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Electronic copy available at: http://ssrn.com/abstract=1817857
2. Investment Contract ............................................................................................................................... 37 3. Commodity ................................................................................................................................................. 39 4. Currency ...................................................................................................................................................... 40
Conclusion ............................................................................................................................... 43
Electronic copy available at: http://ssrn.com/abstract=1817857
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.2 Bitcoin has many properties that could make it an ideal currency for mainstream consumers and merchants. 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.3 Amazingly, as of March 2011, a bitcoin (currency ticker “BTC”) is worth about the same as a U.S. Dollar (“USD”), there are about $5 million worth of bitcoins in existence,4 there are probably somewhere between 5,000 to 30,000 Bitcoin users, and about $150,000 worth of bitcoins are traded every day.5 2 See http://en.wikipedia.org/wiki/Bitcoin; Satoshi Nakamoto, Bitcoin: A Peer-‐to-‐ Peer Electronic Cash System (2009), http://www.bitcoin.org/sites/default/files/bitcoin.pdf; Bitcoin FAQ, http://www.bitcoin.org/faq. 3 See Keir Thomas, Could the Wikileaks Scandal Lead to New Virtual Currency?, PC World: Business Center (Dec. 10, 2010), http://www.pcworld.com/businesscenter/article/213230/could_the_wikileaks_sca ndal_lead_to_new_virtual_currency.html; Rainey Reitman, Electronic Frontier Foundation, Bitcoin – a Step Toward Censorship-‐Resistant Digital Currency (Jan. 20, 2011), 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.”). In fact, Anonymous, a loosely organized group of hacktivists that have attacked Wikileaks’ foes, among others, The Week, Anonymous: The secret group’s 5 biggest hacks (Mar. 7, 2011), http://theweek.com/article/index/212846/anonymous-‐the-‐secret-‐groups-‐5-‐ biggest-‐hacks, accept donations in Bitcoins on their anonymous news site, AnonNews. AnonNews – Everything Anonymous, Donating through Bitcoin, http://www.anonnews.org/bitcoin.html (last visited Mar. 7, 2011). 4 See Page Indicating USD-‐Bitcoin Exchange Rate Provided By “Mt. Gox,” http://bitcoincharts.com/markets/mtgoxUSD.html. Mt. Gox is, according to the Bitcoin wiki, “the most widely used bitcoin currency exchange market.” https://en.bitcoin.it/wiki/MtGox. 5 Gavin Andresen, Video, Making Money: creating a decentralized electronic currency, Ignite Amherst (2011), available at http://blip.tv/file/4771178 [hereinafter Andresen Video]; see http://bitcoinwatch.com/ (last visited Mar. 28, 3
Although the Bitcoin economy is flourishing, Bitcoin users are anxious about Bitcoin’s legal status.6 Some believe that governments, particularly the U.S. government, are likely to crack down on Bitcoin. 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 Alternatively, 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, silver, and copper.10 Part I explains how Bitcoin works and Part II describes its nascent ecosystem of websites and services. Part III compares Bitcoin to its competition, including payment processors like PayPal and digital gold currencies. Part IV explores whether Bitcoin can be a sustainable currency and why individuals would trust a 2011) (approximately 120,000 bitcoins transacted in last 24 hours at an exchange rate of approximately 0.8 USD/ BTC). 6 See, e.g., epii, How long until governments outlaw bitcoin usage? (Mar. 29, 2011), http://www.bitcoin.org/smf/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 Harbringer of the New Economy?, 17 CARDOZO J. INT’L & COMP. L. 589, 590-‐92 (2009) (citations omitted). 9 See, e.g., Glass, Re: How long until governments outlaw bitcoin usage? (Mar. 29, 2011), http://www.bitcoin.org/smf/index.php?topic=5110.msg74713#msg74713. 10 See, e.g., id.; Dept. of Justice, Press Release, Defendant Convicted of Minting His Own Currency (Mar. 18, 2011), available at http://charlotte.fbi.gov/dojpressrel/pressrel11/ce031811.htm (“[The defendant] intended for the Liberty Dollar to be used as current money in order to limit reliance on, and to compete with, United States currency…. 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…. “Attempts to undermine the legitimate currency of this country are simply a unique form of domestic terrorism,” U.S. Attorney Tompkins said in announcing the verdict. “While these forms of anti-‐government activities do not involve violence, they are every bit as insidious and represent a clear and present danger to the economic stability of this country,” she added.). 4
com/2010/12/paypal-‐statement-‐regarding-‐wikileaks/ 12 Wei Dai. such as an ounce of gold. a corporation with large market share susceptible to government pressure. J. See Bitcoin. XV RICH. supra note 5.com/bmoney. and Linux.bitcoin. because the Bitcoin code is opensource and the protocol 5 . but usable graphical user interface. See https://en.2[:] Windows [.it/wiki/Satoshi_Nakamoto. I. 7 (2008). 15 See bitcoin. & TECH. due to what Paypal deemed “illegal activity.] Linux [. including statutes supposedly aimed at enforcing the federal government’s monopoly on issuing currency and securities regulation. Wikileaks. Mac OS X. with an ugly. http://weidai. 3.bitcoin. Dollar. http://www. Government – or any legal institution for that matter – and is a digital rather than paper currency.20. publishing a description of his invention14 and also releasing software to make it work. stopped processing donations to his whistleblowing organization.currency not supported by any legal institution and not redeemable for any commodity.txt 13 The name is almost certainly a pseudonym.S. by providing them with a medium of exchange…” 12 About ten years later. In 1998. distributed.org/ (“Download Bitcoin 0. 17 The Bitcoin developers publish an “official” Bitcoin client for Windows. http://law.edu/jolt/v15i2/article4. 14 Nakamoto. b-‐money at para 13 (1998). Dollar. Bitcoin Primer Julian Assange was probably not surprised when PayPal. Bitcoin is not backed by the U. https://www.” like the U. Paypal statement regarding Wikileaks (Dec.] Mac OS X”).thepaypalblog.com/bitcoin/bitcoin (current repository for the official Bitcoin program code). another member of the cypherpunks proposed a digital. https://github. storable on electronic media and transferable over the internet.S. 16 See William Hett.L. confusing. Unlike the U. Satoshi Nakamoto13 figured out how to implement such a currency.15 Bitcoin is a “fiat currency.”11 In the 1990s. anonymous currency called “b-‐money” that would allow “untraceable pseudonymous entities to cooperate with each other more efficiently.richmond.bitcoin.S. https://en. However. Digital Currencies and the Financing of Terrorism. or 11 PAYPAL. because it is not redeemable for a certain amount of a commodity.pdf (describing how digital currencies generally work).16 Individuals who want to own or transact in Bitcoins can either run a program on their own computer that implements the Bitcoin protocol (a “Bitcoin client”17).it/wiki/Original_Bitcoin_client (screenshot of graphical user interface).3. 4. Part V will explore a few of the many legal ramifications of Bitcoin. Andresen Video. Assange was a member of the cypherphunks mailing list. a group that discussed achieving privacy and libertarian ideals by using cryptography. 2010). supra note 2.
Bitcoins are divisible to eight decimal places and can easily be further divided with minor software changes.000 blocks (10 minutes / block x 210.000 blocks generated. such as one written in Java. as illustrated in Figure 1.bitcoin. 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. making the system a distributed one impervious to central attack.wallet&feature=search_result 18 A “block” contains the solution that the mining computers are trying to solve. 50 bitcoins are awarded for the first 210. although the rate will halve to 25 bitcoins in about two years and will halve every four years after that.18 At those rates. and another intended for mobile phones and tablets running the Android operating system. and the award is halved every 210. According to the Bitcoin FAQ. A block is created about once every ten minutes. Currently.schildbach.create an account on a website that runs the Bitcoin client for its users. https://market. specification is public.000 blocks have been generated (according to my Bitcoin client). the problem difficulty adjusts to ensure that bitcoins are created at a pre-‐determined rate and not faster or slower. others are in the process of creating alternative clients.android. although the current official Bitcoin client only allows two decimal places. The Bitcoin client saves an individual’s bitcoins in a file called the wallet. These programs connect to one another over the internet forming peer-‐to-‐peer networks. 2011. about 50 bitcoins are issued every 10 minutes.it/wiki/Category:Clients.000 blocks / 60 / 365). As of March 8.5 million bitcoins will be created in the first four years. As more or fewer miners join the network. half that amount in the next four years. See https://en. 10. It takes about 4 years to generate 210. approaching but never reaching a total supply of 21 million bitcoins. and so on. which the user must secure and backup.000 blocks afterwards. approximately 113. 6 . which means that in approximately two years the award will be halved to 25 bitcoins.com/details?id=de.
FAQ.com/markets/mtgoxUSD.bitcoin. 7 . http://www. How are new Bitcoins created?. Gox charts on Bitcoinwatch. 2011). 10. one bitcoin is approximately at parity with the US Dollar19 – a 2000% percent appreciation against the Dollar in less than a year. 2011. 8. http://bitcoincharts. 19 See Mt. As illustrated in Figure 2. Expected Bitcoin supply over time.5 million will be created in the first four years.org/faq (last visited Mar.Expected Total Bitcoins Total Bitcoins (millions) 25 20 15 10 5 0 2009 2013 2017 2022 2025 2029 Year Figure 1. In late April. one bitcoin costs less than half a cent. 15. and so on. Bitcoin. 2011). half that amount in the next four years.html (last visited Apr. The total supply will approach but never reach 21 million. in May 2010.
Notably absent from this ecosystem. joint mining operations and so on. 22 Although transaction fees are not generally used right now.g. 8 .. 14. Slashdot. Bitcoin Ecosystem A growing ecosystem surrounds Bitcoin.org. are futures 20 See. so far. By contrast. and individuals can create unlimited accounts instantly and for free. search for transactions or accounts. Bitcoin transactions are irreversible in the same way cash transactions are irreversible. including exchanges.22 Furthermore. http://blockexplorer.it/wiki/Introduction#Anonymity (last visited Mar. http://bitcoincharts. 21 Bitcoin Wiki. for example. market information and chart providers.21 Individuals can send bitcoins for free.20 but nothing in the system ties accounts to individuals. individuals will more often attach transaction fees. The ten-‐fold jump in value likely happened as a result in a spike in demand for the currency after Bitcoin was publicized on a popular technology website. The system is partially anonymous in that anyone can see the trail of all transactions from all accounts. Block Explorer. transaction services providers. Note that Bitcoins were in existence before May 2010 but the currency exchange from which this data is taken was not operating before then. escrow providers.com/charts/bcmPPUSD#rg360zlztgMzm1g10zm2g25zx.Figure 2. Log-‐scale of Bitcoin / USD exchange rate. https://en.com/ (allowing users to see latest Bitcoin transactions. e. Introduction: Anonymity. 2011). Bitcoin Charts.bitcoin. but may add an optional transaction fee to ensure the transaction is quickly processed. credit card charges can be charged back to a merchant. and so on). II. many Bitcoin activists expect that as the volume of transactions increase.
