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Bitcoin: An Innovative Alternative Digital Currency

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Abstract and Figures

Bitcoin is a digital, decentralized, partially anonymous currency, not backed by any government or other legal entity, and not redeemable for gold or other commodity. It relies on peer-to-peer networking and cryptography to maintain its integrity. Compared to most currencies or online payment services, such as PayPal, bitcoins are highly liquid, have low transaction costs, and can be used to make micropayments. This new currency could also hold the key to allowing organizations such as Wikileaks, hated by governments, to receive donations and conduct business anonymously. Although the Bitcoin economy is flourishing, Bitcoin users are anxious about Bitcoin’s legal status. This paper examines a few relevant legal issues, such as the recent conviction of the Liberty Dollar creator, the Stamp Payments Act, and the federal securities acts.
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[159]
Bitcoin: An Innovative
Alternative Digital Currency
by REUBEN GRINBERG*
I.Introduction ..................................................................................................... 160
II.Bitcoin Primer ................................................................................................ 162
III.Bitcoin Ecosystem ........................................................................................ 165
IV.Comparing Bitcoin to its Competition ....................................................... 168
A.Facilitation of e-commerce .................................................................. 168
1.Traditional e-commerce ................................................................... 168
2.Micropayments .................................................................................. 170
3.Virtual World and Game-Related Commerce .............................. 170
B.Gold-Backed Currencies ..................................................................... 172
V.Is Bitcoin Sustainable? .................................................................................. 174
A.Iraqi Swiss Dinar .................................................................................. 174
B.Confidence ............................................................................................ 175
1.Improper Use of Discretionary Authority ..................................... 175
2.Superior Competing Currency ........................................................ 176
3.Government Crackdown .................................................................. 177
4.Deflationary Spiral ........................................................................... 177
C.Potential Technology Failures ............................................................ 179
1.Anonymity Failure............................................................................ 179
2.Theft ................................................................................................... 180
3.Denial of Service ............................................................................... 180
VI.Legal Issues ................................................................................................... 181
* Yale Law School, J.D. 2011; University of Texas at Austin, M.S. 2007; Yale
University, B.S. 2005. The author is a first-year law clerk at a law firm in New York City.
The author would like to thank professor Jonathan R. Macey, professor Ronald Mann,
Melanie Keene, Gavin Andresen, and members of the Bitcoin community for their helpful
comments on an earlier draft of this Article. The author also thanks Assistant U.S.
Attorney Jill Westmoreland Rose and Bernard von NotHaus, opposing parties in the
Liberty Dollar cases who took the time to answer my questions. Finally, the author also
thanks Zion Maffeo, David Simson, and other helpful editors of the Hastings Science &
Technology Law Journal.
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160 HASTINGS SCIENCE & TECHNOLOGY LAW JOURNAL [Vol. 4:1
A.Federal Government’s Monopoly on Issuing Currencies ................ 182
1.The Stamp Payments Act of 1862 ................................................... 183
2.Prohibition on Coining Money and the Liberty Dollar Saga ....... 191
B. Securities Regulations ............................................................................ 194
1.Note or Stock .................................................................................... 195
2.Investment Contract ......................................................................... 196
3.Commodity ........................................................................................ 199
4.Currency ............................................................................................ 200
C.Anti-Money Laundering Laws and Regulations .............................. 204
VII. Conclusion ................................................................................................... 206
I. Introduction
Bitcoin is a digital, decentralized, partially anonymous currency,
not backed by any government or other legal entity, and not
redeemable for gold or other commodity. It relies on peer-to-peer
networking and cryptography to maintain its integrity.1 Its
proponents argue that Bitcoin has many properties that could make it
an ideal currency for mainstream consumers and merchants. For
example, bitcoins are highly liquid, have low transaction costs, can be
used to send payments quickly across the internet, and can be used to
make micropayments. This new currency could also hold the key to
allowing organizations such as Wikileaks, hated by governments, to
receive donations and conduct business anonymously.2
Amazingly, as of October 2011, a bitcoin (currency ticker BTC)
is worth about two U.S. Dollars (USD), there are about $20 million
worth of bitcoins in existence,3 there are probably around 20,000
1. See Bitcoin, WIKIPEDIA, http://en.wikipedia.org/wiki/Bitcoin (last modified Oct.
25, 2011); Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, BITCOIN
PROJECT, http://bitcoin.org/bitcoin.pdf (last visited Oct. 25, 2011); FAQ, BITCOIN WIKI,
https://en.bitcoin.it/wiki/FAQ (last modified Oct. 25, 2011).
2. See Keir Thomas, Could the Wikileaks Scandal Lead to New Virtual Currency?,
PC WORLD: BUSINESS CENTER (Dec. 10, 2010, 4:30 PM), http://www.pcworld.com/
businesscenter/article/213230/could_the_wikileaks_scandal_lead_to_new_virtual_currency
.html; Rainey Reitman, Bitcoin – a Step Toward Censorship-Resistant Digital Currency,
ELECTRONIC FRONTIER FOUNDATION, (Jan. 20, 2011, 5:20 PM), https://www.eff.org/
deeplinks/2011/01/bitcoin-step-toward-censorship-resistant (“Bitcoin is particularly
interesting in the wake of recent events that demonstrated how financial institutions can
make political decisions in whom they service, showcased by the decisions of PayPal, Visa,
Mastercard and Bank of America to cut off services to Wikileaks.”).
3. See BITCOIN WATCH, http://bitcoinwatch.com/ (last visited Oct. 21, 2011).
GRINBERG 110.DOCX (DO NOT DELETE) 11/11/2011 12:31 PM
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Bitcoin users,4 and over $300,000 worth of bitcoins are traded every
day.5
Although the Bitcoin economy is flourishing, users are anxious
about Bitcoin’s legal status and the possibility of a government
crackdown.6 Some point to Bitcoin’s ability, like all digital and
anonymous currencies, to facilitate money laundering, tax evasion,
and trade in illegal drugs and child pornography.7 Indeed, the U.S.
government prosecuted and shut down the creators of e-gold, a digital
currency backed by gold, under state and federal laws for conspiracy
to commit money laundering, and also for providing services to those
involved in “child exploitation, credit card fraud, and wire
(investment) fraud.”8 Others point to governments’ purported
interests in protecting their economies and monopolies on minting
new money.9 These individuals point to the successful prosecution
and conviction of the creator of the Liberty Dollar, a paper and coin-
based currency backed by gold and other precious metals.10
Part II explains how Bitcoin works and Part III describes its
nascent ecosystem of websites and services. Part IV compares Bitcoin
to its competition, including payment processors like PayPal and
digital gold currencies. Part V explores whether Bitcoin can be a
sustainable currency and why individuals would trust a currency not
supported by any legal institution and not redeemable for any
4. See Bitcoin Map, BITCOIN WIKI, https://en.bitcoin.it/wiki/Bitcoin_Map (last
modified Oct. 21, 2011).
5. See, e.g., BITCOIN WATCH, supra note 3 (when visited, approximately 110,000
bitcoins exchanged in previous 24 hours at an exchange rate of approximately 2.5 USD per
BTC).
6. See, e.g., epii, Comment on How long until governments outlaw bitcoin usage?,
BITCOIN FORUM (Mar. 29, 2011 8:40:41 AM), http://bitcointalk.org/index.php?topic=
5110.msg74627#msg74627 (“I think that illegalization is Bitcoin’s most likely mode of
failure.”).
7. See, e.g., id. (“Considering how quickly services like Silk Road [an anonymous
marketplace for illegal drugs] have sprung up, and the fact that the demographic of people
who seem most interested in Bitcoin at this point tends to overlap with the demographic of
likely tax evaders, I am afraid that this illegalization might just be a matter of time.”).
8. See Peter C. Tucker, The Digital Currency Doppelganger: Regulatory Challenge or
Harbinger of the New Economy?, 17 CARDOZO J. INTL & COMP. L. 589, 590–92 (2009)
(citations omitted).
9. See, e.g., Glass, Comment on How long until governments outlaw bitcoin usage?,
BITCOIN FORUM (Mar. 29, 2011 10:46:59 AM), http://bitcointalk.org/index.php?
topic=5110.msg74713#msg74713.
10. See, e.g., id.; Press Release, Department of Justice, Defendant Convicted of
Minting His Own Currency (Mar. 18, 2011), available at http://charlotte.fbi.gov/dojpressrel/
pressrel11/ce031811.htm [hereinafter DOJ, Liberty Dollar Conviction Release].
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commodity. Part VI explores a few of the many legal ramifications of
Bitcoin, including statutes supposedly aimed at enforcing the federal
government’s monopoly on issuing currency and securities regulation.
II. Bitcoin Primer
Julian Assange was probably unsurprised when PayPal, a
corporation with large market share susceptible to government
pressure, stopped processing donations to his whistleblowing
organization, Wikileaks, due to what Paypal deemed “illegal
activity.”11 In the 1990s, Assange was a member of the cypherpunks
mailing list, a group that disdained most government regulation and
discussed achieving privacy and libertarian ideals by using
cryptography. In 1998, another member of the cypherpunks
proposed a digital, distributed, anonymous currency called “b-
money” that would allow “untraceable pseudonymous entities to
cooperate with each other more efficiently, by providing them with a
medium of exchange . . .”12 About ten years later, a programmer
working under the pseudonym Satoshi Nakamoto figured out how to
implement such a currency, publishing a description of his invention
and also releasing software to make it work.13
Like the U.S. Dollar, Bitcoin is not redeemable for another type
of money or for a certain amount of a commodity, such as an ounce of
gold. Unlike the U.S. Dollar, Bitcoin is not backed by the U.S.
Government or any other legal institution and is a digital rather than
paper currency, storable on electronic media and transferable over
the internet.14
Individuals who want to own or transact in Bitcoin can either run
a program on their own computer that implements the Bitcoin
protocol (a Bitcoin client),15 or create an account on a website that
11. PayPal statement regarding Wikileaks, PAYPAL BLOG (Dec. 3, 2010),
https://www.thepaypalblog.com/2010/12/paypal-statement-regarding-wikileaks.
12. Wei Dai, b-money, WEI DAIS HOME PAGE, http://weidai.com/bmoney.txt (last
visited Oct. 7, 2011) (the thirteenth paragraph).
13. Nakamoto, supra note 1.
14. See William Hett, Digital Currencies and the Financing of Terrorism, XV RICH.
J.L. & TECH. 4, 7 (2008), available at http://jolt.richmond.edu/v15i2/article4.pdf (describing
how digital currencies generally work).
15. The Bitcoin developers publish an “official” Bitcoin client for Windows, Mac OS
X, and Linux, with an ugly, confusing, but usable graphical user interface. See Original
Bitcoin Client, BITCOIN WIKI, https://en.bitcoin.it/wiki/Original_Bitcoin_client (last visited
Oct. 25, 2011) (including screenshot of graphical user interface). Others are creating
alternative clients, such as one written in Java, and another intended for mobile devices
running the Android operating system. See Category:Clients, BITCOIN WIKI,
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runs the Bitcoin client for its users. The Bitcoin client saves an
individual’s bitcoins in a file called the wallet, which the user must
secure and backup. These programs connect to one another over the
Internet forming peer-to-peer networks, making the system a
distributed one resistant to central attack.
New bitcoins are issued to competing “miners” who use their
computers to generate solutions to problems that help ensure the
integrity and security of the system. As the number of miners in the
network changes, the problem difficulty adjusts to ensure that
bitcoins are created at a predetermined rate and not faster or slower.
Currently, about 50 bitcoins are issued every ten minutes, although
the rate will halve to 25 bitcoins in about two years and will halve
every four years after that.16 At those rates, 10.5 million bitcoins will
be created in the first four years, half that amount in the next four
years, and so on, approaching but never reaching a total supply of 21
million bitcoins, as illustrated in Figure 1. Bitcoins are divisible to
eight decimal places.
https://en.bitcoin.it/wiki/Category:Clients (last modified June 25, 2011); Bitcoin Wallet,
Android Market, https://market.android.com/details?id=de.schildbach.wallet (last updated
Oct. 5, 2011).
16. A “block” contains the solution that the mining computers are trying to solve. A
block is created about once every ten minutes. According to the Bitcoin FAQ, 50 bitcoins
are awarded for the first 210,000 blocks generated, and the award is halved every 210,000
blocks afterwards. It takes about 4 years to generate 210,000 blocks (10 minutes / block x
210,000 blocks / 60 / 365). As of March 8, 2011, approximately 113,000 blocks have been
generated (according to my Bitcoin client), which means that in approximately two years
the award will be halved to 25 bitcoins. The total supply of bitcoins will approach but
never reach 21 million. FAQ: How are new Bitcoins created?, BITCOIN WIKI,
https://en.bitcoin.it/wiki/FAQ#How_are_new_Bitcoins_created (last modified Oct. 25,
2011).
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Figure 1. Expected bitcoin supply over time.
In May 2010, one bitcoin traded at half a cent. It rose steeply
until it reached $30 in June 2011 (a 600,000% increase) before
crashing back to $2 in October17, as illustrated in Figure 2.
Figure 2. Bitcoin to USD exchange rate on the Mt. Gox exchange
through October 22, 2011.
The system is partially anonymous in that anyone can see the
trail of all transactions from all accounts,18 but nothing in the system
ties accounts to individuals, and individuals can create unlimited
17 See BITCOIN CHARTS, http://bitcoincharts.com/charts/mtgoxUSD#tgMzm 1g 10
zm 2g25 (last visited Nov. 7, 2011).
18. See, e.g., BITCOIN BLOCK EXPLORER, http://blockexplorer.com (allowing users to
see latest Bitcoin transactions, search for transactions or accounts, and so on) (last visited
Oct. 7, 2011).
0
5
10
15
20
25
2009 2013
2017 2022 2025 2029
Y
ear
Expected Total Bitcoins
Total Bitcoins
(
millions
)
GRINBERG 110.DOCX (DO NOT DELETE) 11/11/2011 12:31 PM
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accounts instantly and for free.19 Individuals can send bitcoins for
free, but may add optional transaction fees to ensure their
transactions are quickly processed.20 Furthermore, Bitcoin
transactions are irreversible in the same way cash transactions are
irreversible. By contrast, credit card charges can be charged back to
merchants.
III. Bitcoin Ecosystem
A growing ecosystem surrounds Bitcoin, including exchanges,
transaction services providers, market information and chart
providers, escrow providers, joint mining operations and so on.
Absent from this ecosystem at present are futures markets and
entities offering legitimate investment returns, such as fractional
reserve banks, although some individuals have announced plans to
build these.21
Individuals holding this currency represent a number of interests,
including technology early adopters, privacy and cryptography
enthusiasts, government-mistrusting “gold bugs,” criminals, and
speculators.22 A large number of online merchants accept bitcoins,
catering to individuals with these interests, including web hosts,
online casinos, illicit drug marketplaces, auction sites, technology
consulting firms, and adult media and sex toy merchants.23 A number
of nonprofit organizations such as Wikileaks accept donations in
19. Introduction, BITCOIN WIKI, https://en.bitcoin.it/wiki/Introduction#Anonymity
(last visited Mar. 14, 2011) (subsection “Anonymity”).
20. Although transaction fees are not generally used right now, many Bitcoin activists
expect that as the volume of transactions increase, individuals will more often attach
transaction fees.
21. See, e.g., Nefario, Investors for bitcoin stock market and credit rating agrency [sic],
dev started!, BITCOIN FORUM (Feb. 25, 2011 3:01:32 AM), http://bitcointalk.org/
index.php?topic=3844.0 (stock market and credit rating agency); gigabytecoin, Where To
Create Your Own Bank For Less Than $25K???, BITCOIN FORUM (Mar. 24, 2011 5:22:16
AM), http://bitcointalk.org/index.php?topic=4871.0 (bank).
22. See reubgr, Poll: Why Do You Use Bitcoin?, BITCOIN FORUM (Mar. 14, 2011)
http://bitcointalk.org/index.php?topic=4465.0 (poll conducted by the author on the main
Bitcoin forum); Tucker, supra note 8, at 601–08 (describing users generally interested in
digital currencies); chodpaba, What if one Bitcoin was worth the same as one share
Berkshire Hathaway?, BITCOIN FORUM (Mar. 12, 2011 12:43:29 AM),
http://bitcointalk.org/index.php?topic=4390.0 (considering whether a single Bitcoin would
ever equal in worth a share of Berkshire Hathaway).
23. See Trade, BITCOIN WIKI, https://en.bitcoin.it/wiki/Trade (last modified Oct. 25,
2011) (listing merchants that accept bitcoins).
