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

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 BITCOIN’S STRUCTURE IN THE UNITED STATES ...... 938

1.Criminal Activity ............................................................ 938

2.Failure to Report Bitcoin in Taxes ............................... 940

B.FOREIGN COUNTRY’S 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/ICELAND’S 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 today’s 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.