Pacy: Tales from the Cryptocurrency

121

Tales from the Cryptocurrency: On Bitcoin, Square Pegs, and Round

Holes

ERIC P. PACY

ABSTRACT

Bitcoin is a technologically advanced, decentralized, virtual form of money that is transferred (almost) instantly and (almost) anonymously using a peer-to-peer network supported by a certain number of computer geeks willing to expend massive amounts of computing power in exchange for new bitcoins. Yet it is still money. However, regulators and scholars have been reticent to treat cryptocurrencies like Bitcoin as money, electing instead to attempt to fit this new technology into an existing regulatory framework as something other than money. By doing this, they create unnecessary complexity and sometimes absurd results. This Note argues that Bitcoin is most logically characterized as money and that the law should evolve to embrace this new technology.

Candidate for Juris Doctor, New England Law | Boston (2015). B.A., cum laude, English,

University of Massachusetts–Dartmouth (2011). I would like to thank my family and friends

for all of their love and support. In particular, I would like to thank my amazing wife, Caleigh.

New England Law Review Scribes Award Winner, 2013–2014.

122 New England Law Review v. 49 | 121

INTRODUCTION

itcoin is money.1 It is a technologically advanced, decentralized, and virtual form of money that is transferred (almost) instantly and (almost) anonymously using a peer-to-peer network supported by a

certain number of computer geeks willing to expend massive amounts of computing power in exchange for new bitcoins.2 Yet it is still money.

Prior to 1972, “mail” meant communication—personal letters, important documents, and packages which needed to be sent to another person would be given to a courier to arrive some days later.3 In 1972, Ray Tomlinson brought us electronic mail.4 Today, the majority of communications, once physically written and delivered, are passed from one individual to another using email and the Internet.5 Email changed the way we think about mail; it was a new and more efficient way of sending documents, yet it has always been considered an electronic form of mail, not something else.6

1 See infra Part V (discussing the specific features of traditional money and how bitcoin is

the functional equivalent). 2 See infra notes 18–34 and accompanying text. 3 See Randolph E. Schmid, You Never Write Anymore; Well, Hardly Anyone Does Anymore,

NBC NEWS (Oct. 3, 2011, 7:15 PM), http://www.nbcnews.com/id/44760552/ns/technology_and

_science-tech_and_gadgets/t/you-never-write-any-more-well-hardly-anyone-does/#.UwfqBvR

DuSo. 4 See Ian Peter, The History of Email, NETHISTORY, http://www.nethistory.info/History%20of

%20the%20Internet/email.html (last visited Mar. 17, 2015). In 1965, researchers at the

Massachusetts Institute of Technology created a program to send messages on the same

computer. Id. What’s more, Ray Tomlinson’s contribution of figuring out how to specify a

mail recipient did not put email into the mainstream on its own—many other developers

contributed critical features of what we recognize today as email. See id. Tomlinson said, “any

single development is stepping on the heels of the previous one and is so closely followed by

the next that most advances are obscured. I think that few individuals will be remembered.”

Id. 5 See THE RADICATI GROUP, INC., EMAIL STATISTICS REPORT, 2013-2017, at 2–3 (Sara Radicati,

ed., 2013), available at http://www.radicati.com/wp/wp-content/uploads/2013/04/Email-

Statistics-Report-2013-2017-Executive-Summary.pdf (presenting statistics indicating the

ubiquity of email, particularly in the business context). 6 See Email, WEBOPEDIA, http://www.webopedia.com/TERM/E/e_mail.html (last visited

Mar. 17, 2015). The nomenclature of email (you “send” it, you receive it in your “mailbox,”

etc.) suggests that we still consider it mail. See id. Further, some courts have recognized that

the Fourth Amendment protections traditionally applied to mail, see Ex Parte Jackson, 96 U.S.

727, 733 (1877), are also extended to email. United States v. Warshak, 631 F.3d 266, 285–86 (6th

Cir. 2010) (“Given the fundamental similarities between email and traditional forms of

communication, it would defy common sense to afford emails lesser Fourth Amendment

protection.”).

B

2014 Tal es f rom the Cryptocurrency 123

However, when it comes to virtual currencies, commentators and regulators have been reticent to allow the “money” label to stick.7 Consequently, there is some confusion about what regulations might apply to Bitcoin and other virtual currencies.8 For instance, the Securities Exchange Commission (“SEC”) has made comments reserving the possibility that Bitcoin could be regulated as a type of security, and scholars have made some compelling arguments to that effect.9 The Commodity Futures Trading Commission (“CFTC”) would have jurisdiction if the United States concludes that Bitcoin is best categorized as a commodity, as some other countries have done.10

Underpinning this tug-a-war is the definition of money and how Bitcoin fits that definition.11 If we apply existing black-letter legal definitions, Bitcoin is not exactly “money,” “currency,” or “foreign currency,” and Bitcoin users do not hold “accounts” with “financial institutions.”12 However, in the world of economics, it appears inescapable that virtual currency is money—albeit with certain technology-enabled advantages to the medium.13

This Note argues that regulators should treat virtual currency the same as “real” currencies in order to conform to the common understanding of money. Part I attempts to instill a working knowledge of the Bitcoin protocol, highlighting its strengths and weaknesses. Part II gives a brief survey of some potential existing regulatory frameworks which may apply to Bitcoin and the consequences of classifying it. Part III argues that Bitcoin is not a security or a commodity. Part IV examines the legal definition of money, while Part V analyzes the economic definition of money and demonstrates that Bitcoin satisfies that definition.

7 See, e.g., I.R.S., NOTICE 2014-21, at 1–2 (2014), available at http://www.irs.gov/pub/irs-

drop/n-14-21.pdf (stating that virtual currencies are considered property for income tax

purposes). 8 See, e.g., Todd P. Zarega & Thomas H. Watterson, United States: Regulating Bitcoins: CFTC

vs. SEC?, MONDAQ (Jan. 2, 2014), http://www.mondaq.com/unitedstates/x/283878/

Commodities+Derivatives+Stock+Exchanges/Regulating+Bitcoins+CFTC+vs+SEC. 9 See id.; Derek A. Dion, I’ll Gladly Trade You Two Bits on Tuesday For a Byte Today: Bitcoin,

Regulating Fraud in the E-conomy Of Hacker-Cash, 2013 U. ILL. J.L. TECH. & POL'Y 165, 192 (2013). 10 See infra Part II.D. 11 See, e.g., Zarega & Watterson, supra note 8. 12 See infra Part IV. 13 See infra Part V.


I. Background

A. Bitcoin: A Peek Under the Hood

Bitcoin was developed and unveiled in 2008 by a programmer, or consortium of programmers, going by the moniker Satoshi Nakamoto.14 Some idealists view Bitcoin’s genesis as a populist reaction to the global financial crisis of 2007–2008.15 Aside from the timing, Bitcoin’s creator seemed to have been making a statement about the bailouts of various “too-big-to-fail” financial institutions.16 The first ever Bitcoin transaction (between Nakamoto and Hal Finney) carried a simple message—a newspaper headline: “The Times 03/Jan/2009 Chancellor on Brink of Second Bailout for Banks.”17

Whatever the inspiration, Bitcoin’s genius is its ability to solve the “double-spending problem” without the aid of a trusted third party.18 The “double-spending problem” simply means that, in order to complete an electronic transaction, there must be a way to verify that the funds transferred have not already been spent.19 If we imagine a unit of virtual currency, which is no more than a computer file, double spending would be as simple as creating copies of the same file and sending them to different merchants, destroying faith in the currency.20 Traditionally, this problem has been solved with the use of a trusted third party, like Paypal,

14 See SATOSHI NAKAMOTO, BITCOIN: A PEER-TO-PEER ELECTRONIC CASH SYSTEM 1 (2008),

available at www.bitcoin.org/bitcoin.pdf. The name Satoshi Nakamoto is in all likelihood a

pseudonym; it translates in English to something like “thinking clearly inside the foundation.”

Alec Liu, Who is Satoshi Nakamoto, the Creator of Bitcoin?, MOTHERBOARD (May 22, 2013,

9:45AM), http://motherboard.vice.com/blog/who-is-satoshi-nakamoto-the-creator-of-bitcoin.

Much effort has been devoted to attempting to identify “Nakamoto,” who has been in contact

with Bitcoin users and developers as recently as 2010, in spite of his opaque identity. See Alec

Liu, What Satoshi Said: Understanding Bitcoin Through the Lens of Its Enigmatic Creator,

MOTHERBOARD (Jan. 16, 2014, 5:30AM), http://motherboard.vice.com/blog/quotes-from-

satoshi-understanding-bitcoin-through-the-lens-of-its-enigmatic-creator. 15 See Jeff Desjardines, The Definitive History of Bitcoin, VISUAL CAPITALIST (Feb. 13, 2014,

8:00PM), http://www.visualcapitalist.com/the-definitive-history-of-bitcoin. 16 See Leah McGrath Goodman, The Face Behind Bitcoin, NEWSWEEK (Mar. 6, 2014, 6:05AM),

http://www.newsweek.com/2014/03/14/face-behind-bitcoin-247957.html. 17 See Liu, What Satoshi Said, supra note 14. Some speculate that Bitcoin was released

partially out of anger resulting from the bailouts given to large financial institutions. See id. 18 See NAKAMOTO, supra note 14. 19 See Double Spending, INVESTOPEDIA, http://www.investopedia.com/terms/d/double

spending.asp (last visited Mar. 17, 2015). 20 See Michael Nielsen, How the Bitcoin Protocol Actually Works, MICHAELNIELSEN (Dec. 6,

2014), www.michaelnielsen.org/ddi/how-the-bitcoin-protocol-actually-works.


that can verify the transaction and prevent double spending by keeping a ledger of the user’s transactions.21

Bitcoin solves the problem another way—using “cryptographic proof instead of trust.”22 Bitcoin relies on a peer-to-peer network23 to create and maintain a public ledger, known as the block chain.24 Each transaction contains two public keys—one each from the transferor and transferee—proving that the funds were transferred.25 Both parties “sign” the transaction with their private key, and the transaction is recorded in a block.26 The block is then verified by the network through a process called “mining” before being added to the block chain.27 “Mining” is the process of matching a portion of the code of a block of transactions with a previous block, using increasingly complex mathematical algorithms, in order to ensure that transactions in a block are legitimate.28 If the miner verifies a block, it consummates the transactions therein by adding it to the block chain, at which time the miner is rewarded with newly-minted bitcoins.29 This incentivizes miners to remain honest and support the system, in addition to increasing the total money supply.30

There are a couple of quirks intentionally built into the Bitcoin protocol: first, as bitcoins are mined over time, the bounty received is reduced, yet the difficulty of solving the algorithms increases;31 second, there is a hard cap of 21 million bitcoins that will ever be placed into

21 JERRY BRITO & ANDREA CASTILLO, BITCOIN: A PRIMER FOR POLICYMAKERS 3–4 (2013),

available at http://mercatus.org/sites/default/files/Brito_BitcoinPrimer_v1.3.pdf [hereinafter

Primer]. 22 NAKAMOTO, supra note 14. 23 This simply means two or more computers are directly connected to share resources

without the use of an intermediary server, as was used in file-sharing networks such as

Napster. See James Cope, QuickStudy: Peer-to-Peer Network, COMPUTERWORLD (Apr. 8, 2002,

1:00AM), http://www.computerworld.com/s/article/69883/Peer_to_Peer_Network,. 24 Primer, supra note 21, at 4. 25 Id. at 5. 26 Id. 27 Danton Bryans, Bitcoin and Money Laundering: Mining for an Effective Solution, 89 IND. L.J.

441, 446 (2014). 28 Id. at 446 n.37; see NAKAMOTO, supra note 14, at 3–4. 29 Bryans, supra note 27, at 446. 30 See NAKAMOTO, supra note 14, at 4. It is possible that, if a single node controlled 51% of

the processing power in the network, the attacking node could reverse previous transactions,

create new bitcoins, or effectively double spend. See id. at 3–4. 31 The first block was mined by Nakamoto. The block, referred to as the “genesis block,”

carried a bounty of 50 bitcoins. At the time of this writing, a successfully mined block yields

25 bitcoins. See Desjardines, supra note 15.


circulation.32 These features make Bitcoin behave more like a commodity-backed currency, like gold, than traditional paper money.33 Eventually, when the last bitcoin is mined (projected to occur in 2140), miners will no longer mint new bitcoins, but they will still collect small transaction fees as incentive to continue supporting the system.34

B. Bitcoin Pros

Nakamoto presents Bitcoin as offering a solution to the “inherent weaknesses of the trust based model.”35 Nakamoto cites the fact that electronic transactions conducted through a third party cannot be truly irreversible, forcing third parties to mediate disputes and consequently increasing transaction costs.36 Beyond this innovation in trust, enthusiasts have cited a number of potential benefits Bitcoin may contribute.37

Nakamoto’s humble idea appears to have caught on, as some businesses have integrated38 Bitcoin into their payment options, citing efficiency and low costs.39 Bitcoin presents an attractive alternative for small businesses that would prefer to avoid the cost of opening a market

32 Samantha Sharf, Bitcoin Gets Valued: Bank of America Puts a Price Target on the Virtual

Tender, FORBES (Dec. 5, 2013), http://www.forbes.com/sites/samanthasharf/2013/12/05/bitcoin-

gets-valued-bank-of-america-puts-a-price-on-the-virtual-tender. 33 See DAVID FRIEDMAN, GOLD, PAPER, OR . . . IS THERE A BETTER MONEY? 1–3 (1982), available

at http://object.cato.org/sites/cato.org/files/pubs/pdf/pa017.pdf; See also Ken Tindell, Geeks Love

the Bitcoin Phenomenon Like They Loved the Internet in 1995, BUSINESS INSIDER (Apr. 5, 2014),

http://www.businessinsider.com/how-bitcoins-are-mined-and-used-2013-4. 34 See Tindell, supra note 33. 35 NAKAMOTO, supra note 14, at 1. 36 Id. 37 See Jerry Brito, Bitcoin: More than Money, REASON (Nov. 19, 2013, 7:00 AM),

http://reason.com/archives/2013/11/19/bitcoin-more-than-money/print (“Bitcoins are money.