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166 HASTINGS SCIENCE & TECHNOLOGY LAW JOURNAL [Vol. 4:1
Bitcoin.24 And a small handful of retail businesses accept bitcoins,
although there is little indication that the amount of bitcoin-based
business transacted by these retail establishments is significant.25
To accommodate growing demand several exchanges have been
created, offering exchanges between Bitcoin and traditional
currencies, including the U.S. Dollar, Japanese Yen, Euro, and other
digital currencies, including Liberty Reserve, Pecunix, and
WebMoney.26 Mt. Gox, which seems to be the most popular
exchange27 with $10,000 in trading volume on a particular day in
March 2011,28 has an easy to use website.29 None of the standard
exchanges allow futures trading yet, although there is a less formal
over-the-counter exchange that allows individuals to list buy and sell
orders involving bitcoins and any service, commodity, or currency.30
Option contracts have been sold on the over-the-counter exchange.31
24. See Donate, WIKILEAKS, http://shop.wikileaks.org/donate#dbitcoin (last visited
Oct. 25, 2011). In June 2011, the Electronic Frontier Foundation decided to no longer
accept donations in bitcoins, citing unclear and complex legal issues. See Cindy Cohn, EFF
and Bitcoin, ELECTRONIC FRONTIER FOUNDATION (June 20, 2011 5:51 PM),
https://www.eff.org/deeplinks/2011/06/eff-and-bitcoin.
25. See Joshua Davis, The Crypto-Currency, THE NEW YORKER, Oct. 10, 2011, at 68
(noting that Davis, in the course of researching his article, was the first individual to use
bitcoins to pay at the Howard Johnson Hotel in California).
26. See Currency exchanges, BITCOIN WIKI, https://en.bitcoin.it/wiki/Trade#
Currency_exchanges (last visited Oct. 25, 2011).
27. MtGox, BITCOIN WIKI, https://en.bitcoin.it/wiki/MtGox (last modified Oct. 23,
2011) (“MtGox . . . is the most widely used bitcoin currency exchange market . . . and
remains the largest in terms of popularity and volume.”).
28. On the Bitcoin Charts site, trading volume on Mt. Gox on March 6, 2011 was
USD $10,000, more than ten times greater than the volume on any of the other listed
exchanges.
29. See MT. GOX, http://www.mtgox.com (last visited Oct. 7, 2011). One can transfer
money into the account by sending cash, money order or check to an individual (two
percent commission) or by Paypal (seven percent commission), either of which takes
several business days. Once the money appears in the Mt. Gox account, the website
allows purchasing and selling Bitcoins at the prevalent exchange rate or at some particular
price, with a 0.65% commission. The website also allows instantly sending funds to
another individual’s Mt. Gox account or to a Bitcoin account. I was able to purchase
about $9 worth of Bitcoins on Mt. Gox. I first sent $10 by Paypal to “Bitcoin Morpheus,”
as instructed on the Mt. Gox website. That individual took a $1 commission and added
USD $9 to the my account on Mt. Gox. I then purchased about $9 worth of Bitcoins and
then sent them to my Bitcoin account number.
30. #BITCOIN-OTC, http://bitcoin-otc.com (last visited Mar. 7, 2011).
31. See Bitcoin options trading on the Bitcoin OTC marketplace, BITCOIN MONEY
(Apr. 13, 2011), http://www.bitcoinmoney.com/post/4585101363/first-bitcoin-put-option-
contract (“The first ever bitcoin PUT option contract was just recently traded on the
#bitcoin-otc marketplace. A buyer paid to a seller 1.50 BTC as the premium for a contract
that gives the buyer the option to sell at a later time 100 BTC at the rate of $0.75/BTC.”).
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Several sites provide transaction services, allowing individuals to
keep, send, and receive bitcoins without ever running the Bitcoin
client on their own computers. Mt. Gox, for example, allows sending
bitcoins through email, as does Bitcoin Mail. Instawallet provides a
website that allows individuals to create Bitcoin addresses, send
bitcoins to any address for free, and check balances.32
At first, individuals could quickly mine a significant number of
bitcoins on their own computers. But the problem difficulty has
increased so much that most computers would now take on average a
year or more to mine just 50 BTC.33 Several enterprising individuals
have created mining collectives that have enormous computational
power, collect mining rewards often, and distribute the rewards
among members of the collective according to the amount of work
they contributed towards finding the reward (i.e., their computational
power).34
Name Description
Bitcoin Watch35 Provides currency exchange value and volume charts
for a number of Bitcoin exchanges.
Bitcoin Monitor36 Shows the most recent Bitcoin transactions, currency
exchanges, and Block solutions.
Bitcoin Block Explorer37 Allows individuals to search by address and see all
transactions for that address.
Bitcoin Faucet38 A service that provides 0.05 BTC for free, by one of
the main developers behind Bitcoin, who “want[s]
Bitcoin to be successful, [and] created this little service
to give [new users] a few coins to start with.”39
Bitcoin Mail40 A site that allows individuals to send bitcoins to others
by email.
32. INSTAWALLET, https://www.instawallet.org (last visited Oct. 24, 2011).
33. See Jered Kenna, Remove “generate bitcoins” from standard client?, B
ITCOIN
FORUM (Mar. 23, 2011 1:44:37 PM), http://bitcointalk.org/index.php?topic=4828.0
(discussing the low probability of individual miners generating bitcoins).
34. See Pooled Mining, BITCOIN WIKI, https://en.bitcoin.it/wiki/Pooled_mining (last
modified Sept. 1, 2011).
35. BITCOIN WATCH, http://bitcoinwatch.com (last visited Oct. 7, 2011).
36. BITCOIN MONITOR, http://www.bitcoinmonitor.com (last visited Oct. 7, 2011).
37. BITCOIN BLOCK EXPLORER, http://blockexplorer.com (last visited Oct. 7, 2011).
38. BITCOIN FAUCET, https://freebitcoins.appspot.com (last visited Oct. 7, 2011).
39. Gavin Andresen, Free Bitcoins, http://freebitcoins.appspot.com/ (last visited
March 6, 2011) (under “What’s the catch?”).
40. BITMAIL, http://www.bitcoinmail.com (last visited Oct. 7, 2011).
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168 HASTINGS SCIENCE & TECHNOLOGY LAW JOURNAL [Vol. 4:1
A more comprehensive list of Bitcoin exchanges and merchants
who accept Bitcoin is available on the Bitcoin Wiki.41
IV. Comparing Bitcoin to its Competition
Bitcoin competes with at least two classes of products: (1)
products that facilitate internet-based commerce, and (2) gold-backed
currencies. As described below, Bitcoin is unlikely to make
significant headway in the traditional ecommerce market because
consumers generally do not care about the kind of anonymity that
Bitcoin provides, prefer to compare prices of most goods and services
in a currency they are familiar with, and want fraud protection (which
Bitcoin currently lacks). However, Bitcoin may be especially
competitive in the micropayment and virtual world markets, where
consumers care less about pricing in a familiar currency. Bitcoin is
likely to be attractive to those who like gold-backed currencies
because its value depends on the availability of a limited (albeit
virtual) resource rather than discretionary actions by central bankers.
A. Facilitation of e-commerce
1. Traditional e-commerce
The growth of the internet created demand for electronic
payment systems.42 PayPal has come to dominate this space, allowing
users to fund accounts by credit card or bank transfers.43 Companies
that took the alternative approach of creating digital currencies which
were convertible to and from existing currencies, such as DigiCash,
GoldMoney, Pecunix, and Web-Money,44 have not been as successful45
due to a combination of lack of competitive advantages, managerial
incompetence, and dubious legality.
41. Trade, BITCOIN WIKI, https://en.bitcoin.it/wiki/Trade (last modified Oct. 25,
2011).
42. Tucker, supra note 8, at 601; Carl Kaminski, Online Peer-to-Peer Payments:
PayPal Primes the Pump, Will Banks Follow?, 7 N.C. BANKING INST. 375, 375 (2003).
43. Tucker, supra note 8, at 601–02; Kaminsky, supra note 42, at 378–79. PayPal
handles payments for more than 100,000 websites in 18 currencies, and has more than 100
million user accounts. Id. Competitors abound, such as Google Checkout, Amazon
Payments, and Dwolla. See Rafe Needleman, Cash is dead, says Dwolla, CNET NEWS
(Dec. 17, 2010, 7:00 AM), http://news.cnet.com/8301-19882_3-20025966-250.html.
44. Tucker, supra note 8, at 601–02.
45. See Sarah Jane Hughes et al., Developments in the Law Concerning Stored-Value
Cards and Other Electronic Payments Products, 63 BUS. LAW. 237, 257 & n.157 (2007)
(noting bankruptcy of DigiCash, one of the largest digital currency providers).
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The failure of DigiCash is instructive.46 Users turned out to have
no qualms about entering credit card information online47 (one of
DigiCash’s supposed advantages) and did not care about DigiCash’s
strong anonymity guarantees48 (as is especially evident today).49
Similarly, fundamental features of other digital currencies also turned
out to be liabilities rather than assets. GoldMoney and Pecunix, for
example, are denominated in gold rather than the U.S. Dollar, and
most consumers would probably not be interested in shopping and
browsing items with prices in an unfamiliar currency.50
Similarly, Bitcoin is unlikely to be particularly competitive in the
traditional ecommerce market. Most consumers do not care about
anonymity or centralization. They do not want to shop real goods in
prices listed in Bitcoin instead of dollars. They are unafraid of
inflation of the money supply by the Federal Reserve. Furthermore,
46. DigiCash was one of the earliest digital currencies, begun in the early 1990s, and
was initially run by David Chaum, who had obtained numerous digital currency patents in
the 1980s related to ensuring anonymity using cryptography. DigiCash’s history, up until
its bankruptcy in 1998, is one of poor management, missed opportunities, and failed deals.
See Ian Grigg, How DigiCash Blew Everything, CRYPTOME (Feb. 10, 1999),
http://cryptome.org/jya/digicrash.htm (translation of a Dutch online magazine article
describing events leading up to DigiCash’s bankruptcy); see also Alternative History of
Bitcoin, BITCOIN FORUM (Feb, 22, 2011), http://bitcointalk.org/index.php?topic=3755.0
(forum discussion comparing DigiCash to Bitcoin).
47. Tucker, supra note 8, at 593–94.
48. Steven Levy, E-Money (That’s What I Want), WIRED, Dec. 1994, at 174, available
at http://www.wired.com/wired/archive/2.12/emoney.html (“David Chaum has devoted his
life, or at least his life’s work, to creating cryptographic technology that liberates
individuals from the spooky shadows of those who gather digital profiles.
[H]e . . . advocate[s] a form of [digital currency] that fits neatly into a privacy paradigm,
whereby the details of people’s lives are shielded from the prying eyes of the state, the
corporation, and various unsavory elements.”).
49. Individuals give enormous amounts of data to financial companies, such as credit
card companies, and social news websites, such as Facebook. These companies, in turn,
whether with users’ consent—or simply without users’ complaints, sell or give this
information to others. See, e.g., Josh Constine, The Facebook Credits GetBalance API
Helps Developers Dynamically Price Virtual Goods, INSIDE FACEBOOK (Mar. 4, 2011),
http://www.insidefacebook.com/2011/03/04/facebook-credits-getbalance-api (noting that
Facebook allows companies that develop applications using Facebook Credits to see the
Credits balance of its users, which would allow an application to “identify high rollers with
a large balance of Credits and dynamically price virtual goods to increase purchase
probability or profit margin, improving monetization.”); OFFERMATIC,
http://www.offermatic.com (last visited Oct 7, 2011) (website that gives individuals deals in
return for sharing credit card purchase history).
50. See, e.g., SirFlibble, BitCoin – Fee-Free Paypal Alternative?, WHIRLPOOL
FORUMS (Mar. 21, 2011 6:50 PM), http://forums.whirlpool.net.au/forum-replies.cfm?t=
1663664 (“‘[I]nternet currenc[ies]’ have never worked and never will. Paypal, Paymate etc
work because they trade in money not fictional widgets.”).
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Bitcoin has no built in anti-fraud capabilities, whereas companies like
PayPal have invested millions of dollars in protecting customers
against fraud.51
It is true that one of Bitcoin and other digital currencies’ most
touted benefits is low transaction costs. However, as online credit
card use declines, there is no reason to think that the current payment
processing market leaders will not reduce their transaction costs in
response to competitive pressure.52
2. Micropayments
Another kind of ecommerce involves very small payments, called
micropayments, for digital goods. Because transaction costs through
existing payment processors are so large, making payments of, say, 10
cents to 30 cents over the internet is generally impractical. Payments
as small as 99 cents were once considered micropayments but
companies like Apple have handled 99 cent payments without a hitch
using credit cards. Services involving smaller payments are generally
non-existent. As credit cards become a less common way to fund
online payment accounts, transaction costs are likely to fall, perhaps
making micropayments from PayPal and similar processors feasible.
Bitcoin could be competitive in this space because of the low
transaction costs. Furthermore, the denomination in non-U.S.
Dollars is probably less important in this market. YouTipIt is a
“microdonation” service that allows individuals to tip websites or
businesses using bitcoins.53 However, a competitor that relies on
traditional fiat currencies and PayPal, called Flattr, exists;54 YouTipIt
and similar Bitcoin services may not succeed unless they can offer
something that traditional services cannot.
3. Virtual World and Game-Related Commerce
Aside from traditional ecommerce and micropayments,
individuals also engage in commerce in virtual worlds or in games,
51. Although Bitcoin is cryptographically secure, fraud is often a result of human
rather than technical failure. Scammers can use electronic currencies that do not allow
chargebacks to prevent victims from getting their money back.
52. See Bill Zielke, Why Credit Cards Are Not the Future of Online Payment,
MASHABLE (Mar. 2, 2011), http://mashable.com/2011/03/02/credit-card-decline (“[S]enior
director of Merchant Services at PayPal” notes that use of credit cards online has declined
and will continue to decline because of the inconvenience of using credit cards online and
also because of high transaction fees).
53. See YOUTIPIT, http://www.youtipit.org (last visited Oct. 7, 2011).
54. See FLATTR, http://flattr.com (last visited Oct. 7, 2011).
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such as buying or selling digital clothing in Second Life or buying
crops in Farmville.55 While alternative digital currencies failed to gain
a foot-hold in real-world ecommerce, they flourish in virtual
ecommerce. For example, in the virtual world Second Life, nearly all
commerce is transacted in Linden Dollars, with about USD $50
million worth of transactions monthly at the end of 2009,56 and about
USD $30 million worth of Linden Dollars in existence at the end of
2010.57 Facebook recently introduced Facebook Credits, and requires
this currency to be used for games like Farmville which run on
Facebook. Facebook then takes a commission of 30% of all
purchases made with Facebook credits.58
As Facebook’s huge cut indicates, virtual world and game-
related currencies have the potential to be big money makers for the
currency issuers. On the other hand, developing a secure virtual
currency, protected from fraud, and the accompanying exchanges
requires a significant investment of technical and legal expertise, not
to mention time. Game-related virtual currencies present other
problems too, related to centralized and discretionary control. The
central game authority can decide to issue a lot of new currency,
either to itself or to users. Doing so may decrease the value of the
currency and particularly upset users who keep a nontrivial share of
their wealth in the virtual currency, as is probably the case in Second
Life. Similarly, if hackers or the government target the issuer’s
currency system, holders of the currency may be surprised to find
their in-game wealth suddenly inaccessible.
Because Bitcoin could alleviate or eliminate a number of these
problems, it has the potential to become a de facto standard for
certain virtual and game-related currencies. Developers who want to
focus on providing an enjoyable virtual or game experience could use
Bitcoin instead of reinventing the wheel. At least one developer has
already made Bitcoin the in game currency for his virtual world.59
55. FarmVille, WIKIPEDIA, http://en.wikipedia.org/wiki/FarmVille (last modified
Oct. 25, 2011) (describing gameplay for FarmVille).
56. Press Release, Linden Lab, Second Life Celebrates Major Milestones for Virtual
Worlds (Sept, 22, 2009), available at http://lindenlab.com/press/releases/22_09_09.
57. The Second Life Economy in Q4 2010, SECONDLIFE BLOGS (Jan. 26, 2011 12:30
PM), http://community.secondlife.com/t5/Featured-News/The-Second-Life-Economy-in-
Q4-2010/ba-p/674618.
58. See Samuel Axon, FarmVille Adds Facebook Credits Payment Option,
MASHABLE (Mar. 10, 2010), http://mashable.com/2010/03/10/farmville-facebook-credits.
