The Nature of the Form: Legal and Regulatory Issues Surrounding the Bitcoin Digital Currency System

AuthorJoshua J. Doguet
Pages1119-1153
The Nature of the Form: Legal and Regulatory Issues
Surrounding the Bitcoin Digital Currency System
We are at the beginning of a mighty struggle for control of the
Internet—the web links everything and very soon it will mediate
most human activity—because the Internet has fashioned a new and
complicated environment for an age-old dilemma that pits the
demands of security with the desire for freedom.1
INTRODUCTION
Technology experts have described Bitcoin as a “masterpiece of
technology”a work of genius on par with the Mona Lisa.2 Its
beauty, though, is not outwardly apparent but instead lies at the heart
of its design. Bitcoin is a digital currency system created to facilitate
Internet commerce. It does this by using digital signatures and peer-
to-peer technology to curtail the system’s need for trusted third
parties, such as financial intermediaries and central banks.3 Bitcoin’s
architecture gives it several advantages over alternative payment
systems: transaction costs are lower, privacy is enhanced, and
inflationary pressures within the system should be reduced.4
“Currency . . . is exactly like religion. It’s based entirely on
faith.”5 This is especially the case with Bitcoin; no government,
corporation, or commodity (like gold) backs the digital currency.6
Practically, however, it is not very different from established fiat
Copyright 2013, by JOSHUA J. DOGUET.
1. Presentation, Misha Glenny, Hire the Hackers!, TED (Sept. 2011),
available at http://threatpost.com/en_us/blogs/ted-global-misha-glenny-says-hire-
hackers-091511.
2. Ari Altstedter , Bitcoins Create Truly Democratic Policy, Followers Say,
CANADA.COM (Jul. 22, 2011) (on file with author) (quoting IT consultant, Bruce
Wagner) (internal quotation marks o mitted).
3. Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System,
BITCOIN.ORG, 1–2, 4 (2008), http://bitcoin.org/bitcoin.pdf. See discussion infra
Part I.B.1–2.
4. Id. at 1, 6; Andy Greenberg, Crypto Currency, FORBES (May 9, 2011),
http://www.forbes.com/forbes/2011/0509/technology-psilocybin-bitcoins-gavin-
andresen-crypto -currency.html. See discussio n infra Part I.B.2.
5. Matthew Yeomans, The Quest for a Global E-Currency, CNN (Sept. 28,
1999), http://articles.cnn.com/1999-09-28/tech/9909_28_global.e.currency.idg_1
_credit-card-debit-global-internet-project/3 (quoting Jack Weatherford, author of
THE HISTORY OF MONEY).
6. Video, Bitcoin & the End of State-Controlled Money: Q&A with Jerry
Brito, REASON.COM, http://reason.tv/video/show/jerry-brito-on-bitcoin (last visit ed
Oct. 5, 2011).
1120 LOUISIANA LAW REVIEW [Vol. 73
currencies.7 Bitcoin’s value fluctuates with respect to the value of
other currencies, and Bitcoins can be spent anywhere a merchant is
willing to accept them.8
In 2008, an enigmatic programmer, known only as Satoshi
Nakamoto, first proposed the idea for Bitcoin on a cryptography
email list.9 Early the following year, he published the open-source
software that implemented his system online.10 Since then, a
growing community of developers has maintained the software,
which has been downloaded hundreds of thousands of times by
individuals all over the world.11 At one point, Bitcoin attained a
circulation worth approximately $100 million.12
Bitcoin’s positive attributes should make it attractive to
consumers and merchants.13 If it attains a critical mass with both
groups, it could one day become a mainstream currency.14 In fact, as
a result of the increased access our society has to networked
technology, some have intimated that the use of private, digital
7. “Fiat money . . . [is] not redeemable for any co mmodity; its status as
money is conferred initially by the government but eventually by common
experience.” WILLIAM A. MCEACHERN, ECONOMICS: A CONTEMPORARY
INTRODUCTION 732 (6th ed. 2003).
8. Paul Krugman, Golden Cyberfetters, N.Y. TIMES (Sept. 7, 2011, 12:20
AM), http://krugman.blogs.nytimes.com/2011/09/07/golden-cyberfetters; Bitcoin
Has Got Geeks Excited. What About Economists?, THE ECONOM IST, Jun. 18,
2011, at 83, available at http://www.economist.com/node/18836780. This aspect
of Bitcoin gives i t an advantage o ver digital, com munity currencie s that can only
be used within the community that created them, such as Second Life’s Linden
Dollars, Facebook Credits, and World of Warcraft Gold. Reuben Grinberg,
Bitcoin: An Innovative Digital Currency, 4 HASTINGS SCI. & TECH. L.J. 159, 171–
72 (2012). See discussion infra Part III.A.
