013 FinCEN issued interpretive guidance clarifying the application of the Bank Secret Act to virtual currencies. FinCEN had previously promulgated regulations governing money services businesses ("MSBs"), including currency exchanges and money transmitters, which are obligated to comply with registration, record-keeping, and other requirements. The March 2013 guidance attempts to clarify if and when participants in virtual currency transactions might be engaging in "money transmission" and thus subject to the MSB rules. They may be "users, exchangers or administrators, or combinations thereof." Depending of classification different rules may apply.

In October, 2013, a bill was introduced into Congress to amend the Bank Secrecy Act to, among other things, broaden its prohibitions of money laundering, to assure compliance with the recommendations of the Financial Action Task Force, and to broaden the personal responsibility of individuals as well as institutions to comply with the Bank Secrecy Act. In January, the bill was referred to the Subcommittee on Crime, Terrorism, Homeland Security, and Investigations.

Counsel must examine these rules along with the virtual currency business client to determine their applicability.

Electronic Funds Transfer Act.

This law is most commonly thought of as regulating ATMs, but it goes much further than that. It states:

the term "electronic fund transfer" means any transfer of funds, other than a transaction originated by check, draft, or similar paper instrument, which is initiated through an electronic terminal, telephonic instrument, or computer or magnetic tape so as to order, instruct, or authorize a financial institution to debit or credit an account. Such term includes, but is not limited to, point-of-sale transfers, automated teller machine transactions, direct deposits or withdrawals of funds, and transfers initiated by telephone. ...

It then goes on to exclude many everyday transactions. Indictments have been issued to people dealing in bitcoin for failure to comply with this law. Establishing a bitcoin business requires particular attention be paid to compliance with this law.

Money Transmitting Services.

The term money transmitting services has been broadly defined. One federal law provides that:

(b)(2) the term "money transmitting" includes transferring funds on behalf of the public by any and all means including but not limited to transfers within this country or to locations abroad by wire, check, draft, facsimile, or courier.

That law has been broadly interpreted to require businesses which are not banks or other money depositories, but deal in virtual currencies, to register with both the federal government and state governments.

Transaction Reporting

Federal and state laws and regulations require that organizations through which transactions of a certain size (measured in U.S. dollars) occur must report those transactions to the U.S. Treasury. The reports require identity of the transmitter and the recipient. Email addresses and e-wallets will not suffice. Currently the reporting dollar amount is $10,000.

Money Laundering

Generally speaking, money laundering is aiding the movement of money illegally obtained into the above ground legal economy or hiding it from legally authorized scrutiny. To say the least, you can get in trouble.

One federal definition of money laundering is:

(a)(1) Whoever, knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity, conducts or attempts to conduct such a financial transaction which in fact involves the proceeds of specified unlawful activity--

...(B) knowing that the transaction is designed in whole or in part--

(i) to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity; or

(ii) to avoid a transaction reporting requirement under State or Federal law,

shall be sentenced to a fine of not more than $500,000 or twice the value of the property involved in the transaction, whichever is greater, or imprisonment for not more than twenty years, or both.

To avoid participation in money laundering one must know with whom one deals on both sides of the transaction. Silk Road is accused of knowingly becoming a market place for drug dealers. The definition does not mean that all transactions with suspect persons constitute money laundering. There are a number of aspects of a transaction and business that must be explored, but anybody dealing in the anonymous world of digital currencies must be cautious. It's simple – find out enough about whom you are dealing and what they are dealing in so that you don't aid crooks.

The same law makes it a crime not to report certain money transaction involving more than $10,000 to the IRS.

Securities laws – federal and state

The key element in determining whether the federal and/or state securities laws apply to a situation is determining if a "security", as defined by these laws and the courts, is involved. Securities laws are aimed at establishing disclosure of important information so investors can determine whether to invest, hold or sell, and to set rules for buying and selling so that there is a "level playing field". Companies raising investment capital, whether the investment be in money, bitcoin or something else, may or may not be exempt from registering their securities with the SEC or their state. In 2012 Congress passed the JOBS Act ("JumpStart Our Business Startups" Act) which substantially liberalized how one can raise capital in some circumstances without having registered the securities. As we have indicated above, a digital currency can be characterized in many ways depending how it shows up in a transaction. Businesses dealing with bitcoin have to determine what securities laws may apply, what exemptions are available, and how to comply.

Privacy Acts There are at least 20 federal privacy statutes dealing with a vast number of subjects. While the Freedom of Information Act permits applicants to obtain certain records, it limits what must be released to whom. Other laws prohibit banks and other financial institutions from releasing information to anybody but registered signatories of the depositor. And other laws require institutions (and individuals) to collect and retain information regarding who they are dealing with and turn it over to the government. People dealing in bitcoin as a business must be familiar with these laws, determine whether they are subject to them, and establish procedures to comply.

Bankruptcy Laws Mt. Gox, the largest bitcoin exchange, has filed for bankruptcy in Texas. And Mt. Gox and its founder have been sued in a class action in Illinois. That suit may be transferred by the bankruptcy court to its Texas jurisdiction. Bankruptcy courts have broad powers to capture the assets of bankrupts and protect the debtor's creditors.

Contract Law One of the premises of bitcoin and other digital currencies is that bitcoin transactions are irreversible. The digital string cannot be broken. However, people paying or receiving bitcoin have claimed that they did not get what they bargained for. In other words, transactions in which bitcoin is involved are subject to the same contract laws as other transactions.

Taxation, Health Care and Social Security Laws US tax laws, health care laws, social security laws and many others will apply to businesses conducting digital currency businesses, in the United States. State laws will also be applicable. Employers in the bitcoin world must be aware and provide for compliance.

The IRS has spoken On March 25, 2014, the IRS published a Notice in which it treats bitcoin as "property", not currency. Presumably that means that bitcoin transactions will be dealt with as barter transactions. The taxation of barter transactions raises issues beyond the scope of this article.

CONCLUSION As can be seen, the legal issues being raised by the advent of bitcoin cover a wide range and will require those in the industry to engage competent legal counsel to navigate the area. Beware, regulations are coming.


1 This article is updated, in part, to March 28, 2014. The information presented here should not be construed to be formal legal advice, nor the formation of an attorney/client relationship.

Attorney Advertising. Prior results do not guarantee a similar outcome. The information presented should not be construed to be formal legal advice nor the formation of a lawyer-client relationship.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions