By: Amanda Maslar
The reality of the most notorious virtual currency is that it is only a matter of time before it comes under the purview of a regulatory body. Bitcoin is a cryptocurrency that exists entirely online; it is partially anonymous and affords its users rigorous privacy protections in their transactions.[i] Its online presence is shrouded in mystery, aided by the fact that no one knows exactly who introduced the world to the illustrious Bitcoin.[ii]
Bitcoin is not pegged to any currency, and its value is dictated entirely by demand.[iii] Central banks around the world have used monetary policy tools to manipulate the money supply and the value of currency throughout history; the Federal Reserve, however, has in recent years engaged in aggressive policies to stabilize the U.S. dollar, which has concerned some who fear inflation and a devaluation of the U.S. currency.[iv] Many people believe the Federal Reserve and other central banks around the world wield too much power, leading some to create alternative currencies like Bitcoin.[v] Anti-Federal Reserve activists and Internet-world enthusiasts alike admire Bitcoin for not being controlled by any nation’s bank or centralized authority.[vi] This independence is an attraction for those who simply want more privacy in their transactions, but it has also led some to use it to facilitate illegal transactions, tax evasion, and money laundering, as the anonymity and digitals aspects of Bitcoin lend itself to these sorts of illicit activities.[vii]
The unique characteristics of Bitcoin have led to fierce debate over its legality and the need for potential regulation. It seems appropriate to call Bitcoin an alternative currency because it is so often referred to as a virtual currency. In the U.S., currency is defined as “an item (such as a coin, government note, or banknote) that circulates as a medium of exchange.”[viii] In the context of the U.S. monetary system, however, the legality of Bitcoin is questionable. Article I of the U.S. Constitution grants to Congress the exclusive power to coin money and “regulate the value thereof.”[ix] Many commentators have taken this to mean that the federal government has a monopoly over the right to issue currency.[x] Thus, the legality of currencies outside of the U.S. model is unclear, especially for private currencies that seem to be outside the scope of Congress’ authority over the currency of the United States as a nation.[xi]
The legality of private currencies has centered on a largely obsolete and mostly forgotten statute called the Stamp Payments Act of 1862.[xii] The statute reads:
Whoever makes, issues, circulates, or pays out any note, check, memorandum, token, or other obligation for a less sum than $1, intended to circulate as money or to be received or used in lieu of lawful money of the United States, shall be fined under this title or imprisoned not more than six months, or both.[xiii]
An excellent discussion of the legislative history and Congressional intent of this statute is discussed in United States v. Van Auken, an 1877 Supreme Court case involving the circulation of certificates granting the bearer fifty cents worth of goods in the Bangor Furnace Company.[xiv] After analyzing the phrasing of the Stamp Payments Act, the Court noted that the provision was drafted so as to secure the national currency from competition with other currencies; notes for small items issued with “only a neighborhood circulation” were thus permitted, as they did not interfere with the national currency.[xv] This interpretation seems to imply that private currencies may be considered legal, depending on their geographic reach, what they can be exchanged for, and their ability to compete with the national currency.[xvi] Bitcoin’s legality in the U.S. could hinge on it being deemed a local currency.
The establishment of local currencies used within communities has developed in a few regions in the U.S., mostly in the Northeastern corner of the country. Ithaca HOURS was a program created in 1991 to boost the local economy in Ithaca, NY and keep residents’ money in the community.[xvii] Still operating today, the system is measured in hours, with one hour equaling $10.[xviii] Today, over 900 businesses in Ithaca, NY accept Ithaca HOURS as payment.[xix] BerkShares, a system set up in the Berkshire region of Massachusetts, is another example of a private currency based in a local community.[xx] BerkShares can be redeemed by exchanging federal currency at a number of local banks and can be used at local restaurants and shops.[xxi] Its website is clear in stating, “BerkShares will not, and are not intended to, replace federal currency.”[xxii] These examples of regional currencies do not violate the Stamp Payments Act because they circulate only locally and typically rely on paper notes instead of coined money.[xxiii] This is also important because the Constitutional provision in Section 8 of Article I specifically discusses coining money instead of paper notes.[xxiv]
Bitcoin does not fit into the community currency category for exemption from the Stamp Payments Act. First of all, Bitcoin is a medium of exchange that is used globally and is in no way restricted by any kind of regional borders.[xxv] Theoretically, wherever one can access the Internet, bitcoins can be exchanged for goods and services.[xxvi] There is also no limit to what bitcoins can be exchanged for, including narcotics, counterfeit money, fake identification documents, and other nefarious services.[xxvii] Finally, and perhaps most persuasively, bitcoins were created to compete with the U.S. currency and some users specifically use bitcoins just for that purpose only.[xxviii] These examples reveal that Bitcoin is inherently different from community currencies.