9. It is likely that the programmer’s na me is actually a pseudonym. Tom
Simonite, What Bitcoin Is, and Why It Matters, MIT TECHNOLOGY REVIEW (May
25, 2011), http://www.technologyreview.com/computing/37619. The idea at the
core of the Bitcoin system actually comes from “a concept called crypto-currency,
which was first described in 1998 by Wei Dai.” About Bitcoin, BITCOIN.ORG,
http://bitcoin.org/about.html (last visited Sept. 20, 2011).
10. Simonite, supra note 9.
11. About Bitcoin, supra note 9 (listing developers that have contributed to
the Bitcoin software); Download Statistics: Bitcoin, SOURCEFORGE, http:
//sourceforge.net/projects/bitcoin/files/Bitcoin/stats/timeline?dates=2010-09-22
+to+2011-09-22 (last visited Sept. 20, 2011).
12. Thomas Lowenthal, Bitcoin: Inside the Encrypted, Peer-to-Peer Digital
Currency, ARS TECHNICA, http://arstechnica.com/tech-policy/news/2011/06/bit
coin-inside-the-encrypted-peer-to-peer-currency.ars (last visited Sept. 23, 2011).
As of April 10, 2013, “the value of all outstanding Bitcoins is a bit less than $3
billion.” Timothy B. Lee, Nobody Knows If There’s a Bitcoin Bubble, FORBES
(Apr. 10, 2013, 12:09 PM), http://www.forbes.com/sites/timothylee/2013/04
/10/nobody-knows-if-bitcoin-is-a-bubble.
13. Grinberg, supra note 8, at 160. See discussion infra P art I.B.2.
14. Altstedter, supra note 2.
2013] COMMENT 1121
currencies may prove to be the norm in the future. Even their limited
success could have a substantial impact on the fate of more
traditional currencies.15
The Bitcoin system itself is still in the early stages of
development.16 Its massive growth in a relatively short timeframe
may predominantly be credited to the excitement it has given geeks
and libertarians.17 The partial anonymity provided b y the system,
however, has led to a concern that the currency will be increasingly
used for criminal purposes.18 Additionally, Bitcoin’s lack of
government oversight also gives way to another troublesome aspect
of the system: a lack of consumer safeguards.19 As one might
conclude, where large sums of money flow, legal consequences are
sure to follow.20
While Bitcoin is certainly not the first digital currency to gain
traction online,21 its innovative architecture is sure to make direct
regulation impractical.22 Even though Bitcoin raises a number of
concerns that its community cannot fully address, a complete
prohibition on its use would be a rash and ineffective response.23
Ultimately, regulatory efforts directed at Bitcoin exchanges would
best serve the interests of lawmakers.24 However, due to the
international nature of both the system and its actors, such controls
may only be successful at the domestic level.25
15 . Jennifer L. Sc henker, The Future of Money, INFORMILO (Jan. 23, 2012),
http://www.informilo.com/20120123/future-money-488; Simonite, supra note 9.
16. Scott Thill, Bitcoin: A New Kind of Money That’s Beyond the Reach of
Bankers, Wall St., and Regulators?, GUERNICA (Aug. 2, 2011), http://www
.guernicamag.com/blog/2941/scott_thill_bitcoin_a_new_kind.
17. Schenker, supra note 15. See discussion infra Part III.A.
18. Cindy Cohn, EFF and Bitcoin, ELECTRONIC FRONTIER FOUNDATION (Jun.
20, 2011), https://www.eff.org/deeplinks/2011/06/eff-and-bitcoin. See discussion
infra Part III.A.
19. Id. See discussion infra Part III.B.
2 0. F. Gregory Lastowka & Dan Hunter, The Laws of the Vi rtual Worlds, 92
CAL. L. REV. 1, 8 (2004).
21 . WebMoney, E-Gold, Pecunix, and Liberty Reserve are digital currencies
that are based on, or backed by, the price of gold. Peter C. Tucker, The Digital
Currency Doppelganger: Regulatory Challenge or Harbinger of the New
Economy?, 17 CARDOZO J. INTL & COMP. L. 589, 598 (2009). Flooz and Beenz
were corporate-backed digital currencies that failed during the “dot-com bust” due
to lack of consumer interest. Mar k W. Vigoroso, Beenz.com Closes Internet
Currency Business, E-COMMERCE TIMES (Aug. 17, 2001, 6:39 PM), http://www
.ecommercetimes.com/story/12892.html.
22. See discussion infra Part IV.
23. See discussion infra Part IV.A, C.
24. See discussion infra Part IV.B.
25. Id.

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