59. See nextnonce, Bitcoin stole my weekend!, BITCOIN FORUM (Mar. 15, 2011 8:42:16
PM), http://bitcointalk.org/index.php?topic=4494.msg65921#msg65921 (describing
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The many implementations of Bitcoin would allow the developers to
easily integrate Bitcoin functionality into the user interface of the
virtual world or game. Similarly, because the company would not be
the currency issuer, individuals would not have to worry about the
company inflating the currency, failing, and so on. Users might also
have more trust in the system knowing that even if the company
supporting the game or virtual world fails or is put under legal
pressure, the currency will survive.
For a certain subset of games or virtual worlds, however, Bitcoin
would be inappropriate. In World of Warcraft (WoW), for example,
players can earn WoW Gold by accomplishing various in-game tasks.
Blizzard, the maker of WoW, no doubt intended for a player’s in-
game wealth to represent skill and time invested in the game—rather
than out-of-game wealth. In this game, as in others, the creators and
players may agree that individuals poor in the real world can escape
reality and be rich in-game.60 Thus, the End User License Agreement
generally prohibits the out-of-game sale of WoW Gold. Note that
this prohibition is generally unsuccessful, with significant WoW Gold
traded outside the game.61 For these kinds of games, Bitcoin would
be inappropriate since it is easily converted into other currencies via
exchanges.
B. Gold-Backed Currencies
Certain individuals, called “gold bugs” and “perma bears” are
interested in alternative currencies because of their political beliefs
and investment predictions.62 These individuals believe that central
banking institutions that have the authority to print more money, like
the Federal Reserve, corrupt the economy and therefore they do not
trust government-backed fiat currencies (those unredeemable for
integration of Bitcoin into a “browser-based MMO (Massively Multiplayer Online) game”
at http://minethings.com).
60. See, e.g., Backing in-game currency with Bitcoin seems relatively easy . . ., BITCOIN
FORUM (Feb. 24, 2011), http://bitcointalk.org/index.php?topic=3798.0 (discussing relative
merits of using Bitcoin as in-game currency).
61. See Daniel Terdiman, Virtual gaming’s elusive exchange rates, CNET NEWS (Aug.
5, 2005 7:18 AM), http://news.cnet.com/Virtual-gamings-elusive-exchange-rates/2100-
1043_3-5820137.html.
62. See Mike Stathis, Fool’s Gold (Part 1), SEEKING ALPHA (July 10, 2009),
http://seekingalpha.com/article/148106-fool-s-gold-part-1; Perma-Bears and Gold Bugs,
CONTINENTAL CAPITAL ADVISORS, LLC (Aug. 14, 2009), http://www.continentalca.com/
home/August-14-2009.
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commodities).63 Accordingly, these individuals prefer to hold their
wealth and make exchanges in currencies backed by commodities—
usually gold. An analysis of this perspective is beyond the scope of
this Article,64 but a comparison of Bitcoin to other “gold bug”
currencies is instructive.
Currencies provide individuals with “tangible medium[s] of
exchange that . . . sellers will accept . . . for their goods or services.”65
Historically, many currencies were “specie,” meaning they were
inherently valuable, such as gold or silver coins. To alleviate the
problems of carrying around heavy coins, some governments, banks,
or private companies created paper money redeemable for a certain
amount of gold or another commodity. (Sometimes, these backing
entities kept less of the commodity, such as gold, in their reserves
than would be necessary if everyone decided to redeem their notes).
In other cases, some governments created paper currencies that
were not redeemable for any commodity (or simply eliminated the
ability to redeem the currency for the commodity in which it was
previously redeemable).66 These “fiat currencies” had value simply
because their backing governments identified the currency as “legal
tender”—acceptable for paying legal debts, including taxes.67 These
governments can (and usually do) print more currency over time,
increasing the supply of the currency relative to demand, which
reduces the value of the currency and correspondingly increases
prices in a process known as inflation.68 More recently, several
63. See, e.g., nextnonce, supra note 59 (“I’m a huge fan of alternative currencies,
especially considering the gross mismanagement of the USD and other fiat currencies.”).
64. The paradigmatic argument is perhaps: Ron Paul, End the Fed (2009). In general,
most mainstream economists believe that central banks play an important and positive
role in economies, and that pegging currencies to gold or other commodities can cause
unnecessary economic harms. See BARRY EICHENGREEN, GOLDEN FETTERS: THE GOLD
STANDARD AND THE GREAT DEPRESSION, 1919–1939 Preface (1992); Ben Bernanke,
Remarks at the Conference to Honor Milton Friedman at University of Chicago (Nov. 8,
2002), available at http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/
20021108/ default.htm.
65. See RICHARD SCOTT CARNELL, JONATHAN R. MACEY & GEOFFREY P. MILLER,
THE LAW OF BANKING AND FINANCIAL INSTITUTIONS 2 (4th ed. 2009).
66. See, e.g., Nixon Shock, WIKIPEDIA, http://en.wikipedia.org/wiki/Nixon_Shock (last
modified Oct. 25, 2011) (describing how President Nixon ended “convertibility between
U.S. dollars and gold”).
67. See Julia Alpert Gladstone, Exploring the Role of Digital Currency in the Retail
Payments System, 31 NEW ENG. L. REV. 1193, 1196 (1997).
68. Control over the money supply is an important lever of monetary policy for
governments, which can be used to protect against recessions or depressions. On the other
hand, governments can print money irresponsibly and cause hyperinflation. Zimbabwe,
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private companies have created digital currencies—some to facilitate
ecommerce, as discussed above, but others to serve needs of
government-distrusting “gold-bugs.”69
Bitcoin is similar to the dozens of gold-backed digital currencies
that already exist, such as Pecunix or GoldMoney, because it is liquid,
digital, easy for end users to exchange with one another, generally
anonymous, and popular among government-distrusting “gold bugs.”
However, Bitcoin is different in several key ways: (1) there is no
central authority that can issue new currency or defraud holders of
the currency (e.g., by holding fractional reserves while promising to
hold full reserves), (2) it is fiat money rather than commodity money,
and (3) it may be difficult to regulate because there is no centrally
controlling authority.
V. Is Bitcoin Sustainable?
The vast majority of currencies are backed by governments (or
other legal entities), commodities, or both. So who would trust
Bitcoin, a currency backed by neither? But individuals apparently do
trust Bitcoin, buying bitcoins at a rate sufficient to keep Bitcoins
almost at parity with the dollar. This part examines whether this trust
is misplaced.
A. Iraqi Swiss Dinar
At least one currency, the Iraqi Swiss Dinar, was backed by
neither government nor commodity yet held a stable value and never
collapsed over a ten-year period. This fiat currency, printed with
Switzerland-manufactured plates, was backed by the Iraqi
government before the 1990 Gulf War. Because of sanctions imposed
on Iraq during the war that prevented importing more notes, Saddam
Hussein’s government disendorsed the old currency and created new
“Saddam Dinars.” The Swiss Dinars continued to circulate in
northern Kurdish regions of Iraq, maintaining a stable trading value.
By contrast, Saddam Hussein printed an enormous amount of new
for example, increased its money supply by about 10,000 times in 2008 and experienced a
more than 200 million percent inflation rate in 2008. See Hyperinflataion, WIKIPEDIA,
http://en.wikipedia.org/wiki/Zimbabwean_dollar#Hyperinflation (last modified Oct. 21,
2011). On currency exchange markets, the value of a currency against other currencies is
strongly influenced by predictions regarding inflation and whether a government will be
able to meet its debts (as a governments struggles to pay its debts, it will be more likely to
print more money, causing inflation).
69. These digital currencies have generally failed to become market leaders in
ecommerce, as discussed above. See generally Tucker, supra note 8.
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currency (as did counterfeiters because of the primitive technology
used to print the notes), causing hyperinflation in the Saddam Dinars.
After the 2003 U.S. invasion of Iraq, the U.S. central provisional
authority allowed individuals to trade in Swiss Dinars for new Dinars
at an exchange rate of 1 Swiss Dinar to 150 new Dinars.70
The Iraqi Swiss Dinar shows that a currency like Bitcoin, without
commodity or institutional backing, may be sustainable.
Nevertheless, Bitcoin may fail for a variety of reasons, and it
behooves Bitcoin users and investors to understand the risks.
B. Confidence
Like almost anything in which individuals can invest their money,
Bitcoin is probably susceptible to irrational bubbles and also
irrational or rational loss of confidence, which would collapse demand
relative to supply. As explained in more depth below, confidence
might collapse in Bitcoin because of unexpected changes in the
inflation rate imposed by the software developers or others, a
government crackdown, the creation of superior competing
alternative currencies, or a deflationary spiral. Confidence might also
collapse because of technical problems: if the anonymity of the
system is compromised, if money is lost or stolen, or if hackers or
governments are able to prevent any new transactions from settling.
1. Improper Use of Discretionary Authority
Some put confidence in Bitcoin because they believe that Bitcoin
has no central institution with discretionary authority to increase the
money supply more quickly than the inflation rate built into the
software. However, either the developers71 or a “convincing
70. See History of the CBI, CENTRAL BANK OF IRAQ, http://www.cbi.iq/
index.php?pid=History (last visited Oct. 25, 2011) (sections labeled “1990–2003” and
“2003–Today”); Mervyn King, The institutions of monetary policy—Lecture given at the
American Economic Association Annual Meeting, San Diego 7–11 (Jan. 4, 2004),
available at http://www.bis.org/review/r040202b.pdf?frames=0; Swiss Dinar, WIKIPEDIA,
http://en.wikipedia.org/wiki/Swiss_dinar (last visited Oct. 25, 2011).
71. Although the details of the Bitcoin Protocol, including the inflation rate, were set
by Bitcoin’s creator, Satoshi Nakamoto, in 2009, a five-member development team
continue to work on the software. They fix bugs, make changes, and issue new releases on
the main Bitcoin website. See, e.g., eMansipater, Comment on Counterfeiting and Loss
Prevention, BITCOIN FORUM (Feb. 25, 2011 3:12:03 AM), http://bitcointalk.org/
index.php?topic=3832.msg54809#msg54809 (describing an instance in which the
development team successfully responded to a security flaw that allowed an individual to
award himself 184 billion bitcoins by fixing the flaw and eliminating the offending
transaction). This development team constitutes the de facto central bank of Bitcoin. If
they were to decide that the inflation rate needed to be changed and updated the software,
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coalition” (i.e., a group that releases a compatible version of Bitcoin
with different inflation settings and convinces a majority of users to
switch)72 could probably exercise discretionary authority to change
the inflation rate. Such an exercise of discretion, even if done with
good intentions and supported by a majority of Bitcoin users, may
nevertheless cause many individuals to lose confidence in Bitcoin and
sell off their holdings, starting a panic. Alternatively, if the inflation
rate is increased so much that Bitcoin undergoes hyperinflation,
Bitcoin’s value would probably drop precipitously.
2. Superior Competing Currency
A superior competing currency could lead to a crisis of
confidence causing either a collapse of Bitcoin’s value73 or merely a
permanent reduction of Bitcoin’s value.74
most users would probably use the new version of the software because of their trust in the
development team. See id. (describing instance in which majority of Bitcoin clients
switched to a new version of the software). This development team may decide to change
core assumptions of the Bitcoin community either because it honestly and correctly
believes doing so is in the best interest of the Bitcoin community or because the
development team has been co-opted by a particular interest group. As one commentator
explained:
Given the project is open-source, what would prevent central banks,
governments, keynesians, and other BTC competitors/enemies to infiltrate the
community of developers in order to push their own agendas ? One of the
possible infiltration attacks could be to push for minting more than 21M BTC
and stop the deflationary process built-in in the concept of BTC: lots of
economical and political arguments could be used to support this idea in a very
rational fashion. Many other infiltration attacks are possible and just up to your
imagination.
Sebastiano Scròfina, Comment on How can Bitcoin be hacked?, QUORA FORUM (Jan. 24,
2011), http://www.quora.com/How-can-Bitcoin-be-hacked.
72. A coalition may take control of the Bitcoin network by convincing a majority of
Bitcoin users to use a different version of the software. See When the majority decides to
change the rules, BITCOIN FORUM (Mar. 21, 2011 4:18:48 PM), http://bitcointalk.org/
index.php?topic=4740.0. One Bitcoin user has termed this vulnerability “mob rule.”
temp1029, Comment on Counterfeiting and Loss Prevention, BITCOIN FORUM (Feb 24,
2011 11:06:08 PM), http://bitcointalk.org/index.php?topic=3832.msg54605#msg54605.
Such a coalition might succeed for any number of reasons. For example, it may argue that
Bitcoin is undergoing a deflationary spiral and needs a higher inflation rate to be
sustainable. See, e.g., Would you support moving to a system with controled [sic] inflation?,
BITCOIN FORUM (Mar. 25, 2011 05:06:30 PM), http://bitcointalk.org/index.php?
topic=4940.0 (asking whether a majority would support making the inflation rate constant
rather than being halved every four years). Or it may appeal to prejudice, by arguing that
a majority of bitcoins are unfairly owned by a disfavored ethnic group, for example, or
populism, by arguing that a majority of Bitcoin-denominated debt is owed to wealthy
corporations, for example.
73. As some individuals sell bitcoins to buy the new currency other individuals, in a
panic, could start to sell their bitcoins at fire-sale prices, afraid of being the last ones to
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3. Government Crackdown
Although Bitcoin may be difficult to shut down because of its
decentralized nature, a government crackdown on Bitcoin may
nevertheless cause a crisis of confidence—especially if many Bitcoin
users do not want to own a currency that is associated with
criminality.75
4. Deflationary Spiral
Bitcoin might undergo a deflationary spiral that causes certain
individuals or industries to abandon Bitcoin,76 possibly causing a panic
own bitcoins. In some ways, such a large-scale defection would resemble the defections
from older to newer technologies where the technologies have “network effects.” For
example, Friendster is a social networking site created in 2002, before Facebook.
Friendster initially had the largest market share but had a number of technical problems,
such as its slow website. Very quickly, Facebook overtook Friendster in the U.S. market,
as participants abandoned their Friendster accounts in droves. See, e.g., Gary Rivlin, The
Wallflower at the Web Party, N. Y. TIMES (Oct. 15, 2006), http://www.nytimes.com/2006/
10/15/business/yourmoney/15friend.html.
74. A panic would destroy the value of bitcoins if they had value only because many
merchants and service providers were willing to accept bitcoins for their goods and
services. C.f. FAQ: Where does the value of Bitcoin stem from?,” BITCOIN WIKI,
https://en.bitcoin.it/wiki/FAQ#Where_does_the_value_of_Bitcoin_stem_from_What_back
s_up_Bitcoin (last visited Mar. 26, 2011) (“Bitcoins have value if they are accepted as
payment by many. . . . In a sense, you could say that Bitcoin is ‘backed up’ by the price
tags of merchants—a price tag is a promise to exchange goods for a specified amount of
currency.”). Yet there is another way to value them: as a currency whose supply grows
much less slowly over the long term than almost any other currency in existence.
Recognizing this value, investors may purchase bitcoins as others dump them in a panic—
stabilizing Bitcoin’s value and ensuring its continued existence.
75. In 2006, the U.S. Mint warned consumers that use of Liberty Dollars, an
alternative metal-backed currency privately issued in the U.S., is illegal. See Press Release,
United States Mint, Liberty Dollars Not Legal Tender, United States Mint Warns
Consumers: Justice Determines Use of Liberty Dollar Medallions as Money is a Crime
(Sept. 14, 2006), available at http://www.usmint.gov/pressroom/index.cfm? action=
press_release&id=710 [hereinafter U.S. Mint, Liberty Dollar Consumer Warning]. Liberty
Dollar’s creator complained that the U.S. Mint’s warning had a substantial “chilling
effect” and eliminated demand for the currency, causing economic damage to Liberty
Dollar owners. Plaintiff’s Complaint at ¶ 15, Nothaus v. Paulson, No. 3:07-CV-038 RLY-
WGH, 2007 WL 4579959 (S.D. Ind. March 20, 2007).
76. Modern economists, following modern monetary theory, believe that deflation—
the decrease in prices over time—can have deleterious effects on an economy. Deflation
can lead to a deflationary spiral: prices fall, causing lower production, leading to lower
wages, leading to lower demand, and further decreases in prices. Many economists believe
that a deflationary spiral caused the Great Depression and other major recessions. To
counteract deflation and keep inflation manageable, the U.S. central bank (the Federal
Reserve, colloquially known as “the Fed”) manages both the supply and demand for
money. Generally, as the supply of money decreases and demand increases, money
becomes more valuable and goods cost less in that money. The most well-known tactic the
Fed uses is to set the discount window interest rate—the rate at which other banks can
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or just a permanent depression in Bitcoin’s value. Since the upper
limit of bitcoins is fixed at 21 million, bitcoins will become more
valuable over time as the supply of government-backed fiat
currencies continue to increase.77 As prices denominated in bitcoins
fall, producers may respond by lowering production, leading to lower
wages, lower demand, and further decreases in prices.78 The end
result of such a spiral is underemployed human capital and other
means of production and destruction of wealth. Thus, industries
using Bitcoin79 that fall into such a spiral may decide to abandon
borrow from it. A higher rate discourages borrowing (lowering demand for money) and a
lower rate encourages borrowing (increasing demand for money).