But bureaucrats, like many observers since the digital currency burst on the scene in January

2009, are likely missing the larger implications. Bitcoin is much, much more than just

money.”). 38 As of this writing, the most significant American businesses to incorporate Bitcoin into

their payment systems are the Sacramento Kings franchise of the National Basketball

Association, Porn.com, and Overstock.com. See Raymond Hackney, Bitcoin, Porn, and

Basketball, THE DOMAINS (Jan. 17, 2014), http://www.thedomains.com/2014/01/17/bitcoin-porn-

and-basketball; Fani Kelesidou, Overstock Sales Ramp Up After Accepting Bitcoin; Will Amazon

Follow Suit?, THE MOTLEY FOOL (Jan. 16, 2014), http://www.fool.com/investing/general/20

14/01/16/overstock-sales-ramp-up-after-accepting-bitcoin-wi.aspx. 39 Bailey Reutzel, Why Some Merchants Accept Bitcoin Despite the Risks, PAYMENTS SOURCE

(May 21, 2013), http://www.paymentssource.com/news/why-some-merchants-accept-bitcoin-

despite-the-risks-3014183-1.html.


account with a credit card company and evade the various fees associated with accepting credit card payments.40

Further, while some may malign the permanent nature of Bitcoin transactions (transactions added to the block chain are irreversible), merchants may see this as relief from charge-back fraud.41 Charge-back fraud occurs when a purchaser charges a payment to a credit card and collects the product purchased, but then challenges the transaction to recoup the purchase price.42 The burden then falls on the merchant to verify the transaction (which can be difficult to do) or else suffer a loss.43 Bitcoin eliminates charge-back fraud, and therefore lowers transaction costs by making transactions permanent, as if the transaction was conducted in cash.44

Finally, Bitcoin can serve as an alternative for citizens of countries with oppressive financial regimes.45 Some commenters have extolled Bitcoin as a safe-haven currency for the economically oppressed.46 When Cyprus declared a bank holiday and seized its citizens’ deposits in March 2013, many citizens turned to Bitcoin for relief.47 Similarly, Bitcoin may offer relief to Argentinians, whose government’s policies have led to 25% (and growing) annual inflation, combined with price and capital controls preventing Argentinians from changing currencies.48

C. Bitcoin Risks

Bitcoin’s growth has also revealed some ostensible risks to individual consumers and the criminal justice system, which are inherent in the decentralized virtual currency.49

40 Primer, supra note 21, at 10. 41 Id. at 11. 42 See Emily Maltby, Chargebacks Create Business Headaches, WALL ST. J. (Feb. 10, 2011, 12:01

AM), http://online.wsj.com/article/SB10001424052748704698004576104554234202010.html. 43 Id. 44 See Primer, supra note 21, at 12. 45 See Jeff Fong, Bitcoin Price 2013: How Bitcoin Could Help the World’s Poorest People,

POLICYMIC (May 14, 2013), http://www.policymic.com/articles/41561/bitcoin-price-2013-how

-bitcoin-could-help-the-world-s-poorest-people. 46 Is Bitcoin the New Safe-Haven Currency? Bitcoins Surge After Cyprus Bank Raid,

ACTIVISTPOST (Mar. 19, 2013), http://www.activistpost.com/2013/03/cyprus-bank-raid-

bitcoins.html. 47 See Desjardines, supra note 15. The value of a bitcoin shot up to $100 on April 1, 2013, and

$200 on April 8, 2013. Id. 48 Jon Matonis, Bitcoin’s Promise in Argentina, FORBES (Apr. 27, 2013),

http://www.forbes.com/sites/jonmatonis/2013/04/27/bitcoins-promise-in-argentina. 49 See infra Part I.C.1–2.


1. Bitcoin’s Market Volatility Problem

One significant risk to consumers—and probably the biggest hurdle to Bitcoin’s legitimacy—is price volatility.50 One reason Bitcoin’s valuation is so volatile is its newness.51 While consumers are unsure of Bitcoin’s “real” value, novice investors rush to quench their own FOMO52 in reaction to media coverage.53 Some commentators have also noted that, while Bitcoin has a hard market cap, there is nothing preventing other “brands” of cryptocurrency from being produced to compete with and undermine the value of the bitcoin.54 Volatility is a critical hurdle preventing some from adopting cryptocurrencies as their preferred store of value.55 However, it is possible that the volatility will be less dramatic as more businesses accept payment in bitcoin and speculation steadies.56

2. Anonymity, or Pseudonymity, Strictly Speaking

One perspective is that Bitcoin is inherently dangerous as a payment system because it is “almost entirely anonymous.”57 This idea is based on the observation that Bitcoin users have no central authority with which to register, and the only identifying information a person records on the block

50 See Timothy B. Lee, An Illustrated History of Bitcoin Crashes, FORBES (Apr. 11, 2013),

http://www.forbes.com/sites/timothylee/2013/04/11/an-illustrated-history-of-bitcoin-crashes

(illustrating wild fluctuations in Bitcoin value between June 2011 and April 2013). As of this

writing, the value of a bitcoin has been hovering around $290 USD. See Blockchain,

http://markets.blockchain.info (last visited Mar. 17, 2015). In fact, the value of a bitcoin has

fluctuated so significantly it was named the Worst Investment of 2014. See Matt Phillips,

Bitcoin Is the Worst Investment of 2014, Quartz (Dec. 15, 2014), http://qz.com/312598/bitcoin-is-

the-worst-investment-of-2014/. 51 See Matthew O’Brien, Bitcoin Is No Longer a Currency, THE ATLANTIC (Apr. 11, 2013),

available at http://www.theatlantic.com/business/archive/2013/04/bitcoin-is-no-longer-a-

currency/274859. 52 Or “fear of missing out,” a term associated with the cultural jealousy cultivated by

modern social networks. See John M. Grohol, FOMO Addiction: The Fear of Missing Out,

PSYCHCENTRAL (Apr. 14, 2011), www.psychcentral.com/blog/archives/2011/04/14/fomo-

addiction-the-fear-of-missing-out. 53 See Felix Salmon, The Bitcoin Bubble and the Future of Currency, MEDIUM (Apr. 3, 2013),

https://medium.com/money-banking/2b5ef79482cb. 54 Sharf, supra note 32. However, this phenomenon is presently well underway, and market

valuations exist for at least seventy-six different cryptocurrencies. See Crypto-Currency Market

Capitalizations, COINMARKETCAP, http://coinmarketcap.com/ (last visited Mar. 17, 2015). 55 See O’Brien, supra note 51. 56 See Adam Gurri, Bitcoins, Free Banking, and the Optional Clause, ÜMLAUT (May 6, 2013),

http://theumlaut.com/2013/05/06/bitcoins-free-banking-and-the-optional-clause. 57 Peter Twomey, Halting a Shift in the Paradigm: The Need for Bitcoin Regulation, 16 TRINITY

C.L. REV. 67, 70 (2013).


chain is his or her public key—which can be changed from transaction to transaction.58 This has led some to fear that Bitcoin transactions could impede criminal investigations and provide a safe haven for money launderers.59

The most commonly cited example of the nefarious ways Bitcoin could be used is the Silk Road, an online black market which traded only in Bitcoins and where anonymous users60 could buy and sell illicit goods and services.61 Because Bitcoin was the preferred payment system, law enforcement struggled to police transactions on the Silk Road.62

Determining the owner of bitcoins is not impossible.63 Because a person’s identity is tied to his or her public key and the public key is tied to every transaction, which is forever publicly available in the block chain, transactions cannot truly be anonymous.64 It is thus inherent in the Bitcoin protocol that transactions recorded on the block chain must be more public than cash transactions, which can be totally anonymous.65 Most merchants collect identifying information about buyers when a transaction is made.66 And even if they do not, law enforcement may be able to use a metadata-type analysis to determine the owner of transacted bitcoins by analyzing the block chain.67 Notably, the block chain is always available for investigation without the need for a subpoena or probable cause.68 Therefore, while using Bitcoin is closer to being anonymous than conventional electronic payment systems, it is still less anonymous than cash.69

58 Id. at 69–70. 59 Id. at 70. 60 Certain parts of the Internet, collectively called the Deep Web, are only reachable by

using software that makes users anonymous, like The Onion Router, which essentially

scrambles a user’s Internet Protocol address and makes them (nearly) unidentifiable. Jivan

Achreja, Privacy, TOR, BTC, and What the Silk Road Crackdown Means to You: The Latest in the

Battle for Internet Anonymity, EXITEVENT (Nov. 12, 2013), http://exitevent.com/article/privacy-

tor-btc-and-what-the-silk-road-crackdown-means-to-you-131112. 61 Twomey, supra note 57, at 71–72. 62 Id. 63 Primer, supra note 21, at 18. 64 See id. 65 Id. 66 Id. 67 Joshua Brustein, Bitcoin May Not Be So Anonymous, After All, BUSINESSWEEK (Aug. 27,

2013), http://www.businessweek.com/articles/2013-08-27/bitcoin-may-not-be-so-anonymous-

after-all. 68 Id. 69 Id.


