United States: Virtual Currencies Hit The World Stage: Bitcoin’s Ever-Evolving Legal Status

Last Updated: October 27 2014
Article by Martin Mushkin, Joseph Sahid and Joseph Taub

Published the week of October 19, 2014, by yBitcoin Magazine

Congratulations, virtual currency world—New York wants to expressly regulate you! That's how important Bitcoin and other digital currencies have become in recent years. And as we know, what happens in New York's financial world often has implications for the wider world. All the recent attention New York has paid to virtual currency is raising many important legal questions, with potentially profound implications. This article will offer a brief survey of just some of them.

A Cryptic History of Money

Bitcoin is the latest and best known 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, thus putting the currency beyond the control or manipulation of any government. Not long after the computer was invented people started discussing the development of currency based on that series of zeroes and ones called "bits."

But mediums of exchange go back to the first bartering by cave people. When A and B first exchanged goods, each was getting something from the other that he wanted. Soon, there came a point when B didn't really want more apples but knew that he could exchange them with C for the tomatoes B really wanted. Soon he had an inventory waiting to be bartered. And shortly after that B needed some means of storing his accumulating wealth other than in the tomatoes and other produce he had bartered for.

Initially, B's excess wealth might have been represented in certain beads or special rocks. Next came smelted copper and eventually gold and silver.

Then there was the problem of storage for this wealth inventory. So here came banks and coins minted by governments, followed by the age of paper or fiat money, checks and credit cards. Today, instead of masses of paper moving through the banking system, all this transfer of wealth—debiting and crediting—takes place electronically. That means we are already in the digital currency era.

A Few Legal Questions

The introduction to the original white paper by Bitcoin's pseudonymous founder "Satoshi Nakamoto" states:

"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 ... . The fraud system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes."

What Nakamoto could not address at the time was Bitcoin's legal status in the currency and taxation worlds. What exactly is Bitcoin for legal purposes? This is a critical question, because Bitcoin's legal characterization makes a difference as to whether it is regulated, how it is regulated, and who regulates it.

Thus far, Bitcoin has been regarded as both a currency and a commodity. In SEC v. Shavers, a federal court in Texas held that since Bitcoin could be used to buy things other than Bitcoin itself, it was money. The court found that paying in bitcoins for shares in a business run by others for profit was buying a security and subject to SEC regulation. The court did not deal with the nature of what the business was going to do with the "money." The business intended to deal in bitcoins.

The court could have classified the transaction as an investment in commodities, as a Bitcoin trading business, or as trading in forex. The case presented different ways of looking at Bitcoin, along with several possible regulatory schemes: currency, securities, commodities and forex.

All of that suggests another question: Who has legal jurisdiction over Bitcoin transactions? Suppose Company A, physically in country X, uses the Internet to find an exchange, "GiveandTake," upon which it can offer its shares. It accepts payment only in Bitcoin. The exchange is only virtual and Company A does not know where the exchange is located.

Company A offers its securities, and investors pay for it by depositing bitcoins into Company A's electronic wallet. The wallet is administered by "Maybesafe," thought to be in country Y. Company A does not have the physical name and address of "Maybesafe" or the investors. All it has is email addresses. Of course, the securities the investors purchase are really electronic entries. Later, Company A pays dividends to the investors by sending the dividends to their virtual wallets via their email addresses. These recipients could be anywhere in the world.

Suppose things go wrong. Perhaps some of Nakamoto's "honest nodes" succumb to "attacker nodes." Maybe the business simply goes bankrupt. What government(s) can take jurisdiction? To what court can the injured party go to seek justice? Where the physical offices of the various participants are located, or the location of their servers?

The New York Story

New York, Wall Street's home, has published proposed regulations defining its jurisdiction as covering any transaction "involving New York or a New York resident." There are stated limits to "involving," but even so, anybody in the Bitcoin business "involving" New York will have to obtain a license. The only real exclusion is for "merchants and consumers" who "utilize Virtual Currency solely for the purchase or sale of goods or services."

