Is Bitcoin rat poison? Cryptocurrency, crime, and counterfeiting (CCC).

Author:Engle, Eric
Position:Currency Laws in Ordinary Federal Legislation through Conclusion: The Bitcoin Bubble, with footnotes, p. 365-393

Currency Laws in Ordinary Federal Legislation

i. The Stamp Act

The Stamp Payments Act is a U.S. Federal law which prohibits circulation of privately issued currency worth less than one dollar: (147) recall, that when the dollar was pegged to gold it was much more valuable than today because coinage had precious metal content and dollars were redeemable in specie. (148) Consequently the specie value of U.S. coinage was greater than the nominal value. (149) This encouraged coin hoarding, depleting the treasury's store of precious metals. (150) Consequently, private persons facing a shortfall in "small change" emitted redeemable tokens denominated as U.S. money to make up for the shortfall. (151) The stamp act was enacted to combat coin hoarding: scrip worth less than one dollar is illegal. (152)

Case-law on the stamp act has since provided several factors for seeing when private scrip violates U.S. laws prohibiting counterfeiting, forming legal principles that should apply by analogy to other laws, i.e. scrip over one dollar of value. (153) The following factors are relevant when analyzing whether a given scrip is lawful.

* Scrip that only circulates locally, not nationally, is likelier to not violate United States law. (154)

* Scrip that can only be redeemed for goods, is also likely not to be found in violation of laws against counterfeiting. (155)

* Scrip that does not visually resemble U.S. money, is less likely to violate U.S. laws against counterfeiting. (156)

* Finally, scrip that resembles a commercial check is less likely to violate U.S. counterfeiting laws. (157)

While these cases all address the stamp act, logic implies that they would apply to prohibitions against counterfeit generally by legal analogy, and not merely to counterfeits below a value of one dollar, which in fact are de minimis due to the devaluation of the fiat dollar as compared to the gold standard dollar. (158)

ii. The Counterfeiting Statutes

The Stamp Act limits itself to what are now small denominations and covers scrip as well as counterfeit. (159) The federal counterfeiting statute (160) prohibits the creation of larger sums of money. (161) The counterfeiting statute is intended to protect the monopoly of the United States dollar as a means of exchange. (162) Are cryptocurrencies counterfeits?

At least one U.S. court has found bitcoin to be currency, (163) although 18 U.S.C. [section] 485 requires similarity between the counterfeit object and U.S. money, 18 U.S.C. [section]. 486 does not require similarity. (164) Thus, "Bitcoin has the potential to be deemed a counterfeit and rendered illegal" (165) because it competes against the dollar as a general medium of exchange and thereby violates the federal money monopoly. (166) If the factors which indicate when scrip is unlawful under the Stamp Act apply by analogy to the federal counterfeiting statute then it is clear that cryptocurrency violates the counterfeiting statute. (167) Considering these factors in the case of cryptocurrencies such as bitcoin: bitcoin circulates globally, is not redeemable for goods sold by the emitter and competes with the dollar. (168) Taken together, those facts indicate cryptocurrency should be seen as counterfeit. (169) Although bitcoin does not resemble U.S. money, it also does not resemble a check because it is not an unconditional promise to pay a sum certain on a determinable date. (170) Cryptocurrency is scrip, but given these factors the logical conclusion is that cryptocurrency is unlawful scrip and is in violation of the federal counterfeiting statute because it competes with the dollar as a general medium of exchange.

iii. Money Laundering

Cryptocurrency also raises the problem of money laundering. (172) Money laundering is the attempt to disguise the source or destination of criminally tainted funds. (173) Money laundering seeks to make dirty money appear clean. (174)

Generally, money laundering can be divided into three stages: (1) placement; (2) layering; and (3) integration. For the first step, money, usually in the form of cash generated from criminal activities, is 'placed' or converted into a less bulky and noticeable form (e.g., diamonds). In the second step, multiple financial transactions are made to create a long and twisted trail, hence putting 'layers' between the origin of the dirty money and its eventual entrance into the clean monetary supply. Finally, through a front business for instance, the dirty money is integrated into mainstream society as part of the front business' income. (175) Cryptocurrency makes placement and layering easier than it would otherwise be and is an ideal vehicle for money laundering due to anonymity. (176) Money laundering is a federal crime under the Bank Secrecy Act ("BSA") (177) and the Money Laundering Control Act of 1986. (178) We discuss the historical evolution of anti-money laundering laws ("AML") to show why they are somewhat inadequate to govern cryptocurrency transactions and how to strengthen the bans against money laundering so as to prevent and punish use of crypto currency as a tool of money laundering. (179)