Investors for bitcoin stock market and credit rating agrency [sic]. 24. supra note 8. Pecunix.bitcoin. https://en.php?topic=4871. Nefario. Gox is t]he most widely used bitcoin currency exchange market. https://en. trading volume on Mt.bitcoin. 2011 was USD $10. Dollar. Trade. 2011). more than ten times greater than the volume on any of the other listed exchanges.26 To accommodate growing demand several exchanges have been created. http://www.0 (bank). privacy and cryptography enthusiasts.eff.php?topic=4465. illicit drug marketplaces. 2011) (listing merchants that accept bitcoins).000.php?topic=3844. 28 Bitcoin Wiki. 26 See Bitcoin Wiki. 14. including Liberty Reserve.0 (poll I conducted on the main Bitcoin forum). including the U. 14. including web hosts. at 601-‐08 (describing users generally interested in digital currencies). Some individuals are also “invested” in Bitcoins because they apparently believe Bitcoins have the potential to significantly appreciate in value. dev started! (Feb. which seems to be the most popular exchange28 with $10.org/smf/index. 25 See Bitcoin Wiki. Japanese Yen. See chodpaba. Tucker. 14. http://www. online casinos.0 (stock market and credit rating agency).” and criminals. https://en.. 12.27 Mt.0. 27 See Bitcoin Wiki. auction sites.25 Additionally. and other digital currencies. 24 See Bitcoin Forum.bitcoin. 2011). government-‐ mistrusting “gold bugs.bitcoin. Gox. http://www.it/wiki/Trade#Donation-‐accepting_organizations_and_projects (last visited Mar. Donation-‐accepting organizations and projects.it/wiki/Trade (last visited Mar.php?topic=4390. https://www. 2011). http://www.org/smf/index.23 Individuals holding this currency represent a number of interests. Trade.bitcoin. 2011).24 A number of merchants accept bitcoins. Euro. including technology early adopters. Where To Create Your Own Bank For Less Than $25K??? (Mar.g. a number of non-‐profit organizations accept donations in Bitcoin. 2011) (“Donate to EFF using Bitcoin P2P Cryptocurrency! Transfer money from your Bitcoin account to ours: 1MCwBbhNGp5hRm5rC1Aims2YFRe2SXPYKt”). Currency exchange. EFF. catering to individuals with these interests.org/smf/index.”). https://en.bitcoin. 14. offering exchanges between Bitcoin and traditional currencies. 25. and WebMoney. Gox on March 6. 29 On the Bitcoin Charts site. 2011) (“[Mt. although some individuals have announced plans to build these. technology consulting firms. gigabytecoin. and adult media and sex toy merchants.org/helpout (last visited Mar. Mt Gox. Trade. the most prominent of which is the Electronic Frontier Foundation. 14.S.markets and entities offering legitimate investment returns.bitcoin. 2011).it/wiki/Trade#Currency_exchange (last visited Mar.org/smf/index. Poll: Why Do You Use Bitcoin?. Ways You Can Help EFF. such as fractional reserve banks.it/wiki/MtGox (last visited Mar. What if one Bitcoin was worth the same as one share Berkshire Hathaway? (Mar. 9 .bitcoin.000 in trading volume on a particular day in March 2011.29 has an easy to use 23 See. e.
allows sending bitcoins through email. Gox account. My Bitcoin also has tools to help merchants easily accept payment in bitcoins on their websites. Gox website. 2011). Gox. with a 0.bitcoin-‐ otc.com/ (last visited Mar.org/smf/index. send bitcoins to any address for free.website. http://www. 13. Gox. a Bitcoin escrow service. on average. http://www. as does Bitcoin Mail. approximately 13 years. 34 See Remove "generate bitcoins" from standard client? (Mar.30 None of the standard exchanges allow futures trading. 32 http://wiki. send. 2011).75/BTC. Mt. close to or more than a year to mine just 50 BTC.com. allowing individuals to keep.com/post/4585101363/first-‐bitcoin-‐put-‐ option-‐contract (“The first ever bitcoin PUT option contract was just recently traded on the #bitcoin-‐otc marketplace. on average.32 and have been sold on the over-‐the-‐counter exchange. commodity. for example.mtgox. 2011). although there is a less formal over-‐the-‐counter exchange that allows individuals to list buy and sell orders involving bitcoins and any service. My Bitcoin and Vejka provide websites that allows individuals to create unlimited Bitcoin addresses. money order or check to an individual (two percent commission) or by Paypal (seven percent commission). yet.31 Call options are possible using Clear Coin. That individual took a $1 commission and added USD $9 to the my account on Mt.4 GHz intel core duo) would take. A significant increase in the amount of computational power participating in mining in the Bitcoin network caused the Bitcoin protocol to automatically increase the difficulty of striking Bitcoin gold. See Bitcoin Generation Calculator. 23. The website also allows instantly sending funds to another individual’s Mt.0 (discussing the low probability of individuals generating bitcoins as individuals). Gox account or to a Bitcoin account.com/wiki/Option_orders#Call_Options_using_ClearCoin_Escrow 33 See Bitcoin Money. and receive bitcoins without ever running the Bitcoin client on their own computers.php?topic=4828. One can transfer money into the account by sending cash. Although early on.” as instructed on the Mt. individuals could mine a significant number of bitcoins on their own computers. Gox. 10 .bitcoinmoney. 7.”). the my Macbook Air (a fairly slow machine. Once the money appears in the Mt. running on a 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. or currency.bitcoin. I first sent $10 USD by Paypal to “Bitcoin Morpheus.65% commission. either of which takes several business days. the website allows purchasing and selling Bitcoins at the prevalent exchange rate or at some particular price. I then purchased about $9 worth of Bitcoins and then sent them to my Bitcoin account number. For example. to mine its first 50 BTC. A buyer paid to a seller 1. the problem difficulty has increased so much that most computers now would take.33 Several sites provide transaction services. Bitcoin options trading on the Bitcoin OTC marketplace (Apr.34 30 See http://www. and check balances. 31 http://bitcoin-‐otc. I was able to purchase about USD $9 worth of Bitcoins on Mt.
Comparing Bitcoin to its Competition Bitcoin competes with at least two classes of products: (1) products that facilitate internet-‐based commerce. 2011).bitcoinmail. As described below.appspot.”39 40 Bitcoin Mail A site that allows individuals to send bitcoins to others by email.000. and Block solutions.bitcoin.com 42 https://en. What’s the Catch. Name Description 35 Bitcoin Charts Provides currency exchange value and volume charts for a number of Bitcoin exchanges.Several enterprising individuals have created mining collectives that have enormous computational power. the approximate difficulty factor on March 14. [and] created this little service to give [new users] a few coins to start with. 35 http://bitcoincharts. their computational power). Free Bitcoins.bitcoinmonitor. and (2) gold-‐backed currencies. A more comprehensive list of Bitcoin exchanges and merchants who accept Bitcoin is available on the Bitcoin wiki.e.com/bitcoin/calculator. ClearCoin41 An electronic service that holds bitcoins in escrow.alloscomp.com/ 39 Gavin Andresen. currency exchanges.com/ 37 http://blockexplorer. collect mining rewards often. Bitcoin Faucet38 A service that provides 0.it/wiki/Trade 11 .com/ 41 http://www. 40 http://www. and distribute the rewards among members of the collective according to the amount of work they contributed towards finding the reward (i. 36 Bitcoin Monitor Shows the most recent Bitcoin transactions. Fees are 1% for transactions over 100 BTC and nothing otherwise. the approximate speed of my computer according to the Bitcoin client..42 III. 2011). Bitcoin is unlikely to make significant headway in the traditional ecommerce market http://www.clearcoin.php (entering a “hash rate” of 800 khps.com/ 36 http://www. and 76. by one of the main developers behind Bitcoin.05 BTC for free. http://freebitcoins.appspot. 37 Bitcoin Block Explorer Allows individuals to search by address and see all transactions for that address.com/ 38 https://freebitcoins. who “want[s] Bitcoin to be successful.com/ (last visited March 6.
and Web-‐Money.org/smf/index.bitcoin. 375. at 601. However.43 PayPal has come to dominate this space. Hughes et al. 46 See Sarah J.cnet. is one of poor management. Kaminsky. Pecunix. 257 & n.html. LAW.157 (2007) (noting bankruptcy of DigiCash. missed opportunities. 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.0 (comparing DigiCash to Bitcoin).000 websites in 18 currencies.C. at 601-‐602. http://www. 48 Tucker. 12 . such as Google Checkout. e. NEXT!.g. Will Banks Follow?. allowing users to fund accounts by credit card or bank transfers. begun in the early 1990s. Developments in the Law Concerning Stored-‐Value Cards and Other Electronic Payments Products. and was initially run by David Chaum. supra note 8. Competitors abound. available at http://cryptome. Carl Kaminski. Facilitation of e-‐commerce 1. and dubious legality.. 7 N. DigiCash’s history. 375 (2003) 44 Tucker.org/jya/digicrash. prefer to compare prices of most goods and services in a currency they are familiar with.com/8301-‐19882_3-‐20025966-‐ 250. at 378-‐379. and has more than 100 million user accounts. such as DigiCash.47 Users turned out to have no qualms about entering credit card information online48 (one of DigiCash’s supposed advantages) 43 Tucker. Bitcoin may be especially competitive in the micropayment and virtual world markets. 63 BUS. supra note 8. Amazon Payments. Dwolla. The failure of DigiCash is instructive. 45 Tucker. Online Peer-‐to-‐Peer Payments: PayPal Primes the Pump. 47 DigiCash was one of the earliest digital currencies. supra note 8. 237. where consumers care less about pricing in a familiar currency.php?topic=3755. See http://news. PayPal handles payments for more than 100. and failed deals. who had obtained numerous digital currency patents in the 80s related to ensuring anonymity using cryptography. 1999). Id. GoldMoney. and want fraud protection (which Bitcoin currently lacks). How DigiCash Blew Everything.htm (last visited Apr 27. a. BANKING INST. supra note 43. one of the largest digital currency providers). supra note 8. at 593-‐4. at 601-‐602.. managerial incompetence. translated by Dutch natives and edited by Ian Grigg from original article Hoe DigiCash alles verknalde.because consumers generally do not care about the kind of anonymity that Bitcoin provides. up until its bankruptcy in 1998.45 have not been as successful46 due to a combination of lack of competitive advantages. 44 Companies that took the alternative approach of creating digital currencies which were convertible to and from existing currencies. Traditional ecommerce The growth of the internet created demand for electronic payment systems. See.
g. 13 . and most consumers would probably not be interested in shopping and browsing items with prices in an unfamiliar currency.au/forum-‐replies. sell or give this information to others. there 49 Steven Levy.whirlpool. [H]e … advocate[es] a form of [digital currency] that fits neatly into a privacy paradigm. However.51 Similarly. 51 See.S.and did not care about DigiCash’s strong anonymity guarantees49 (as is especially evident today50). Wired. 2011) http://forums. They are unafraid of inflation of the money supply by the Federal Reserve. for example. BitCoin – Fee-‐Free Paypal Alternative? (Mar. GoldMoney and Pecunix. They do not want to shop real goods in prices listed in Bitcoin instead of dollars. fraud is often a result of human rather than technical failure. whereby the details of people's lives are shielded from the prying eyes of the state.”). These companies. Bitcoin has no built in anti-‐fraud capabilities.insidefacebook.com/wired/archive/2.net. See.52 It is true that one of Bitcoin’s (and other digital currencies’) largest benefits is the low transaction costs. fundamental features of other digital currencies also turned out to be liabilities rather than assets. in turn. Offermatic. Bitcoin is unlikely to be particularly competitive in the traditional ecommerce market.html (“David Chaum has devoted his life. e.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.wired. such as credit card companies. E-‐money (That’s What I Want). Furthermore. 4. are denominated in gold rather than the U. and social news websites..”). Dollar.offermatic.12 (Dec.”).g. Scammers can use electronic currencies that do not allow chargebacks to prevent victims from getting their money back. 2011).cfm?t=1663664 (“’[I]nternet currenc[ies]’ have never worked and never will. to creating cryptographic technology that liberates individuals from the spooky shadows of those who gather digital profiles. and various unsavory elements. available at http://www..12/emoney. 50 Individuals give enormous amounts of data to financial companies. e. Most consumers do not care about anonymity or centralization. http://www. 52 Although Bitcoin is cryptographically secure. such as facebook. improving monetization. Paymate etc work because they trade in money not fictional widgets. 1994). 2. the corporation. The Facebook Credits GetBalance API Helps Developers Dynamically Price Virtual Goods (Mar. SirFibble. whether with users’ consent – or simply without users’ complaints. 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. Josh Constine. Paypal. http://www. Similarly.com (website that gives individuals deals in return for sharing credit card purchase history). 21. or at least his life's work. whereas companies like PayPal have invested millions of dollars in protecting customers against fraud. as credit cards become less ubiquitous online.
