United States: Virtual Currency Businesses: An Analysis Of The Evolving Regulatory Landscape


Whether virtual currency businesses boom or go bust remains to be seen. The jury is out on whether Bitcoin or some other digital currency garners widespread acceptance by merchants and consumers as a substitute for the U.S. dollar for the electronic payment of goods and services.1

Proponents of virtual currency tout a number of its benefits.2 They extol it as a fast and flexible electronic payment option that will benefit customers because of lower transaction fees than most major credit cards.3 They claim merchants will see cost savings because payments in Bitcoin are "nonrecourse," which means no potential chargebacks like with credit card transactions.4 Some businesses assert digital currency technology will improve the financial services industry by enabling lower cost instant payment transactions across borders in different currencies.5 Thrill-seeking investors also hope for financial gains from investment in virtual currencies as Bitcoin exchange rates against the U.S. dollar have changed dramatically over time with prices fluctuating from $13 per Bitcoin in the beginning of January 2013 to more than $1,100 by the beginning of December 2013 (although back down to around $260 by mid-2015).6 As major retailers like Dell,7 Overstock.com,8 eBay,9 and PayPal10 issue announcements that they already accept or are considering accepting Bitcoin, virtual currency has begun to garner some legitimacy with consumers, merchants, and investors.11

On the other hand, there remain significant hurdles to its widespread acceptance. The Silk Road and Mt. Gox scandals, among others, have raised valid consumer protection concerns regarding digital forms of currency such as vulnerability to cyber-attack, susceptibility to fraudulent activity, risk of currency devaluation, and lack of consumer protection.12 The now defunct Silk Road marketplace, an online black market that was shut down by the Federal Bureau of Investigation (FBI) in 2013, tarnished the reputation of Bitcoin as the digital cryptocurrency was the means by which users of the site purchased illicit goods and services with relative anonymity.13 Ross Ulbricht, the site's mastermind, was ultimately sentenced to life in prison for running the online drug marketplace.14 Mt. Gox, once Bitcoin's biggest exchange, also dealt a significant blow to the virtual currency industry when it suspended trading in February 2014, shuttered its website, and filed for bankruptcy after announcing that more than $400 million worth of customer Bitcoins had vanished without recourse due to computer hackings.15 The extreme volatility of the Bitcoin price index—a speculator's dream for some—raises concern for more conservative, risk averse investors.16 And the non-recourse nature of virtual currency transactions—a benefit for merchants—creates consumer risk as it eliminates traditional credit card protections for purchasers.17

While it remains uncertain how pervasive the fledgling virtual currency industry will become, one thing is certain: regulation for businesses that operate in the virtual currency space will increase.18 Federal and state regulators have taken notice of the growing digital currency phenomena, and they are currently grappling with regulatory issues within their purview.19 Virtual currency businesses have drawn particular attention from federal and state agencies responsible for monitoring and investigating financial crimes, and in recent years administrative and judicial decisions have provided some guidance regarding the evolving regulatory requirements for virtual currency businesses.20

This article examines the evolving legal status of virtual currency and emerging federal, state, and judicial decisions affecting businesses involved in the virtual currency space.21 It concludes any business structured around Bitcoin or other virtual currency should monitor closely the evolving regulatory landscape as the price of failing to maintain a proactive compliance program is high.22 While predicting the direction of the regulation is difficult, existing administrative rulings, memoranda, and judicial decisions indicate that virtual currency businesses should pay close attention to federal and state money transmitter registration and licensing requirements, tax obligations, commodities, and securities law.23

This article also suggests that increased regulatory obligations for virtual currency businesses may be the price of legitimizing the industry.24 While many in the industry oppose regulation because of compliance costs, the current state of regulatory uncertainty presents other, perhaps more costly, risks for legitimate virtual currency businesses.25 The perceived consumer protection risks associated with virtual currencies limit the market share of legitimate businesses, and regulatory uncertainty can stymie investment by sophisticated institutional investors.26 While settling the uncertain regulatory landscape may cause growing pains for the virtual currency industry, these pains appear necessary in order to move the industry out of the Internet shadows and into the mainstream.27

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1. See Jaroslaw Adamowski, New Research Links Bitcoin Price Spikes to Media Hype, COINDESK (Nov. 19, 2014), http://www.coindesk.com/reasons-behind-bitcoins-price-media-hype/, archived at http://perma.cc/RG92-82RD.

