Virtual Currency
| Publication year | 2018 |
| Author | By Puneet V. Kakkar* |
By Puneet V. Kakkar*
A little over ten years ago, Satoshi Nakamoto mined the first "block" of a blockchain that would operate Bitcoin, a new deregulated virtual currency.1 The operation of Bitcoin was simple yet ground-breaking: Using the technology of cryptography, and the use of a blockchain (or distributed ledger), two parties could transact directly with each other without a third-party intermediary, such as a bank.2 Since that time, over 1,000 virtual currencies have emerged, drawing upon the same general principle of a distributed ledger upon which a community of users (much like the Internet) verifies transactions and balances. Over the past ten years, Bitcoin, and virtual currencies generally, have been used as property (which increases and decreases value), mediums of exchange for goods and services, and transfer of funds between parties. Virtual currency has even allowed people to transact around the world only with the use of a digital device. In May 2013, the market capitalization of Bitcoin was approximately $1.3 billion, with one Bitcoin worth approximately $139. Around five years later, in January 2018, 1 Bitcon exchanged for approximately $14,000 and bore a market capitalization of $229 billion.3 In December 2018, the value of 1 Bitcoin decreased to approximately $3,400, with a market capitalization of $73 billion.4
Overall, 2018 demonstrated that while values for virtual currency can be volatile over time, its place in American society is here to stay. As a result, the role of virtual currency makes its way into lawsuits. Though states and the federal government are beginning to consider how to statutorily regulate the roles of cryptocurrency in everyday lives, government agencies and courts are applying existing law and precedent to address these changing times and technologies and embrace new issues posed by virtual currency.
Virtual currency (also known as crypto-currency or digital currency) is generally defined as an electronic-sourced unit of value that can be used as a substitute for fiat currency (i.e., currency created and regulated by a government). Virtual currency exists entirely on the Internet and is not stored in any physical form. It is not issued by any government, bank, or company and is instead generated and controlled through computer software operating on a decentralized peer-to-peer network, like the Internet.
Bitcoin is the most prominent type of virtual currency, which allows users to transfer funds more anonymously than would be possible through traditional banking and credit systems. Bitcoins are a decentralized form of virtual currency having no association with banks or governments. Users store their Bitcoins in digital "wallets," which are identified by unique electronic "addresses." To access Bitcoins on the public ledger, an individual must use a public address (or "public key") and a private address (or "private key"). The public address can be analogized to an account number while the private key is like the password to access that account. Even though the public addresses of those engaging in Bitcoin transactions are recorded on the public ledger, the "Blockchain," the true identities of the individuals or entities behind the public addresses are not recorded. If, however, a real individual or entity is linked to a public address, it would be possible to determine what transactions were conducted by that individual or entity. Bitcoin transactions are, therefore, described as "pseudonymous," meaning they are partially anonymous. Generally, individuals can purchase or sell Bitcoin in a peer-to-peer context (i.e., another individual willing to exchange Bitcoin for cash) or from exchange companies. Individuals can also exchange cash for Bitcoins at kiosk machines (i.e., ATMs). Bitcoins are created by the process of "mining," whereby those who solve complicated algorithms to validate transactions on the Blockchain are awarded new Bitcoins.
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Virtual currency presents great promises. People can transact with others quicker, faster, and across the world without having to use intermediaries. Where access to finance is difficult, or access to brick-and-mortar financial institutions is impractical, virtual currency offers an avenue of liquidity. Some people also prefer the pseudonymous nature of virtual currency; this, however, highlights the potential nefarious uses of virtual currency. Because of the quasi-secretive nature of the currency and its lack of affiliation with any government, virtual currency has also been used to facilitate illegal transactions, such as the means of payment for terrorist financing, drugs, and violent crimes. Indeed, in 2018, a federal grand jury, convened by Special Counsel Robert Mueller, charged officers of Russia's Main Intelligence Directorate of the General Staff for hacking into the computers of U.S. persons and entities involved in the 2016 U.S. presidential election. The charges included allegations that conspirators used Bitcoin to lease a server in Malaysia that hosted the website dcleaks. com, which was used to release stolen emails of those involved in the U.S. presidential campaign.5
Congress has not yet passed legislation governing virtual currencies. Recently, members of Congress have introduced legislation addressing the use of crypto currencies and hosted roundtables to learn about the technology and solicit perspectives from various stakeholders. For example, on September 25, 2018, U.S. Congressman Warren Davidson (R-OH) hosted a bipartisan roundtable discussion, "Legislating Certainty for Cryptocurrencies" with Members of Congress and stakeholders to discuss a regulatory framework.6 At the state level, in 2017, the California legislature introduced the "Virtual Currency Bill," which would have required businesses that dealt with virtual currency to obtain a state-issued license. The bill expired in 2018 before a vote could be held.7
Though there is no legislation regulating the use of virtual currency, regulatory agencies - particularly at the federal level - have embraced the multi-faceted functions of virtual currency. In 2013, the Department of Treasury's Financial Crimes Enforcement Network ("FinCEN") issued guidance as to the applicability of regulations implementing the Bank Secrecy Act to those who use, administer, or exchange convertible virtual currency.8 In 2014, the Internal Revenue Service issued a notice describing how general tax principles applied to transactions using virtual currency, including that virtual currency would be treated as "property" and, if accepted as payment for goods or services, is taxable income.9 In 2017, the Securities and Exchange Commission ("SEC") issued a report of investigation to make clear to those who would use blockchainenabled means (i.e, virtual currencies) for capital raising (in a process known as an "Initial Coin Offering") may be subject to U.S. federal securities laws.10
Though virtual currency is a new technology with few statutes directly...
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