they flourished in virtual ecommerce. Furthermore.youtipit. Why Credit Cards Are Not the Future of Online Payment (Mar.is no reason to think that the current payment processing market leaders will not competitively reduce their transaction costs. Services involving smaller payments are generally non-‐ existent. in the virtual world Second Life. nearly all commerce is transacted in Linden Dollars. 2. http://en. individuals also engage in commerce in virtual worlds or in games. with about USD $1.com/t5/Featured-‐News/The-‐Second-‐Life-‐Economy-‐ in-‐Q4-‐2010/ba-‐p/674618 14 . 15.com/ 56 Wikipedia. making payments of.com/pressroom/general/factsheets/economics 58 http://community. 53 See Bill Zielke.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).secondlife. perhaps making micropayments from PayPal and similar processors feasible.54 However.5 million worth of transactions daily in 2007. 54 See http://www. 55 See http://flattr. Bitcoin could be competitive in this space because of the low transaction costs. Virtual World and Game-‐Related Commerce Aside from traditional ecommerce and micropayments. dollars is probably less important in this market.58 Facebook has recently introduced Facebook Credits.S. say. 3. Micropayments Another kind of ecommerce involves very small payments.57 and about USD $30 million worth of Linden Dollars in existence at the end of 2010. Because transaction costs through existing payment processors are so large. YouTipIt is a “microdonation” service that allows individuals to tip websites or businesses using bitcoins. the denomination in non-‐U. for digital goods.org. such as Farmville. exists. 57 http://lindenlab. FarmVille: Gameplay. and taking 30% of all purchases made with Facebook credits.55 YouTipIt and similar Bitcoin services may not succeed unless they can offer something that traditional services cannot. 10 cents or 30 cents over the internet is generally impractical. As credit cards become a less common way to fund online payment accounts. transaction costs are likely to fall.org/wiki/FarmVille (last visited Mar. such as buying or selling digital clothing in Second Life or buying crops in Farmville.56 Where alternative digital currencies failed to gain a foot-‐hold in real-‐world ecommerce.wikipedia. 53 2. requiring this currency to be used for games that run on Facebook. a competitor that relies on traditional fiat currencies and PayPal. 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. 2011) http://mashable. called micropayments. For example. called Flattr. 2011).
Blizzard. because the company would not be the currency issuer.bitcoin.bitcoin. 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. Bitcoin would be inappropriate since it is easily convertible into other currencies in exchanges. however. 59 nextnonce. On the other hand. Because Bitcoin could alleviate or eliminate a number of these problems. Game-‐related virtual currencies present a number of other problems too. 2011) (describing integration of Bitcoin into a “browser-‐based MMO” at http://minethings. the creators and players may agree that individuals poor in the real world can escape reality and be rich in-‐game. For these kinds of games.msg65921#msg65921 (March 15. the End User License Agreement generally prohibits the out-‐ of-‐game sale of WoW Gold. Bitcoin stole my weekend!. 15 . players can earn WoW Gold by accomplishing various in-‐game tasks. 60 See http://www. Such an increase may be worrisome if it decreases the value of the currency and if certain users keep a non-‐trivial share of their wealth in the virtual currency.php?topic=4494. (Although this prohibition is generally unsuccessful. Similarly. developing a secure virtual currency. In World of Warcraft (WoW). http://www.com).0. Bitcoin would be inappropriate.php?topic=3798.60 Thus. it has the potential to become a de facto standard for certain virtual and game-‐related currencies. As Facebook’s huge cut indicates. For a certain subset of games or virtual worlds. for example. the maker of WoW. as is probably the case in Second Life. failing.59 The many available implementations of Bitcoin would allow the developers to easily integrate Bitcoin functionality into the user interface of the virtual world or game. The central game authority can decide to issue a lot of new currency. Similarly. holders of the currency may be surprised to find their in-‐game wealth suddenly inaccessible. and so on. At least one developer has already made Bitcoin the in game currency for his virtual world.org/smf/index. protected from the possibility of fraud. if hackers or the government target the issuer’s currency system. In this game. virtual world and game-‐related currencies have the potential to be big money makers for the issuers of the currency. Developers who want to focus on providing an enjoyable virtual or game experience could use Bitcoin instead of reinventing the wheel. relating to centralized and discretionary control. 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. and the accompanying necessary exchanges requires a significant investment of technical and legal experience. and also time. the currency will survive.org/smf/index. with significant WoW Gold traded outside the game). either to itself or to users. as in others. individuals would not have to worry about the company inflating the currency.
called “gold bugs” and “perma bears” are interested in alternative currencies because of their political beliefs and investment predictions. In other cases. These “fiat currencies” had value simply because their backing governments identified the currency as “legal tender” – acceptable for paying legal debts.gov/BOARDDOCS/SPEECHES/2002/20021108/default.”). 16 . In general. End the Fed (2009). To alleviate the problems of carrying around heavy coins. these individuals prefer to hold their wealth and make exchanges in currencies backed by commodities – usually gold. nextnonce. Miller. including taxes. Preface. Bitcoin Forum. in their reserves than would be necessary if everyone decided to redeem their notes).” 63 Historically.bitcoin. available at http://www. these backing entities kept less of the commodity.” meaning they were inherently valuable. 62 The paradigmatic argument is perhaps: Ron Paul. 2009).org/smf/index. These individuals believe that central banking institutions that have the authority to print more money. some governments.61 Thus. An analysis of this perspective is beyond the scope of this paper. 1993. Speech by Ben Bernanke to the Conference to Honor Milton Friedman at University of Chicago. 2011) (“I'm a huge fan of alternative currencies.g. Macey. (Sometimes. banks.b.msg65921#msg65921 (Mar.. Currencies provide individuals with “tangible medium[s] of exchange that …sellers will accept… for their goods or services. REV. See Eichengreen.org/wiki/Nixon_Shock 65 See Julia Alpert Gladstone. and that pegging currencies to gold or other commodities can cause unnecessary economic harms.php?topic=4494.federalreserve. Exploring the Role of Digital Currency in the Retail Payments System. like the Federal Reserve. November 8 2002. e.62 but a comparison of Bitcoin to other “gold bug” currencies is instructive.wikipedia. Gold-‐Backed Currencies Certain individuals. 31 NEW ENG. http://www. 1196 (1997). htm. The Law and Banking of Financial Institutions (4th ed. 1919-‐1939. Barry (1992) Golden Fetters: The Gold Standard and the Great Depression. most mainstream economists believe that central banks play an important and positive role in economies. or private companies created paper money redeemable for a certain amount of gold or another commodity. especially considering the gross mismanagement of the USD and other fiat currencies. L.65 61 See. 63 See Carnell. many currencies were “specie. 15. 64 http://en. corrupt the economy and therefore they do not trust government-‐backed fiat currencies (those unredeemable for commodities). such as gold or silver coins. 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 redeemable64). Bitcoin stole my weekend!. such as gold.
and popular among government-‐ distrusting “gold bugs. by holding fractional reserves while promising to hold full reserves). because it is liquid. 17 .These governments can (and usually do) print more currency over time.. easy for end-‐users to exchange with one another. increased its money supply by about 10. 66 Control over the money supply is an important lever of monetary policy for governments. as discussed above. as discussed above. See generally Tucker. for example. supra note 8. such as eGold or GoldGrams.” However. but others to serve needs of government-‐ distrusting “gold-‐bugs. several private companies have created digital currencies – some to facilitate ecommerce. On the other hand. 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.org/wiki/Zimbabwean_dollar#Hyperinflation.66 More recently.” 67 Bitcoin is similar to the dozens of gold-‐backed digital currencies that already exist. 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. increasing the supply of the currency relative to demand. On currency exchange markets. digital. generally anonymous. which can be used to protect against recessions or depressions. Zimbabwe. causing inflation).g. it will be more likely to print more money. which reduces the value of the currency and correspondingly increases prices in a process known as inflation. governments can print money irresponsibly and cause hyperinflation. 67 These digital currencies have generally failed to become market leaders in ecommerce.wikipedia.000 times in 2008 and experienced a more than 200 million percent inflation rate in 2008. (2) it is fiat money rather than commodity money. and (3) it may be practically difficult to regulate because there is no centrally controlling authority. http://en.
bis.iq/index.html. Is Bitcoin Sustainable? The vast majority of currencies are backed by governments (or other legal entities). This fiat currency. 7-‐11 (2004). The institutions of monetary policy. 15. http://www.org/buy-‐ silver/2006/09/phoenix-‐dollar. After the 2003 U. a. maintaining a stable trading value.com/phoenix.69 68 http://vertoro. Dollar and other modern currencies Liberty Dollar (no longer circulating) Phoenix Dollar (no longer circulating)68 Digital Gold Currencies Bitcoin Form Paper Paper Coin Digital Digital Fiat Gold Silver Gold Fiat Value Backing U.S. 2011). This part examines whether this trust is misplaced. Saddam Hussein’s government disendorsed the old currency and created new “Saddam dinars. the U.org/review/r040202b. Iraqi Swiss Dinar At least one currency. was backed by neither government nor commodity yet held a stable value and never collapsed over a ten year period. http://en.S. So who would trust Bitcoin. http://goldprice. History of the CBI. By contrast. 18 .org/wiki/Swiss_dinar. or both. causing hyperinflation in the Saddam Dinars. commodities.S.wikipedia.S.cbi. 1990-‐2003 and 2003 – Today. available at http://www.pdf?frames=0. Government Private corporation Private corporation Private corporation No legal entity IV. Mervyn King.” The Swiss Dinars continued to circulate in northern Kurdish regions of Iraq. central provisional authority allowed individuals to trade in Swiss Dinars for new Sadam Dinars at an exchange rate of 1 Swiss Dinar to 150 Sadam Dinars. buying bitcoins at a rate sufficient to keep Bitcoins almost at parity with the dollar.php?pid=History (last visited Mar. 69 See Central Bank of Iraq. U. Saddam Hussein printed an enormous amount of new currency (as did counterfeiters because of the primitive technology used to print the notes).htm. invasion of Iraq. printed with Switzerland-‐manufactured plates. Because of sanctions imposed on Iraq during the war that prevented importing more notes. a currency backed by neither? But individuals apparently do trust Bitcoin. the Iraqi Swiss Dinar. was backed by the Iraqi government before the 1990 Gulf War.
http://www.. Nevertheless. Bitcoin may fail for a variety of reasons. keynesians. See. which would collapse demand relative to supply. without commodity or institutional backing. This development team constitutes the de facto central bank of Bitcoin. e. a five-‐member development team continue to work on the software. 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 19 .bitcoin. and issue new releases on the main Bitcoin website.php?topic=3832. http://www. may be sustainable. See http://www. As explained in more depth below. what would prevent central banks. 1. either the developers70 or a 70 Although the details of the Bitcoin Protocol. They fix bugs. a government crackdown.msg54809#msg54809 (describing instance in which majority of Bitcoin clients switched to a new version of the software). However. b. were set by Bitcoin’s creator. make changes. If they were to decide that the inflation rate needed to be changed and updated the software. in 2009. including the inflation rate. 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.org/smf/index. governments.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). the creation of superior competing alternative currencies.com/How-‐can-‐ Bitcoin-‐be-‐hacked/answer/Sebastiano-‐Scr%C3%B2fina (“Given the project is open-‐ source.bitcoin. Confidence Like almost anything in which individuals can invest their money.org/smf/index. and it behooves Bitcoin users and investors to understand the risks. most users would probably use the new version of the software because of their trust in the development team. or a deflationary spiral. or if hackers or governments are able to prevent any new transactions from settling). (Confidence might also collapse because of technical problems: if the anonymity of the system is compromised.g.quora. confidence might collapse in Bitcoin because of unexpected changes in the inflation rate imposed by the software developers or others. 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.php?topic=3832. The Iraqi Swiss Dinar shows that a currency like Bitcoin. Bitcoin is probably susceptible to irrational bubbles and also irrational or rational loss of confidence. if money is lost or stolen. Satoshi Nakamoto.