While this distinction may seem clear, application of the Stamp Payments Act is still uncertain because it might not be appropriate to classify Bitcoin as an alternative currency. Bitcoin is a virtual currency and lacks the physical aspects of currency, an important feature of the Act.[xxix] This means that Bitcoin is more of a competitor to online payment systems like Paypal or even transaction entities like Visa, MasterCard, or American Express than the currency of the U.S.[xxx] Additionally, Bitcoin is not pegged to the U.S. dollar; it can be exchanged for a multitude of national currencies and receives its value from supply and demand, not the value of any U.S. currency.[xxxi] So while the Stamp Payments Act could be amended to include virtual currencies like Bitcoin into its jurisdiction, as the Act stands it will likely not apply to regulate bitcoins.
It must be noted, however, that in August 2013, Germany declared Bitcoin a private currency and was careful in stating that Bitcoin would not be treated as a foreign currency but rather a financial instrument to be regulated by German banking rules.[xxxii] This classification is especially interesting given that it comes from Germany, arguably the most stable of the countries that utilize the ailing Euro.[xxxiii] An example of “classic German forward-thinking,” this ruling would permit Germany to continue to collect tax on Bitcoin transactions if the Euro ever toppled and Germans turned to Bitcoin to fill that void.[xxxiv] While Germany’s reasoning has little influence on U.S. regulatory decisions, it is important to remember how Bitcoin has a global reach and U.S. policy will impact the world market.
Even discounting Bitcoin as a private currency does not bring it within the scope of the Stamp Payments Act because the arguments for pulling Bitcoin within the scope of the Act are increasingly outweighed by arguments against doing so.[xxxv] The price volatility of Bitcoin means it is not very useful as a medium of exchange, which is the role of currency.[xxxvi] This makes Bitcoin risky and unpredictable for both buyers and sellers.[xxxvii] Since Bitcoin does not fit into the existing laws governing alternative currencies, regulators should look to its other characteristics to better police bitcoins.[xxxviii]
Since Bitcoin has gained so much traction from people investing in bitcoins as capital assets, it seems fitting that the Securities and Exchange Commission (“SEC”) regulate it, as the SEC’s mission is to monitor the capital markets to ensure investors are operating in a fair and efficient marketplace.[xxxix] Additionally, in May 2013, Commissioner Bart Chilton of the U.S. Commodity Futures Trading Commission (“CFTC”) announced he intended to introduce regulations to the Bitcoin marketplace.[xl] Commissioner Chilton implied Bitcoin had several commodity-like features that would pull it under the jurisdiction of the CFTC.[xli] While no action has yet to be taken by the CFTC, the Commodity Exchange Act (CEA) does give some insights into this potential for regulation.
Check back for the next installment of “Two Sides of the Same [Bit]Coin” in December 2014 to learn more about potential regulatory approaches to the illustrious cybercurrency!
[i] Reuben Grinberg, Bitcoin: An Innovative Alternative Digital Currency, 4 Hastings Sci. & Tech. L.J. 159, 160 (2012).
[ii] The concept of Bitcoin comes from Satoshi Nakamoto’s paper, Bitcoin: A Peer-to-Peer Electronic Cash System. Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, Bitcoin.org (2008),http://bitcoin.org/bitcoin.pdf. The race to unmask Satoshi Nakamoto has fueled several investigations. See, e.g., Rebecca Greenfield, The Race to Unmask Bitcoin’s Inventors, The Atlantic Wire (Oct. 11, 2011), http://www.theatlanticwire.com/technology/2011/10/race-unmask-bitcoins-inventors/43535/.