II. Regulatory Pretenders Competing to Control Bitcoin

Today, Bitcoin arguably falls within the purview of several existing regulatory frameworks, and the Federal Government is actively seeking to integrate Bitcoin.70 However, Bitcoin lacks any central governing body and exists only as a peer-to-peer network, making direct regulation impossible.71 If the United States is interested in regulating virtual currencies like Bitcoin, it should focus its efforts on the various exchanges.72 The Bitcoin exchanges are the best candidates for regulation because: (1) they are tangible business entities, sometimes incorporated in the United States and dealing in fiat73 money; and (2) Bitcoin would not be nearly as practical without the exchanges.74 While Bitcoin is a new technology, uncontemplated by existing law, several regulatory frameworks may apply to the exchanges depending on how we define virtual currencies.75

A. Securities Regulation

If Bitcoin is classified as a security, then Bitcoin exchanges would be considered securities exchanges subject to the requirements of the Securities Act of 1933 and the Exchange Act of 1934.76 The Securities Act of 1933 explicitly applies to investments, commodities, notes, and stocks.77 It punishes those who “with intent to defraud, passes, utters, publishes, or sells, or attempts to pass, utter, publish, or sell, or with like intent brings into the United States or keeps in possession or conceals any falsely made, forged, counterfeited, or altered obligation or other security of the United States.”78

70 See infra Parts II.A–D. 71 See Twomey, supra note 57, at 75. 72 Id. at 75–76. 73 As opposed to commodity money, fiat money refers to the currency issued by

governments and not backed by physical commodities. Fiat money has value because the

issuing government dictates that it does. Fiat Money, INVESTOPEDIA,

www.investopedia.com//terms/f/fiatmoney.asp (last visited Mar. 17, 2015). Of course, the

government can only produce money by fiat insofar as the governed agree that the money is

valuable. This means that all money is arguably fiat money in that it has value because people

agree that it does. See Pascal-Emmanuel Gobry, All Money Is Fiat Money, FORBES (Jan. 8, 2013),

http://www.forbes.com/sites/pascalemmanuelgobry/2013/01/08/all-money-is-fiat-money/. 74 Twomey, supra note 57, at 76. 75 See infra Parts II.A–D. 76 Securities Act of 1933, 15 U.S.C. § 77b(a)(1) (2012); Securities Exchange Act of 1934, 15

U.S.C. § 78c(a)(10) (2012). 77 15 U.S.C. § 77b(a)(1) (2012). 78 18 U.S.C. § 472 (2012).


The reporting requirements of the Securities and Exchange Acts are comprehensive and require that: (1) investments be registered with the SEC;79 and (2) the issuer of such investment comply with the SEC reporting requirements.80

B. Bank Secrecy Act

The Bank Secrecy Act (“BSA”)81 evolved from Congress’s first attempt to curb money laundering with the Bank Records and Foreign Transactions Act.82 Money laundering refers to the process by which individuals render “dirty” money “clean,” so that it may be used for legal activities.83 The BSA expressly gives authority to the Secretary of the Treasury to promulgate rules and issue monetary penalties for violations.84 The Secretary of the Treasury then delegated that authority to a Treasury Department bureau called the Financial Crimes Enforcement Network (“FinCEN”).85 Under the BSA, financial institutions must report any transactions over $10,000,86 and may be “designate[d] . . . as [agents] of the United States Government” for the purpose of reporting activities in any circumstances prescribed by FinCEN.87 Further, any institution which qualifies as a money-services business must register with FinCEN, even if it is not located in the United States.88 Importantly, money transmitters are considered money-services businesses.89 FinCEN has issued guidance stating that Bitcoin exchanges

79 15 U.S.C. § 77f(a) (2012). 80 17 C.F.R. § 229.601 (2012) (outlining the table of required SEC reporting exhibits). 81 “Although technically comprised of other provisions in the United States Code (e.g., 12

U.S.C. §§ 1818(s), 1818(i)(2)(A)(ii) and 1829(b), and 18 U.S.C. §§ 1956 and 1957), the provisions

codified at 31 U.S.C. §§ 5311–5330 are commonly understood as the Bank Secrecy Act.”

Stephens B. Woodrough, Civil Money Penalties and the Bank Secrecy Act—A Hidden Limitation of

Power, 119 BANKING L.J. 46, 47 n.6 (2002). 82 See id. at 46–47 & n.6. 83 Shawn Turner, U.S. Anti-Money Laundering Regulations: An Economic Approach to

Cyberlaundering, 54 CASE W. RES. L. REV. 1389, 1391 (2004). 84 Woodrough, supra note 81, at 47. 85 Treas. Order 180-01 (Mar. 24, 2003). 86 31 C.F.R. § 103.22 (2010); see 31 U.S.C. § 5313(a) (2012). 87 See 31 U.S.C. § 5313(b). 88 Bank Secrecy Act Regulations, 76 Fed. Reg. 43,585, 43,588 (July 21, 2011) (to be codified at

31 C.F.R. pts. 101, 1021, and 1022) ("[A]n entity qualifies as an MSB based on its activity within

the United States, not the physical presence of one or more of its agents, agencies, branches or

offices in the United States. This proposal arose out of the recognition that the Internet and

other technological advances make it increasingly possible for persons to offer MSB services in

the United States from foreign locations."). 89 31 C.F.R. § 1010.100(ff) (2011).


are money transmitters and Bitcoin miners may be money transmitters in certain circumstances.90

Title III of the USA PATRIOT Act broadened the existing federal money-laundering legislation.91 Importantly, the Patriot Act criminalized operating an unlicensed money-transmitting business.92 Further, the Patriot Act forces additional requirements on financial institutions, including the “designation of an internal compliance officer, the establishment of an ongoing employee training program and . . . implement[ion of] an international minimum customer information standard called ‘Know Your Customer.’”93 The expanded “Know Your Customer” requirements under the Patriot Act require financial institutions to verify the identities of parties (and keep record of the same) “in connection with the opening of an account.”94 Bringing Bitcoin exchanges within the oversight of FinCEN via the BSA, as modified by the Patriot Act, is an effective way to regulate Bitcoin users through the Bitcoin exchanges and solve potential money laundering concerns raised by the pseudonymity of virtual currency.95

C. Electronic Funds Transfer Act and Regulation E

The Electronic Funds Transfer Act (“EFTA”) and the Federal Reserve’s “Regulation E” provide another potential regulatory framework that would rein in cryptocurrencies, depending on their definition.96 Congress’s intent in enacting the EFTA was to “provid[e] a framework of law regulating the rights of consumers as against financial institutions in electronic funds transfers.”97 In furtherance of that purpose, the Federal

90 See DEP’T OF THE TREASURY FIN. CRIMES ENFORCEMENT NETWORK, FIN-2013-G001,

APPLICATION OF FINCEN’S REGULATIONS TO PERSONS ADMINISTERING, EXCHANGING, OR USING

VIRTUAL CURRENCIES 3, 5 (Mar. 18, 2013) [hereinafter FINCEN GUIDANCE]. The guidance

explains that Bitcoin exchanges are money-services businesses, and Bitcoin miners are money-

services businesses only to the extent that they sell mined bitcoins to another for real currency.