S. See.f.bitcoin. 71 A coalition may take control of the Bitcoin network by convincing a majority of Bitcoin users to use a different version of the software.bitcoin. We must inflate the currency to eliminate their economic power!”) or populism (“A majority of bitcoin debt is owed to evil corporations.73 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.. may nevertheless cause many individuals to lose confidence in Bitcoin and sell off their holdings. starting a panic. C. Friendster is a social networking site created in 2002. Alternatively.0 (asking whether a majority would support making the inflation rate constant rather than being halved every four years). Bitcoin FAQ. Such an exercise of discretion. Bitcoin’s value would probably drop precipitously. “Where does the value of Bitcoin stem 20 . 72 As some individuals sell bitcoins to buy the new currency other individuals.msg54605#msg54605.bitcoin. For example. it may argue that Bitcoin is undergoing a deflationary spiral and needs a higher inflation rate to be sustainable. if the inflation rate is increased so much that Bitcoin undergoes hyperinflation. Superior Competing Currency The creation of a superior competing currency could lead to a crisis of confidence leading to a collapse of Bitcoin’s value72 or could just lead to a permanent reduction of Bitcoin’s value.g. before Facebook. In some ways.org/smf/index. http://www.” temp1029.“convincing coalition” (i. We must inflate the currency to transfer wealth to creditors from debtors!”).php?topic=4740. Facebook overtook Friendster in the U. market. 2011).e. Friendster initially had the largest market share but had a number of technical problems. Many other infiltration attacks are possible and just up to your imagination. Very quickly.php?topic=4940.”). a group that releases a compatible version of Bitcoin with different inflation settings and convinces a majority of users to switch)71 could probably exercise discretionary authority to change the inflation rate. could start to sell their bitcoins at fire-‐sale prices.” For example. Such a coalition might succeed for any number of reasons. as participants abandoned their Friendster accounts in droves. such as its slow website.0.org/smf/index. in a panic. Re: Counterfeiting and Loss Prevention (Feb 24. such a large-‐scale defection would resemble the defections from older to newer technologies where the technologies have “network effects. afraid of being the last ones to own bitcoins. Or it may appeal to prejudice (“A majority of bitcoins are owed by members of a disfavored ethnic group. One Bitcoin user has termed this vulnerability “mob rule. 2. http://www.php?topic=3832. even if done with good intentions and supported by a majority of Bitcoin users. e. 73 A panic would destroy the value of bitcoins if they only derived their value from the fact that many merchants and service providers were willing to accept bitcoins for their goods and services. http://www.org/smf/index.
and further decreases in prices.org/faq#Where_does_the_value_of_Bitcoin_stem_from_What_ba cks_up_Bitcoin (last visited Mar. Mint warned consumers that use of Liberty Dollars. an alternative metal-‐backed currency privately issued in the U. http://www.. 75 Modern economists. central bank.75 possibly causing a panic or just a permanent from? What backs up Bitcoin. To counteract deflation and keep inflation manageable.S. Liberty Dollars Not Legal Tender. 14. The most well-‐known tactic the Fed uses is to set the discount window interest rate – the rate at which other banks can borrow from it. 21 . the U. Recognizing this value. Many economists believe that a deflationary spiral caused the Great Depression and other major recessions. Government Crackdown Although Bitcoin may be difficult to shut down because of its decentralized nature. 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. the U. Complaint. 26.S. Liberty Dollar’s creator complained that the U.S. Nothaus. In a sense.bitcoin.S. known as the Federal Reserve (colloquially known as “the Fed”). A higher rate discourages borrowing (lowering demand for money) and a lower rate encourages borrowing (increasing demand for money)..”)..” http://www. 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.cfm?flash=yes&action=press_release&id =710 [hereinafter U. 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. United States Mint Warns Consumers: Justice Determines Use of Liberty Dollar Medallions as Money is a Crime (Sept. 2006). investors may purchase bitcoins as others dump them in a panic – stabilizing Bitcoin’s value and ensuring its continued existence. Generally. Deflation can lead to a deflationary spiral: prices fall. Press Release. causing lower production. causing economic damage to Liberty Dollar owners. Mint. Mint’s warning had a substantial “chilling effect” and eliminated demand for the currency. Liberty Dollar Consumer Warning]. Deflationary Spiral Bitcoin might undergo a deflationary spiral that causes certain individuals or industries to abandon Bitcoin.usmint. U.3. Mint. manages both the supply and demand for money. believe that deflation – the decrease in prices over time – can have deleterious effects on an economy. 74 In 2006.S.gov/pressroom/index. is illegal.74 4. 2007 WL 4579959 (2007) para 15. following modern monetary theory. money becomes more valuable and goods cost less in that money. leading to lower demand. leading to lower wages. 2011) (“Bitcoins have value if they are accepted as payment by many..S. as the supply of money decreases and demand increases.
msg69876#msg69876. 21.g. http://www. Although it would be difficult to have transactions in amounts less than one cent. say. 79 epii. lower demand. for example.bitcoin.. e.” Dai.msg61491#msg61491 (suggesting using “mBTC.. See.bitcoin.php?topic=4724.bitcoin. although the supply of Bitcoins will never increase beyond 21 million. four millibitcoins. 79 76 Unlike the Dollar.php?topic=4940. Bitcoins are likely to continually appreciate in value over time.php?topic=4740. http://www. industries using Bitcoin78 that fall into such a spiral may decide to abandon Bitcoin. Maybe big multinational corporations will use them to pay their international supply chains in industries that are used to constant deflation. 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.0004 bitcoins might be referred to as.org/smf/index.php?topic=4234.”).00000001” to transactions of “. Re: Labor costs and prices in an economy using bitcoin exclusively (Mar.php?topic=4724.org/smf/index. http://www. http://www. Furthermore. and further decreases in prices. uBTC and nBTC” for small amounts of bitcoins).org/smf/index. Even the possibility of such a spiral may limit Bitcoin’s reach. transactions of. Though I'm not pessimistic personally.org/smf/index.0004 bitcoins would be simple for programs to handle because bitcoins are infinitely divisible. Since the upper limit of bitcoins is fixed at 21 million. the price of goods in Bitcoins will decrease over time.msg72218#msg72218 (“The economic future of Bitcoin is still unclear. Thus. http://www. bitcoins will become more valuable over time as the supply of government-‐backed fiat currencies continue to increase. demand could always fall over time. 2011). as the supply of other currencies increases faster than the supply of Bitcoins increases. e. stable inflation rate. Thus. Bitcoin users might create new names for certain small amounts of bitcoins to facilitate communication.g.76 As prices denominated in bitcoins fall. say.77 The end result of such a spiral is underemployed human capital and other means of production and destruction of wealth. the supply of Bitcoins is fixed: There will never be more than 21 million Bitcoins in existence. most people 22 .) Thus.bitcoin. eliminating concerns about the feasibility of sub-‐“bitpenny” transactions. 0. 0. 78 See Gavin Andreson. Bitcoins are infinitely divisible. producers may respond by lowering production. in no small part because it is treading new economic ground.msg69032#msg69032 (“I think there is a strong possibility bitcoins will end up being used for something none of us is thinking about.org/smf/index. 77 A concern that often goes hand in hand with deflation – the scarcity of small-‐value currency – is not a problem for Bitcoin. (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. indicating that Bitcoin is a deflationary currency – and may be susceptible to a deflationary spiral. See.000000001 BTC”).depression in Bitcoin’s value. leading to lower wages. While the Fed will indefinitely increase the supply of the Dollar to target a low.bitcoin. Bitcoin has no central bank that can pull the levers of monetary policy.msg69762#msg69762 (comparing the feasibility of transactions in “$0.
However.bitcoin.bitcoin..bitcoin.80 as the following three examples illustrate. See. Similarly. Potential Technology Failures Besides the failure scenarios just mentioned.msg2044#msg2044 (“Want to thank me for this post? Donate here! Flip your coins over to: 13Cq8AmdrqewatRxEyU2xNuMvegbaLCvEe”). Facebook.82 Such unexpected and sudden exposure would obviously be deleterious to Bitcoin’s value.it/wiki/Weaknesses (listing a number of potential technological vulnerabilities).”).org/smf/index.g. Beacon. 2007).bitcoin. technology failures could prevent individuals from transacting in bitcoins or cause a crisis of confidence.81 It might be possible.c. http://www. Theft 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.php?topic=241. without his consent.all (several comments indicating that individuals use Bitcoin because of the anonymity it provides. to undo the anonymity of the system.it/wiki/Anonymity. individuals sometimes post account numbers online in ways that can be connected to their online identities. and merchants.bitcoin.83 2. http://www.. anonymity is the only feature I need”).php?topic=241. http://www.org/smf/index. 1. using statistical techniques and some identified accounts. See. see also http://www. e.ryananderson.. among other features).g. in his newsfeed for his girlfriend and friends to see).g.org/smf/index. e. e..ca/2007/11/26/facebook-‐beacon-‐and-‐privacy/ (recounting story of facebook user who bought an engagement ring from overstock. and Privacy (Nov.g. 26.org/smf/index. 23 . mainstream consumers generally prefer that their transactions remain between them. 82 See https://en. Anonymity Failure All Bitcoin transactions are public.0 83 Anonymity is an important feature to many current Bitcoin users. 80 See https://en. 81 Many participants in the Bitcoin Forums post a Bitcoin account number that can be used to provide a tip for a good quality post.msg8874#msg8874 (“For me. but are considered anonymous because nothing ties individuals or organizations to the accounts that are identified in the transactions.php?topic=241.com and was horrified to find that the surprise was ruined when the purchase was posted.php?topic=4465. http://www. See. credit card companies).bitcoin. their financial intermediaries (e.0.
backups. Will That Be Cash. 253 (1997) (“[C]ustomers…want to know what will be done in the event that their hard drive crashes with stored e-‐money…”).88 Individuals with a majority of the computational power in the Bitcoin mining network can effectively preclude any transaction from being processed. since then.bitcoin. 89 Gaining control of the network in order to prevent transactions from settling would cost.89 Although some 84 Bitcoins are generally stored in a “wallet. Credit.org/smf/index.. Using this program. if expensive. See brucewagner. Because the Bitcoin wallet is not encrypted.bitcoin.85 A large-‐scale theft of bitcoins from many users could create a confidence crisis. BANKING INST. Id.” Individuals may store the wallet on their own computers or with an ewallet service.msg51389#msg51389. and guarantees users’ bitcoins may be a more secure option (once reliable and legally reachable services exist.php?topic=3596.msg22948#msg22948.bitcoin.com/How-‐can-‐Bitcoin-‐be-‐ hacked/answer/Sebastiano-‐Scr%C3%B2fina. on the order of a million dollars.dat File?”. http://www. 85 See. http://www.87 3. Comment. 225. 86 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. excluding electricity costs. bitcoins can be lost or stolen. Alston. See BlueMatt. 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. The case of the Russian Scammer. 87 Bitcoin trojan horses already exist. and each user should take care to backup and secure his Bitcoin wallet. e. or E-‐Money.org/smf/index. However.org/faq#How_do_I_backup_my_wallet. Such a sustained attack might significantly depress the exchange rate and lead to a collapse of confidence. see also http://www. https://www. regularly backing up has become customary for mainstream computer users.84 Keeping bitcoins on one’s computer can be as dangerous as keeping large sums of cash in one’s physical wallet. 86 But see Heather C.php?topic=3628. “Automatic Encrrytion and Password Protection of wallet.org/smf/index. The current total power in the Bitcoin mining network is approximately 500 Giga-‐hashes per second.C. Although few individuals backed up in 1997. the scammer was able to steal more than 150 bitcoins from a number of users. Id. see http://www.org/smf/index.quora.. These problems can be mitigated to some extent by making the Bitcoin software secure. Obtaining the necessary computational power is easy.php?topic=3597.bitcoin.php?topic=1852. 88 See.g.0 (some individuals questioning the reliability of some popular ewallet providers)). A specialized processor called a GPU that can calculate at 24 . e. such theft is fairly simple. it is nevertheless susceptible to a form of denial of service attack.g. in March 2011. http://www. Denial of Service Although Bitcoin is decentralized and generally has no single point of failure. 1 N. using an online wallet service that secures.Like cash.20.bitcoin.