77. Unlike the U.S. Dollar, Bitcoin has no central bank that can pull the levers of
monetary policy. While the Fed will indefinitely increase the supply of the U.S. Dollar to
target a low, stable inflation rate, the supply of Bitcoins is fixed: There will never be more
than 21 million bitcoins in existence. Thus, as the supply of other currencies increases
faster than the supply of bitcoins increases, bitcoins are likely to continually appreciate in
value over time. This is not to say that bitcoins are a good investment: Bitcoin’s
appreciation may be much lower than investment returns than even the most riskless
investments—treasury bills. Furthermore, although the supply of bitcoins will never
increase beyond 21 million, demand could always fall over time. Thus, the price of goods
in bitcoins will decrease over time, indicating that Bitcoin is a deflationary currency—and
may be susceptible to a deflationary spiral.
78. A concern that often goes hand in hand with deflation—the scarcity of small-
value currency—is not a problem for Bitcoin. Bitcoins are infinitely divisible, eliminating
concerns about the feasibility of sub-”bitpenny” transactions. Newcomers to the Bitcoin
community have worried that the fixed number of bitcoins will inhibit Bitcoin’s reach
because “[there’s] not a lot of bitcoins to go round.” Dai, Comment on When the majority
decides to change the rules, BITCOIN FORUM (Mar. 22, 2011 08:07:01 PM),
http://bitcointalk.org/index.php?topic=4740.msg69876#msg69876. Although it would be
difficult to have transactions in amounts less than one cent, transactions of, say, 0.0004
bitcoins would be simple for programs to handle because bitcoins are infinitely divisible.
See, e.g., chodpaba, Comment on Labor costs and prices in an economy using bitcoin
exclusively, BITCOIN FORUM (Mar. 22, 2011 04:55:50 PM), http://bitcointalk.org/
index.php?topic=4724.msg69762#msg69762 (comparing the feasibility of transactions in
“$0.00000001” to transactions of “.000000001 BTC”). Bitcoin users might create new
names for certain small amounts of bitcoins to facilitate communication. 0.0004 bitcoins
might be referred to as, say, ‘four millibitcoins.’ See, e.g., Meni Rosenfeld, Comment on If
Bitcoins catch on, will people get used to having so few?, BITCOIN FORUM (Mar. 7, 2011,
1:00:55 PM), http://bitcointalk.org/index.php?topic=4234.msg61491#msg61491 (suggesting
using “mBTC, uBTC and nBTC” for small amounts of bitcoins).
79. See Gavin Andresen, Comment on Labor costs and prices in an economy using
bitcoin exclusively, BITCOIN FORUM (Mar. 21, 2011 12:37:04 PM), http://bitcointalk.org/
index.php?topic=4724.msg69032#msg69032 (“I think there is a strong possibility bitcoins
will end up being used for something none of us is thinking about. Maybe big
multinational corporations will use them to pay their international supply chains in
industries that are used to constant deflation.”).
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Bitcoin. Even the possibility of such a spiral may limit Bitcoin’s
reach.80
C. Potential Technology Failures
Technology failures could also prevent individuals from
transacting in bitcoins or cause a crisis of confidence,81 as the
following three examples illustrate.
1. Anonymity Failure
All Bitcoin transactions are public, but are considered
anonymous because nothing ties individuals or organizations to the
accounts that are identified in the transactions. However, individuals
sometimes post account numbers online in ways that can be
connected to their online identities.82 It might be possible, using
statistical techniques and some identified accounts, to undo the
anonymity of the system.83 Such unexpected and sudden exposure
would obviously be deleterious to Bitcoin’s value.84
80. epii, Comment on Would you sdupport moving to a system with controled [sic]
inflation?, BITCOIN FORUM (Mar. 25, 2011 6:01:05 PM), http://bitcointalk.org/index.php?
topic=4940.msg72218#msg72218 (“The economic future of Bitcoin is still unclear, in no
small part because it is treading new economic ground. Though I’m not pessimistic
personally, most people will stick with systems like the ones they know until they
understand enough such that making the change is something they can do with
confidence.”).
81. See Weaknesses, BITCOIN WIKI, https://en.bitcoin.it/wiki/Weaknesses (last visited
Mar. 26, 2011) (listing a number of potential technological vulnerabilities).
82. Many participants in the Bitcoin Forums post a Bitcoin account number to receive
a tip for a good quality post. See, e.g., Bitcoiner, Comment on Anonymity, BITCOIN
FORUM (July 7, 2010 11:20:49 pm), http://bitcointalk.org/index.php?topic=241.msg2044#
msg2044 (user signature of “Want to thank me for this post? Donate here! Flip your coins
over to: 13Cq8AmdrqewatRxEyU2xNuMvegbaLCvEe”).
83. See Anonymity, BITCOIN WIKI, https://en.bitcoin.it/wiki/Anonymity (last visited
Mar. 26, 2011); see also theymos, Anonymity, BITCOIN FORUM (July 07, 2010 4:54:44 PM),
http://bitcointalk.org/index.php?topic=241.0.
84. Anonymity is an important feature to many current Bitcoin users. See, e.g.,
nimnul, Comment on Anonymity, BITCOIN FORUM (Aug. 12, 2011 11:52:38 AM)
http://bitcointalk.org/index.php?topic=241.msg8874#msg8874 (“For me, anonymity is the
only feature I need”); Why do you use Bitcoin?, BITCOIN FORUM (Mar. 14, 2011),
http://bitcointalk.org/index.php?topic=4465.0 (several comments indicating that
individuals use Bitcoin because of the anonymity it provides). Similarly, mainstream
consumers generally prefer that their transactions remain between them, their financial
intermediaries (e.g., credit card companies), and merchants. See, e.g., Ryan Anderson,
Facebook, Beacon, and Privacy, THE NEW PR (Nov. 26, 2007),
http://www.ryananderson.ca/2007/11/26/facebook-beacon-and-privacy/ (recounting story of
Facebook user who bought an engagement ring from overstock.com and was horrified to
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2. Theft
Like cash, bitcoins can be lost or stolen.85 Keeping bitcoins on
one’s computer can be as dangerous as keeping large sums of cash in
one’s physical wallet, and each user should take care to backup and
secure his Bitcoin wallet.86 A large-scale theft of bitcoins from many
users could create a confidence crisis.87 Such theft could occur by a
virus or trojan horse that installs itself on a Bitcoin user’s computer
and sends the wallet file to the criminal who wrote the software.88
3. Denial of Service
Although Bitcoin is decentralized and generally has no single
point of failure, it is nevertheless susceptible to a form of denial of
service attack.89 Individuals with a majority of the computational
power in the Bitcoin mining network can effectively preclude any
transaction from being processed. Such a sustained attack might
significantly depress the exchange rate and lead to a collapse of
find that the surprise was ruined when the purchase was posted, without his consent, in his
newsfeed for his girlfriend and friends to see).
85. Bitcoins are generally stored in a “wallet.” Individuals may store the wallet on
their own computers or with an ewallet service.
86. See, e.g., FAQ: How do I backup my wallet?, BITCOIN WIKI, http://en.bitcoin.it/
wiki/FAQ#How_do_I_backup_my_wallet (last visited Mar. 26, 2011).
87. But see Heather C. Alston, Comment, Will That Be Cash, Credit, or E-Money, 1
N.C. BANKING INST. 225, 253 (1997) (“[C]ustomers . . . want to know what will be done in
the event that their hard drive crashes with stored e-money . . . ”). Although few
individuals backed up in 1997, since then, regularly backing up has become customary for
mainstream computer users.
88. Bitcoin trojan horses already exist. See Matt Corallo, The case of the Russian
Scammer, B
ITCOIN FORUM (Feb, 19, 2011 5:21:35 PM), http://bitcointalk.org/
index.php?topic=3628.msg51389#msg51389; see also Matt Corallo, Comment on A simple
application to backup your wallet in Dropbox and Gmail [scam], BITCOIN FORUM (Feb.
19, 2011 5:01:22 PM), http://bitcointalk.org/index.php? topic=3596.20. A scammer created
a program that purported to backup a user’s wallet file but instead emailed the file to the
creator of the software and deleted the wallet from the user’s computer. Id. Using this
program, the scammer was able to steal more than 150 bitcoins from a number of users.
Id. Because the Bitcoin wallet is not encrypted, such theft is fairly simple. See Bruce
Wagner, “Automatic Encrrytion [sic] and Password Protection of wallet.dat File?”,
BITCOIN FORUM (Nov. 19, 2010 11:19:15 PM), http://bitcointalk.org/index.php? topic=
1852.msg22948#msg22948. These problems can be mitigated to some extent by making
the Bitcoin software secure. However, using an online wallet service that secures,
backups, and guarantees users’ bitcoins may be a more secure option—but only if reliable
and legally accountable. See Cryptoman, Lost money on MyBitcoin.com? Report it here.
[UPDATE: funds recovered], BITCOIN FORUM (Feb. 18, 2011 4:46:08 PM),
http://bitcointalk.org/index.php?topic=3597.0 (some individuals questioning the reliability
of some popular ewallet providers)).
89. See, e.g., Sebastiano Scròfina, Comment on How can Bitcoin be hacked?, QUORA
FORUM (Jan. 24, 2011), http://www.quora.com/How-can-Bitcoin-be-hacked.
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confidence. Obtaining the necessary computational power is easy, if
expensive.90 Although some question why anyone would do such a
thing,91 several parties might have sufficient interest: governments
who want to shut Bitcoin down,92 individuals with future liabilities in
bitcoins,93 or hackers who want to blackmail a business that relies on
bitcoins.
As the Iraqi Swiss Dinar illustrates, Bitcoin’s lack of commodity
or government backing alone does not doom Bitcoin to failure.
However, potential users should be aware that it is still a young and
developing currency, and could potentially fail in many ways.
VI. Legal Issues
Although Bitcoin may be more resistant to government attack
because of its decentralized nature, many Bitcoin users, including
90. Gaining control of the network in order to prevent transactions from settling
would cost, in March 2011, on the order of a million dollars, plus electricity costs. The
total power in the Bitcoin mining network is currently about 500 Giga-hashes per second.
A specialized processor called a GPU that can calculate at approximately 600 Mega-
hashes per second costs approximately $600. Thus, the current network has a power of
about 1000 of these GPUs. An individual would need to spend around $600,000 (plus costs
for supporting infrastructure) to control a majority of the processing power on the
network. See ripper234, Can you retort/refute this attack on Bitcoin?, BITCOIN FORUM
(Mar. 28, 2011 8:37:17 AM), http://bitcointalk.org/index.php?topic=5048.0.
Incredible computational power can be purchased from cloud computing providers
over the internet. See, e.g., Amazon Elastic Compute Cloud, WIKIPEDIA,
http://en.wikipedia.org/wiki/Amazon_Elastic_Compute_Cloud (last visited Oct. 25, 2011).
Hackers control and sell use of huge networks of computers called “botnets,” see Botnet,
WIKIPEDIA, http://en.wikipedia.org/wiki/Botnet (last visited Oct. 25, 2011). And
government agencies such as the CIA and NSA likely have significant computational
power at their disposal.
91. One user notes that even if an individual dominates the network, that entity will
never earn more than fifty bitcoins every ten minutes. See Nhdb, Comment on What stops
people with capable of [sic] massive amounts of cpu power . . . from mining all of the
remaining bitcoins?, REDDIT (Mar. 24, 2011), http://www.reddit.com/r/Bitcoin/
comments/gam37/what_stops_people_with_capable_of_massive_amounts/c1m73fv.
However, this amounts to substantial gross revenues of approximately USD $2.4 million
per year. (Bitcoin only awards 50 bitcoins every 10 minutes; 0.9 USD / bitcoin * 50
bitcoins / 10 minutes x 60 minutes / hour x 24 hours / day x 365 days / year = USD $2.4
million). Although gaining control of a majority of the mining network would cost on the
order of $1 million, see supra note 90, electricity and other infrastructure costs would eat
into this profit significantly.
92. Governments may have an interest in shutting Bitcoin down because it is
anonymous and consequently might facilitate illegal drug dealing, child pornography, and
money laundering.
93. Individuals who have future liabilities in bitcoins, such as a borrower or a futures
contract party, have significant incentive to reduce their future liabilities by generally
wreaking havoc in the system to collapse the value of the currency.
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both consumers and businesses, are anxious about its legal status.
That it may exist in a legal grey area may significantly hamper
demand for bitcoins. This Part examines just a few of the many
relevant legal issues.
A. Federal Government’s Monopoly on Issuing Currencies
Commentators often write that the federal government has an
“exclusive right to issue currency”94 because of the Constitution’s
assignment of control over currency to Congress to the exclusion of
states95 and the Federal Reserve’s control over the money supply. To
those taking the federal government’s monopoly at face value, the
recent conviction of a creator of a private currency called the Liberty
Dollar comes as no surprise. The Department of Justice, in a press
release noting the conviction, stated “It is a violation of federal
law . . . to create private coin or currency systems to compete with the
official coinage and currency of the United States.”96
However, organizations have been issuing a certain type of
private currency—community currencies meant to circulate only
within a particular community—in the U.S. for decades. Government
officials have known about these currencies and have commented
that they seem to pose no threat.97 Thus, the government’s supposed
monopoly is more limited than it may seem at first.
The Constitution has nothing to say about private parties
creating money.98 Instead, two sets of federal statutes affect private
94. See, e.g., Brian W. Smith & Ramsey J. Wilson, How Best to Guide the Evolution of
Electronic Currency Law, 46 AM. U. L. REV. 1105, 1111 (1996–1997).
95. The Constitution gives Congress the power to “To coin Money” and “regulate the
Value thereof,” U.S. Const. art I § 8, and prohibits states from “coin[ing] money.” U.S.
Const art I § 10.
96. DOJ, Liberty Dollar Conviction Release, supra note 10.
97. See Barbara A. Good, Private Money: Everything Old is New Again, ECONOMIC
COMMENTARY (Fed. Reserve Bank of Cleveland), Apr. 1, 1998, available at
http://www.clevelandfed.org/research/commentary/1998/0401.pdf (discussing Ithaca Hours
and other local, private currencies and noting that “Private money is not prohibited if it
complies with certain government regulations”); Smith & Wilson, supra note 94, at 1115
n.55 (comments by Federal Reserve Chairman Alan Greenspan that “some of the recent
speculation about risks to monetary policy . . . has been a bit alarmist;” remarks by
Edward W. Kelley, Jr., Member, Board of Governors of the Federal Reserve System, that
“even if every person in the United States held $150 in electronic currency, the total value
would amount to less than $50 billion, which is insignificant relative to the current M1
monetary aggregate of $1 trillion.”).
98. LEWIS D. SOLOMON, RETHINKING OUR CENTRALIZED MONETARY SYSTEM:
THE CASE FOR A SYSTEM OF LOCAL CURRENCIES 95–96 (1996).
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parties’ abilities to create currencies: The Stamp Payments Act of
1862 and federal counterfeiting statutes.
1. The Stamp Payments Act of 1862
In the nineteenth century, inflation caused the metal in small-
value official coins to become more valuable than the face value of
the coins themselves. People hoarded these coins, causing a shortage.
In order to make change for customers, companies used privately
issued currencies in the form of notes or tokens in small
denominations.99
Economists and politicians argued that these private currencies
were endangering the economy and contributing to inflation. About
a dozen states prohibited private issue of notes and tokens in values
less than $5. Congress, deciding that a federal response was prudent,
adopted the substance of these state laws as section 2 of the Stamp
Payments Act, and in section 1, allowed U.S. postage stamps to be
used for government debts less than $5, later amended to $1. Section
1 was quickly repealed, but Section 2 is still in effect.
Section 2 of the Stamp Payments Act of 1862 states:
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.100
Judicial interpretations of the Act and its precursors indicate that
the touchstone of the Act is competition with official currency. In a
1938 case the Supreme Court reversed a conviction of a Railroad
worker who had been convicted of violating a statute very similar to
the 1862 Act for giving privately issued $1 notes as change to travelers
who purchased their tickets with $5 notes. The indictments were
insufficient as a matter of law because the notes were not averred to
be “‘paper currency,’ or ‘paper medium evidently intended for
common circulation.’”101 Importantly, the legislative history for a
recodification of the Act interpreted this case as meaning that
99. Thomas P. Vartanian, et al, Echoes of the Past With Implications for the Future:
The Stamp Payments Act of 1862 and Electronic Commerce, BNA’s Banking Report (Sept.