In the banking world, New York's highest court has ruled its courts have jurisdiction over Lebanese Canadian Bank sued by U.S., Canadian, and Israeli citizens resident in Israel who were victims of Hezbollah rocket attacks. The claim was that the bank assisted Hezbollah by "facilitating international money transactions" by using its New York correspondent bank to transfer money to Hezbollah agents. This approach could be applied to Bitcoin. Beware Bitcoiners!

In our hypothetical case, New York's proposed regulations could require that Company A know the physical address of the exchange, that the exchange and wallet be licensed, and that all parties, including the investors, know with whom they are dealing beyond mere email addresses.

The proposed regulation requires all advertisements by licensees to include their name and a statement that they are licensed to engage in a "Virtual Currency Business" by New York. The license will serve as an advertised badge of integrity, like a bank saying it is a member of the FDIC. Hopefully, there will be no Mt. Gox or Silk Road fiascos by New York licensees.

But it's a tough regulation. Applicants must submit fingerprints, extensive personnel background information, certification of an outside investigator, a detailed business plan, and audited financials— much like a bank.

Once in business, a licensee must have a written compliance plan, maintain compliance personnel, be audited, and report frequently to the regulators. Among other things, if for instance, $10,000 in bitcoin or money is transmitted in "one day by one person," as in buying shares "involving New York or any resident of New York," the licensees will have to report the transaction to the New York regulators.

Some Laws That Might Apply

The Treasury's Financial Crime Enforcement Network (FinCEN) requires U.S. financial institutions to assist U.S. government agencies to detect and prevent money laundering and other criminal activity. Under the Electronic Funds Transfer Act, any transfer of funds, other than a transaction originated by check, or similar paper instrument, which is initiated through an electronic terminal, telephonic instrument, or computer, must be reported. "Money transmitting" includes transferring funds on behalf of the public by any and all means within this country or abroad. These laws would ostensibly cover Bitcoin transactions such as the illegal drug dealings in the infamous Silk Road case.

Bitcoiners, like all businesses, will have to comply with the securities laws, privacy, tax, health, Social Security laws, and money transmitter laws, and honor their contracts—or risk being sued. For Bitcoiners, regulation will greatly compromise the vaunted anonymity of the currency. This is a matter of more than a little concern for many in the Bitcoin community. Will a New York badge of integrity be worth it?

And About the Rest of the World...

New York isn't the only jurisdiction considering whether and how to regulate Bitcoin, but with New York being the 800-pound gorilla of the financial world that it is, you can bet that the rest of the world is watching very closely. Given Bitcoin's endurance and ever-evolving prominence on the world's financial stage, governments everywhere are considering regulation, and they will most certainly be closely observing what happens in New York.

As it stands now, Russia and others may criminalize Bitcoin in the future. On the other hand, they may find that tactic to be unsustainable and a bad move for their own financial system. The best advice from here is to stay tuned. Bitcoin remains an ever-evolving legal quandary.

Bitcoin Snapshot: Russia

The situation in Russia has been shifting and ambiguous since the beginning of the year with many players. In January the Bank of Russia issued a statement discouraging the use of bitcoins, warning that Russians who use them risk becoming unwittingly involved in illegal activities. In February, Russia's prosecutor general announced that with the ruble being the official currency of the Russian Federation, existing Russian law categorically prohibits Bitcoin. This contrasts with one issued by Bank of Russia in March clarifying that its February meeting with the general prosecutor did not conclude that all "cryptocurrencies"" were prohibited, and was merely intended to develop a regulatory framework to combat illegal operations and protect the rights of users.

It seems that the matter will be settled soon enough, though, as Russia's Finance Ministry announced it is drafting a bill that would not only ban Bitcoin and other monetary surrogates, but moreover restrict access to websites on which they are bought, sold, and transferred. It is opposed by the chair of the Duma's Committee on Financial Markets, however. And given Russia's well-documented ambivalence on the matter, the bill's fate appeared uncertain as a vote loomed this year.

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.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
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.

Disclaimer

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.

General

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