see note _ supra. Although creating a network of computers powerful enough to gain the majority of the network would cost on the order of $1 million.92 or hackers who want to blackmail a business that relies on bitcoins. That it may exist in a legal grey area may significantly hamper demand for bitcoins.php?topic=5048. are anxious about its legal status.bitcoin. V.” see http://en.question why anyone would do such a thing. have significant incentive to reduce their future liabilities by generally wreaking havoc in the system to collapse the value of the currency. potential users should be aware that it is still a young and developing currency. many Bitcoin users. see http://en. 91 Governments may have an interest in shutting Bitcoin down because it is anonymous and may therefore facilitate illegal drug and child pornography exchanges in addition to money laundering. do not doom Bitcoin to failure.wikipedia. http://www. This Part examines just a few of the many approximately 600 Mega-‐hashes per second can be purchased for approximately $600. alone. such as a borrower or a futures contract party. electricity and other infrastructure costs would eat into this profit significantly. this amounts to substantial gross revenues of approximately USD $2. 25 . 0. and government agencies such as the CIA and NSA likely have significant computational power at their disposal. the current network has a power of about 1000 of these specialized GPUs. Thus. Bitcoin’s lack of commodity or government backing.91 individuals with future liabilities in bitcoins.org/smf/index. Incredible computational power can be purchased from cloud computing providers over the internet. An individual could thus spend around $600.9 USD / bitcoin * 50 bitcoins / 10 minutes x 60 minutes / hour x 24 hours / day x 365 days / year = USD $2. Legal Although Bitcoin may be more resistant to government attack because of its decentralized nature. 92 Individuals who have future liabilities in bitcoins. 90 One user notes that even if an individual dominates the network that entity will never earn more than fifty bitcoins every ten minutes. However.000 (plus costs for supporting infrastructure) to gain a majority of processing power on the network. and could potentially fail in many ways. However. as the Iraqi Swiss Dinar illustrates.wikipedia. In sum. See http://www. including both consumers and businesses.org/wiki/Botnet.org/wiki/Amazon_Elastic_Compute_Cloud. 90 several parties might have sufficient interest: governments who want to shut Bitcoin down.4 million per year.4 million).com/r/Bitcoin/comments/gam37/what_stops_people_with_cap able_of_massive_amounts/c1m73fv.reddit.0. hackers control and sell control to huge networks of computers called “botnets. (Bitcoin only awards 50 bitcoins every 10 minutes.
Art I § 8. supra note 93. in a press release noting the conviction. Board of Governors of the Federal Reserve System..” Const Art I § 10. 1996. U. Member. 26 . Smith & Wilson. Greenspan Is Low-‐Key About E-‐Cash Impact on Payment System. 93 See. Kelley. 95 Dep’t of Justice. Government officials have known about these currencies and have commented that they seem to pose no threat. Private Money: Everything Old is New Again (1998). To those taking the federal government’s monopoly at face value. e. some of the recent speculation about risks to monetary policy. which is insignificant relative to the current M1 monetary aggregate of $1 trillion. the government’s supposed monopoly is more limited than it may seem at first. Press Release. other statutes. such as the federal securities acts. Federal Government’s Monopoly on Issuing Currencies Commentators often write that the federal government has an “exclusive right to issue currency” 93 because of the Constitution’s assignment of control over currency to Congress to the exclusion of states94 and the Federal Reserve’s control over the money supply. e. Smith & Ramsey J.relevant legal issues. The Department of Justice. 1996). Edward W. the recent conviction of a creator of a private currency called the Liberty Dollar comes as no surprise. See id..” Const. a.S..”). organizations have been issuing a certain type of private currency – community currencies meant to circulate only within a particular community – in the U. Remarks at the Digital Commerce Conference 4 (May 6. 1105. 4-‐18. probably do. Good. has been a bit alarmist.96 Thus. the total value would amount to less than $50 billion. at 1115 n. at 26..' (quoting FRB Chairman Alan Greenspan)). for decades. 27 ("'In my judgment.g. 46 AM. Brian W. 94 The Constitution gives Congress the power to “To coin Money” and “regulate the Value thereof. Jr. 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. How Best to Guide the Evolution of Electronic Currency Law.clevelandfed.pdf (discussing Ithaca Hours and other local. Wilson. I conclude that while statutes ostensibly designed to enforce the federal government’s monopoly on issuing currency do not apply to Bitcoin. Mar..” 95 However. private currencies and also noting that “Private money is not prohibited if it complies with certain government regulations”). available at http://www.. Federal Reserve Bank of Cleveland. 1111 (1996-‐1997).55 (“See. Mr. L. Kelley points out that. REV.g. even if every person in the United States held $150 in electronic currency. and prohibits states from “coin[ing] money. 15 BANKING POL’Y REP.org/research/commentary/1998/0401. Defendant Convicted of Minting His Own Currency 96 Barbara A.
All of these cases find that the currencies in question did not violate the Act. Echoes of the Past With Implications for the Future: The Stamp Payments Act of 1862 and Electronic Commerce. However. the Act is unlikely to apply to anything that (1) circulates in a limited area. 26 F. issues. § 336. et. The Stamp Payments Act of 1862 In the 19th century. supra note 98 (citing Van Auken. Roussopulous.101 97 LEWIS D. 1996). memorandum.The Constitution has nothing to say about private parties creating money. Vartanian.S. 1863)(No. 1878) (cited by Vartanian. Pa.S.S. 368 (U. because they do not physically resemble official currency. intended to circulate as money or to be received or used in lieu of lawful money of the United States. 15796). due to inflation). United States v. SOLOMON. or both.S.D. Economists and politicians argued that private currencies in small denominations were endangering the economy and contributing to inflation. token. 1292 (W. or pays out any note. shall be fined under this title or imprisoned not more than six months. About a dozen states attempted to eliminate these currencies by prohibiting private issue of notes and tokens in values less than $5. circulates. More specifically. currency. 95 F.97 Instead.99 Judicial interpretations indicate that the possibility of widespread circulation and therefore competition with official currency is the touchstone of the Act. allowed U. Van Auken. United States v. currency and is otherwise unlikely to compete with small-‐denominations of U. 101 Vartanian. coins. and in section 1.S. RETHINKING OUR CENTRALIZED MONETARY SYSTEM: THE CASE FOR A SYSTEM OF LOCAL CURRENCIES 95-‐96 (1996). or other obligation for a less sum than $1. 977 (D. (3) does not resemble official U.S 366. 100 See United States v. 100 (2) is redeemable only in goods. al. these cases primarily rested on the fact that these currencies were unlikely to circulate widely or as money because they were redeemable in goods at 27 . 98 (Individuals were hoarding small-‐value official U.S. coins because the metal in them was worth more than their face values. 1899)). Section 2 of the Stamp Payments Act of 1862 states: Whoever makes.S. in part. 96 U. 98 Thomas P. BNA’s Banking Report (Sept. companies issued private currencies in small denominations in response to shortage of small U. Cas.. 99 18 U. 23.C. Congress eventually adopted the substance of these state laws as section 2 of the Stamp Payments Act. postage stamps to be used for government debts less than $5. check. supra note 98) (reasoning that Congress did not mean to prohibit things that would circulate only in a limited area because such things were unlike and would not compete with official circulating small change). Minn. 1. Monongahela Bridge Co. two sets of federal statutes affect private parties’ abilities to create currencies: The Stamp Payments Act of 1862 and federal counterfeiting statutes.
103 Vartanian.htm (last visited Apr. inter alia. currency. because “denominations are at least $1.S.102 Although the motivations behind this law have long since passed.” “Quarer HOUR. and. 2011) (indicating denominations of “One HOUR.S.com/currency. http://www.103 A number of existing “community currencies. Wall Street Journal at B1 (Jun. e.” such as Ithaca Dollars.S. 2. among other reasons. by design. supra note 96 (noting that community currencies are legal if. Berkshares. 368 (U.html (last visited Apr. 2011) (noting that Ithaca Hours are legal. Paul Glover.S 366. and has been stylistically amended a number of times without consideration of its present day application.ithacahours.com/intro. http://www. Liberty Dollar coins and paper currency were never created in denominations smaller than $1. alone.S.104 (These currencies may also fall outside the Act’s reach because they are intended. Additionally.or (4) is a commercial check (such as a customer might make out to a store to buy something worth less than $1)..107 particular stores. may not be enough to make the Act inapplicable if that thing is nevertheless likely to circulate widely. 105 See. Good.ithacahours. like currencies redeemable only in goods or that only circulate in a limited area. are unlikely to compete with official coinage. Stettinius.g. have avoided any legal attack under the Act by creating only notes in values greater than $1. 104 See.com/od/coinbuyingadvice/qt/libertydollars. Thus lack of resemblance to U. punishment under the Stamps Payment Act is limited to six month imprisonment – much less than under the statutes von Nothaus was ultimately convicted under. 27. Mint Warns About NORFED Liberty Dollar U.about. Ellen Graham.html (last visited Apr 2.106 Virtual world currencies. they are “issued in denominations valued at a minimum of $1”). Van Auken. 106 See Susan Headley.” and “Two Hours”).00 value”).” “Eighth HOUR. and LETS. What are NORFED Liberty Dollar Coins?: U. http://coins. 107 See United States v.g. Although the case against Liberty Dollars might have been straightforward under the Act.” “Half HOUR. 96 U. 1878) 28 . such as Linden Dollars or World of Warcraft Gold.S. 102 See U. to circulate only locally. supra note 98.” These currencies can generally only be used to purchase virtual goods in a particular virtual environment. and also because their scrip is often denominated in “hours” rather dollars105). e. The Ithaca HOUR Family. Creating Community Economics with Local Currency.. 2011) (noting denominations of Liberty Dollars that are all $1 or greater). 1996). likely do not fall within 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. it has remained on the books. v. Coin Lookalikes!. Community groups print local (and legal) currencies. 2.
one could also argue that Congress’s repassage of the Act. is certainly “intended to circulate as money” (among those who accept Bitcoin and proselytize its acceptance by various merchants and individuals).S. as confirmed by the last phrase. supra note 98. Although the phrase “other obligation” may be general enough to refer to something that is not physical. in certain ways. coins. “or other obligation. Thus. Although digital currencies are often described as digital tokens.” Most of the cases brought under the Act dealt with “obligations. and checks rather than U. Bitcoin is meant to circulate broadly.S. a bitcoin may not be a “token” within the statute’s meaning because it is not an obligation. the principle of ejusdem generis indicates that it should be interpreted as only referring to physically manifested things.109 one may argue either that Congress could not have conceived of digital currencies at the time the statute was written (and therefore did not intend to prohibit them) or that Congress’s failure to add “electronic cash or coins” to the text when it was amended in 1994 indicates that Congress did not intend for the act to apply to digital currencies. a “note. A bitcoin. Banning Bitcoin would do little to promote the intention of Congress – preventing competition with official small-‐value currency (even if the motivation behind that intention were still relevant today. supra note 98. however. and therefore do not extend to digital currencies. virtual world currencies. 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. one could argue that bitcoins are not “obligations” and therefore fall outside the list. Bitcoin supporters have a number of purposive and textual arguments on their side and would likely prevail.” 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. 110 Vartanian. currency. unlike a check or note. C. token. is not an “obligation. or other obligation” in the statute are all physical manifestations of currency. Even if Bitcoin is eventually used in in-‐ real-‐life transactions. Of course.f.108 Unlike scrip redeemable for goods. indicates that Congress had no intent to prevent the Act from applying to digital currencies. 111 Id. Bitcoin is mainly used over the internet and competes with credit cards. with U.112 Furthermore.Digital currencies cannot play it safe the way community currencies have. Bitcoin could eventually be used to purchase items at a physical store or vending machine or for individuals who are standing right next to one another to exchange money using their smart phones. PayPal. 109 For example.111 Even if digital tokens are found to fall within this list. However. memorandum. a Bitcoin. which it is not). or community currencies. Bitcoin is prohibited by the Stamp Payments Act. Kerry 29 . there is no question that transactions in sub-‐dollar (and even sub-‐cent) values occur. Thus. just as the Supreme Court found that scrip 108 Vartanian. and competes.110 A number of textual interpretations would support these purposive arguments. when it knew of the possibility of digital currencies.” 112 Each of the items in the list of things proscribed by the Act is an obligation. under one view of the case law. In any case. check.