23, 1996).
100. 18 U.S.C. § 336.
101. Stettinius v. United States, 22 F. Cas. 1322, 1334 (C.C.D.D.C. 1839) (No. 13387)
(quoting Act July 7, 1838, § 1, 5 Stat. 297).
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commercial instruments, such as checks, for small amounts were not
prohibited.102
In Monongahela Bridge Co, the District Court for the Western
District of Pennsylvania rejected a conviction against a bridge
company based on “issuing paper tickets to be received for toll.”103
The tickets had printed on their face “Monongahela Bridge—good
for one trip.” The judge found that unlike tokens issued by
merchants that were prohibited by the Act, these tickets did not
resemble U.S. coins or stamps “in shape, design or material” and “do
not contain a promise to pay money, they are not the representatives
of money, and therefore cannot be said to circulate, or be intended to
circulate as money.”104 According to the judge, the Act was designed
to promote the “free and untrammeled circulation” of U.S. coins and
postage.105 Further, the Judge expounded that money is a universal
medium of exchange, “the one thing acceptable to all men, and in
exchange for which they will give any commodity they possess.”106
Sovereign governments have the power to make money and may
punish infringements on its power.107
In the Supreme Court case United States v. Van Auken, the
defendant was indicted for circulating 50-cent store gift certificates
with the imprint “The Bangor Furnace Company will pay the bearer,
on demand, fifty cents, in goods, at their store, in Bangor, Mich.”108
The Supreme Court first made a purpose-based analysis of the Act.
The Supreme Court, like the Pennsylvania District Court, found that
the goal was to “secure, as far as possible, the field for [official small
value currency], without competition from any quarter.”109
Certificates payable in specific goods would only circulate locally and
would not compete with official currency, the Supreme Court held,
and Congress could not have intended to prohibit such certificates.110
Next, the Supreme Court referred to the Act’s text. It found that
the reference to notes and checks, which are instruments of money,
102. Vartanian, supra note 99, at nn. 24–25 and accompanying text.
103. United States v. Monongahela Bridge Co., 26 F. Cas. 1292, 1292 (W.D. Pa. 1863)
(No. 15796).
104. Id. at 1293–93.
105. Id. at 1292.
106. Id. at 1293.
107. Id.
108. United States v. Van Auken, 96 U.S 366, 368 (U.S. 1878).
109. Id. at 367.
110. Id. at 368.
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limited the reach of the remaining words to notes for money.111 In
other words, the Act only applies to things “measurable by the
pecuniary standard” and not to anything measured, for example, “by
the pound, the gallon, the yard.” It found further support for this
interpretation in a dictionary definition of “sum,” which was
“quantity of money or currency.”112 Thus, the statute’s inclusion of
“obligation[s] for a less sum than $1” meant the same thing as “for a
less sum of money than one dollar.”113 Therefore, a certificate
payable in goods at a specific store—even for a specific dollar value of
goods—was not “for a less sum than $1” because it was not an
obligation payable in money or currency.114
In United States v. Roussopulous, the District Court of the
District of Minnesota cited Van Auken in rejecting an indictment
against a defendant for issuing metal tokens that were redeemable for
50 cents worth of goods at a particular store.115 First, because the
tokens were payable in goods, they were not payable in money, as
required by the statute.116 Second, the Court found that the form of
the token was so different from all official coinage that the token
“does not purport to be a piece of money,” and “cannot, therefore,
have been intended to circulate as money.”117
From these cases, the following factors in determining
competition with official currency can be derived. The Act is unlikely
to apply to anything that (1) circulates in a limited area,118 (2) is
redeemable only in goods, (3) does not resemble official U.S.
currency and is otherwise unlikely to compete with small-
denominations of U.S. currency,119 or (4) is a commercial check (such
as a customer might make out to a store to buy something worth less
than $1).120
111. Id.
112. Id.
113. Id.
114. Id. at 368–69.
115. 95 F. 977, 978 (D. Minn. 1899).
116. Id.
117. Id.
118. See United States v. Van Auken, 96 U.S 366, 368 (U.S. 1878).
119. Vartanian, supra note 99 (citing Van Auken; United States v. Monongahela
Bridge Co., 26 F. Cas. 1292 (W.D. Pa. 1863) (No. 15796); United States v. Roussopulous,
95 F. 977 (D. Minn. 1899)).
120. See Stettinius v. United States, 22 F. Cas. 1322, 1324 (C.C.D.D.C. 1839) (No.
13387).
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Although the motivations behind the Stamp Payments Act have
long since passed, the law has not been repealed, and has been
stylistically amended a number of times without consideration of its
present day application.121
A number of existing “community currencies,” such as Ithaca
Dollars, Berkshares, and LETS, have avoided any legal attack under
the Act by creating notes only in values greater than $1.122 These
currencies may also fall outside the Act’s reach because they are
intended to circulate only locally, and because their scrip is often
denominated in “hours” rather than dollars.123 Although the case
against Liberty Dollars might have been straightforward under the
Act, Liberty Dollar coins and paper currency were never created in
denominations smaller than $1.124
Virtual world currencies, such as Linden Dollars or World of
Warcraft Gold, likely fall outside the Act’s reach because these
currencies are not “intended to circulate as money or to be received
or used in lieu of lawful money of the United States.” These
currencies can generally only be used to purchase virtual goods in a
particular virtual environment, and, like currencies redeemable only
in goods or that only circulate in a limited area, are unlikely to
compete with official coinage.125
One view is that Bitcoin, like most digital currencies, is different
from community currencies, virtual world currencies, and gift
certificates in ways that make Bitcoin more likely to fall within the
Act. First, unlike community currencies, Bitcoin does not limit
transactions to those worth more than $1.126 Second, several factors
121. Vartanian, supra note 99.
122. See, e.g., Ellen Graham, Community Groups Print Local (and Legal) Currencies,
WALL ST. J., June 27, 1996, at B1; Paul Glover, Creating Community Economics with
Local Currency, http://www.paulglover.org/hourintro.html (last visited Oct. 25, 2011)
(noting that Ithaca Hours are legal, among other reasons, because “denominations are at
least $1.00 value”); Good, supra note 97 (noting that community currencies are legal if,
inter alia, they are “issued in denominations valued at a minimum of $1”).
123. See, e.g., Paul Glover, The Ithaca HOUR Family, http://www.paulglover.org/
hourcurrency.html (last visited Oct. 25, 2011) (indicating denominations of “One HOUR,”
“Half HOUR,” “Quarter HOUR,” “Eighth HOUR,” and “Two HOURS”).
124. See Susan Headley, What are NORFED Liberty Dollar Coins?: U.S. Mint Warns
About NORFED Liberty Dollar U.S. Coin Lookalikes!, ABOUT.COM,
http://coins.about.com/od/coinbuyingadvice/qt/libertydollars.htm (last visited Apr. 2, 2011)
(noting denominations of Liberty Dollars that are all $1 or greater). Additionally,
punishment under the Stamps Payment Act is limited to six month imprisonment—much
less than under the statutes by which von NotHaus was ultimately convicted.
125. See United States v. Van Auken, 96 U.S 366, 368 (U.S. 1878).
126. See Vartanian, supra note 99.
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indicate that Bitcoin is intended to compete with official currency.
Bitcoin supporters proselytize its acceptance by merchants and
individuals in parallel with or in lieu of dollars, and many merchants,
offering many different kinds of goods and services, accept bitcoins as
payment. Bitcoins are not limited to a particular geographic area but
instead are used everywhere in the U.S. (and the world) where dollars
could be used—i.e., where there is Internet access. Thus, one might
argue that Bitcoin is a “token . . . 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,” violating the Stamp Payments Act.
However, using the Supreme Court’s approach in Van Auken
analyzing the Act’s purpose and closely reading its text—the better
reading is that Bitcoin does not fall within the Act. First, banning
Bitcoin would not promote Congress’s goal in passing the Act of
preventing competition with U.S. coins. Bitcoin is mainly used over
the Internet and therefore competes with credit cards, PayPal, and
checks rather than U.S. coins. Today, Bitcoin is rarely used in face-
to-face transactions in which it would compete with U.S. coins.
Second, because the Act provides criminal penalties, a court may
narrowly interpret it and conclude that because a nineteenth-century
Congress could not have conceived of digital currencies, they cannot
be within the scope of the Act.127 For example, in United States v.
Gellman, the court warned that early money-related laws providing
criminal penalties should be cautiously applied to new technologies.128
In that case, the defendants were charged with violating
counterfeiting statutes by manufacturing inexpensive metal coins in
the size and shape of U.S. coins that were meant to fool vending
machines, jukeboxes, parking meters, and so on. The standard courts
had used in applying these counterfeiting statutes was whether the
coins would “deceive a person using ordinary caution,”129 but the
coins in Gellman would not deceive a person because they contained
the inscriptions “No Cash Value” and “Good for Amusement Only”
and had no numbers inscribed on them. The Court rejected the
prosecution’s request for a new “mechanical test” that would apply to
these new coins. The court concluded that:
127. Id.
128. United States v. Gellman, 44 F. Supp. 360, 365–66 (D. Minn. 1942).
129. Id. at 363 (quoting United States v. Bogart, 24 F. Cas. 1185 (N.D.N.Y. 1878) (No.
14,617)).
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The difficulty is that this indictment seeks to charge the
defendants with an offense under statutes which were enacted
over one hundred years ago when vending machines probably
did not exist. They were never framed to embrace the use of
metal tokens as a substitution for money in the limited sense
referred to. While the Court is not unmindful that there should
be some curb on the fraud that is being perpetrated by the use
of these slugs or tokens, relief must be sought from Congress
and not from the courts. . . . A criminal statute must be strictly
construed, and to apply these statutes to the factual situation
disclosed by this evidence would be entirely unwarranted.130
A close reading of the text supports these purpose-based
arguments. Although digital currencies are often described as “digital
tokens,” a “note, check, memorandum, token, or other obligation” in
the statute are all physical manifestations of currency, indicating that
the statute was only meant to extend to physical instruments and not
to digital currencies.131 Although the phrase “other obligation” may
be general enough to refer to something that is not physical, the
principle of ejusdem generis indicates that it should be interpreted as
only referring to physically manifested things.
On the other hand, one could argue that Congress did not need
to conceive of digital currencies to create a statute that would
prohibit them if they fell within the clear meaning of the text and aim
of the statute.132 Thus, the better textual argument is that bitcoins are
130. Id. at 365–66.
131. Id.
132. Two other arguments can be made in favor of Bitcoin that suffer the same flaw as
the “physical manifestation theory.” Aside from this argument about Bitcoin not being an
obligation, just as the Supreme Court found in Van Auken that scrip redeemable in goods
is not “for a less sum than $1,” United States v. Van Auken, 96 U.S 366 (U.S. 1878), a
court may find that a bitcoin, which is not redeemable for any particular thing and is not
pegged to the dollar, is not “for a less sum than $1.” See Vartanian, supra note 99. One
could also argue that while Bitcoin users intend for bitcoins to circulate as money, they do
not do so within the meaning of the Act because the word “circulate” in the phrase
“circulate as money” refers to physical circulation or because “money” refers to physical
manifestations of money, (although such an interpretation seems overly formalistic.) Such
an argument was made by a former General Counsel for the Office of the Comptroller of
the Currency and also MasterCard. See Smith & Wilson, supra note 94, at 1110 (“The
SPA may be inapplicable to all forms of electronic currency, because such currencies lack
the physical characteristics of U.S. currency. Instruments that do not have the physical
characteristics of U.S. coins or paper currency cannot be ‘intended to circulate as
money.’”). But see id. (“If faced with an ether-based payment system, however, a court
may dismiss the relevance of distinctions based on physical attributes and instead may
focus on similarities arising from non-physical properties, such as the rights and
obligations of the holders.”).
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not “obligations” and therefore fall outside the list.133 Each of the
items in the list of things proscribed by the Act is an obligation, as
confirmed by the last phrase, “or other obligation.” Most of the cases
brought under the Act dealt with “obligations,” such as a paper ticket
that obligated the issuer to provide passage across a bridge or scrip
that obligated the issuer to provide 50 cents in merchandise. A
bitcoin, however, is not an obligation—it has value only because other
individuals are willing to ascribe it value and not because any entity
has promised to provide something in return for a bitcoin. Thus, a
bitcoin may not be a “token” within the statute’s meaning because it
is not an obligation.
In personal correspondence, Professor Ronald Mann of
Columbia Law School, who conducts research on payment systems
and electronic commerce among other topics, disagreed with using
the word “obligations” to narrow the scope the statute. According to
Mann, “[T]hat reading can’t prevail, I think, because the statute
plainly would cover a private coin that was valued based solely on its
metallic content (and thus was not an ‘obligation’). Because I think
Bitcoin is pretty clearly a ‘token,’ albeit an electronic one, I would
argue it is covered.”
However, the evidence against Professor Mann’s interpretation is
strong. The only evidence for his view is the word “token,” which
colloquially may describe any metal coins used as currency.
However, Webster’s Dictionary defines “token,” in relevant part, as
“[a] piece of metal intended for currency, and issued by a private
party, usually bearing the name of the issuer, and redeemable in
lawful money . . .”134 The first part of this definition describes
something that is redeemable—that is, an obligation—rather than a
coin that is valued based solely on its metallic content (i.e., “specie”).
Thus, mere use of the word “token” does not bring specie within the
statute.
Furthermore, no evidence indicates that the statute was aimed at
specie. Money in nineteenth-century America before the passage of
the Stamp Payments Act consisted mostly of bank notes.135 Although
specie was probably the most trusted store of value, it was chronically
133. C.f. Kerry Lynn Macintosh, The New Money, 14 BERKELEY TECH. L.J. 659, 672
n.78 (1999) (“An argument can be made that ‘obligation’ was never intended to include
electronic money . . . .”).
134. WEBSTERS THIRD INTERNATIONAL DICTIONARY OF THE ENGLISH LANGUAGE
UNABRIDGED 2404 (Philip B. Grove et al., eds., 3rd ed. 1993) (Token definition seven is
cited.).
135. CARNELL, MACEY & MILLER, supra note 65, at 7.
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scarce.136 It was extremely unlikely that businesses wanting to make
change would use extremely valuable specie to do so. As the
legislative history indicates, the Act was instead aimed at
“shinplasters,”137 a derogatory term for worthless privately issued
notes and tokens.138 Underscoring that the target of the Act was
worthless obligations, the Treasury Secretary wrote in a letter to
Congress in support of the Act that “The depreciation of [official]
currency, result[s], in great measure, from the unrestricted issues of
non-specie-paying banks and unauthorized associations and
persons . . . .”139
Perhaps the best argument against the application of the Act to
Bitcoin is pragmatic. It is a 150-year-old statute that has outlived its
usefulness. Courts began limiting its application almost immediately
after it was passed.140 Although many academic works have noted
that the Stamp Payments Act may be a problem for digital
currencies,141 and digital currencies have existed for more than a
decade, there has been no published court opinion interpreting the
Act since 1899.142 And the comparatively lenient punishments
available for violations of the Act (fine and maximum six month
imprisonment) and availability of more fitting statutes under which to
136. Id. at 2, 5, 7.
137. CONG. GLOBE, 37th Cong., 2d Sess. 3405 (1862), available at
http://memory.loc.gov/cgi-bin/ampage? collId=llcg&fileName=061/llcg061.db
&recNum=526 (Congressman Phelps, speaking in opposition to the Act on Constitutional
grounds stated that “I am as much in favor as any member on the floor of this House of
preventing the circulation of shinplasters.”).
138. See Vartanian, supra note 99.
139. CONG. GLOBE, 37th Cong., 2d Sess. 3405 (1862) (emphasis added).
140. The initial Act was passed in response to private issuers creating small-
denomination tokens or scrip, often redeemable only in merchandise from the issuer.
Thus, the court’s finding in Van Auken that scrip redeemable only for goods was not
prohibited by the Act is questionable. Furthermore, although one may argue that a single
issuer’s scrip circulating in a limited area may not compete with official U.S. currency,
there is no question that many such private currencies circulating would, taken together,
challenge the monopoly of official stamps and coins. Thus, the court limited the Act by
interpreting it more narrowly than the text and intentions of Congress would indicate it
should have been.
141. See, e.g., Vartanian, supra note 99; Smith & Wilson, supra note 94; Macintosh,
supra note 133, at 671–72.
