The Law of Bitcoin

A common misconception about Bitcoin is that it is not regulated.

The claim is frequently repeated in the media. Here is BBC News in August of 2014: “The so far unregulated digital currency has courted controversy because of its volatile value and its popularity among cybercriminals.” USA Today in October: “The value in the decentralized and unregulated digital currency has plummeted since hitting a high of more than $1,130 in December 2013.” And TIME Magazine in November: “A Texas man was charged with fraud in New York on Thursday, in what federal authorities claim is the first-ever Ponzi scheme involving the unregulated digital currency Bitcoin.”

That last one is pretty telling. If the use of Bitcoin in certain circumstances wasn’t regulated, for what was the Texas man arrested?

The truth is that a wide variety of laws and regulations have applied to the use of Bitcoin since its inception in 2009. The confusion seems to stem from the idea that as governments have not taken steps to regulate the currency specifically, it is therefore unregulated.

This could not be further from the truth, as the chapters in this book attest. The law of Bitcoin is one that is not only fast-emerging, but in many ways already exists. It is only a matter of looking at precedent and statutes and applying them to the novel circumstances that new technology makes possible. When that is not possible, it is an indication that we may need new laws.

Network vs. Actors

Part of the problem with saying that Bitcoin is unregulated is that it is not often clear what is meant by “Bitcoin.” Do we mean the technology, the peer-to-peer network, or individual use of that network in commerce?

In some sense it may be accurate to say that the technology and the peer-to-peer network are unregulated. In fact, these may be beyond regulation. The technology is ultimately a protocol—a set of shared rules that can be expressed in writing—so that, in the U.S. at least, it is protected speech not subject to prior restraint under the First Amendment except in rare cases of compelling governmental interest. And the peer-to-peer network as a whole is practically impossible to regulate because it is decentralized—too many participants to police efficiently, and many outside of one’s jurisdiction altogether.

In another, perhaps more pedantic sense, however, it may be more accurate to say that Bitcoin is never unregulated. After all, Bitcoin the protocol is ultimately a set of rules that regulate the decentralized digital currency (e.g., there will only ever be 21 million bitcoins), and the peer-to-peer network enforces these rules in its operation. Indeed, at its core Bitcoin is an attempt at regulation through cryptography rather than human institutions.

But typically, when one hears that “Bitcoin is unregulated,” the implication is that governments have not yet acted to “regulate” the digital currency in some way. This is incorrect because particular activities of actors employing the Bitcoin network are subject to any number of existing regulations. Even when the technology is not specifically mentioned in a law or regulation, an activity or use of a new technology can be covered by existing laws or regulation. The chapters that follow survey the applicable laws of various countries and how they intersect with Bitcoin today.

Guidance vs. Regulation

Regulations tend to be written broadly so that they can accommodate changes in the future. When a new technology like Bitcoin comes along, there are often questions about how exactly to comply with the existing regulations, but not necessarily questions about if the regulations apply. To address these how-not-if questions, regulators will often issue guidance.

Law and Guidance

Guidance is not a new regulation, but a statement of how the existing regulation applies. The implication is that the regulation always applied to the new technology or activity, and that even without the guidance it would have applied. New regulations must first be proposed and regulators must consider comments from the public before promulgating a final rule. Guidance does not require due process because, technically, there is no new law being created; the existing applicable law is simply being explained.

For example, in the U.S., a business that accepts value from a customer and transmits it to a third party on behalf of that customer will be subject to federal money laundering and know-your-customer regulations, as well as state money transmission licensing requirements. The fact that Bitcoin is employed as the medium of exchange does not change the calculation. This was as true in January of 2009 when Bitcoin first launched as it is today.

In March of 2013, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued guidance explaining which actors in the digital currency space were covered by existing regulations and how they should comply. FinCEN will tell you, however, that their guidance was not a new regulation, but a clarification of how their existing regulation already applied, and indeed applied from the inception of the Bitcoin network.

Similarly, the Internal Revenue Service issued guidance on the tax treatment of capital gains from bitcoin trading in March of 2014. This did not mean that capital gains before the guidance were not subject to tax, but rather it explained how the tax that was already owed should be calculated. As far as the IRS is concerned, its regulations and the tax law always applied to bitcoin traders with or without proffered guidance. Taxes on capital gains are due on trades as far back as January of 2009.

Often, however, a government agency will not issue guidance and will simply enforce the existing law or regulation. If it is successful, it demonstrates that the law or regulation has always applied. The case of Trendon Shavers, the Texas man noted in the quote above, illustrates this.

Shavers was engaged in a Ponzi scheme in which he sold shares in a fund and promised investors returns of up to 1 percent per day, or 7 percent per week. When the SEC brought suit against him, he argued that his fund offering did not qualify as a security under the law because “Bitcoin is not money, and is not part of anything regulated by the United States.”

The judge in the case found that, to the contrary, “[i]t is clear that Bitcoin can be used as money.” In a way, this now serves as guidance to all future actors who are considering issuing securities and taking investments in bitcoin. And, subject to review by higher courts, of course, the precedent also means that this was always the meaning of the existing law; not that new law was created.

So it’s not right to say that Bitcoin is an unregulated digital currency given how many regulations apply to actors using the currency. Agency guidance in the U.S. underscores that fact. The same dynamic plays out in every other country. It cannot be overstated how important it is for entrepreneurs, legal professionals, and scholars in the Bitcoin space to understand the state of the law around the world.

Although there are important proceedings that will make new law, today much of the public policy work to be done in the Bitcoin space is not developing new regulations. Instead, it is figuring out how existing laws and regulations apply to activities that employ the Bitcoin network. The pages that follow are a guide to that endeavor.