Avoiding Liability: Changing the Regulatory Structure of Cryptocurrencies to Better Ensure Legal Use

Author:Allison M. Lovell
Position:J.D. Candidate, The University of Iowa College of Law, 2019; B.A., University of Illinois at Urbana-Champaign, 2016
Pages:927-955
SUMMARY

Monitoring the transactions consumers in the United States make when buying and selling virtual currency requires an inventive regulatory system because many types of virtual currency, like Bitcoin, are operated anonymously and independently. In the United States today, the Internal Revenue Service (“IRS”) has little structure in how it monitors cryptocurrencies, merely classifying them as... (see full summary)

 
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927
Avoiding Liability: Changing the
Regulatory Structure of Cryptocurrencies
to Better Ensure Legal Use
Allison M. Lovell*
ABSTRACT: Monitoring the transactions consumers in the United States
make when buying and selling virtual currency requires an inventive
regulatory system because many types of virtual currency, like Bitcoin, are
operated anonymously and independently. In the United States today, the
Internal Revenue Service (“IRS”) has little structure in how it monitors
cryptocurrencies, merely classifying them as property and having the taxpayer
report all losses and gains subject to the rules of personal property. This
classification is difficult to apply because the IRS has little control over how
the system is regulated. To solve this issue, the United States should either
outlaw the use of cryptocurrency altogether or reclassify virtual currency as
foreign currency. Making virtual currency use illegal might not be the most
practical solution because of its prominence in the market today, but it would
provide the federal government a clear way to deal with cryptocurrency. If the
United States reclassifies virtual currency as a foreign currency, there would
be an established regulatory framework in place that the IRS would be able to
follow when attempting to monitor the use of virtual currency. With either
solution, the United States will be better equipped to regulate the financial
marketplace of virtual currencies.
I.INTRODUCTION ............................................................................. 928
II. HISTORY AND REGULATION OF CRYPTOCURRENCY ....................... 929
A.WHAT IS A CRYPTOCURRENCY? ................................................ 929
B.BITCOIN .................................................................................. 931
1.Structure ........................................................................ 931
2.How the System Operates ............................................. 933
C.UNITED STATES REGULATION OF CRYPTOCURRENCY ................. 934
*
J.D. Candidate, The University of Iowa College of Law, 2019; B.A., University of Illinois
at Urbana-Champaign, 2016. Thank you to my parents for the lifetime of love and support,
especially for their encouragement while I pursue my legal career. I would also like to thank my
friends for listening to me discuss the publication process and cryptocurrency for months on end.
928 IOWA LAW REVIEW [Vol. 104:927
1.Importance of Classifying Cryptocurrency .................. 934
2.Classification Within the Existing Tax Structure ........ 936
III.PROBLEMS REGULATING BITCOIN IN THE UNITED STATES
AND OTHER COUNTRIES ............................................................... 938
A.ISSUES WITH BITCOINS STRUCTURE IN THE UNITED STATES ...... 938
1.Criminal Activity ............................................................ 938
2.Failure to Report Bitcoin in Taxes ............................... 940
B.FOREIGN COUNTRYS REGULATION OF CRYPTOCURRENCY .......... 944
1.China .............................................................................. 944
2.Japan .............................................................................. 945
3.Iceland ........................................................................... 947
IV.CHANGING HOW THE UNITED STATES CLASSIFIES
CRYPTOCURRENCY ......................................................................... 948
A.FOLLOW CHINA/ICELANDS MODEL TO ELIMINATE
BITCOIN USAGE ....................................................................... 948
B.FOLLOW JAPANESE MODEL TO TREAT CRYPTOCURRENCIES
AS FOREIGN CURRENCY ............................................................ 950
V.CONCLUSION ................................................................................ 953
I. INTRODUCTION
Money is a tool of exchange, which can’t exist unless there are goods
produced and men able to produce them. Money is the material
shape of the principle that men who wish to deal with one another
must deal by trade and give value for value. . . . Money is made
possible only by the men who produce.1
When Ayn Rand wrote those words in 1957, she could not have known
that she was describing cryptocurrency, because the Internet did not yet exist.
However, Rand was able to loosely describe todays preeminent form of
cryptocurrency—Bitcoin.2 The new structure of cryptocurrency is similar to a
“deal by trade” where different consumers are willing to exchange “value for
value” based upon work performed by the men willing to produce the
electronic currency.3 While coins and paper currency are still one of the most
prominent forms of currency today, virtual currency has emerged and will
1. AYN RAND, ATLAS SHRUGGED 313 (1957).
2. See generally Daniel Shane, Bitcoin: What’s Driving the Frenzy?, CNN MONEY (Dec. 8, 2017,
6:23 AM), http://money.cnn.com/2017/12/07/investing/bitcoin-what-is-going-on/index.html
(explaining the phenomenon behind Bitcoin’s increasing popularity as an alternative means of
exchange, giving new meaning to the term “money”).
3. See RAND, supra note 1, at 313.

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