142. See United States v. Roussopulous, 95 F. 977 (D. Minn. 1899). A search of
Google Scholar and Westlaw has found no case interpreting Section 2 of the Stamp
Payments Act since Roussopulous.
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attack Bitcoin, as described infra, are likely to dissuade prosecutors
from trying to breathe new life into the Stamps Payment Act.143
2. Prohibition on Coining Current Money and the Liberty Dollar Saga
Bernard von NotHaus started printing and distributing metallic
and paper currency called Liberty Dollars in 1998.144 The currency
was backed by gold, silver, or other precious metals, and was intended
to be inflation-proof, unlike the U.S. Dollar.145 The U.S. Mint warned
consumers about the Liberty Dollar in 2006,146 NotHaus’s offices were
raided by the FBI and Secret Service in 2007,147 and NotHaus was
indicted in 2009148 and convicted in March 2011.149 In press releases
related to the indictment and conviction, the Department of Justice
made several statements that seemed extremely hostile to private
currencies, going as far as referring to NotHaus as a “domestic
terrorist.”150 NotHaus himself believes that his indictment and
143. Nevertheless, the Act, having outlived its usefulness and perhaps impeding the
development of digital currencies, should be repealed. See Macintosh, supra note 133, at
671–73.
144. Indictment at ¶¶ 1, 13–15, 19, United States v. NotHaus, 5:09CR27, (W.D.N.C.
May 19, 2009).
145. Id. at ¶¶ 14, 15, 19.
146. U.S. Mint, Liberty Dollar Consumer Warning, supra note 75.
147. Frontal Assault on Freedom: FBI Raids Liberty Dollar, THE RABID QUILL (Nov.
15, 2007), available at http://replay.waybackmachine.org/20080117060339/http://
www.rabidquill.com/2007/11/15/frontal-assault-on-freedom-fbi-raids-liberty-dollar
(including text of e-mail message from Bernard von NotHaus describing the raid); Liberty
Dollar Office Raided, EVANSVILLE COURIER & PRESS (Nov. 15, 2007 1:42 PM),
http://www.courierpress.com/news/2007/nov/15/liberty-dollar-office-raided.
148. Press Release, United States Attorney’s Office, Western District of North
Carolina, Four Defendants Indicted in Unlawful Coin Operation (June 3, 2009), available
at http://charlotte.fbi.gov/dojpressrel/pressrel09/ce060309.htm [hereinafter DOJ, Liberty
Dollar Indictment Release].
149. DOJ, Liberty Dollar Conviction Release, supra note 10.
150. In noting the indictment, the DOJ press release quoted an FBI special agent:
“People understand that there is only one legal currency in the United States. When
groups try to replace the U.S. dollar with coins and bills that don’t hold the same value, it
affects the economy.” DOJ, Liberty Dollar Indictment Release, supra note 148. The press
release noting the conviction stated: “Along with the power to coin money, Congress has
the concurrent power to restrain the circulation of money which is not issued under its
own authority in order to protect and preserve the constitutional currency for the benefit
of all citizens of the nation. It is a violation of federal law for individuals, such as von
NotHaus, or organizations, such as NORFED, to create private coin or currency systems
to compete with the official coinage and currency of the United States.” DOJ, Liberty
Dollar Conviction Release, supra note 10. Furthermore, the release quoted a U.S.
Attorney as saying: “Attempts to undermine the legitimate currency of this country are
simply a unique form of domestic terrorism . . . .” Id.
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conviction were “political,”151 ostensibly because the federal
government is hostile to private currencies.
As a threshold matter, the statutes under which NotHaus was
convicted, 18 U.S.C. §§ 485 and 486, are inapplicable to Bitcoin
because they only deal with metal coins or coins or bars that resemble
official U.S. or foreign currency.152 Nevertheless, some have mused
that the attack on Liberty Dollar indicate that Bitcoin will be next.
Such fears are magnified by the political overlap between NotHaus
and Liberty Dollar users, on the one hand, and some Bitcoin users on
the other: gold-bugs who believe that the Federal Reserve does harm
to the economy and that the existence of an inflation resistant
currency would benefit the economy.153
However, the Liberty Dollar government action is best
understood as an attack on counterfeiting and fraud rather than as
the first salvo in a war against private currencies,154 as confirmed by
Assistant U.S. Attorney (AUSA) Jill Westmoreland Rose, who
successfully prosecuted NotHaus.155 In a 2006 U.S. Mint press
151. NotHaus told me that his conviction was “political.” Telephone Interview with
Bernard von NotHaus (Apr. 12, 2011) [hereinafter NotHaus Interview]. When I asked
him why he believed so, he told me “it’s a fact, not a belief.” Id.
152. Section 485 is titled “Coins or bars,” and is clearly limited to “coins” or “bars”
that are counterfeit and resemble official U.S. or foreign currency. Section 486, titled
“Uttering coins of gold, silver or other metal,” only deals with “coins of . . . metal.” A
Bitcoin is a digital token rather than a coin or a bar and does not resemble any official
currency.
153. Reached after his conviction, NotHaus told me that that U.S. Dollars are “fiat
pieces of shit.” NotHaus Interview, supra note 151. He also said, “I suggest you get hip to
the monetary system. Wake up and smell the stench.” Id.
154. C.f. Seth Lipsky, Op-Ed., When Private Money Becomes a Felony Offense: The
Popular Revolt Against a Declining Dollar Leads to a Curious Conviction, WALL ST. J.
(Mar. 31, 2011), http://online.wsj.com/article/SB1000142405274870442580457622038367360
8952.html (noting the apparent mismatch between theories of counterfeit used in the trial,
on the one hand, and language in the conviction press release indicating that private
currencies are illegal).
155. Telephone Interview with Jill Westmoreland Rose, Assistant U.S. Attorney,
Western District of North Carolina (Apr. 7, 2011) [hereinafter Rose Interview]. Ms. Rose
said that the case “is not about private voluntary barter or currency systems. This is a case
about fraud and counterfeiting.” I presented Ms. Rose with a hypothetical of an
alternative coin-based currency system, not priced in dollars, that presented no risk of
fraud or counterfeiting but was intended to be circulated and generally accepted. Rose
said that although one could make an argument that such a currency would be prohibited
by 18 U.S.C. § 486 because it was “intended for use as current money,” prosecutions based
on such a theory would be very unlikely unless there are victims who make consumer
complaints.
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release,156 the 2009 indictment, and 2011 trial, the government focused
on the similarity of Liberty Dollars to official U.S. currency and
potential to confuse consumers.157 These materials noted that
NotHaus tried to spend Liberty Dollars into regular circulation,
encouraged other Liberty Dollar users to do the same, and
encouraged businesses to give Liberty Dollars as change to
unsuspecting customers.158 NotHaus and his organization profited
from their fraud because the face value of Liberty Dollar metal
currencies was set higher than the value of their metal content.159
156. In 2006, the U.S. Mint published a press release notifying consumers that Liberty
Dollars are “not genuine United States Mint bullion coins,” “not legal tender,” and “are
neither backed by, nor affiliated with, the United States Government.” U.S. Mint, Liberty
Dollar Consumer Warning, supra note 75. The release warned consumers that Liberty
Dollar medallions might be confused with official U.S. currency because they had similar
wording and images. Id. It also warned that “[a]ccording to the NORFED website,
‘Liberty merchants’ are encouraged to accept NORFED ‘Liberty Dollar’ medallions and
offer them as change in sales transactions of merchandise or services.” Id.
157. United States’ Response in Opposition to Defendant’s’ Motions Under Rules 29,
33 and 34 of the Fed.R.Crim.Proc. at 4–5, United States v. NotHaus, 5:09CR27-V,
(W.D.N.C. Apr. 7, 2011) (“The government presented substantial evidence at trial on each
element of the charges for which Defendant was convicted. Ultimately, the evidence
presented at trial showed that Defendant (1) designed and created counterfeit coins
(Liberty Dollars) that resembled genuine coins of the United States; (2) instructed
individuals on methods to inject the Liberty Dollar coins into the flow of current money
by misleading people to believe that the coins were genuine U.S. coins; and (3) defrauded
people by minting the Liberty Dollar coins with a dollar value that was in excess of the
true inherent value of the silver contained in the coins . . . . Defendant engages in a wholly
irrelevant discussion of ‘private currency barter systems’ and contends that the
government sought to paint a picture that private currency systems were illegal....
Defendant was not operating a ‘private currency barter system,’ rather, he was
counterfeiting United States coins and using deceptive means to inject them into the flow
of current money to defraud the public.”) (citations omitted).
158. Adam Jefferson Kirby, The Strange Case of The Liberty Dollar, SILVER
MONTHLY, http://www.silvermonthly.com/1459/the-strange-case-of-the-liberty-dollar (last
visited Apr. 4, 2011) (“It was common practice for Von Nothaus [sic] and his associates to
present Liberty Dollars to merchants unfamiliar with his product without offering the
explanation that they were not U.S. legal tender currency, but rather, a voluntary barter
currency, one which could not be redeemed at face value for Federal Reserve Notes in any
U.S. commercial bank. A video exposé posted originally on the Liberty Dollar
website . . . features Von Nothaus [sic] personally buying sandwiches with a $10 Liberty
Dollar coin, declaring it to be a ‘new ten dollar silver piece’ as he handed it to the
bewildered vendor.”).
159. One of the prosecutors, Jill Westmoreland Rose, told me: “If you’re giving
someone a $10 coin and tell them that it’s legal, but it only has $4 worth of silver, you’re
defrauding people.” Rose Interview, supra.note 155. (These profits—those accruing to a
currency issuer because excess of face value of currency over the cost of its creation—are
called “seniorage” and are often reserved to governments). Kerry Lynn Macintosh, How
to Encourage Global Electronic Commerce: The Case for Private Currencies On the
Internet, 11 HARV. J.L. & TECH. 733, 747 n.50 (1998).
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NotHaus contested these characterizations and argued that he only
encouraged individuals to enter into knowing and voluntary
exchanges.160 However, a jury disagreed, finding him to have violated
all three counterfeiting counts of the indictment.161
From this perspective, the U.S. Attorney’s characterization of
NotHaus as a domestic terrorist is more understandable. He
attempted to create a paper and metal currency denominated in
dollars that directly competed with U.S. greenbacks in representing
official government-backed money. He is like a counterfeiter who
prints greenbacks to pawn off on unsuspecting individuals and
customers. Although some believe that metal-backed Liberty Dollars
are worth more than greenbacks, that is no reason for unsuspecting
individuals to be involuntarily stuck with Liberty Dollars instead of
greenbacks.162
B. Securities Regulations
Federal law subjects “securities” to a panoply of regulations,
making the determination of whether bitcoins are “securities”
extremely important.163 “Security” is defined broadly in the Securities
Act of 1933 § 2(a)(1) as including “any note, stock, . . . , transferable
share, [or] investment contract,” and about thirty other things. Other
securities laws, such as section 3(a)(10) of the Securities and
Exchange Act of 1934, contain substantially identical language.
These laws also contain lists of “exempted securities,” which are
160. For example, in a case that von NotHaus filed against the U.S. Mint (that was
later dismissed), he argued that neither he nor “individuals in the Liberty Dollar
organization have . . . represented the Liberty Dollar as legal tender or ‘current money.’
Liberty Dollar has encouraged persons who utilize the barter currency to offer it to
merchants as barter payment for goods and services but not as ‘legal tender’ or ‘current
money’.” Complaint at ¶ 14, NotHaus v. Paulson, No. 3:07-CV-038 RLY-WGH, 2007 WL
4579959 (S.D. Ind. Mar. 20, 2007). When I spoke to him after his conviction, he argued
that the government had not proven the counterfeiting charges against him and asked why
the government did not produce witnesses who had been defrauded or mislead. NotHaus
interview, supra note 151. He said that he was convicted because the prosecution, which
he described as “lying pieces of shit,” had “lied.” Id.
161. Verdict Form, United States v. von NotHaus, 5:09CR27-V (W.D.N.C. Mar. 18,
2011).
162. See Kirby, supra note 158 (arguing that Von Nothaus’s tactics were illegitimate).
Individuals printing currency that purports to be “dollars” theoretically interfere with the
Federal Reserve’s control over monetary policy (although the amount in circulation—
approximately $20 million in the case of Liberty Dollars—is so small that there could be
no practical effect). Smith & Wilson, supra note 94, at 1115 & n.55.
163. C.f. S
OLOMON, supra note 98, at 109–10 (noting the importance of determining
whether private, local currencies are securities under the federal securities laws).
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exempt from registration and disclosure laws but are still subject to
antifraud and civil suit provisions.
At least one commentator has concluded that digital currencies
are unlikely to be regulated as securities.164 Bitcoin supporters may
similarly argue, as elaborated below, that bitcoins do not look like
securities or investments, especially because there is no money-
making enterprise that is attempting to raise money, and that bitcoins
are instead like commodities or currencies, which are generally not
regulated under the federal securities laws. Furthermore, although
bitcoins may resemble “investment contracts,” they ultimately do not
fall within that definition as described in more detail below.165
1. Note or Stock
A bitcoin is not “stock” within the meaning of these statutes
because it lacks important characteristics of stock, such as conferring
the “right to receive dividends contingent upon an apportionment of
profits” and “voting rights in proportion to the number of shares
owned.”166 Similarly, a bitcoin is not a “note” within the meaning of
the statutes because it lacks the essential characteristics of a note:167
164. Macintosh, supra note 159, at 746 n.49.
165. In an earlier draft of this article, I concluded that bitcoins likely were investment
contracts but as explained below, events that took place in the Bitcoin world after that
draft was published have changed my mind.
166. See Landreth Timber Co. v. Landreth, 471 U.S. 681, 686 (1985) (citing United
Housing Foundation, Inc. v. Forman, 421 U.S. 837, 851 (1975)) (noting that something is a
“stock” and therefore a “security” within the 1933 Act if it has “significant characteristics
typically associated with stock” such as “(i) the right to receive dividends contingent upon
an apportionment of profits; (ii) negotiability; (iii) the ability to be pledged or
hypothecated; (iv) the conferring of voting rights in proportion to the number of shares
owned; and (v) the capacity to appreciate in value.” (citations and quotations omitted)).
167. The test for whether something is a “note” within the securities laws “begins with
a presumption that any note with a term of more than nine months is a ‘security’” but
allows “an issuer to rebut the presumption that a note is a security if it can show that the
note in question bear[s] a strong family resemblance to an item on the judicially crafted
list of exceptions” of notes that “are obviously not securities.” Reves v. Ernst & Young,
494 U.S. 56, 63–65 (1990) (citations and quotations omitted). On first glance, this
definition seems circular because it requires a court to determine whether something is a
“note” before applying a test to determine whether it is a “note” under the securities laws.
However, it is clear that the Supreme Court is using the word “note” in two different ways:
first, whether it is an instrument commonly considered a “note” within the commercial
world; and second, if it is such an instrument, whether it should fall within the definition of
“note” in the securities laws. See id. at 63 (“the phrase ‘any note’ should not be
interpreted to mean literally ‘any note’ but must be understood against the backdrop of
what Congress was attempting to accomplish in enacting the Securities Acts.”). If
something is not a “note” in the broad commercial sense then it is not a “note” within the
securities laws.
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an instrument that indicates a “promise by the maker to pay a sum of
money to another party.”168 Although some digital currency tokens
represent promises to pay,169 a bitcoin instead represents a settled
amount.170
2. Investment Contract
If a bitcoin is a security, it will be because it falls within the vague
and broad phrase “investment contract.”171 The Supreme Court, in
SEC v. W. J. Howey Co., has interpreted something to be an
“investment contract” and therefore a “security” if it is a “contract,
transaction or scheme whereby a person [1] invests his money in [2] a
common enterprise and [3] is led to expect profits [4] solely from the
efforts of the promoter or a third party . . .”172 In that case, individuals
who purchased a row of orange trees and management services in
return for a share of the operation’s profits were found to have
purchased “securities.” Supporters of Bitcoin like John William
Nelson, a Georgia attorney, argue that Bitcoin does not meet any of
the requirements of the Howey test,173 while opponents would argue
that it meets all of them. The best argument is likely somewhere
between these extremes.
Investment of Money. Supporters may argue that no individual
invests his money because bitcoins are initially awarded to those who
invest computational time rather than money. However, most
168. See Part VI.A.1, supra, (arguing that a bitcoin is not an obligation); C.f. Edward
Sonnenschein, Jr., Federal Securities Law Coverage of Note Transactions: The Antifraud
Provisions, 35 BUS. LAW. 1567, 1578 (1980) (“The term[] ‘note’ [is] used in reference to a
highly diverse set of instruments which are utilized in an even more diverse set of
transactions. Although the Uniform Commercial Code defines the term more narrowly,
the feature common to these instruments is that they embody a promise by the maker to
pay a sum of money to another party, the payee. Such payment may become due either at
a specified time, or upon the demand of the payee or the occurrence of some specified
event, or some combination of the above.” (citation omitted)).