78 (1999) (“An argument can be made that ‘obligation’ was never intended to include electronic money….S 366 (U. 115 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. a court may dismiss the relevance of distinctions based on physical attributes and instead may focus on similarities arising from non-‐physical properties.S. Instruments that do not have the physical characteristics of U. … A criminal statute must be strictly construed. 360. But see id. Furthermore.J. 113 United States v. and to apply these 30 . challenge the monopoly of official stamps and coins. Gellman.S. currency. They were never framed to embrace the use of metal tokens as a substitution for money in the limited sense referred to. Supp.”).”). taken together. supra note 98. Van Auken.S. 114 See Vartanian. 672 n. 96 U. 117 United States v. (“If faced with an ether-‐based payment system. coins or paper currency cannot be ‘intended 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. The New Money. Courts began limiting its application almost immediately after it was passed.”113 a court may find that a bitcoin. the court limited the Act by interpreting it more narrowly than the text and intentions of Congress would indicate it should have been. 1878). the court’s finding in Van Auken that scrip redeemable only for goods was not prohibited by the Act is questionable. Minn. 1942) (“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. because such currencies lack the physical characteristics of U. 659. relief must be sought from Congress and not from the courts.S. is not “for a less sum than $1.117 Although Lynn Macintosh. 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. there is no question that many such private currencies circulating would.”114 And one may argue that although Bitcoin users intend for Bitcoin to circulate as money.116 Federal courts have warned that early money-‐related laws should be cautiously applied to new technologies. Thus. such as the rights and obligations of the holders. often redeemable only in merchandise from the issuer. 44 F.redeemable in goods is not “for a less sum than $1. 365-‐66 (D. It is a 150 year-‐old statute that has obviously outlived its usefulness. 116 The initial Act was passed in response to private issuers creating small-‐ denomination tokens or scrip.115 But Bitcoin users have other reasons to fear little from the Stamp Payments Act. which is not redeemable for any particular thing and is not pegged to the dollar. Thus. although one may argue that a single issuer’s scrip circulating in a limited area may not compete with official U. supra note 93. currency. at 1110 (“The SPA may be inapplicable to all forms of electronic currency. however. L. 14 BERKELEY TECH. especially where the statute provides criminal penalties.
many academic works have noted that the Stamp Payments Act may be a problem for digital currencies.g. Mint warned consumers about the Liberty Dollar in 2006.waybackmachine. Liberty Dollar Indictment Release]. silver. or other precious metals.org/20080117060339/http://www.123 NotHaus’s offices were raided by the FBI and Secret Service in 2007. unlike the U. should be repealed.124 and NotHaus was indicted in 2009125 and convicted in March 2011. supra note 98 (“[T]he court emphasized the issues raised by charging defendants with an offense under a statute that had been enacted more than 100 years ago when coin-‐ operated machines did not exist.gov/dojpressrel/pressrel09/ce060309. and suggested that proper relief should be sought from Congress.com/news/2007/nov/15/liberty-‐dollar-‐office-‐raided/ 125 United States Attorney’s Office. 2009). 122 Id. supra note 112. 124 http://replay. para 14. 118 See.S. http://charlotte. and was intended to be inflation-‐proof. 119 See Roussopulous.S. 3. Macintosh. 13-‐15. 19 (May 19. http://www.com/ 2007/11/15/frontal-‐assault-‐on-‐freedom-‐fbi-‐raids-‐liberty-‐dollar/. supra note 98. Smith & Wilson.S.118 there has apparently been no published court opinion interpreting the Act since 1899. 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 1998.120 2. Press Release.S.119 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 attack Bitcoin. at 671-‐72.121 The currency was backed by gold. as described infra. Vartanian. 31 . at 671-‐73. Four Defendants Indicted in Unlawful Coin Operation (Jun. 5:09CR27. United States Mint Warns Consumers: Justice Determines Use of Liberty Dollar Medallions as Money is a Crime (Sept.fbi. Vartanian.cfm?flash=yes&action=press_release&id =710 [hereinafter U.htm [hereinafter DOJ.rabidquill.”).”) (citing Gellman).126 In press releases related to the indictment statutes to the factual situation disclosed by this evidence would be entirely unwarranted. having outlived its usefulness and perhaps impeding the development of digital currencies. Press Release. 121 Indictment. supra note 92. at para 1. 120 Nevertheless. http://www. Mint. 2006). e. 2009).courierpress. 14.. Liberty Dollars Not Legal Tender. NotHaus. dollar.gov/pressroom/index. Western District of North Carolina. 19. are likely to dissuade prosecutors from trying to breath new life into the Stamps Payment Act. Mint. the Act.122 The U. 123 U.usmint. supra note 112. 15. United States v. A search through google scholar and Westlaw has found no case interpreting Section 2 of the Stamp Payments Act since Roussopulous. Liberty Dollar Consumer Warning]. See Macintosh.
a DOJ press release quoted an FBI special agent as saying.” only deals with “coins of …metal.htm.S. or foreign currency. going as far as referring to NotHaus as a domestic terrorist.129 Nevertheless. 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 126 United States Attorney’s Office.fbi. “People understand that there is only one legal currency in the United States. it affects the economy. 130 Reached after his conviction. 32 . 18 U. As a threshold matter. Such fears are magnified by the political overlap between NotHaus and Liberty Dollar users. Dollars are “fiat pieces of shit.” Id. Press Release.130 However. such as NORFED. Defendant Convicted of Minting His Own Currency (Mar.S. he told me “it’s a fact.and conviction. When groups try to replace the U.S. or foreign currency. http://charlotte. 129 Section 485 is titled “Coins or bars” and is clearly limited to “coins” or “bars” that are counterfeit and resemble official U.C.127 NotHaus himself believes that his indictment and conviction were “political. “Along with the power to coin money. Section 486. Wake up and smell the stench.S. 12. NotHaus told me that that U. When I asked him why he believed so.gov/dojpressrel/pressrel11/ce031811. not a belief. Liberty Dollar Conviction Release. the statutes under which NotHaus was convicted. on the one hand. [hereinafter DOJ. Western District of North Carolina. 2011). the release quoted a U. dollar with coins and bills that don’t hold the same value. the Department of Justice made several statements that seemed extremely hostile to private currencies. It is a violation of federal law for individuals.S. 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. 128 NotHaus told me that his conviction was “political. supra. or organizations. 127 In noting the indictment. to create private coin or currency systems to compete with the official coinage and currency of the United States. 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. §§ 485 and 486. some have mused that the attack on Liberty Dollar indicate that Bitcoin will be next. The press release noting the conviction stated. titled “Uttering coins of gold.” DOJ. Furthermore.” DOJ.” Nothaus Interview. “I suggest you get hip to the monetary system.”128 ostensibly because the federal government is hostile to private currencies. Liberty Dollar Indictment Release.” Telephone Interview with Bernard von NotHaus (Apr. 18.” Id. such as von NotHaus.” A Bitcoin is a digital token rather than a coin or a bar and does not resemble any official currency. He also said. 2011) [hereinafter NotHaus Interview]. silver or other metal. Liberty Dollar Conviction Release].” Id.S. Attorney as saying “Attempts to undermine the legitimate currency of this country are simply a unique form of domestic terrorism…. are inapplicable to Bitcoin because they only deal with metal coins or coins or bars that resemble official U.
133 the 2009 indictment. 132 Telephone Interview with Jill Westmoreland Rose.CRIM. at 4-‐5 (Apr. and 2011 trial. 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. § 486 because it was “intended for use as current money. 31. Rose said that the case “is not about private voluntary barter or currency systems. Mint press release. not priced in dollars. U..” prosecutions based on such a theory would be very unlikely unless there are victims who make consumer complaints. NotHaus.S. 33 AND 34 OF THE FED.S.currencies. Western District of North Carolina (Apr. Defendant was not operating a ‘private currency barter system. ‘Liberty merchants’ are encouraged to accept NORFED ‘Liberty Dollar’ medallions and offer them as change in sales transactions of merchandise or services. 2011)..S. Mint.S. available at http://online. 7. v. Op-‐Ed.” “not legal tender.C. 7. Attorney.134 These 131 C. he was counterfeiting United States coins 33 ..” U.” I presented Ms. Liberty Dollar Consumer Warning. the evidence presented at trial showed that Defendant (1) designed and created counterfeit coins (Liberty Dollars) that resembled genuine coins of the United States.com/article/SB100014240527487044258045762203836736089 52. currency because they had similar wording and images. supra. 5:09CR27-‐V.S. The release warned consumers that Liberty Dollar medallions might be confused with official U.” and “are neither backed by. 133 In 2006. Id. 134 UNITED STATES’ RESPONSE IN OPPOSITION TO DEFENDANT’S MOTIONS UNDER RULES 29.S. currency and potential to confuse consumers. Mint published a press release notifying consumers that Liberty Dollars are “not genuine United States Mint bullion coins.S. the U. Ultimately. the government focused on the similarity of Liberty Dollars to official U.html?mod=googlenews_wsj (noting the apparent mismatch between theories of counterfeit used in the trial. It also warned that “According to the NORFED website. WSJ (Mar. 2011). on the one hand. Assistant U.f. When Private Money Becomes a Felony Offense: The popular revolt against a declining dollar leads to a curious conviction. coins. Rose said that although one could make an argument that such a currency would be prohibited by 18 U.S.wsj.. (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.’ rather. Ms.131 as confirmed by Assistant U. and language in the conviction press release indicating that private currencies are illegal). who successfully prosecuted NotHaus. the United States Government.132 In a 2006 U.R. Attorney (AUSA) Jill Westmoreland Rose. 2011) (“The government presented substantial evidence at trial on each element of the charges for which Defendant was convicted. Seth Lipsky.S. nor affiliated with.” Id. This is a case about fraud and counterfeiting.PROC. Rose with a hypothetical of an alternative coin-‐ based currency system.S. 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…. that presented no risk of fraud or counterfeiting but was intended to be circulated and generally accepted.