Id. at 5. To the extent that miners use mined bitcoins for their own benefit, they are a user of

the virtual currency and not a money-services business. See Milly Bitcoin, FinCEN Issues

Bitcoin-Friendly Ruling for Miners, COINTEXT (Dec. 27, 2013), http://cointext.com/fincen-issues-

bitcoin-friendly-ruling-for-miners/. This is true even if the miner converts mined bitcoins into

fiat currency before using them for personal reasons. See id. 91 See Uniting and Strengthening America by Providing Appropriate Tools Required to

Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001, Pub. L. No. 107–56, 115

Stat. 272 (2001). 92 18 U.S.C. § 1960 (2012). 93 Twomey, supra note 57, at 77 (internal citation omitted). 94 USA PATRIOT Act of 2001 § 326(a); 31 U.S.C. § 5318(l) (2012). 95 See Twomey supra note 57, at 76. 96 C.f. Electronic Fund Transfers (Regulation E), 12 C.F.R. §§ 205.1–205.20 (2011). 97 Shawmut Worcester Cnty. Bank v. First Am. Bank & Trust, 731 F. Supp. 57, 61 (D. Mass.


Reserve’s board of governors announced Regulation E, which applies to any electronic transaction in which a consumer allows a financial institution “to debit or credit a consumer’s account.”98 Regulation E effectively mandates financial institutions to make various disclosures99 and institutes various practices deemed to advance the interests of consumer protection.100

As of October 28, 2013, the Consumer Financial Protection Bureau amended Regulation E to include additional requirements for remittance transfers.101 Specifically, the amendment requires the disclosure of: “the exchange rate,” “fees and taxes collected by the companies,” “fees charged by the companies’ agents abroad and intermediary institutions,” “the amount of money expected to be delivered abroad, not including certain fees charged to the recipient or foreign taxes,” and, sometimes, a disclosure regarding additional fees.102 In addition, the amendment requires financial institutions to give consumers thirty minutes in which to cancel a transaction,103 investigate alleged mistakes, and assume liability “for mistakes made by certain people who work for [the financial institution].”104 Most importantly, characterizing Bitcoin and various Bitcoin actors in a way that brings the cryptocurrency under the umbrella of the EFTA subjects those entities to the Consumer Financial Protection Bureau for future regulation.105

D. Commodity and Futures Regulation

The Commodity Exchange Act requires futures contracts106 to be executed on a federally sanctioned exchange.107 The 1974 amendments to

1990). 98 See 12 C.F.R. §§ 205.1(b), 205.3(b). 99 Here is a tremendous over-simplification of the Regulation E disclosure requirements:

financial institutions must inform the consumer regarding the consumer’s liability, rights (to

documentation, confidentiality, et cetera), ATM and non-ATM fees associated with the

transaction, and conflict resolution options. See 12 C.F.R. § 205.7. 100 While this topic is beyond the scope of this Note, let it suffice to say that the

requirements are thorough and one can appreciate the competitive advantages of a

decentralized virtual currency cut from Bitcoin’s cloth. See generally 12 C.F.R. §§ 205.5–205.20. 101 See CONSUMER FINANCIAL PROTECTION BUREAU, SUMMARY OF THE FINAL REMITTANCE

TRANSFER RULE (AMENDMENT TO REGULATION E) 1 (2013), available at

http://files.consumerfinance.gov/f/201305_cfpb_remittance-transfer-rule_summary.pdf. 102 Id. 103 Id. at 2. Recall that Bitcoin transactions are naturally irreversible, placing this

requirement fundamentally at odds with the Bitcoin protocol. See NAKAMOTO, supra note 14. 104 See CONSUMER FINANCIAL PROTECTION BUREAU, supra note 101, at 2. 105 See 12 C.F.R. § 205.1; CONSUMER FINANCIAL PROTECTION BUREAU, supra note 101. 106 Contracts for purchase or sale of a commodity to be delivered and/or accepted in the


the Act give exclusive authority to the Commodity Futures Trading Commission to regulate futures contracts.108

Businesses operating as contract markets must submit an application to the Commodity Futures Trading Commission in order to become a board of trade.109 The applicant must prove to the Commission that the contract is not contrary to the public interest110 and that the business has adequate mechanisms in place to prevent price manipulation.111

For transactions in “foreign currency,” the Commission has no jurisdiction to regulate off-exchange transactions under the Treasury Amendment to the Commodity Exchange Act.112 This exclusion spawned from congressional belief that transactions in foreign currency, being typically conducted on an informal basis, are better supervised through bank regulation.113 However, an exception to this rule exists when the transaction is entered into “on a leveraged or margined basis, or [similarly] financed” and a party involved is not an “eligible contract participant.”114 It is important to note that foreign currency transactions do not escape regulation—they are simply outside the jurisdiction of the Commodity Futures Trading Commission.115

future. BLACK’S LAW DICTIONARY 746 (9th ed. 2009). 107 See 7 U.S.C. § 2a(ii) (1982). 108 Commodity Futures Trading Commission Act of 1974, Pub. L. No. 93-463, §§ 101, 102, 88

Stat. 1389 (codified as amended in scattered sections of 7 U.S.C.). 109 See 7 U.S.C. § 7a (1982). 110 Roberta Romano, A Thumbnail Sketch of Derivative Securities and Their Regulation, 55 MD.

L. REV. 1, 23 (1996). 111 Id. 112 See Dunn v. Commodity Futures Trading Comm'n, 519 U.S. 465, 469 (1997) (describing

the Treasury Amendment’s applicability to foreign currency options). 113 S. REP. NO. 93-1131, at § 201 (1974), reprinted in 1974 U.S.C.C.A.N. 5843, 5863. 114 7 U.S.C. § 2(c)(2)(C)(i)(I)(aa)–(bb) (2012); Nikolei M. Kaplanov, Nerdy Money: Bitcoin, the

Private Digital Currency, and the Case Against Its Regulation, 25 LOY. CONSUMER L. REV. 111, 148

(2012). 115 “Retail” foreign exchange participants must register as either futures commission

merchants or retail foreign exchange dealers. See Kaplanov, supra note 114, at 148. Further,

these participants must adhere to certain “disclosure, record-keeping, financial reporting and

minimum capital standards.” Christopher Doering & Roberta Rampton, U.S. CFTC Issues Final

Forex Exchange Market Rule, REUTERS (Aug. 31, 2010), http://www.reuters.com/article/2010/08/

31/financial-regulation-forex-idUKN3121025420100831.


