legalstatus

Since the advent of bitcoin, the new form of virtual currency was embroiled in the heated debate of legality. Several characteristics of bitcoin have made it an attractive vehicle for illegal activities. First of all, bitcoin does not have a financial supervisory institution, it enables its users to trade pseudonymously. Engaging in transactions do not reveal personal identities of the user. Thus, bitcoin can be used in transactions of illegal goods, such as drugs, and in money laundering. Moreover, the fact that bitcoin does not require any intermediary in the transaction even facilitated its Thus, the core challenge that lawmakers came to face was how they can fit bitcoin into the existing criminal law framework.

Governments around the world have tried to fit bitcoin into the existing system of crime execution. However, the legality and status of bitcoin should be preceded to build the legal framework for bitcoin. Thus, the applicability of several criminal laws concerning money transmission and laundering is contingent upon the question of whether bitcoin is legally accepted as a currency. However, the lack of a central financial authority in issuing and regulating bitcoin and accountability henceforth leaves the room for dissent on whether bitcoin is a legal currency. The overarching legal question that the applicability of criminal statutes is contingent upon is whether bitcoin can be considered as a legal currency.

In the United States, which is one of major markets for bitcoin, there have been active attempts to create a regulatory framework for bitcoin. For instance, in 2015, the New York State introduced the license system for bitcoin trading, called BitLicense. Also, in September 2016, the bipartisan caucus on blockchain was created in the U.S. Congress to “stay up to speed on evolving digital currency and blockchain technologies, and develop policies that advance them. (Breland, 2016) However, not only the legal debate of bitcoin is still ongoing, leaving its legal status shaky, but also the society lacks the society-wide consensus on the status of bitcoin.

This section explores legal issues surrounding bitcoin through the case study of the United States, which plays a leading role in bitcoin market and is having the most heated debate on bitcoin. Here, I seek to explore key court rulings, and the attempts to introduce the regulatory framework for bitcoin. The study of the U.S. will provide an insight into the bigger context of challenges that each government might face. The text on the general overview on regulations in different countries is provided here: refer to the section on regulation for general overview.

1) The Lawfulness of Bitcoin
While bitcoin is widely in use, the lawfulness of bitcoin still remains contested in the United States. Section 2 of the Stamp Payments Act of 1862 incriminates any action to “make, issue, circulate, or pay out any note, check, memorandum, token, or other obligation for a less sum than $1, intended to circulate as money or to be received in lieu of lawful money of the United States.” (Murphy&Murphy, 2015) Thus, bitcoin can be seen as a violation of federal law on the ground that it interferes with the existing currency system.

2) The Legal Status of Bitcoin as a Currency
The legal status of bitcoin lacks clear definitive grounds yet. For instance, in Germany, there are regulations that concern virtual currency. In Germany, any financial instrument, or “Units of Account,” which refers to an agency of banking business or financial services, need to go through an authorization of the German Federal Financial Supervisory Agency (GFFSA). Section 9 of the German Banking Act specifically offers an exhaustive list of the Units of Account. Included in the list are digital currencies, particularly bitcoin. (Boehm) Thus, this federal law recognizes bitcoin as a lawful medium of financial activities.
Several law enforcement institutions around the world have tried to fit bitcoin into the existing system of crime execution. To do so, it must be established that bitcoin falls into the category of legal currency. Thus, the applicability of several criminal laws concerning money transmission and laundering is contingent upon the question of whether bitcoin is legally accepted as a currency. However, the lack of a central financial authority in issuing and regulating bitcoin and accountability henceforth leaves the room for dissent on whether bitcoin is legal tender. The overarching legal question that bitcoin faces, thus, is whether bitcoin can be considered as legal tender.

Important Court Rulings and Their Implications: Case Study of the United States

One of the most recent key court rulings in the U.S. regarding the legitimacy of bitcoin as an actual currency is the Espinoza v. Florida case, where the defendant was charged of unauthorized money transmissions and money laundering. Defense attorney Frank Andrew Prieto held up a 1966 U.S. quarter in court and asked expert witness Charles Evans, a Barry University economist, “Is bitcoin an actual coin?” “In a sense of a physical piece of base metal?” said Evans, who was paid $3,000 in bitcoins for his appearance in court. “No.” (Bogage, 2016)

The Florida dismissed the charge based on following grounds. Firstly, the statute does not incriminate a direct transaction without a “middleman.” Secondly, the defendant cannot be considered as “money transmitter,” as he was compensated with a “fee.” (Palley, 2016) The Florida judge ruled that bitcoin is not a real currency, as it does not have “tangible wealth.” The major criterion for her judgment seemed to be tangibility of bitcoin’s value, stating that bitcoin “cannot be hidden under a mattress like cash and gold bars.” Thus, as bitcoin did not qualify as “money,”the judge dismissed the charge of unauthorized money transmissions and laundering placed on the defendant.

The recent Florida ruling has been widely hailed by the proponents of bitcoin. Such ruling, which does not negates the status of bitcoin as a currency, is believed to grant users with greater autonomy and leeway from financial institutions and regulations and thus to promote the use of bitcoin over wide. The Espinoza case resonated with past few cases regarding the incrimination of illegal activities that involve bitcoin. For instance, in the Hashfast Technologies case, the Bankruptcy Court for the Northern District of California found that bitcoins are
“not the United States dollars,” and that it does not need to address whether bitcoins are currency. (The National Law Review, 2016)

However, in coming months, another ruling about bitcoin overruled the legal view on bitcoin in the Florida ruling. On September 21, 2016, a New York judge ruled that bitcoin can be seen as a form of funds. In the U.S. v. Murgio case, the district judge ruled against Anthony Murgio, who operated an illegal bitcoin exchange company and had classified information about the JPMorgan hack. (Goldstein, 2016) Here, the judge ruled that “funds” mean “pecuniary resources” and that bitcoins qualify as funds since they can function as a means of payment or exchange. (The National Law Review, 2016)

Notwithstanding with several court rulings that dismissed the charge of money laundering and transmissions, the recent New York court ruling further complicated the current attempts to define bitcoin and incorporate it into the existing legal framework. However, it is a landmark decision in that it is the first court ruling that incriminated the use of virtual currency.