legal tender currency.C. supra.136 NotHaus contested these characterizations and argued that he only encouraged individuals to enter into knowing and voluntary exchanges. supra. told me “If you’re giving someone a $10 coin and tell them that it’s legal. but rather. J. 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. (last visited Apr. which he described as “lying pieces of shit. Ind. 747 n. Kerry Lynn Macintosh. The Strange Case of The Liberty Dollar.D.materials noted that NotHaus tried to spend Liberty Dollars into regular circulation. He said that he was convicted because the prosecution.138 From this perspective.S.” had “lied. 135 Adam Jefferson Kirby.L.137 However.” NotHaus v. Jill Westmoreland Rose. he argued that neither he nor “individuals in the Liberty Dollar organization have … represented the Liberty Dollar as legal tender or ‘current money. 2007).S. http://www.N. A video exposé posted originally on the Liberty Dollar website … features Von Nothaus personally buying sandwiches with a $10 Liberty Dollar coin. 20. declaring it to be a ‘new ten dollar silver piece’ as he handed it to the bewildered vendor. 18. Mar. Liberty Dollar Conviction Release. No. (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). Verdict Form. encouraged other Liberty Dollar users to do the same. but it only has $4 worth of silver. He attempted to create a paper and metal currency denominated in dollars that directly competed with U.”). the U. Attorney’s characterization of NotHaus as a “domestic terrorist”139 is more understandable. greenbacks and using deceptive means to inject them into the flow of current money to defraud the public. 137 For example.D. supra. in a case that von NotHaus filed against the U. you’re defrauding people.com/1459/the-‐strange-‐case-‐of-‐the-‐liberty-‐dollar/. NotHaus interview. and encouraged businesses to give Liberty Dollars as change to unsuspecting customers.”) (citations omitted). Paulson.’ 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’. Mar.50 (1998). 34 . When I spoke to him after his conviction.135 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. How to Encourage Global Electronic Commerce: The Case for Private Currencies On the Internet. & TECH.S. 2007 WL 4579959 at para 14 (S. 2011) (“It was common practice for Von Nothaus and his associates to present Liberty Dollars to merchants unfamiliar with his product without offering the explanation that they were not U.” Id.S. one which could not be redeemed at face value for Federal Reserve Notes in any U. 3:07-‐CV-‐038 RLY-‐ WGH. 5:09CR27-‐V (W.S. v. 136 One of the prosecutors. finding him to have violated all three counterfeiting counts of the indictment. 11 HARV. 139 DOJ. 4. a jury disagreed.S. 733. 2011). commercial bank. von NotHaus. Complaint. a voluntary barter currency.” Interview. Silver Monthly. Mint (that was later dismissed).silvermonthly. 138 U.
141 “Security” is defined broadly in the Securities Act of 1933 §2(a)(1) as including “any note. inviting the reprisal of government force.f.142 Bitcoin supporters may similarly argue. as elaborated below. this unfortunate. especially because there is no money-‐making enterprise that is attempting to raise money. SOLOMON. supra (“To directly compete for consumer market share with a distinctive good or service is one thing. He is like a counterfeiter who prints greenbacks to pawn off on unsuspecting individuals and customers.140 b. deceptive practice does not lend credibility to the legitimate criticism of the U. Furthermore. the engagement in the practice of infiltrating the currency market in such a way seems to be tantamount to a kind of economic insurrection. nor to the legitimate practice of entering into private voluntary barter using gold and silver as a medium of exchange. 141 C.55. at 1115 & n. which are generally not 140 See Kirby. government’s fiscal policy of inflation. 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). Other securities laws. Furthermore. transferable share. [or] investment contract. stock. 142 Macintosh. at 109-‐10 (1996) (noting the importance of determining whether private. Securities Regulations Federal law subjects “securities” to a panoply of regulations. and that bitcoins are instead like commodities or currencies. that is no reason for unsuspecting individuals to be involuntarily stuck with Liberty Dollars instead of greenbacks. supra note 136. local currencies are securities under the federal securities laws). at 746 n. To undermine the legitimate market share of a firm by emitting false or erroneous versions of that firm’s distinctive products constitutes the crime of counterfeiting…. such as section 3(a)(10) of the Securities and Exchange Act of 1934. supra note 93. contain substantially identical language. Smith & Wilson. supra note 97. ….in representing official government-‐backed money.S. Although some believe that metal-‐backed Liberty Dollars are worth more than greenbacks.”). At least one commentator has concluded that digital currencies are unlikely to be regulated as securities.” and about thirty other things. However compelling Von Nothaus’ philosophical and constitutional arguments may be. if Von Nothaus wanted his competitive product to be able to vie for market share of exchange media.” which are exempt from registration and disclosure laws but are still subject to antifraud and civil suit provisions.49. These laws also contain lists of “exempted securities. the coins should not have been made to so closely resemble U.S. Although it can be argued persuasively that the Liberty Dollars are not technically counterfeit. legal tender coins. 35 . that bitcoins do not look like securities or investments. making the determination of whether bitcoins are “securities” extremely important.
although bitcoins do have many features of commodities or currencies. 35 BUS.. 144 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. (iii) the ability to be pledged or hypothecated. Jr. Ernst & Young. 56.f.”145 Although some digital currency tokens may represent promises to pay. (ii) negotiability. they also resemble securities.”). Edward Sonnenschein. 1567. a bitcoin is not a “note” within the meaning of the statutes because it lacks the essential characteristics of a note:144 an instrument that indicates a “promise by the maker to pay a sum of money to another party. v. whether it is an instrument commonly considered a “note” within the commercial world. Landreth. Although the Uniform Commercial Code defines the term more narrowly.” Reves v. Federal Securities Law Coverage of Note Transactions: The Antifraud Provisions. 421 U. However. the feature common to these instruments is that they embody a promise by the maker to pay a sum of money to another party.” (citations and quotations omitted)). if it is such an instrument.S.147 143 See Landreth Timber Co. Inc.regulated under the federal securities laws. 837.S. S.” 143 Similarly. and may specifically be considered “investment contracts. 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." but must be understood against the backdrop of what Congress was attempting to accomplish in enacting the Securities Acts. Forman. 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. On first glance. as described below. 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. However. at 63 (“the phrase "any note" should not be interpreted to mean literally "any note. and (v) the capacity to appreciate in value. 494 U. 145 C. If something is not a “note” in the broad commercial sense then it is not a “note” within the securities laws. (iv) the conferring of voting rights in proportion to the number of shares owned. 681. 686 (1985) (citing United Housing Foundation. 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. the 36 . (citations and quotations omitted). LAW. 471 U. See id. Note or Stock A bitcoin is not “stock” within the meaning of these statutes because it lacks important characteristics of stock. v.146 a bitcoin instead represents a settled amount. it is clear that the Supreme Court is using the word “note” in two different ways: first. 63-‐65 (1990).” 1. whether it should fall within the definition of “note” in the securities laws. and second.
149 SEC v. Second. it will be because it falls within the vague and broad phrase “investment contract. Investment Contract If a bitcoin is a security. Supp. but the bitcoins will still be worth their full amount. 1 J. 293. http://au. dollars are generally held in expectation of profit. to facilitate commercial exchanges rather than in expectation of profit. Ltd.. What is Foreign Exchange (Forex) (Feb. there is no expectation of profits. Commodities Law and Securities Law – Overlaps and Preemptions. W. “[c]oins or stamps bought for a hobby probably lack a profit element…”). 151 it is unlikely that a court would find that U. 148 Securities Act of 1933 § 2(a)(1). 150 C.18 (1976)(citing SEC v. Brigadoon Scotch Distrib. 328 U. transaction or scheme whereby a person  invests his money in  a common enterprise and  is led to expect profits  solely from the efforts of the promoter or a third party…”149 In that case. Alan R. 388 F. supra note 136.com/articles/110821/20110210/what-‐is-‐foreign-‐ exchange-‐currency-‐conversion-‐financial-‐markets-‐forex-‐foreign-‐exchange-‐ markets. Such payment may become due either at a specified time. no individual invests his money because bitcoins are initially awarded to those who invest computational time rather than money. in Howey.Y. 11.f. J. 2009) (noting the four parts of the Howey test). The individuals who choose to promote Bitcoin are independent of one another. Bromberg. with volumes reaching trillions of dollars per day. 147 If Jack gives Bob a note for $10 and $10-‐worth of bitcoins and later goes bankrupt. 224 & n.htm. 146 See Macintosh.”148 The Supreme Court.N. 2009).D. 151 See International Business Times. Individuals hold bitcoins either for fun150 or as they do other currencies. 1288 (S. see generally Thomas Lee Hazen. 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. First. Securities Regulation in a nutshell 33-‐37 (10th ed. CORP. or upon the demand of the payee or the occurrence of some specified event. 37 . and there is no money-‐making business that seeks to raise money through investments. has interpreted something to be an “investment contract” and therefore a “security” if it is a “contract. 1975)) (Noting that within the context of the Howey test.. 298-‐99 (1946). L.ibtimes.49 (giving an example of a hypothetical digital currency that is in form a “digital promissory note” (quotations omitted)).” Supporters may argue that Bitcoin fails all the requirements of the Howey test.2. Howey Co. 214. even substantial speculation in bitcoins does not payee. or some combination of the above.” (citation omitted)).S. there is no common enterprise.S. at 745-‐46 & n. the note will trade at a discount because Jack cannot fulfill his promise to pay the full amount of the note. Similarly.. Although some individuals do speculate in currencies on foreign exchange markets. Third.
Hazen. 154 Bitcoin supporters might recharacterize the issue by arguing that purchasing bitcoin because of a belief of deleterious inflation in. there is a common enterprise. Turner Enterp.2d 476 (9th Cir. Moreover. First. an investor’s returns do come solely from the efforts of others.. An adjudicator’s decision on the “profits” issue may ultimately depend on who the parties at issue are. which are among the most important factors affecting Bitcoin’s value. 474 F. 155 Although some Bitcoin investors may choose to promote its virtues in order to increase demand.. 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. The minimal participation required by pyramid scheme investors has not precluded application of the securities laws. many Bitcoin users are motivated by a belief that Bitcoin. does not reflect an expectation of profit but instead a fear of loss from holding wealth in the dollar. 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. Third.. unlike the dollar.155 152 Revak v. 87 (2d Cir.Thus. The enterprise can be described as comprising the software developers because they ensure Bitcoin’s technical and money-‐supply properties. Finally. each person holding bitcoins is proportionally better off. 18 F. Second. 1973)).indicate a general expectation of profit. at 35-‐36 (quoting SEC v. 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. most Bitcoin users are probably investing in Bitcoin in expectation of profits. any investor involvement in Bitcoin’s success will also not preclude Bitcoin from being deemed an “investment contract” and therefore a “security. Furthermore.g. There is “horizontal commonality: the tying of each individual investor's fortunes to the fortunes of the other investors…”152 As the value of Bitcoin increases. Thus. Bitcoin investors have no active part to play in Bitcoin’s management but do require the ongoing efforts of the Bitcoin developers. whether they invested for profit. no money goes towards the developers).154 Fourth. 153 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. individuals invest money because many individuals purchase bitcoins on exchanges using money rather than mining them. SEC Realty Corp. at present. most can free ride off those who do so and also off the efforts of the software developers maintaining the software.153 this fact should not be dispositive in a regime that is primarily intended to protect investors. the dollar. to maintain and increase their own wealth. 1994). indicating a profit-‐expectation to some extent. Glenn W. 3d 81. supra note 149. an individual who owns bitcoins does not rely on the efforts of a third party – the bitcoins have inherent value.” 38 . e. it is in their interest to ensure that bitcoins remain liquid and in high demand relative to supply. is inflation-‐resistant. The opposing arguments with respect to the Howey test elements are probably stronger.