ANALYSIS

It is evident that classifying Bitcoin is crucial to enforcing a coherent regulatory framework against those acting in the Bitcoin economy.116 At times, the law has found various “facts and circumstances” tests useful when determining how to treat a particular asset.117 However, this type of treatment can lead to complex litigation and inconsistent results.118 Further, failure to properly recognize what cryptocurrency is at a fundamental level may result in confusion and inadequacy; a regulation which may make perfect sense as applied to conventional financial instruments may be a complete non sequitur when applied to the Bitcoin protocol.119

III. Bitcoin Cannot Logically Be Defined as a Security or Commodity

A. Bitcoin Cannot be Classified as a Security

In a letter addressed to the committee on Homeland Security and Governmental Affairs, Securities and Exchange Chairperson Mary Jo White stated that whether a virtual currency is itself a security will be based on the facts and circumstances of a specific case.120 She also stated that interests in companies holding virtual currencies would likely be securities.121 By leaving open the possibility that Bitcoin could be a security, White effectively reserves the right to regulate virtual currencies going forward.122

116 See supra Part II. 117 For instance, when determining the tax-exempt status of non-profits, courts must

determine whether, under all the facts and circumstances, the organization was involved in a

political campaign. See Elizabeth J. Kingsley, Challenges to ‘Facts and Circumstances’—A

Standard Whose Time has Passed?, J. TAX’N EXEMPTS, Mar./Apr. 2010, available at

www.harmoncurran.com/library/BK%20TOE-Circumstances.pdf. 118 See Richard J. Kovach, Bright Lines, Facts and Circumstances Tests, and Complexity in

Federal Taxation, 46 SYRACUSE L. REV. 1287, 1300 (1996) (“[W]hen key tax determinations are

based on facts and circumstances analyses, the task of professionals becomes difficult enough

to result in great variations of skill.”). 119 See infra Part III.A. 120 Letter from Mary Jo White, Chair, Securities and Exchange Commission, to Thomas R.

Carper, Chairman, Comm. on Homeland Sec. and Governmental Affairs 1 (Aug. 30, 2013),

available at http://online.wsj.com/public/resources/documents/VCurrenty111813.pdf. 121 Id. 122 See Lewis D. Lowenfels & Alan R. Bromberg, What is a Security Under the Federal

Securities Laws?, 56 ALB. L. REV. 473, 483 (1993) (“[I]t is generally acknowledged that currency

is not a security.”). It follows that foreign currencies are likewise not considered currencies.

See Proctor & Gamble Co. v. Bankers Trust Co., 925 F. Supp. 1270, 1280 n.4 (S.D. Ohio 1996).


The strongest catch-all provision that would allow Bitcoin to be classified as a security is the investment-contract category.123 The investment-contract classification depends on the satisfaction of the four-part test set out in S.E.C. v. W.J. Howey Co.:124 (1) it involves “a contract, transaction or scheme whereby a person invests his money”; (2) the investment is made “in a common enterprise”; (3) the investor was “led to expect profits”; and (4) said profits are realized “solely from the efforts of the promoter or a third party . . . .”125 In the context of a virtual currency, the following analysis using the four-part test above could ensue: a person buys bitcoins with the hope that the value of bitcoins will increase, a contract in which the investor is led to expect profits; in a common enterprise, because the many users of Bitcoin benefit from the protocol itself (and since other users likewise hope for the value to increase); and benefits are realized solely on third-party efforts, since the Bitcoin system relies on miners and developers to keep the system running, and bitcoin prices rise in part because of speculators.126

Even in this narrow circumstance, the argument that Bitcoin is a security is flawed.127 An investment in a common enterprise means that the investment allows the enterprise to function and create revenue.128 Bitcoin, on the other hand, does not grow and gain value due to the investment of capital—the Bitcoin protocol demands only the investment of computing power to function.129 Therefore, it would be inaccurate to say that the typical purchaser of bitcoins, even one speculating on its appreciation, has “invested” in Bitcoin in any meaningful sense.130 Further, Bitcoin does not possess characteristics of a common enterprise.131 There is no pooling of an

123 See Zarega & Watterson, supra note 8. 124 328 U.S. 293, 298–99 (1946). 125 Id.; see also Twomey, supra note 57, at 81. 126 See Zarega & Watterson, supra note 8. 127 See infra notes 130–135 and accompanying text. 128 See BLACK’S LAW DICTIONARY 902 (9th ed. 2009) (defining investment as “an expenditure

to acquire property or assets to produce revenue; a capital outlay”). 129 See John William Nelson, Why Bitcoin Isn't a Security Under Federal Securities Law, LEX

TECHNOLOGIAE (June 26, 2011, 11:49 PM), http://www.lextechnologiae.com/2011/06/26/why-

bitcoin-isnt-a-security-under-federal-securities-law. 130 See id. 131 See Hocking v. Dubois, 885 F.2d 1449, 1455 (9th Cir. 1989) (explaining that a common

enterprise might exist if there is either vertical or horizontal commonality). Vertical

commonality means that the investor and a promoter are involved in a common venture,

without the need for additional investors. See Hocking v. Dubois, 839 F.2d 560, 566 (9th Cir.

1988). Horizontal commonality means that a group of investors have placed their assets in a

pool from which they will distribute gains on a pro-rata basis. See id. There is a circuit split as

to which form of commonality is acceptable, but as a rule of thumb, horizontal commonality is


investor group’s assets in a typical Bitcoin transaction; in fact, the identities of the parties to a transaction are obscured by the protocol.132 And there cannot be vertical commonality since Bitcoin is a decentralized peer-to-peer currency with no central office, no financial department, and thus no promoter with whom the investor collaborates.133

The analysis for the fourth element also fails because the protocol does not rely on a third party, and each party acting in the Bitcoin system acts wholly in self-interest.134 This is not to say there could be no securities involving bitcoins; indeed, equity interests in exchanges or other businesses dealing in the periphery of the Bitcoin economy would obviously be securities.135

B. Cryptocurrency Is Not Quite a Commodity

As noted above, the CFTC may have general regulatory authority over contracts for future delivery of commodities, but not foreign currencies.136 The first commodity futures contracts were known as “to arrive” contracts, and they were “used for the delivery of grain to terminal markets.”137 The “to arrive” contracts were supplanted by “time contracts,” which became forward and futures contracts, allowing speculators to ply grain prices.138 At nearly every point in history, leaders have feared the effect of speculation through futures contracts on prices of commodities.139 The principle fear behind the regulation of commodity speculation is subjecting the public to unduly high prices because of the speculation.140

The Commodity Exchange Act defines “commodities,” highlighting the term’s agricultural roots:

The term “commodity” means wheat, cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool, wool tops, fats and oils (including lard, tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal, livestock, livestock products, and frozen

required by stricter courts and vertical commonality is less uniformly accepted. See id. 132 See supra Part I.C.2. 133 See Primer, supra note 21, at 5. One would imagine that a decentralized peer-to-peer

network would make a lousy promoter, anyways. See id. 134 See supra Part I.A. 135 See Letter From Mary Jo White, Chair, supra note 122. 136 See supra Part II.D. 137 JERRY W. MARKHAM, LAW ENFORCEMENT AND THE HISTORY OF MARKET MANIPULATION

17 (2014). 138 Id. 139 See id. at 4, 8. 140 See id. at 58.


concentrated orange juice, and all other goods and articles, except onions . . . and motion picture box office receipts . . . and all services, rights, and interests . . . in which contracts for future delivery are presently or in the future dealt in.141

However, the final portion of this definition suggests that “commodity” has expanded to encompass anything that is or could be the subject of a futures contract.142 This is limited by the Treasury Amendment, which excludes transactions in foreign currency between financial institutions.143 Under this expansive definition, Bitcoin is arguably a “service, right [or] interest in which [futures contracts] are . . . in the future dealt in.”144 Those who argue that Bitcoin should be treated as a commodity emphasize the favorable comparison to gold and its inherently finite supply.145 However, it appears several countries have designated Bitcoin a type of “virtual commodity,” simply because of an unwillingness to call it a currency.146

The CEA definition of commodities hints at the obvious—commodities are almost always tangible goods with inherent value.147 Clearly, Bitcoin does not comport with this understanding of commodity.148 Bitcoins are strings of code that represent a part of a transaction.149 No “tangible property” exists in the annals of cyber space.150 Further, Bitcoin’s value is mainly in its potential as a medium of exchange—it has no inherent value.151

141 7 U.S.C. § 1a(9) (2012) (emphasis added). 142 See Conroy v. Andeck Resources ’81 Year-End Ltd., 484 N.E.2d 525, 530 (Ill. App. Ct.