[iii] Nakamoto, supra note 2, at 1; see Joshua J. Doguet, Note, The Nature of the Form: Legal and Regulatory Issues Surrounding the Bitcoin Digital Currency, 73 La. L. Rev. 1119 (2013).
[iv] David Wessel, In Fed We Trust 7 (2009).
[v] See id.; Nakamoto, supra note 2.
[vi] Grinberg, supra note 1, at 164 (discussing who Bitcoin’s primary users are, which include “technology early adopters, privacy and cryptography enthusiasts, government-mistrusting ‘gold bugs,’ criminals, and speculators”).
[viii] Black’s Law Dictionary 440 (9th ed. 2009).
[ix] U.S. Const. art I, § 8.
[x] Grinberg, supra note 1, at 182 (citingBrian W. Smith & Ramsey J. Wilson, How Best to Guide the Evolution of Electronic Currency Law, 46 Am. U. L. Rev. 1105, 1111 (1997)); At the time of the writing of the Constitution, however, the framers were only familiar with coined money and so the document does not mention the issuance of paper money by the government. Doguet, supra note 3, at 1132.
[xii] Id. at 1131–32.
[xiii] 18 U.S.C. § 336 (2012).
[xiv] United States v. Van Auken, 96 U.S. 366 (1877).
[xv] Id. at 367.
[xvi] Grinberg, supra note 1, at 183–85.
[xvii] Kaplanov, supra note 22, at 142.
[xxiii] Grinberg, supra note 1, at 186; Kaplanov, supra note 22, at 142–43.
[xxv] Grinberg, supra note 1, at 187.
[xxvii] Timothy B. Lee & Hayley Tsukayama, Bitcoin Industry Reeling as Authorities Shut Down Silk Road Online Marketplace, Wash. Post (Oct. 2, 2013), http://www.washingtonpost.com/business/economy/bitcoin-industry-reeling-as-authorities-shut-down-silk-road-online-marketplace/2013/10/02/961b105a-2ba1-11e3-97a3-ff2758228523_story.html.
[xxviii] Doguet, supra note 3, at 1134.
[xxix] Id. at 1134 –35; Grinberg, supra note 1, at 187. Bitcoin private keys can be printed out to prove possession of bitcoins, but this “physicality” is outside the Act’s definition and intention. See 18 U.S.C. § 336 (2012); Quentin Fottrell, To Secure Your Bitcoins Print Them Out: Why the Digital Currency Maybe be More Secure in Analog Form, MarketWatch (Feb. 26, 2014, 11:10 AM), http://www.marketwatch.com/story/to-secure-your-bitcoins-print-them-out-2014-02-26.
[xxx] Doguet, supra note 3, at 1134 –35; Grinberg, supra note 1, at 187.
[xxxi] Id. at 1134 –35.
[xxxiii] Strobe Tallbot, Monnet’s Brandy & Europe’s Fate, The Brookings Essay (Feb. 7, 2014), http://www.brookings.edu/series/the-brookings-essay.
[xxxiv] Matt Clinch, supra note 32.
[xxxv] Kaplanov, supra note 22, at 136.
[xxxvi] Greenfield, supra note 8.
[xxxviii] Doguet, supra note 3, at 1136.
[xxxix] The Investor’s Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation, U.S. Securities and Exchange Commission, http://www.sec.gov/about/whatwedo.shtml (last visited Nov. 12, 2014).
[xl] Interview by CNBC Squawk Box with Bart Chilton, Commissioner, U.S. Commodity Futures Trading Commission, in Little Rock, AK (CNBC May 7, 2013), available at http://video.cnbc.com/gallery/?video=3000166533#eyJ2aWQiOiIzMDAwMTY2NTMzIiwiZW5jVmlkIjoiN3p5N3p4L0F0ZmNvaTh5M2Rha2lEUT09IiwidlRhYiI6ImluZm8iLCJ2UGFnZSI6MSwiZ05hdiI6WyLCoExhdGVzdCBWaWRlbyJdLCJnU2VjdCI6IkFMTCIsImdQYWdlIjoiMSIsInN5bSI6IiIsInNlYXJjaCI6IiJ9.