. those arguing that a bitcoin is not a security may be better off taking another tack.3. If all software development on Bitcoin stopped.”). supra note 150. 986. Alternatively. supra note 150.g. and other items traded as commodities are tangible items. 1 (Sept. 39 . on the other hand. say. 1 BLUE SKY L.. would Bitcoin retain its high value against the dollar. Commodity Because there is a convincing argument that bitcoins meet the Howey test requirements for an investment contract. Miller. metals. margin. it is more likely to be considered an “investment contract” and therefore a “security. Bitcoin is like corn and any other commodity. Id. bitcoins are commodities. 157 Carnell. Sec.158 Bitcoins are not “tangible. However. supra note 63. against the corporation. They might argue that bitcoins are not within the spirit of the securities acts and do not look like or act like a “security” – instead. REP.” Id.504 (“Obviously. through a vote on important business matters.e. 1973). Moore. Comm’r. not securities…”)).612. 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. has only the right to use the corn (by. 18. or pledging it – one similarly cannot “use” a bitcoin except by buying. corn. Where a contract is for future delivery. 989 n.. Securities.157 In these ways. decisions explaining why commodities are not securities have also noted that commodities are “tangible” and have “inherent value.g. A commodity transferred in a spot contract by way of a “naked” sale -‐-‐ meaning sold and actually delivered at present rather than in future. at 130 (“All securities represent claims against an issuer: i. Recent Developments in Commodities Law. at 222 (citing Ga. P 14. selling. management (e. it is regulated by the CFTC as a commodity future rather than by the SEC as a security. Johnson & Moore. have a feature that commodities do not have: they confer a claim on some other entity.. the same way that one generally cannot “use” a security – except by buying. grains. Macey. Furthermore. in case of bankruptcy).g. or other entity that issued the securities. which are generally held not to be securities. such as a merger). without accompanying managerial services. REV. one who owns. e. selling. or pledging. at 988-‐990.” unlike securities. & LEE L. 158 See Bromberg. making corn-‐on-‐the-‐cob or processing it into biofuel) or to sell the corn or make contracts involving that corn. Similarly. 37 WASH. Johnson & Tyler M. 156 See Steven M. repurchase agreements. government. Release No.” and one may argue that by design they have no inherent value because there is no government or commodity backing them. one may also argue that bitcoins do have inherent value by dint of their promised rarity over time. at 221-‐22. Where a commodity sale is not naked and involves other services. or guarantees regarding subsequent price movements –is not a “security” within the federal securities laws. Securities may confer a claim on an issuer’s profits (as through dividend payments).156 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. at 10. supra.22. Bromberg. for example? Probably not. or assets (e. at 221-‐22.
56 ALB. 473. at 223-‐24. they may be exempt from the registration and disclosure provisions while being subject to antifraud and civil suit provisions. accord Bellah v. 160 Id. Ohio’s blue sky law defines security to include “the currency of any government other than those of the United States or Canada.” Securities Exchange Act of 1934 § 3(a)(10).)163 159 Bromberg.” 159 Thus. 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. (Furthermore.”). 163 For example.162 However.. Supp. See SOLOMON. the 1933 Act exempts from regulation “[a]ny note. 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.D. exclusive of days of grace.” Ohio Rev. as explained below. Ohio 1996) (“foreign currency… is not a security as defined in the 1933 and 1934 Acts. currencies may not be securities161 – or alternatively. 1114 (5th Cir. or any renewal thereof the maturity of which is likewise limited…” Securities Act of 1933 § 3(a)(3). 162 For example. What is a Security Under the Federal Securities Laws?. 1974).01(B) (1992). L. or any renewal thereof the maturity of which is likewise limited. Currency Under federal securities laws. 483 (1993) (“[I]t is generally acknowledged that currency is not a security. currencies may generally be considered securities under some state securities laws. 40 . Bankers Trust Co. Bromberg. v. The 1934 Act excludes from the definition of security “currency or any note. Procter & Gamble Co. draft.” ). REV. supra note 97. 114-‐15 (concluding that paper-‐based local currencies would most likely fall under this exemption). 1281 & n. 925 F. supra note 150. 2d 1109. bill of exchange. bill of exchange. or banker's acceptance which has a maturity at the time of issuance of not exceeding nine months. Bitcoin may fall outside these exemptions or exclusions.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. 495 F.160 An examination of these laws is beyond the scope of this paper. draft. exclusive of days of grace. one commentator has noted that commodities are not “investment contracts” under Howey principally because of the absence of a “common enterprise” and “dependence. First National Bank of Hereford.Code § 1707. Lowenfels & Alan R. at 223 & n.4 (S. 1270.15 161 Lewis D. 4. they also share features with securities and are unlikely to evade categorization as an “investment contract” on this ground. Texas. although bitcoins share many features with commodities. and which has a maturity at the time of issuance of not exceeding nine months.
g.” However. 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. 166 See Securities Act of 1933 § 3(a)(3).) (“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.g. An examination of the legislative history of the neighboring short term note exception is instructive.169 “[C]urrency” is also not likely to be interpreted literally.”167 Thus the 1934 Act excludes certain short term notes just like the 1933 Act exempts them. See. They have instead concluded that ‘when Congress spoke of notes with a maturity not exceeding nine months.166 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. 421 U. Reves at 950 (“[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 what attempting to accomplish in enacting the Securities Acts. See Zeller v. and Professor Loss have assumed that Congress had the same intent for the 1934 Act exclusion. draft. which is not a “note.. 1092. Reves at 955-‐56 (“The Courts of Appeals have been unanimous in rejecting a literal reading of the [short term note] exclusion.170 The history indicates that congress wanted to exempt 164 Securities Act of 1933 § 3(a)(3). Reves v. The 1933 Act exempts “[a]ny note. Ernst & Young. bill of exchange..S.S..” “form should be on economic reality”)). Knight. 476 F. Forman.”). not investment securities. but instead take account of the economics of the transaction under investigation. 837 (1975) (“any stock” not interpreted literally). 799-‐800 (2d Cir 1973) (Friendly. but the 1934 Act also excludes “currency. or banker's acceptance” as the plain text of that exemption requires. 169 Reves at 950 (“In discharging our duty. bill of exchange.. 167 Securities Exchange Act of 1934 § 3(a)(10). 336 (1967) (in interpreting the term “security. United Housing Foundation v. it meant commercial paper. J... J. we are not bound by legal formalists. 389 U. 168 focusing on the economic substance rather than form of the instrument or transaction. 2d 795.. Justice Stevens. at 113-‐14. 494 U. 332. Tcherepnin v. concurring) (“[T]here is no apparent reason 41 .”). 165 but it would probably not apply to Bitcoin. J. e.”) (Stevens. 957 (1990) (Stevens. 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 term. concurring). 170 Judge Friendly. 165 See SOLOMON. draft. supra note 97. and which has a maturity at the time of issuance of not exceeding nine months…”164 One commentator has concluded that this exemption would apply to local paper currency.S. 168 E. Bogue Electric Manufacturing Corp.
15 U. 4412 (1961).. 1079 n. agricultural.S. 2d 795. 875 Before the Senate Comm. currency generally does not resemble a security. does not pose risk for the public (even if they purchase a lot of it). pp.. 1st sess.” 174 Like commercial paper. 1st Sess. on Banking and Currency. 95 (1933). No. 799-‐800 (2d Cir 1973) (Friendly. Zeller v. Reg. 47 on S.. 4412 (1961). See Zeller v. 3-‐4). and may not be safe or liquid. 463 F. 875 Before the Senate Comm.S. 476 F. 875. Bogue Electric Manufacturing Corp. 2d 795. Zeller v. 799-‐800 (2d Cir 1973) (Friendly.. 2d 1075. It is significant that section 3(a) (10) of the 1934 act exempts ‘currency’ from the definition of security.commercial paper. 1st sess. 476 F. 1092. 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. “only second to Government bonds. 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. at 94. Bitcoin may fall under the literal definition of “currency. may pose risks for investors..C. Although this legislative history refers mainly to the 1933 Act exemption (which says nothing about “currency”).”). Ernst & Young. the Supreme Court noted that “the fundamental purpose undergirding the Securities Acts is to eliminate serious abuses in a largely unregulated securities market…. Hearings on S.172 was generally not offered to the public.) (“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. In Reves..) approving of the SEC’s reading of the legislative history).”). No. REG. No.173 and because commercial paper was considered extremely safe. 171 Reves at 955-‐957 (Stevens. 1st Sess. 957 (1990) (Stevens.. or industrial transactions”) (quoting Rep.. and is very safe and liquid. Bitcoin may resemble a security.) approving of the SEC’s reading of the legislative history). J. (1033). 799-‐800 (2d Cir 1973) (Friendly. 9158.” but it is also unlike the commercial paper that Congress exempted.’ During the hearings on the 1933 act. 26 Fed. Bogue Electric Manufacturing Corp.. Securities Regulation 796 (1961). as discussed above. 173 Securities Act Rel. pp. 3-‐4). Judge Friendly and Justice Stevens have assumed that Congress had the same intent for the 1934 Act exclusion.12 (7th Cir. 73d Cong. 494 U. 9158. 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).Congress therefore did not attempt to precisely cabin the scope of the to construe § 3(a)(10) of the 1934 Act differently” than § 3(a)(1) of the 1933 Act). 73rd Cong. concurring). at 94.171 a particular type of short term debt. 42 . 2 Loss. 9159 (1961) (“commercial. 26 FED. J. (1033). No. J. 174 Sanders v. Reves v.. Bogue Electric Manufacturing Corp.. 172 Securities Act Rel. on Banking and Currency. 476 F. 875. 2d 795. Inc. because it was used in commercial rather than investment transactions. 1972) (quoting Hearings on S. 47 on S. 9159 (1961)(quoting Rep. 73rd Cong. § 78c(a) (10). J. John Nuveen & Co. 73d Cong.
f. 81-‐83 (1996) (construing the words “current money” in an anti-‐counterfeiting statute). Solomon.g. their use in connection with an investment contract or other transaction constituting a security does not immunize the transaction from the antifraud rules. when faced with the argument that Bitcoin is a “currency” and therefore exempted.e. because it is anonymous and decentralized. a court is likely. J. Reves at 955-‐56 (“The Courts of Appeals have been unanimous in rejecting a literal reading of the [short term note] exclusion.176 A textual argument may support this purposive argument: by “currency. Fraud. Conclusion Bitcoin is novel digital currency that has the potential to be a significant player in the micropayment and virtual world commerce markets. it meant commercial paper. 515.” 175 Thus."). indicate that 175 Reves at 949 (citations and quotations omitted). or banknote) that circulates as a medium of exchange. ‘Current money. Every species of coin or currency.’ that which is generally used as a medium of exchange..”) (Stevens. 98 Minn.” (citations omitted)(emphasis added)).. 178 See. State v. Bromberg. It is synonymous with ‘lawful money. Rather. Furthermore.’ Whatever is intended to.”). While experiences with previous currencies that have had no backing by either commodities or government entities.” Congress did not mean anything “that circulates as a medium of exchange” 177 but instead money that is “current” or generally accepted in some geographic or political area (i. not investment securities. 520-‐21 (1906) (“‘Current money’ means money which passes from hand to hand and from person to person and circulates through the community. government note. respond that Congress did not mean to exempt a currency that is also a security. It is also a great alternative currency for goldbugs who prefer to hold currencies fully backed by commodities. Lewis D. circulate as money. Alan R. Securities Law. 5 KAN.178 The narrow definition would likely exclude bitcoins until bitcoins become generally accepted in any geographical or political area.L. 177 See Black’s Law Dictionary (9th ed. Local Currency: A Legal and Policy Analysis. and does actually. it enacted a definition of ‘security’ sufficiently broad to encompass virtually any instrument that might be sold as an investment. 176 C. They have instead concluded that ‘when Congress spoke of notes with a maturity not exceeding nine months. 2009) (“An item (such as a coin. e.Securities Acts. Quackenbush. J. such as the Iraqi Swiss Dinar. 43 . Lawful money. concurring).6 (321) (1971) ("Even if short term notes are effectively excluded from the definition of security. 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. POL’Y 59.. § 4. & PUB. and therefore difficult to shut down. SEC Rule 10b-‐5. “current money”).
potential users and investors should be aware of the many risks inherent in using such a young technology. banking without a charter. a bitcoin may be a “security” within the meaning of the federal securities laws. including general antifraud rules. Furthermore. including tax evasion. Bitcoin currently operates in a legal grey area. 44 . other legal issues that have not been analyzed in this paper are probably significant. Most importantly.Bitcoin may succeed. state escheat statutes. 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. and money laundering. subjecting bitcoins to a vast regime of regulations. However.