1985). 143 See supra notes 112–15. 144 See 7 U.S.C. § 1a(9) (2012). 145 See NAKAMOTO, supra note 14, at 3–4; See, e.g., Avi Mizrahi, Look at Bitcoin as a Commodity,

Like Digital Gold, Rather than a Currency, FOREXMAGNATES (Nov. 25, 2013),

http://forexmagnates.com/exclusive-interview-with-ron-cao-co-founder-and-managing-

director-at-lightspeed-china-partners/. 146 See Kati Pohjanpalo, Bitcoin Judged Commodity in Finland After Failing Money Test,

BLOOMBERG (Jan. 20, 2014), http://www.bloomberg.com/news/2014-01-19/bitcoin-becomes-

commodity-in-finland-after-failing-currency-test.html; BTC China, The People's Bank of China

and Five Associated Ministries Notice: "Prevention of Risks Associated with Bitcoin,”

https://vip.btcchina.com/page/bocnotice2013 (last visited Mar. 17, 2015). In other words, the

“commodity” classification appears to be a catch-all. See id. 147 See ALAN R. BROMBERG & LEWIS D. LOWENFELS, 1 SECURITIES FRAUD & COMMODITIES

FRAUD 82.103 (1993). 148 See infra notes 150–55 and accompanying text. 149 See supra Part I.A. 150 Cf. Jonathan Bick, Different Kind of Property Right, BICKLAW (Aug. 8, 2005),

http://www.bicklaw.com/publications/internetassets.htm. 151 See Brad DeLong, Watching Bitcoin, Dogecoin, Etc . . ., WASH. CENTER FOR EQUITABLE

GROWTH (Dec. 28, 2013, 1:24 PM), http://equitablegrowth.org/2013/12/28/1466/watching-


IV. Defining Money: Money, Monies, Currency, and Foreign Currency in the Law

Unsurprisingly, courts and legislatures have determined the meaning of the word “money” on various occasions.152 The Uniform Commercial Code (“UCC”) defines “money” and ties money-status to government genesis: “‘Money’ means a medium of exchange currently authorized or adopted by a domestic or foreign government . . . [including] a monetary unit of account established by an intergovernmental organization or by agreement between two or more countries.”153 Bitcoin is at odds with this definition of money because it is decentralized.154 Similarly, the Treasury Department has defined “currency,” making it clear that “money” must be created by government fiat.155 The Treasury Department’s regulation goes further, insisting that currency must have legal tender status somewhere.156 Bitcoin is not, nor will it ever be legal tender157 in any country since it is not backed by any nation’s central bank.158

FinCEN approaches this issue by distinguishing between real currency and virtual currency.159 Whereas real currency has legal tender status in a jurisdiction, virtual currency acts as a substitute for real currency in some circumstances and may be convertible to real currency.160 Similarly, the Internal Revenue Service has announced that, for income tax purposes, virtual currencies are treated as non-monetary assets.161 Under this approach, taxpayers include as income the fair market value of bitcoins the

bitcoin-dogecoin-etc (“Underpinning the value of gold is that if all else fails you can use it to

make pretty things . . . . Placing a floor on the value of bitcoins is . . . what, exactly?”). 152 See In re Hokulani Square, Inc., 460 B.R. 763, 768 (B.A.P. 9th Cir. 2011); see, e.g., U.C.C. §

1-201(b)(24) (2012); 31 C.F.R. § 1010.100(m) (2014). 153 U.C.C. § 1-201(b)(24). 154 See Frequently Asked Questions, BITCOIN, http://bitcoin.org/en/faq#what-is-bitcoin (last

visited Mar. 17, 2015). 155 See 31 C.F.R. § 1010.100(m). “The coin and paper money of the United States or of any

other country that is designated as legal tender and that circulates and is customarily used

and accepted as a medium of exchange in the country of issuance.” Id. 156 Id. 157 Meaning, of course, currency which must be accepted in satisfaction of debts. See 31

U.S.C. § 5103 (2012). In the United States, the only legal tender is U.S. currency and Federal

Reserve notes. Id. 158 See, e.g., David George-Cosh, Canada Says Bitcoin Isn’t Legal Tender, WALL ST. J. (Jan. 16,

2014, 4:26 PM), http://blogs.wsj.com/canadarealtime/2014/01/16/Canada-says-bitcoin-isnt-

legal-tender/ (indicating that Canada has declared that Bitcoin is not considered legal tender). 159 FINCEN GUIDANCE, supra note 90, at 1. 160 Id. 161 I.R.S., NOTICE 2014-21, supra note 7.


moment they are earned.162 Each strategy treats Bitcoin as a placeholder for “real” currency.163

The EFTA and Regulation E, meanwhile, apply only to financial institutions, defined as “a State or National bank, a State or Federal savings and loan association, a mutual savings bank, a State or Federal credit union, or any other person who, directly or indirectly, holds an account belonging to a consumer.”164 Further, the EFTA applies to electronic transfers which credit or debit a consumer account.165 Yet, Bitcoin does not comport with notions of holding an account belonging to a consumer.166 In fact, the key innovation distinguishing Bitcoin is the lack of financial institutions and accounts, since Bitcoin transactions occur on a peer-to-peer basis and are verified on a peer-to-peer network.167 The Bitcoin network itself, and the addresses associated with funds, cannot be deemed a financial institution because it is not a company or legal institution.168 So, the Bitcoin protocol is fundamentally at odds with the legal framework of money.169

V. Defining Money: Economics and Philosophy

A. Bitcoin Satisfies the Economic Definition of Money

Economists, the mavens of money, have a time-honored, formulaic definition of what money is and what it is used for.170 Money can be stratified into three characteristics: “a medium of exchange, a unit of account, and a store of value.”171 Each of these characteristics needs some unpacking.172

There is some legal discourse to the effect that money is a medium of exchange.173 For instance, in In re Hokulani Square, the bankruptcy court was

162 See id. 163 See FINCEN GUIDANCE, supra note 90, at 3, 5; see also I.R.S. Notice 2014-21, supra note 7. 164 15 U.S.C. § 1693a(9) (2012). 165 See Voeks v. Pilot Travel Ctrs., 560 F.Supp. 2d 718, 720 (E.D. Wis. 2008). 166 See Primer, supra note 21, at 32. 167 Id. 168 Id. 169 See supra notes 166–70 and accompanying text. 170 See Maria Pia Paganelli, What Is Money for?, INTERCOLLEGIATE REV. 15 (Spring 2012),

available at http://www.mmisi.org/ir/47_01/paganelli.pdf. 171 Id. (“So we use money to exchange things of different value and to compare the values

of different things, and with it we are able to do so, not only now, but also in the future.”); see

also Lewis J. Spellman, Book Review, 54 TEX. L. REV. 458 (1976) (reviewing JOHN KENNETH

GALBRAITH, MONEY: WHENCE IT CAME, WHERE IT WENT (1975)). 172 See infra notes 177–212 and accompanying text. 173 See infra notes 177–212 and accompanying text.