169. See Macintosh, supra note 159, at 745–46 & n.49 (giving an example of a
hypothetical digital currency that is in the form of a “digital promissory note”).
170. If Jack gives Bob a note for $10 and $10 worth of bitcoins and later goes bankrupt,
the note will trade at a discount because Jack cannot fulfill his promise to pay the full
amount of the note, but the bitcoins will still be worth their full amount.
171. Securities Act of 1933 § 2(a)(1).
172. 328 U.S. 293, 298–99 (1946). See generally Thomas Lee Hazen, Securities
Regulation in a nutshell 33–37 (10th ed. 2009) (noting the four parts of the Howey test).
173. 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 (“Nevertheless, none
of the four characteristics of an investment contract . . . really fit Bitcoin’s model.”).
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individuals do purchase bitcoins on exchanges using money rather
than mining them.
Common Enterprise. A Bitcoin opponent would argue that there
is a common enterprise. There is “horizontal commonality: the tying
of each individual investor’s fortunes to the fortunes of the other
investors . . .”174 As the value of Bitcoin increases, each person
holding bitcoins is proportionally better off. The enterprise can be
described as comprising the software developers because they ensure
Bitcoin’s technical and money-supply properties, which are among
the most important factors affecting Bitcoin’s value. Furthermore,
although it may be true that Bitcoin seems to lack a business or entity
that is trying to raise money (when individuals purchase bitcoins on
an exchange, no money goes towards the developers),175 this fact
should not be dispositive in a regime that is primarily intended to
protect investors.
Here, however, Bitcoin’s proponents’ argument is probably
stronger. The individuals who choose to promote Bitcoin are
independent of one another, and there is no one money-making
business that seeks to raise money through investments. Further,
recent events have shown that the Bitcoin developers, although
important to the continued success of Bitcoin, are far from the most
important players. For example, in June, Mt. Gox, the most popular
exchange, was hacked.176 The thief was able to steal or arbitrarily
assign himself about 25,000 bitcoins—worth about $500,000 at the
time, and tried to sell them all at once. The glut of bitcoins for sale
crashed the price from $17.50 to $0.01 within a half hour,177 throwing
the whole Bitcoin world into a panic. Mt. Gox responded by freezing
trading, writing off the money that the hacker was actually able to
withdraw from the exchange, and rolling back all accounts and trades
to a pre-hack state. The move worked, restoring the trading price at
where it had been before the hack and calming the markets. Mt. Gox
174. Revak v. SEC Realty Corp., 18 F. 3d 81, 87 (2d Cir. 1994).
175. One might argue that Bitcoin’s developers do constitute the money making
business. Bitcoin developers presumably own bitcoins—perhaps more than the average
Bitcoin user. Thus, it is in their interest to ensure that bitcoins remain liquid and in high
demand relative to supply, to maintain and increase their own wealth.
176. Jason Mick, Daily Tech, Inside the Mega-Hack of Bitcoin: the Full Story (June 19,
2011),
http://www.dailytech.com/Inside+the+MegaHack+of+Bitcoin+the+Full+Story/article2194
2.htm; Press Release, Mt. Gox, Clarification of Mt. Gox Compromise Accounts and Major
Bitcoin Sell-Off (June 30, 2011), available at https://mtgox.com/press_release_20110630.
html.
177. Id.
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played a similarly important role when a the third largest exchange,
Bitomat.pl, incompetently lost the file that contained 25,000 bitcoins
belonging to its users.178 Mt. Gox bought Bitomat.pl and restored
balances for all of Bitomat.pl’s users in order to “restore confidence
in the bitcoin economy.”179 Thus, Mt. Gox and other exchanges are
critical parts of the Bitcoin infrastructure, indicating that the
developers cannot be described as the whole Bitcoin enterprise.
Expectation of Profits. Proponents argue that there is no
expectation of profits. Individuals hold bitcoins either for fun180 or as
they do other currencies, to facilitate commercial exchanges rather
than in expectation of profit. Although some individuals do speculate
in currencies on foreign exchange markets, with volumes reaching
trillions of dollars per day,181 it is unlikely that a court would find that
U.S. dollars are generally held in expectation of profit. Similarly,
even substantial speculation in bitcoins does not indicate a general
expectation of profit.
However, at present, most Bitcoin users are probably investing in
Bitcoin in expectation of profits. A very small number of merchants
accept bitcoins (although the number is likely to grow) indicating that
opportunities to use bitcoins in commercial exchanges is limited.
Moreover, many Bitcoin users are motivated by a belief that Bitcoin,
unlike the dollar, is inflation-resistant, indicating a profit expectation
to some extent.182
Solely From the Efforts of Another. Bitcoin opponents may
argue that an investor’s returns do come solely from the efforts of
178. Press Release, Mt. Gox, Mt.Gox, The World’s Largest Bitcoin Exchange to
Acquire Bitomat.pl, Compensate Loss Of Bitcoins (Aug. 11, 2011), available at
https://mtgox.com/press_release_20110811.html.
179. Id.
180. C.f. Alan R. Bromberg, Commodities Law and Securities Law—Overlaps and
Preemptions, 1 J. CORP. L. 217, 224 & n.18 (1976) (citing SEC v. Brigadoon Scotch
Distrib., Ltd., 388 F. Supp. 1288 (S.D.N.Y. 1975)) (Noting that within the context of the
Howey test, “[c]oins or stamps bought for a hobby probably lack a profit element . . .”).
181. See What is Foreign Exchange (Forex)?, INTERNATIONAL BUSINESS TIMES (Feb.
11, 2009), http://au.ibtimes.com/articles/110821/20110210/what-is-foreign-exchange-
currency-conversion-financial-markets-forex-foreign-exchange-markets.htm.
182. Bitcoin supporters might recharacterize the issue by arguing that purchasing
bitcoins because of a belief of deleterious inflation in, e.g., the dollar, does not reflect an
expectation of profit but instead a fear of loss from holding wealth in the U.S. Dollar. An
adjudicator’s decision on the “profits” issue may ultimately depend on who the parties at
issue are, whether they invested for profit, and whether at the time of the dispute or the
time of the facts that gave rise to the dispute the Bitcoin economy has flourished
significantly to support a finding that most individuals hold bitcoins to facilitate
commercial transactions.
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others. Bitcoin investors have no active part to play in Bitcoin’s
management but do require the ongoing efforts of the Bitcoin
developers.183 Opponents, on the other hand, would argue that an
individual who owns bitcoins does not rely on the efforts of a third
party because bitcoins have inherent value, which comes from the
limited supply of bitcoins and for which the developers are not
needed. The issue here is a close one.
In sum, because there is likely no common enterprise, Bitcoin is
unlikely to be an investment contract.
3. Commodity
Those arguing that a bitcoin is not a security may also argue that
bitcoins are not within the spirit of the securities acts and do not look
like or act like a “security”—instead, bitcoins are commodities, which
are generally held not to be securities.184
Owning a bitcoin gives one only rights to use the bitcoin in any
way one sees fit and to sell or make contracts involving that bitcoin.
Similarly, one who owns, say, corn, has only the right to use the corn
(by, e.g., making corn-on-the-cob or processing it into biofuel) or to
sell the corn or make contracts involving that corn. Securities, on the
other hand, have a feature that commodities do not have: they confer
a claim on some other entity.185 In these ways, Bitcoin is like corn and
183. Although some Bitcoin investors may choose to promote its virtues in order to
increase demand, most will free-ride off the few who actively promote Bitcoin, and also
rely on the efforts of the software developers maintaining the software. The minimal
participation required by pyramid scheme investors has not precluded application of the
securities laws. Hazen, supra note 172, at 35–36 (quoting SEC v. Glenn W. Turner
Enterp., 474 F.2d 476 (9th Cir. 1973)). Thus, any investor involvement in Bitcoin’s success
will also not preclude Bitcoin from being deemed an “investment contract” and therefore
a “security.”
184. See Steven M. Johnson & Tyler M. Moore, Recent Developments in Commodities
Law, 37 WASH. & LEE L. REV. 986, 989 n.22; Bromberg, supra note 180, at 221–22. A
commodity transferred in a spot contract by way of a “naked” sale—meaning sold and
actually delivered at present rather than in future, without accompanying managerial
services, margin, repurchase agreements, or guarantees regarding subsequent price
movements—is not a “security” within the federal securities laws. Id. at 221–22. Where a
commodity sale is not naked and involves other services, it is more likely to be considered
an “investment contract” and therefore a “security.” Id. Where a contract is for future
delivery, it is regulated by the CFTC as a commodity future rather than by the SEC as a
security. .Johnson & Moore, supra, at 988–90.
185. CARNELL, MACEY & MILLER, supra note 65, at 130 (“All securities represent
claims against an issuer: i.e., against the corporation, government, or other entity that
issued the securities.”). Securities may confer a claim on an issuer’s profits (as through
dividend payments), management (e.g., through a vote on important business matters,
such as a merger), or assets (e.g., in case of bankruptcy).
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any other commodity. However, decisions explaining why
commodities are not securities have also noted that commodities are
“tangible” and have “inherent value,” unlike securities.186 Bitcoins
are not “tangible,” and one may argue that by design they have no
inherent value because there is no government or commodity backing
them. Furthermore, just as one generally cannot “use” a security—
except by buying, selling, or pledging it—one cannot “use” a bitcoin
except by buying, selling, or pledging. Alternatively, one may argue
that bitcoins do have inherent value by dint of their promised rarity
over time.
The question might come down to how much of a bitcoin’s value
is “inherent” in its initial design and how much is dependent on the
ongoing investment of effort by the software developers and
promoters. If all software development on Bitcoin stopped, would
Bitcoin retain its high value against the U.S. Dollar, for example?
Probably not. One might recognize that this question is substantively
the same as both the “enterprise” and “dependence” elements of the
Howey test: is there a common enterprise that will account for
Bitcoin’s success or failure and is the investor relying solely on the
efforts of that enterprise to put in effort? In fact, one commentator
has noted that commodities are not “investment contracts” under
Howey principally because of the absence of a “common enterprise”
and “dependence.”187
Thus, although bitcoins share many features with commodities,
they also share features with securities and are unlikely to evade
categorization as an “investment contract” on this ground.
Note that many states have regulations governing some or all
commodities that have fraud provisions like those in the federal
securities laws but may be preempted by federal laws.188 An
examination of these laws is beyond the scope of this Article.
4. Currency
Under federal securities laws, currencies may not be
securities189—or alternatively, they may be exempt from the
186. See Bromberg, supra note 180, at 222 (citing Ga. Sec. Comm’r, Release No. 1
(Sept. 18, 1973), 1 BLUE SKY L. REP. P 14,612, at 10,504 (“Obviously, grains, metals, and
other items traded as commodities are tangible items, not securities . . .”)).
187. Bromberg, supra note 180, at 223–24.
188. Id. at 223 n.15.
189. 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.”); Procter & Gamble Co. v. Bankers Trust Co., 925 F. Supp.
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registration and disclosure provisions while being subject to antifraud
and civil suit provisions.190 However, Bitcoin may fall outside these
exemptions or exclusions, as explained below. Furthermore,
currencies may generally be considered securities under some state
securities laws.191
The 1933 Act exempts “[a]ny note, draft, bill of exchange, or
banker’s acceptance which arises out of a current transaction or the
proceeds of which have been or are to be used for current
transactions, and which has a maturity at the time of issuance of not
exceeding nine months . . .”192 One commentator has concluded that
this exemption would apply to local paper currency,193 but it would
probably not apply to Bitcoin, which is not a “note, draft, bill of
exchange, or banker’s acceptance” as the plain text of that exemption
requires.194
The 1934 Act excludes from the definition of a security “currency
or any note . . . which has a maturity at the time of issuance of not
exceeding nine months . . .”195 Thus the 1934 Act excludes certain
short term notes just like the 1933 Act exempts them, but the 1934
Act also excludes “currency.” However, each term defining security
and its exclusions and exemptions is not usually interpreted literally
but interpreted instead to effect Congress’s general purpose in
passing the securities acts and more specific purpose in including that
1270, 1280 n.4 (S.D. Ohio 1996) (“foreign currency . . . is not a security as defined in the
1933 and 1934 Acts.”). The 1934 Act excludes from the definition of security “currency or
any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time
of issuance of not exceeding nine months, exclusive of days of grace, or any renewal
thereof the maturity of which is likewise limited.” Securities Exchange Act of 1934
§ 3(a)(10); accord Bellah v. First National Bank of Hereford, Texas, 495 F. 2d 1109, 1114
(5th Cir. 1974).
190. For example, the 1933 Act exempts from regulation “[a]ny note, draft, bill of
exchange, or banker’s acceptance which arises out of a current transaction or the proceeds
of which have been or are to be used for current transactions, and which has a maturity at
the time of issuance of not exceeding nine months, exclusive of days of grace, or any
renewal thereof the maturity of which is likewise limited . . . .” Securities Act of 1933
§ 3(a)(3). See S
OLOMON, supra note 98, at 114–15 (concluding that paper-based local
currencies would most likely fall under this exemption).
191. For example, Ohio’s blue sky law defines security to include “the currency of any
government other than those of the United States or Canada.” Ohio Rev.Code
§ 1707.01(B) (1992).
192. Securities Act of 1933 § 3(a)(3).
193. See SOLOMON, supra note 98, at 113–14.
194. See Securities Act of 1933 § 3(a)(3).
195. Securities Exchange Act of 1934 § 3(a)(10).
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term,196 focusing on the economic substance rather than form of the
instrument or transaction.197 “Currency” is also not likely to be
interpreted literally.
An examination of the legislative history of the neighboring
short term note exception is instructive.198 The history indicates that
congress wanted to exempt commercial paper,199 a particular type of
short term debt, because it was used in commercial rather than
investment transactions and was generally not offered to the public,200
and because commercial paper was considered extremely safe, “only
second to Government bonds.”201 Like commercial paper, currency
196. See, e.g., Reves v. Ernst & Young, 494 U.S. 56, 63 (1990) (“[T]he phrase ‘any note’
[in the definition of ‘security’] should not be interpreted to mean literally ‘any note’ but
must be understood against the backdrop of what Congress was attempting to accomplish
in enacting the Securities Acts.”); United Housing Foundation v. Forman, 421 U.S. 837
(1975) (“any stock” not interpreted literally); Reves, 494 U.S. at 74 (Stevens, J.,
concurring) (“The Courts of Appeals have been unanimous in rejecting a literal reading of
the [short term note] exclusion. They have instead concluded that when Congress spoke of
notes with a maturity not exceeding nine months, it meant commercial paper, not
investment securities.”).
197. Id. at 61 (“In discharging our duty, we are not bound by legal formalisms, but
instead take account of the economics of the transaction under investigation. See, e.g.,
Tcherepnin v. Knight, 389 U.S. 332, 336 (1967) (in interpreting the term “security,” “form
should be disregarded for substance and the emphasis should be on economic reality”)).
198. Judge Friendly, Justice Stevens, and Professor Loss have assumed that Congress
had the same intent for the 1934 Act exclusion. See Zeller v. Bogue Electric Mfg. Corp.,
476 F. 2d 795, 799–800 (2d Cir. 1973) (Friendly, J.) (“We have no doubt that the
Commission would take the same view with respect to the exclusion in § 3(a)(10) of the
Securities Exchange Act.”); Reves, 494 U.S. at 76 (Stevens, J., concurring) (“[T]here is no
apparent reason to construe § 3(a)(10) of the 1934 Act differently” than § 3(a)(1) of the
1933 Act); 2 LOSS, SECURITIES REGULATION 796 (1961).
199. Reves, 494 U.S. at 73–76 (Stevens, J., concurring).
200. Securities Act Rel. No. 4412 (1961), 26 Fed. Reg. 9158, 9159 (1961) (“commercial,
agricultural, or industrial transactions”) (quoting Rep. No, 47 on S. 875, 73d Cong., 1st
sess. (1033), pp. 3–4); Zeller, 476 F. 2d at 799–800 (approving of the SEC’s reading of the
legislative history).
201. Sanders v. John Nuveen & Co., 463 F. 2d 1075, 1079 n.12 (7th Cir. 1972) (quoting
Hearings on S. 875 Before the Senate Comm. on Banking and Currency, 73rd Cong., 1st
Sess. at 94, 95 (1933)) (“The [SEC] release emphasized the prime quality of the paper
intended to be exempted and stated that the exempted items are ‘composed of assets
easily convertible into cash and are comparable to liquid inventories of an industrial or
mercantile company.’ During the hearings on the 1933 act, commercial paper
discountable by Federal Reserve banks was described as having ‘a record of safety only
second to Government bonds’ and as being the basis of our currency. Hearings on S. 875
Before the Senate Comm. on Banking and Currency, 73rd Cong., 1st Sess. at 94, 95 (1933).
