Wednesday, April 16, 2014

Elusive Bitcoin: Regulation of Bitcoin in the U.S. Part I

The phenomenon of Bitcoin (and virtual currency in general) presents an interesting legal conundrum. It is still not clear for many where does Bitcoin fit within our legal system, and whether and how to regulate it. Today, I would like to take a closer look at the Bitcoin network, the recent legal developments in the U.S. relating to the classification of Bitcoin, and its (non)-regulation.


First, let’s take a look at Bitcoin itself. Bitcoin is a peer-to-peer convertible digital currency and payment system. There is no central authority that issues bitcoins or tracks transactions in bitcoins (i.e., no central bank). The Bitcoin network is based on open source code and is managed by an army of volunteers. All Bitcoin transactions are anonymous and get recorded on the public ledger called a “block chain” by people or entities referred to as “miners”. Miners get compensated for their efforts in new bitcoins and transaction fees. Users keep bitcoins in their own “digital wallets”, which are essentially virtual uninsured bank accounts. If the digital wallet gets accidentally deleted, stolen or lost, all bitcoins in it will be irretrievably gone. Users can obtain bitcoins in four ways: (i) by purchasing bitcoins on a Bitcoin exchange; (ii) accepting bitcoins as payment for goods or services; (iii) earning bitcoins through competitive mining process; or (iv) exchanging bitcoins with others.

Bitcoin is a relatively recent phenomenon. It all started in early 2007, when an anonymous user or group named “Satoshi Nakamoto” began working on a cryptographic-based network. In January 2009 (just slightly over five years ago), the first Bitcoin block was mined, and the first transaction in Bitcoin occurred. In February 2010, the first Bitcoin exchange was created. In September 2012, the Bitcoin foundation was created, and this foundation is presently the core development team behind the Bitcoin network. Since the Bitcoin software is open source, any developer can contribute to the Bitcoin code. You can read about how to do it here.

Presently, Bitcoin is by far the most popular virtual currency. As of today, its market capitalization is approximately $6.7 billion, whereas the market for the second largest currency, Litecoin, is only $373 million, followed by Peercoin at $63 million. You can check the current market cap here.  The value of Bitcoin (here I mean the Bitcoin-USD exchange rate) fluctuates greatly. Just within the past six months, the exchange rate changed from under $200 per Bitcoin to over $1,000 and currently it is at $512.  You can view the chart here.

It remains uncertain whether the Bitcoin will become widely accepted by retail merchants around the world although the list of entities accepting Bitcoin as payment is broadening. For example, the first university (University of Nicosia in Cyprus) announced in November 2013 that its students can now pay tuition in bitcoins. In February 2014, a medical marijuana dispensary in Washington State started accepting bitcoins as payment.  For full story, click here.

For now, many governments are battling with the issue of whether and how to regulate Bitcoin. Many believe that some type of regulation is necessary due to the potential of Bitcoin being used to fund illegal activities. Known to many as the currency of choice for the online black marketplace called Silk Road, Bitcoin has attracted a lot of negative attention and concerns over it being used for illegal purposes and terrorism.

Now, let’s review current regulation of Bitcoin by the federal governmental agencies such as FinCEN, the CFTC, the SEC and the IRS, and the states.

Now, please continue reading Elusive Bitcoin: Part II.

This article is not a legal advice, and was written for general informational purposes only.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga.  Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.

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