tasked with interpreting the term “money disbursed” in a statute limiting the compensation of a trustee in a bankruptcy context.174 After noting that the plain meaning of the term money was a “medium of exchange,” the court went on to hold that “medium of exchange” generally meant anything commonly agreed upon as a token of value used in transactions.175 It is hard to dispute that bitcoins are accepted among those who own bitcoins—as well as an ever-increasing number of merchants who accept bitcoin payments—as a token of value used in transactions.176

The second function of money, the accounting function, means that the ostensible currency is “a common unit of monetary measure that . . . enable[s] the translation of values between different classes of and markets for assets, where those classes and markets may be segmented economically, geographically, or politically.”177 The Bitcoin protocol not only satisfies, but is also superior to, fiat money in regard to the commonality and translatability requirements because the Internet has no jurisdictional boundaries.178 However, virtual currencies struggle to be a consistent unit of measure because the value of a single unit fluctuates.179 This volatility is temporary in nature and a symptom of the currency’s youth—there is nothing to suggest that Bitcoin would fail as a reliable unit of account once it stabilizes.180 In the interim, Bitcoin relies on the operation of exchanges to tie the value of a bitcoin to the value of another, more stable currency.181

The third function of money is the ability to act as a store of value, meaning it predictably maintains or increases in value over time.182 Again, because of price volatility, some critics assert that Bitcoin fails as an effective monetary store of value183 because there is nothing “tangible”

174 See In re Hokulani Square, Inc., 460 B.R. 763, 770–71 (B.A.P. 9th Cir. 2011); see also 11

U.S.C § 326 (2012). 175 See Hokulani, 460 B.R. at 770–71 (noting that legal and non-legal dictionaries, as well as

the UCC, define “money” as a “medium of exchange”). 176 See Kelesidou, supra note 38 and accompanying text. 177 David G. Oedel, Why Regulate Cybermoney?, 46 AM. U. L. REV. 1075, 1078 (1997). 178 See Dan L. Burk, Jurisdiction in a World Without Borders, 1 VA. J.L. & TECH. 3, 3 (1997). 179 See David D. Friedman & Kerry L. Macintosh, The Cash of the Twenty-First Century, 17

SANTA CLARA COMPUTER & HIGH TECH. L.J. 273, 275 (2001) (“If the value of money changes

rapidly, it becomes difficult to use information about past prices to judge present prices.”). 180 See Timothy B. Lee, These Four Charts Suggest that Bitcoin Will Stabilize in the Future,

WASH. POST (Feb. 3, 2014), http://www.washingtonpost.com/blogs/the-switch/wp/2014/02/03/

these-four-charts-suggest-that-bitcoin-will-stabilize-in-the-future. 181 See id. 182 Friedman & Macintosh, supra note 179. 183 See, e.g., Paul Krugman, Bitcoin Is Evil, N.Y. TIMES (Dec. 28, 2013, 2:35 PM),

http://krugman.blogs.nytimes.com/2013/12/28/bitcoin-is-evil (complaining that Bitcoin


(commodity or legislation) supporting it.184 However, others argue that virtual currencies have the potential to be superior stores of value compared to government-backed currencies.185 Since governments (through their central banks) sometimes find it beneficial to cause inflation, decreasing the value of their money relative to the money of other countries, traditional currencies can be unreliable as a store of value.186 And, because private consumers can select from a plethora of virtual cryptocurrencies, the market can set its tolerance for price volatility, encouraging growth in those currencies which maintain a store of value.187

Bitcoin is an effective store of value, and it will become more so in the future.188 Because Bitcoin has a limited supply built into its protocol, unlike fiat currency, it can never be artificially inflated.189 Further, Bitcoin is designed to mimic gold, which is often considered the consummate store of value.190 And while Bitcoin does not have the tangible, inherent utility that traditional commodity-based money has, its utility exists in its superiority to other forms of payment.191 In other words, Bitcoin’s inherent value lies in its ability to avoid high transaction costs (with which other payment forms cannot compete); therefore, merchants are able to make more money on each transaction.192 So, once speculation-based price volatility subsides, Bitcoin will likely be a superior store of value, even to fiat currency.193

B. Bitcoin Increases Economic Autonomy

In modern, commercialized societies, however, money is more important than this cookbook definition suggests.194 For commercial societies like ours, money is the manifestation of liberty in the

enthusiasts are not able to explain why Bitcoin is a reliable store of value). 184 See DeLong, supra note 151. 185 Kerry Lynn Macintosh, How to Encourage Global Electronic Commerce: The Case for Private

Currencies on the Internet, 11 HARV. J.L. & TECH. 733, 762 (1998) (examining the possibilities of

virtual currencies well before the advent of the decentralized cryptocurrencies). 186 Id. 187 Id. at 762–63. 188 See Lee, supra note 180. 189 See supra notes 31–34 and accompanying text. 190 See PRADEEP DUBEY, JOHN GEANOKOPLOS, & MARTIN SHUBIK, COWLES FOUND. FOR RES.

ECON.YALE U., COWLES FOUND. DISCUSSION PAPER NO. 1031R, IS GOLD AN EFFICIENT STORE OF

VALUE? 1–3 (2002) (arguing that gold is not an efficient money, despite its ability to store

value and display utility without being consumed). 191 See supra notes 18–30 and accompanying text. 192 See supra notes 18–30 and accompanying text. 193 See Macintosh, supra note 185, at 762– 63. 194 See Paganelli, supra note 170.


marketplace.195 This freedom is born of the impersonal trade and economic autonomy money allows.196 Personal trade is the idea that non-monetary bartering limits the number of trade partners you could have to only those who want what you have to trade and, in turn, have what you need.197 On the other hand, money allows impersonal trade—expanding the pool of potential trade partners to anyone with something you need, giving you more liberty.198

Economic autonomy is the freedom to purchase what you want.199 This means that money allows us to make our own choices in what types of things we want to hold, without imposing that decision upon anybody else (in contrast with a situation, for example, where individuals simply vote on what things we will make and possess).200 Because the Bitcoin protocol is decentralized and avoids a trusted third party, transaction fees are low or nonexistent.201 This means that microtransactions, or small payments, are economically viable.202 To illustrate, many businesses require a minimum purchase for consumers to use their credit cards because “it costs retailers money to accept cards, [so] small transaction amounts can make accepting cards unprofitable . . . .”203 So consumers often cannot purchase less expensive items (like a $10 lunch) using their credit card or other methods of electronic transfer in many cases.204 However, with Bitcoin, people have the economic autonomy to make these small transactions.205

CONCLUSION

Whether Bitcoin is the next great innovation in trust or an obscure libertarian scam, it certainly appears that virtual currencies are going to be involved in the future of money. Even Bitcoin moderates, who hold that the Bitcoin system is no more than an improved payment system, know that it requires the existence of bitcoins—a separate unit of measure. As

195 Id. at 16–17 (arguing that money is “coined liberty,” a term borrowed from Fyodor

Dostoyevsky). 196 Id. at 17–18. 197 Id. at 17. 198 See id. 199 Id. at 18. 200 See Paganelli, supra note 170, at 18. 201 See supra text accompanying notes 35–40 and accompanying text. 202 See supra notes 35–40. 203 Dana Dratch, Merchants May Require up to $10 Minimum Credit Card Purchase,

CREDITCARDS, http://www.creditcards.com/credit-card-news/credit-card-minimum-payment-

purchases-law-1282.php (last visited Mar. 17, 2015). 204 See id. 205 See supra notes 35–40.


long as users need to own bitcoins, the law must understand that those units of account are, in fact, money.

Pacy: Tales from the Cryptocurrency

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Transcript of Pacy: Tales from the Cryptocurrency