Coining Bitcoin's "Legal-Bits": Examining the Regulatory Framework for Bitcoin and Virtual Currencies

I. INTRODUCTION A. What Are Currencies? B. Virtual Currencies II. BITCOIN A. What Is Bitcoin? 1. Introduction 2. The Ecosystem a. Mining b. Exchanges c. Merchants d. Innovative Ventures B. Why Are People Using Bitcoin? C. What Is Problem? 1. Criminal Activity 2. Tax Evasion 3. Investment Scams III. HOW CAN THE LEGAL SYSTEM HANDLE VIRTUAL CURRENCIES SUCH AS BITCOIN? A. Bank Secrecy Act B. Securities Regulations C. Stamp Payments Act of 1862 D. Electronic Fund Transfer Act of 1978 E. Uniform Commercial Code IV. GOVERNMENT ACTIONS RELATED TO BITCOIN A. FinCEN's Guidance on Virtual Currencies B. California's Department of Financial Institutions' Cease-and-Desist Letter to Foundation C. Asset Seizures and Arrests 1. Crackdown on Silk Road 2. Mt. Gox Assets Frozen D. Regulatory Developments as of April 2, 2014 1. New York State Department of Financial Services Inquiry into Virtual Currencies 2. Foundation Meeting with Federal Regulators 3. Senate Committee Looks into Virtual Currencies 4. Internal Revenue Service Virtual Currency Notice: Virtual Currency Is Property for U.S. Federal Tax Purposes V. WHAT DO THE RECENT GOVERNMENT ACTIONS MEAN FOR BITCOIN'S FUTURE? A. Businesses Exchanging, Buying, and Selling Bitcoins B. Merchants Accepting as an Alternative Payment Currency C. Non-Miner Users D. Miners VI. FINAL THOUGHTS I. INTRODUCTION The and Bitcoin phenomena have recently garnered a great deal of media and regulatory attention. (1) However, many people do not understand what virtual currency, let alone Bitcoin, is and how it works. Fewer still know how to interpret reports of government crackdowns on businesses. This paper explains what is, why people use it, and why government should care. In addition, this paper contemplates whether any existing legal frameworks may be used to regulate Bitcoin: Which laws can be leveraged? How can they be leveraged? What has government done to regulate thus far? The laws affecting have changed dramatically since 2013 when regulators began to recognize as a Businesses engaging in transactions now may be required to meet strict reporting and record-keeping standards. In addition, they may be required to implement anti-money laundering programs. Individual users and businesses alike will need to comply with applicable tax regimes as well. Because regulatory framework of is a new development, future of applicable laws remains uncertain. A. What Are Currencies? Currency is broadly defined as [t]okens used as money in a country. (2) The Financial Crimes Enforcement Network (FinCEN), an Agency of United States government, defines currency as the coin and paper money of United States or of any other country that [i] is designated as legal tender and that [ii] circulates and [iii] is customarily used and accepted as a of exchange in country of issuance. (3) FinCEN terms these currencies (4) Although currencies like United States Dollar (USD) used to be backed by commodities such as gold, (5) today, most real currencies are fiat currencies, which are merely backed by their respective governments. (6) By controlling money supply, governments are able to influence value of their currencies. (7) Relatively stable currency values are achieved by public trust in continued rational government manipulation of money supply. (8) B. Virtual Currencies In contrast to a real currency, a virtual currency is a medium of exchange that operates like a currency in some environments, but does not have all attributes of real currency. (9) The key difference between virtual currency and real currency is that virtual currency does not have legal tender status in any jurisdiction. …