Rethinking Virtual Currency Regulation in the Bitcoin Age

• Publication year: 2021

RETHINKING VIRTUAL CURRENCY REGULATION IN THE BITCOIN AGE

Kevin V. Tu and Michael W. Meredith

Abstract: This Article investigates an increasingly important yet under-developed body of law: regulation of virtual currency. At its peak in March of 2014, the daily volume of Bitcoin transactions in United States dollars exceeded $575,000,000. The growing mainstream acceptance of Bitcoin, however, is best illustrated by the growing number of leading merchants that have decided to accept Bitcoin payments. While Bitcoin's rise as an alternative payment method is well-chronicled, Bitcoin's impact extends further due to its use as an investment vehicle and its ability to spur the growth of an industry of Bitcoin-based businesses. Despite increasingly widespread use, Bitcoin (and other virtual currencies) have largely operated without the burden of regulation. Why? Like the potentially transformative innovations that preceded Bitcoin, virtual currency raises unique challenges for which existing legal models may be unprepared. As policymakers struggle to catch-up, the effort to develop an appropriate regulatory regime for virtual currency is at a critical juncture.

The response in the United States has thus far involved regulatory bodies acting independently to clarify the treatment of virtual currency under a variety of different laws designed to regulate traditional payment systems, financial services, and investments. This Article argues, contrary to this approach, that a narrow focus on the technical application and extension of existing law creates a deficient regulatory regime. Instead, we suggest that policymakers should: (1) engage the various agency stakeholders to promote cross-communication; (2) think more globally about the wide spectrum of issues arising from virtual currency; and (3) embrace the unique and distinct characteristics of virtual currency. In support of this proposition, we show that refocusing on the collection of policy goals advanced by existing law offers policymakers an additional tool to aid in the development of a comprehensive, cohesive, and appropriately-scaled virtual currency regulatory model.

INTRODUCTION ................................................................................ 272

I. AN INTRODUCTION TO VIRTUAL CURRENCY AND BITCOIN ....................................................................................... 277

A. Solving the Double-Spending Problem ................................. 278

B. Benefits of Bitcoin ................................................................. 282

II. BITCOIN IN THE MARKETPLACE ........................................... 284

A. Bitcoin Payments Online ....................................................... 286

B. Bitcoin Payments at "Brick and Mortar" Stores .................... 290

C. Bitcoin as an Investment ........................................................ 292

D. Bitcoin Services ..................................................................... 293

III.CURRENT LEGAL AND REGULATORY ENVIRONMENT ... 296

A. Potential Impediments to Regulating Bitcoin ........................ 296

1. No Centralized Entity ................................................... 296

2. Increased Anonymity ................................................... 297

3. Susceptibility to Theft .................................................. 299

B. Efforts to Regulate ................................................................. 300

1. Foreign Response ......................................................... 301

2. United States Response ................................................ 304

a. Uncertain Scope of Existing Law ............................... 305

b. Clarifying Existing Law ............................................. 306

c. Virtual Currency Specific Legislation ........................ 311

IV. REFOCUSING ON REGULATORY OBJECTIVES ................... 313

A. Federal Prohibitions on Private Currencies ........................... 315

1. Stamp Payments Act Policy Goals ............................... 316

2. Application to Virtual Currency .................................. 319

B. Federal Anti-Money Laundering Legislation ........................ 321

1. Bank Secrecy Act Policy Goals ................................... 322

a. Reporting Requirements ............................................. 323

b. Recordkeeping and Customer Verification Requirements .............................................................. 323

c. Registration Requirements and Compliance Checks .. 324

d. "Know Your Customer" Provisions ........................... 325

2. Application to Virtual Currency .................................. 326

C. State Financial Consumer Protection Law ............................. 331

1. Policy Goals of State Money Transmitter Laws .......... 331

2. Application to Virtual Currency .................................. 332

D. Federal Securities Regulation ................................................ 335

1. Policy Goals of Federal Securities Law ....................... 336

2. Application to Virtual Currency .................................. 337

E. Federal Banking Law ............................................................. 339

1. Policy Goals of Bank Regulation ................................. 340

a. Susceptibility of Banks to Runs and Panics ............... 340

b. The Role of Banks in the Creation and Destruction of Money .................................................................... 341

c. The Role of Banks in the Payment System ................ 342

2. Application to Virtual Currency .................................. 343

a. Is Bitcoin Susceptible to Runs or Panics? .................. 343

b. Is Bitcoin Involved in the Creation and Destruction of Money? ................................................................... 344

c. The Role of Bitcoin in the Payment System .............. 345

CONCLUSION .................................................................................... 346

INTRODUCTION

No longer relegated to relative anonymity, the seemingly limitless potential of decentralized virtual currencies such as Bitcoin has captured the imagination of the public at large.(fn1) Bitcoin was once little known and had limited practical value because few people were willing to accept it as a form of payment. However, the unique characteristics of Bitcoin along with the perceived benefits of Bitcoin over payments in traditional government-backed currency have contributed to its rapid rise in popularity.(fn2) Although still far from being universally accepted, Bitcoin has seen both an increase in its users and widespread growth in the number of merchants (both online retailers and brick and mortar establishments) willing to accept it as a valid form of payment.(fn3) As Bitcoin has become more mainstream, established merchants, including Dell, Expedia, and Overstock.com, have started to accept Bitcoin as an alternative to traditional payment methods such as credit/debit cards.(fn4)

The popularity of Bitcoin has also led to the growth of an industry of virtual currency based businesses designed to facilitate Bitcoin transactions among users. Bitcoin Exchanges, Bitcoin Banks, Bitcoin ATMs, Bitcoin Wallets, and Bitcoin payment gateways have all entered the marketplace.(fn5) Although their business models vary, these third-party service providers can allow for: (1) the exchange of Bitcoin into traditional currency; (2) the purchase and sale of Bitcoin; (3) the online storage of Bitcoin; (4) the transfer of Bitcoin to others; and (5) the acceptance of Bitcoin payments.(fn6)

The potential of Bitcoin, however, is not solely limited to serving as a payment alternative. The fluctuation in value of Bitcoin over time has led many to view it more as a commodity, asset class, or security ripe for speculative investment.(fn7) The price of one bitcoin reached a high of over $1200 in November 2013 with current prices in July of 2014 in the $575 range.(fn8) Despite its volatility, investors have engaged in buying, selling, and trading of Bitcoin in an attempt to achieve a return on investment.(fn9)

Even though Bitcoin has achieved a material level of mainstream use as a form of remittance and is increasingly purchased as an investment, virtual currencies have largely operated free of regulation or legal oversight.(fn10) The growing popularity of Bitcoin, however, has rightfully attracted the attention of policymakers globally.(fn11) Efforts to understand the risks associated with decentralized virtual currencies such as Bitcoin and to implement an appropriate response highlight the unique challenges that face policymakers in creating a consistent, cohesive, and appropriately-scaled legal and regulatory framework for virtual currencies.(fn12)

Attempts to simply categorize Bitcoin into existing regulatory constructs have proven to be difficult.(fn13) Most commonly, the discussion surrounds categorization of Bitcoin as money or property.(fn14) Although Bitcoin shares similarities with both money and property, its unique characteristics result in a materially different risk profile.(fn15) Accordingly, regulation that is tailored to traditional financial services or investment methods may fail to account for the unique attributes of Bitcoin and may also be...