Published on December 13, 2013
GAMAByte: Bitcoin’s Legal Viability Bitcoin has quickly become the world’s dominant digital currency. As it becomes increasingly accepted by more and more businesses, governments around the world have begun wrestling with how to target and control it. Perhaps the greatest concern regulators have expressed is the inherent anonymity in Bitcoin transactions. This lack of traceability makes Bitcoin a powerful tool for money laundering or black market sales activity. While Bitcoin as a currency is still decentralized and unregulated, Bitcoin miners, Bitcoin exchanges and individual Bitcoin users may all be subject to United States regulations based on how they actually use the currency. An#-‐Money Laundering Laws and FinCEN Guidance For example, the U.S. Financial Crimes Enforcement Network (FinCEN), a branch of the U.S. Treasury, has drafted guidance describing when those using Bitcoin could be considered money transmitting businesses (MTBs).1 MTBs are obligated to enforce anti-money laundering regulations and can face liability if they do not keep track of who is using their services. Bitcoin exchanges are the most obvious example of participants in the Bitcoin economy that FinCEN considers to be MTBs. As long as these exchanges operate on U.S. soil, they are subject to anti-money laundering laws. Individuals simply using the virtual currency as an investment or to make purchases, however, could not be considered an MTB. Bitcoin miners, on the other hand, do seem to be liable as MTBs under FinCEN’s classiﬁcation,2 though this treatment is contested by Bitcoin miners who have requested clariﬁcation.3 Ponzi Schemes Also of concern to regulators is the potential for fraudulent Bitcoin investment schemes. Earlier this year, the Securities and Exchange Commission (SEC) charged a Texas man with “running a Bitcoin denominated Ponzi scheme.”4 The same day, the SEC issued a general investor warning regarding such frauds.5 While the SEC still has yet to issue any speciﬁc rules or regulations around Bitcoin, it is clear that the Commission will prosecute fraudulent activity regardless of the currency involved. The Future of Bitcoin Regula#on Currently, Bitcoin remains largely unregulated. It appears that this may not change anytime soon. At recent congressional hearings on the topic, witnesses testifying before the Senate Committee on Homeland Security and Governmental Affairs were greeted with a surprisingly cordial atmosphere from legislators.6 All three White House ofﬁcials who testiﬁed at the hearings heralded the value of the currency and recommended no immediate legislative action to regulate Bitcoin. For now, Bitcoin itself remains legal in the U.S. Any liability arising from its use depends entirely on what is done with the currency. Engaging in money laundering or black market activities will categorically run afoul of already existing laws. Legitimate individual use of Bitcoin, under current regulations, seems to present little legal risk. A GAMA Byte produced by Brandon Wiebe © 2013. Gagnier Margossian LLP. All rights reserved.
Endnotes See Guidance: Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies, FINCEN (2013), available at http://ﬁncen.gov/statutes_regs/guidance/html/FIN-2013-G001.html. 1 “[A] person that creates units of convertible virtual currency and sells those units to another person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter.” Id. 2 3 Danny Bradbury, FinCEN quizzed on mining regs, COINDESK (June 5, 2013), http://www.coindesk.com/ﬁncen-quizzed-on-mining-regs/. 4 Press Release, SEC Charges Texas Man With Running Bitcoin-Denominated Ponzi Scheme, SECURITIES & EXCHANGE COMM’N (July 23, 2013), http:// www.sec.gov/News/PressRelease/Detail/PressRelease/1370539730583#.UqQOjmRDtp-. Schemes Using Virtual Currencies, SECURITIES & EXCHANGE COMM’N, (July 23, 2013) http://investor.gov/news-alerts/investoralerts/investor-alert-ponzi-schemes-using-virtual-currencies#.UqQOh2RDtp. 5 Investor Alert: Ponzi 6 Timothy B. Lee, Here’s How Bitcoin Charmed Washington, WASH. POST (Nov. 21, 2013), http://www.washingtonpost.com/blogs/the-switch/wp/ 2013/11/21/heres-how-bitcoin-charmed-washington/. For more informa+on or just to chat, contact an a3orney at Gagnier Margossian LLP. Internet Intellectual Property Privacy Social Media Technology The Good Stuff #nerdlawyers Los Angeles Sacramento T: 415.766.4591 F: 909.972.1639 E: firstname.lastname@example.org gamallp.com @gamallp San Francisco