It is significant that section 3(a) (10) of the 1934 act exempts ‘currency’ from the definition
of security. 15 U.S.C. § 78c(a)(10).”). Although this legislative history refers mainly to the
1933 Act exemption (which says nothing about “currency”), Judge Friendly and Justice
Stevens have assumed that Congress had the same intent for the 1934 Act exclusion. See
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generally does not resemble a security, does not pose risk for the
public (even if they purchase a lot of it), and is very safe and liquid.
Bitcoin may fall under the literal definition of “currency,” but it
is also unlike the commercial paper that Congress exempted. Bitcoin
may resemble a security, as discussed above, may pose risks for
investors, and may not be safe or liquid. The Supreme Court has
noted that
[T]he fundamental purpose undergirding the Securities Acts is
to eliminate serious abuses in a largely unregulated securities
market . . . . Congress therefore did not attempt to precisely
cabin the scope of the Securities Acts. Rather, it enacted a
definition of ‘security’ sufficiently broad to encompass virtually
any instrument that might be sold as an investment.202
Thus, when faced with the argument that Bitcoin is a “currency”
and therefore exempted, a court is likely to respond that Congress did
not mean to exempt a currency that is also a security.203
A textual argument may support this purposive argument: by
“currency,” Congress did not mean anything “that circulates as a
medium of exchange”204 but instead money that is “current” or
generally accepted in some geographic or political area (i.e., “current
money”).205 The narrow definition would likely exclude bitcoins until
Zeller, 476 F. 2d at 799–800 (Friendly, J.) (“We have no doubt that the Commission would
take the same view with respect to the exclusion in § 3(a)(10) of the Securities Exchange
Act.”); Reves, 494 U.S. at 76 (Stevens, J., concurring) (“[T]here is no apparent reason to
construe § 3(a)(10) of the 1934 Act differently” than § 3(a)(1) of the 1933 Act).
202. Reves, 494 U.S. at 60–61 (citations and quotations omitted).
203. C.f. Reves, 494 U.S. at 74 (“The Courts of Appeals have been unanimous in
rejecting a literal reading of the [short term note] exclusion. They have instead concluded
that when Congress spoke of notes with a maturity not exceeding nine months, it meant
commercial paper, not investment securities.”) (Stevens, J., concurring); Alan R.
Bromberg, Securities Law, Fraud, SEC Rule 10b-5, § 4.6 (321) (1971) (“Even if short term
notes are effectively excluded from the definition of security, their use in connection with
an investment contract or other transaction constituting a security does not immunize the
transaction from the antifraud rules.”).
204. See B
LACKS LAW DICTIONARY (9th ed. 2009) (“An item (such as a coin,
government note, or banknote) that circulates as a medium of exchange.”).
205. See, e.g., State v. Quackenbush, 98 Minn. 515, 520–21 (1906) (“‘Current money’
means money which passes from hand to hand and from person to person and circulates
through the community. It is synonymous with ‘lawful money.’ Whatever is intended to,
and does actually, circulate as money. Every species of coin or currency. Lawful money.
‘Current money,’ that which is generally used as a medium of exchange.” (citations
omitted) (emphasis added)); Lewis D. Solomon, Local Currency: A Legal and Policy
Analysis, 5 KAN. J.L. & PUB. POLY 59, 81–83 (1996) (construing the words “current
money” in an anti-counterfeiting statute).
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bitcoins become generally accepted in any geographical or political
area.
C. Anti-Money Laundering Laws and Regulations
Money laundering is the process by which dirty money—
proceeds of illegal activities—is rendered clean, allowing the money
to be used for legal activities.206 Terrorist financing is similar, except
that it allows clean money to be used for illegal activities,207 and is
often considered under the same umbrella as money laundering.
Digital currencies are attractive vehicles for money laundering
because they allow fast, anonymous, through-the-Internet transfers.
The indictment and later guilty plea of the owners and directors
of the e-gold digital gold currency demonstrate the bifurcated
approach that U.S. federal law takes to money laundering.208 First,
the Bank Secrecy Act (BSA), as amended and implemented by
regulations passed by FinCEN,209 requires a wide-swath of otherwise
unregulated financial institutions to register with the government,
implement anti-money laundering procedures, keep data, and report
certain transactions and other data.210 Similarly, D.C. law required
licenses for money transmitting. E-gold, which allowed individuals to
purchase e-gold using dollars, send e-gold to other e-gold account
holders, and cash out using dollars or other currencies failed to
register under both state and federal law, as it was required to so,
violating 18 U.S.C. § 1960.
The BSA statute and regulations require that any “money
services business” register with FinCEN,211 with threat of civil and
206. Shawn Turner, U.S. Anti-Money Laundering Regulations: An Economic
Approach to Cyber-Laundering, 54 CASE W. RES. L. REV. 1389, 1391 (2004).
207. Russell P. Leino, The Strange Case of Amended Amendment S.A. 1107: Did
Congress Miss a Golden Opportunity to Address the Money Laundering Threat Posed by
Stored Value Cards in the Credit Card Act of 2009?, 13 U. PA. J. BUS. L. 301, 310 (Fall
2010).
208. See Turner, supra note 206, at 1402–06.
209. The BSA gives authority to the Secretary of the Treasury to implement the BSA
through regulations. The Secretary delegated that authority to a bureau of the Treasury
Department called the Financial Crimes Enforcement Network (FinCEN).
210. See Turner, supra note 206, at 1402–05.
211. 31 U.S.C. 5330(a)(1) requires “Any person who owns or controls a money
transmitting business shall register the business (whether or not the business is licensed as
a money transmitting business in any State)” with Treasury (i.e., with FinCEN). The BSA
gives some authority to Treasury to determine who is a “money transmitting business.”
FinCEN has used its delegated authority to pass regulations that give guidance on what
entities are “money transmitting businesses”, which are referred to as “money services
businesses” in the regulations. FinCEN decided to use the term “money services
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criminal penalties. That term is defined in regulations as “A person
wherever located doing business . . . in one or more of the [following]
capacities: (1) Dealer in foreign exchange . . . (2) Check casher . . . (3)
Issuer or seller of traveler’s checks or money orders . . . (4) Provider
of prepaid access . . . (5) Money transmitter . . . (6) U.S. Postal
Service . . . (7) Seller of prepaid access.”212
Second, the Money Laundering Control Act of 1986 (MLCA)
criminalizes money laundering.213 Under the MCLA, the prosecutors
argued that E-gold had violated 18 U.S.C. § 1956, which, in general,
applies to individuals who conduct a financial transaction involving
dirty money, knowing that the money is dirty, with the intent of
promoting certain kinds of illegal activities, concealing the dirty
money’s origin, or avoiding a reporting requirement.214
The factual premises of both these charges were similar:
[T]he E-Gold operation provided digital currency services over
the Internet through two sites: www.e-gold.com and
www.Omnipay.com. Several characteristics of the E-Gold
operation made it attractive to users engaged in criminal
activity, such as not requiring users to provide their true
identity, or any specific identity. The E-Gold operation
continued to allow accounts to be opened without verification
of user identity, despite knowing that “e-gold” was being used
for criminal activity, including child exploitation, investment
scams, credit card fraud and identity theft. In addition, E-Gold
assigned employees with no prior relevant experience to
monitor hundreds of thousands of accounts for criminal activity.
They also participated in designing a system that expressly
encouraged users whose criminal activity had been discovered
to transfer their criminal proceeds among other “e-gold”
accounts. Unlike other Internet payment systems, the E-Gold
operation did not include any statement in its user agreement
prohibiting the use of “e-gold” for criminal activity.215
businesses” instead of the statute’s term “money transmitting business” because it
believed the statute’s terminology to be confusing. FinCEN, Amendment to the Bank
Secrecy Act Regulations-Definitions Relating to, and Registration of, Money Services
Businesses, 64 Fed. Reg. 45438-01, n.1.
212. 31 C.F.R. § 1010.100(ff).
213. Turner, supra note 206, at 1405.
214. See 18 U.S.C. § 1956; Turner, supra note 206, at 1405.
215. Press Release, Department of Justice, Digital Currency Business E-Gold Pleads
Guilty to Money Laundering and Illegal Money Transmitting Charges (July 21, 2008),
available at http://www.justice.gov/opa/pr/2008/July/08-crm-635.html.
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Thus, certain kinds of financial businesses—even those located
abroad216—must register under both federal and state law or face
criminal penalties. Furthermore, if individuals or businesses
knowingly process dirty money, make a profit on those transactions,
and do nothing to stop processing those transactions, they may be
guilty of money laundering.
Thus, there is a serious question of whether BSA and MLCA
regimes impose legal risk for the Bitcoin developers, exchanges,
ewallet providers, individual miners, operators of mining pools, mere
Bitcoin users, and businesses that accept bitcoins. Future work
should analyze these regimes more closely to determine which, if any,
of these groups must register with FinCEN as money services
businesses and be subject to heavy regulatory burdens. Future work
should also determine if any of these groups are at danger of being
considered money launderers since it is generally known that Bitcoin
is used to promote illegal activities, such as the sale and purchase of
illegal drugs.
VII. Conclusion
Bitcoin is novel digital currency that has the potential to be a
significant player in the micropayment and virtual world commerce
markets. It is also a great alternative currency for gold bugs who
prefer to hold currencies fully backed by commodities. Furthermore,
because it is anonymous and decentralized, and therefore difficult to
shut down, it may allow organizations hated by governments—
whether these are morally commendable or detestable
organizations—to be funded without risk of monetary seizure or
sanctions on financial contributors.
While the history of currencies such as the Iraqi Swiss Dinar that
had no backing by either commodities or government entities
indicates that Bitcoin may succeed, potential users and investors
216. That many of these entities are located abroad does not mean that they are not
subject to U.S. laws and regulations if, for example, many of their customers are located in
the U.S. See Press Release, Financial Crimes Enforcement Network, FinCEN Clarifies
Money Services Businesses Definitions: Rule Includes Foreign-Located MSBs Doing
Business in U.S. at ¶ 1–2 (July 18, 2011); Dep’t of the Treasury, Bank Secrecy Act
Regulations; Definitions and Other Regulations Related to Money Services Businesses, 76
Fed. Reg. 43585, 43588 (2011) (“[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 officers 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.”).
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should be aware of the many risks inherent in using such a young
technology.
Most importantly, Bitcoin currently operates in a legal grey area.
The federal government’s supposed monopoly on issuing currency is
somewhat narrow and statutes that impose that monopoly do not
seem to apply to Bitcoin due to its digital nature. However, a bitcoin
may be a “security” within the meaning of the federal securities laws,
subjecting bitcoins to a vast regime of regulations, including general
antifraud rules. Although the best argument is that a bitcoin is not a
security, Bitcoin’s proponents will have to await an SEC or court
interpretation for certainty. Furthermore, other legal issues that have
not been analyzed in this Article are probably significant, including
tax evasion, banking without a charter, state escheat statutes, and
money laundering.
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***
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This paper provides an analysis on the emergence of new technologies in the financial industry and their application to financial and investment activities, where organizations are highly equipped with the technology needed to overshadow traditional financial institutions. In addition, three of the most important and controversial areas of this sector -challenges, regulation and collaboration- are reviewed and analyzed in depth through a systematic literature review. VOS Viewer software has been used to classify the different keywords, according to their co-citation, following clustering techniques. Thanks to the studies carried out by other researchers, it has been possible to structure clearly the distribution and trends in the financial sector, mentioning also possible future trends and gaps to be researched in the sector.
United Housing Foundation v. Forman, 421 U
United Housing Foundation v. Forman, 421 U.S. 837 (1975) ("any stock" not interpreted literally);
concurring) ("The Courts of Appeals have been unanimous in rejecting a literal reading of the [short term note] exclusion. They have instead concluded that when Congress spoke of notes with a maturity not exceeding nine months, it meant commercial paper, not investment securities
  • J Stevens
Reves, 494 U.S. at 74 (Stevens, J., concurring) ("The Courts of Appeals have been unanimous in rejecting a literal reading of the [short term note] exclusion. They have instead concluded that when Congress spoke of notes with a maturity not exceeding nine months, it meant commercial paper, not investment securities.").
In discharging our duty, we are not bound by legal formalisms, but instead take account of the economics of the transaction under investigation
  • Id
Id. at 61 ("In discharging our duty, we are not bound by legal formalisms, but instead take account of the economics of the transaction under investigation. See, e.g., Tcherepnin v. Knight, 389 U.S. 332, 336 (1967) (in interpreting the term "security," "form should be disregarded for substance and the emphasis should be on economic reality")).
and Professor Loss have assumed that Congress had the same intent for the 1934 Act exclusion. See Zeller v. Bogue Electric Mfg
  • Judge Friendly
  • Justice Stevens
Judge Friendly, Justice Stevens, and Professor Loss have assumed that Congress had the same intent for the 1934 Act exclusion. See Zeller v. Bogue Electric Mfg. Corp., 476 F. 2d 795, 799-800 (2d Cir. 1973) (Friendly, J.) ("We have no doubt that the Commission would take the same view with respect to the exclusion in § 3(a)(10) of the Securities Exchange Act.");
  • J Stevens
Reves, 494 U.S. at 76 (Stevens, J., concurring) ("[T]here is no apparent reason to construe § 3(a)(10) of the 1934 Act differently" than § 3(a)(1) of the 1933 Act); 2 LOSS, SECURITIES REGULATION 796 (1961).
476 F. 2d at 799-800 (approving of the SEC's reading of the legislative history)
  • Zeller
Zeller, 476 F. 2d at 799-800 (approving of the SEC's reading of the legislative history).
The [SEC] release emphasized the prime quality of the paper intended to be exempted and stated that the exempted items are 'composed of assets easily convertible into cash and are comparable to liquid inventories of an industrial or mercantile company
  • Sess
Sess. at 94, 95 (1933)) ("The [SEC] release emphasized the prime quality of the paper intended to be exempted and stated that the exempted items are 'composed of assets easily convertible into cash and are comparable to liquid inventories of an industrial or mercantile company.' During the hearings on the 1933 act, commercial paper discountable by Federal Reserve banks was described as having 'a record of safety only second to Government bonds' and as being the basis of our currency. Hearings on S. 875
The Strange Case of Amended Amendment S.A. 1107: Did Congress Miss a Golden Opportunity to Address the Money Laundering Threat Posed by Stored Value Cards in the Credit Card Act of 2009?, 13 U
  • Russell P Leino
Russell P. Leino, The Strange Case of Amended Amendment S.A. 1107: Did Congress Miss a Golden Opportunity to Address the Money Laundering Threat Posed by Stored Value Cards in the Credit Card Act of 2009?, 13 U. PA. J. BUS. L. 301, 310 (Fall 2010).
Id. 180. C.f. Alan R. Bromberg, Commodities Law and Securities Law-Overlaps and Preemptions, 1
  • Jason Mick
  • Daily Tech
Jason Mick, Daily Tech, Inside the Mega-Hack of Bitcoin: the Full Story (June 19, 2011), http://www.dailytech.com/Inside+the+MegaHack+of+Bitcoin+the+Full+Story/article2194 2.htm; Press Release, Mt. Gox, Clarification of Mt. Gox Compromise Accounts and Major Bitcoin Sell-Off (June 30, 2011), available at https://mtgox.com/press_release_20110630. html. 177. Id. 178. Press Release, Mt. Gox, Mt.Gox, The World's Largest Bitcoin Exchange to Acquire Bitomat.pl, Compensate Loss Of Bitcoins (Aug. 11, 2011), available at https://mtgox.com/press_release_20110811.html. 179. Id. 180. C.f. Alan R. Bromberg, Commodities Law and Securities Law-Overlaps and Preemptions, 1 J. CORP. L. 217, 224 & n.18 (1976) (citing SEC v. Brigadoon Scotch Distrib., Ltd., 388 F. Supp. 1288 (S.D.N.Y. 1975)) (Noting that within the context of the Howey test, "[c]oins or stamps bought for a hobby probably lack a profit element...").
Obviously, grains, metals, and other items traded as commodities are tangible items, not securities
See Bromberg, supra note 180, at 222 (citing Ga. Sec. Comm'r, Release No. 1 (Sept. 18, 1973), 1 BLUE SKY L. REP. P 14,612, at 10,504 ("Obviously, grains, metals, and other items traded as commodities are tangible items, not securities...")).