1. Legal Issues Surrounding Bitcoin and Key Court Rulings

As you can see from, the legal ground of bitcoin still remains shaky and uncertain. Despite the lack of consensus on whether bitcoin can be seen as legal tender, there have been several attempts to incorporate bitcoin into the existing framework of criminal law.

1) Money Laundering
The United States: Federal Anti-Money Laundering Law
The federal anti-money laundering laws incriminate financial transactions whose proceeds are used to finance illegal activities. However, the laws impose several requirements, such as recordkeeping by financial institutions, to qualify as “financial transactions.” For instance, the Act 106 of the Bank Secrecy Act stipulates that “financial institutions must file reports of cash transactions exceeding amounts set by the Secretary of the Treasury in regulations, and file suspicious activity reports (SARs) for transactions.” (Murphy & Murphy, 2015) Thus, transactions involving bitcoins cannot be qualified as money laundering due to the absence of such rigorous recordkeeping processes.

The Electronic Fund Transfer Act (EFTA) (Murphy & Murphy 2015)
The Electronic Fund Transfer Act deals with electronic transfers of money. However, its scope is narrowly limited to digital currency that involves a depository institution. The EFTA applies to transfer of funds “initiated by electronic means from a consumer’s account.” It specifically limits the law’s applicable scope to funds that are “held by a financial institution,” which therefore excludes bitcoins, which does not have any governing financial institution. Therefore, the EFTA creates a loophole for transaction activities that involve bitcoin.

2) Tax Fraud
Boehm notes that “as bitcoins are not recognized as traditional money, tax authorities re forced to develop new definitions to categorize Bitcoin revenue as taxable.” To overcome such definitional disparity, Germany, for instance, has defined bitcoin as economic asset, which makes it subject to the Federal Tax Law. (Boehm, 2016)
However, in the United States, the tax status of bitcoin has been contested since the birth of the currency. One major question for taxing bitcoin is whether it should be considered as a currency or property. But in 2014, the Internal Revenue Service has declared that bitcoin would be deem as property in taxing. (Morris, 2016) In November 2016, the IRS requested a transaction record of CoinBase, a bitcoin transaction service firm which was alleged involved in a tax evasion case. (Morris, 2016)

3) Data Thefts / Cybercrimes
For issues related to data thefts and cyber crimes, please refer to the section on security.

2. The Applicability of Criminal Laws on Bitcoin

3. Attempts to Regulate Bitcoin: BitLicense

BitLicense was one of the first federal attempts to regulate the use of bitcoin. It is a form of a business licence issued by the New York State Department of Financial Services. It regulates any type of activities that involve the use of virtual currency. However, this regulatory framework has been hailed as a “total debacle” (Morris, 2016) by many experts.

As the license requires a certain level of the user’s information, it has been regarded as conflicting with anonymity and data privacy, which are primary goals of bitcoin. As a result, several firms that were operating bitcoin transaction business decided to flee (Castillo, 2015) New York and re-establish their business outside of New York. Such phenomenon has been hailed by the “Great Bitcoin Exodus” by the New York Business Journal. At the moment, the Article 78 against the NYDFS has been filed to the New York County Supreme Court challenging the NYDFS's authority to regulate virtual currency. (“Article 78 Against NYDFS”)

Credits:
Kyo Yeon PARK

Sources:
Article 78 Against NYDFS. Web. Retrieved from http://www.article78againstnydfs.com/index.html

Boehm, F. Pesch, P. Bitcoin: A First Legal Analysis: with reference to German and US-American law. Institute for Information, Telecommunication, and Media Law. 3. Retrieved from http://www.uni-muenster.de/Jura.itm/hoeren/materialien/boehm_pesch/BTC_final_camready.pdf

Bogage. Jacob. July 2016. “Bitcoin’s not money, judge rules as she tosses money-laundering charge” The Washington Post. Web.

Breland A. September 2016. Lawmakers announce blockchain technology caucus. Retrieved from thehill.com/policy/technology/297757-lawmakers-announce-blockchain-technology-caucus

Castillo, A. Sept 2015. New York’s BitLicense is a failure. Plain Text. Retrieved from https://readplaintext.com/new-york-s-bitlicense-is-a-failure-7eaf51a1cffb#.sa0l756j8

Goldstein, M. August 2016. “Man Charged in Bitcoin Scheme Appears in New York Court.” The New York Times

Morris, D. November 2016. “IRS Requests Bitcoin Buyer Records in Broad Tax Evasion Case.” Fortune. Retrieved from http://fortune.com/2016/11/20/irs-bitcoin-tax-evasion-case/

Murphy, E. Murphy, M. Seitzinger, M. October 2015. Bitcoin: Questions, Answers, and Analysis of Legal Issues, Congressional Research Service. 19

The National Review. September 2016. “New York Federal Judge Rules ”Bitcoins” Qualify as Money” Retrieved from http://www.natlawreview.com/article/new-york-federal-judge-rules-bitcoins-qualify-money-it-s-virtually-money

Palley, S.D. July 2016. “Why Florida's 'Bitcoin Isn't Money' Ruling Could Have Limited Impact,” CoinDesk. Web. http://www.coindesk.com/florida-bitcoin-money-legal-system/