Money laundering was first outlawed in the United States by the Bank Secrecy Act ("BSA") and then also by the Money Laundering Control Act ("MLCA"). (180) The BSA aims at transactions over $10,000, which caused money launderers to circumvent that law by engaging in multiple transactions of less than $10,000. (181) The MLCA was enacted to cover that weakness of the BSA. 1 (82)

Money laundering statutes initially targeted organized crime, focusing on the criminal and identifying the source of their income in order to cripple organized crime by drying up its stream of revenue. (183) More recently, anti-money laundering laws are also used to combat terrorism. (184) The contemporary institutional approach to money laundering focuses attention on the institutions which receive tainted cash (185) rather than the criminal, through reporting requirements and forfeiture statutes, (186) which require only a civil standard of proof and may even shift the burden of proof to the property owner. (187) Due to this shift, which more often focuses on financial institutions, recent AML regulations require financial institutions responsible to "know your customer" ("KYC"), (188) e.g., through "Customer Identification Programs ("CIP")," (189) to maintain records of transactions (190) and to report suspicious activity. (191) Although the institutional approach is more effective, U.S. money laundering statutes do not focus on the destination of clean money for a dirty transaction. (192) This loophole in the law, having been identified, (193) needs to be closed by legislative amendment.

Money transmitters must have effective anti-money laundering programs to prevent use of their business as a money laundering platform. (194) Although individual bitcoin users are not Money Service Businesses, Bitcoin exchanges can be a money service business and thus subject to SEC regulation and anti-money laundering laws.

(195) The U.S. Treasury Department's Financial Crimes Enforcement Network ("FinCEN" (196)) regards bitcoin administrators (197) as money transmitters (198) and thus obligated to register with FinCen. (199)

Cryptocurrency as a Security

Cryptocurrency's legal classification as a security or currency is somewhat uncertain. (200) Bitcoin has been found to be a security in at least one U.S. (201) court. However, a different U.S. court has found bitcoin to be currency. (202) Currency itself is not a security and thus is not subject to SEC regulation, (203) but currency exchanges and futures on currency are subject to SEC regulation. (204) Cryptocurrency brokers may also be required to register with the SEC. (205)

This paper, consistent with these federal court rulings, argues that cryptocurrency can be both a currency and a security. Cryptocurrencies such as bitcoin are rightly subject to laws against counterfeiting and laws against stock fraud because of their dual nature as a medium of exchange and as a speculative instrument: the federal case which held bitcoin to be currency is not inconsistent with federal case which found bitcoin to be a security. (206) Cryptocurrencies are currencies, and yet may also be subject to SEC jurisdiction as a security, depending on the specific facts of the case at bar. (207) The following hypothetical illustrates the logic of double regulation of the hybrid instrument. If I were to forge federal treasury bonds and negotiate them then I would be in violation of both the anti-fraud provisions of the securities laws and would be guilty of counterfeiting. (208) Counterfeiting and stock fraud are not mutually exclusive crimes; they can be complementary criminal acts. (209) Thus, bitcoin is a currency, yet can also be a security. (210) The fact that cryptocurrency has played a key role in many frauds and other crimes further justifies double regulation. (211)

We now explore the definition of security (212) to see when and why cryptocurrency is subject to SEC rules and regulations.

i. What is a Security?

Although cryptocurrencies are subject to counterfeiting laws, their purchase or sale can also be a violation of the rules and regulations of the Securities and Exchange Commission. (213) The Securities and Exchange Act defines security as "any note, stock, treasury stock, security future, security-based swap, bond ... [or] investment contract" (214) and subjects securities to regulation for issuance and compliance. (215)

Does cryptocurrency fall into any of these categories? Is cryptocurrency a security?

The term "security" is to be liberally interpreted in the context of actual economic facts. (216) Notes may be either securities or commercial paper. (217) Notes are presumed to be securities, (218) though the presumption is rebuttable. (219) Commercial paper that falls due within nine months of issuance is exempted from SEC regulation unlike longer term notes...

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