2. See Kim Lachance Shandrow, 5 Reasons Merchants Should Start Accepting Bitcoin Now, ENTREPRENEUR (Sept. 4, 2014), http://www.entrepreneur.com/article/237026, archived at http://perma. cc/BHA4-AVWQ. Though they are each slightly different, this article will use the terms "digital currency," "virtual currency," and "cryptocurrency" interchangeably. What is the Difference Between Cryptocurrency and Digital Currency?, MAXCOINWORLD (Apr. 28, 2014), http://www.maxcoinworld .com/233/what-is-the-difference-between-cryptocurrency-and-digital-currency/, archived at http://perma. cc/ZDCK-CKMS.

3. See Shandrow, supra note 2.

4. See id.

5. See Executive Summary for Financial Institutions, RIPPLE, https://www.ripple.com/integrated/ executive-summary-for-financial-institutions (last visited Apr. 1, 2015), archived at http://perma.cc/ PGW4-BRWF.

6. Bitcoin Price Index Chart, COINDESK, http://www.coindesk.com/price/ (last visited Apr. 1, 2015), archived at http://perma.cc/44CZ-WPLZ.

7. Dell Now Accepts Bitcoin, DELL, http://www.dell.com/learn/us/en/uscorp1/campaigns/bitcoinmarketing (last visited Apr. 1, 2015), archived at http://perma.cc/EX66-5MB6.

8. Bitcoin on Overstock.com, OVERSTOCK.COM, http://www.overstock.com/bitcoin (last visited Apr. 1, 2015), archived at http://perma.cc/CH3L-EZK6.

9. Caelainn Hogan, Ebay's Paypal Embraces Virtual Currency Bitcoin. Could Help Bitcoin Get Some Respect, WASH. POST (Sept. 10, 2014), http://www.washingtonpost.com/news/morning-mix/wp/ 2014/09/10/ebays-paypal-embraces-anarchic-virtual-currency-bitcoin/, archived at http://perma.cc/Z7Y 7-6YHJ.

10. Id.

11. See Cameron Graham, Out of the Spotlight, Bitcoin Gains Legitimacy, WIRED (Sept. 15, 2014), http://www.wired.com/2014/09/bitcoin-gains-legitimacy/, archived at http://perma.cc/5HWR-Z9ZU.

12. See Charles Poladian, Silk Road Shutdown: NY US Attorney Seizes $28 Million in Bitcoins Belonging to Ross Ulbricht, INT'L BUS. TIMES (Oct. 26, 2013), http://www.ibtimes.com/silk-roadshutdown- ny-us-attorney-seizes-28-million-bitcoins-belonging-ross-ulbricht-1442640, archived at http:// perma.cc/5KH2-2UM8; Yoshifumi Takemoto, Mt. Gox Files for Bankruptcy, Hit With Lawsuit, REUTERS (Feb. 28, 2014), http://www.reuters.com/article/2014/02/28/us-bitcoin-mtgox-bankruptcy-idUSBREA1R 0FX 20140228, archived at http://perma.cc/M73G-GNCV.

13. See Poladian, supra note 12.

14. See Kate Vinton, Silk Road Creator Appeals Life Sentence, FORBES (June 5, 2015), http:// www.forbes.com/sites/katevinton/2015/06/05/silk-road-creator-ross-ulbricht-appeals-life-sentence/.

15. See Risks to Consumers Posed by Virtual Currencies, CONSUMER ADVISORY (Aug. 2014), available at http://files.consumerfinance.gov/f/201408_cfpb_consumer-advisory_virtual-currencies.pdf, archived at http://perma.cc/HB5T-WT36.

16. See Consumer Financial Protection Bureau, Risks to Consumers Posed by Virtual Currencies, CONSUMER ADVISORY (Aug. 2014), available at http://files.consumerfinance.gov/f/201408_cfpb_ http://files.consumerfinance.gov/f/201408_cfpb_ consumer-advisory_virtual-currencies.pdf, archived at http://perma.cc/HB5T-WT36.

17. Id.

18. See U.S. Gov't Accountability Office, Virtual Currencies: Emerging Regulatory, Law Enforcement, and Consumer Protection Challenges, GAO-14-496 (May 2014), available at http://www. gao.gov/assets/670/663678.pdf, archived at http://perma.cc/7L4M-T5LW.

19. Id.

20. Id. at 25 n. 61.

21. See infra Parts II–IV. The scope of this article narrowly addresses recent developments in money transmitter, tax, securities and commodities regulation affecting virtual currency businesses. See infra Parts II–IV. It does not purport to provide a comprehensive compilation of all potential areas of governmental regulation for such business. See infra Parts II–IV.

22. See infra Part IV.

23. See infra Part IV.

24. See infra Parts II, IV.

25. See infra Part IV.

26. See infra Part IV.

27. See infra Parts II–IV.

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