Murphy_E__Seizinger_M_Bitcoin_Questions_Answers_and_Analysis_of_Legal_Issues_2015


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BitcoinDZ 0uestions, Answe
rs, and Analysis of
Legal Issue
s

Edward 5ǯ ,urphy

2pecialist in Financial Economics

,ǯ ,aureen ,urphy

Legislative Attorney

,ichael 5ǯ 2eitzinger

Legislative Attorney

.ctober 13, 2015

Congressional Research Service

7
-
5700

www.crs.gov

R43339

Bi
tcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

2ummary

BitcoinAfirstAappearedAinAJanuaryA2009,AtheAcreationAofAaAcomputerAprogrammerAusingAtheA
pseudonymASatoshiANakamoto.
A
HisAinventionAisAanAopen
-
sourceAIitsAcontrollingAcomputerAcod
eAisA
openAtoApublicAviewJ,Apeer
-
to
-
peerAItransactionsAdoAnotArequireA
aAthird
-
partyAinter
mediaryAsuchAasA
PayPalAorAVisaJ
A
digitalAcurrencyAIbeingAelectronicAwithAnoAphysicalAmanifestationJ.ATheABitcoinA
systemAisAprivate,A
with
A
noAtraditionalAfinancialAinstitutionsAinvolvedAinAtransactions.AUnlikeAearlierA
digitalAcurrenciesAtha
tAhadAsomeAcentralAcontrollingApersonAorAentity,AtheABitcoinAnetworkAisA
completelyAdecentralized
,AwithAallApartsAofAtransactionsAperfor
medAbyAtheAusersAofAtheAsystem.

WithAaABitcoi
nAtransactionAthereAisAnoAthird
-
partyAintermediary.ATheAbuyerAandAsellerAint
eractA
directlyAIpeerAtoApeerJ
,
A
butAtheirAidentitiesAareAencryptedAandAnoApersonalAinformationAisAtransferredA
fromAoneAtoAtheAother.AHowever,AunlikeAaAfullyAanonymousAtransaction,AthereAisAaAtransactionA
record.AAAfullAtransactionArecordAofAeveryABitcoinAand
A
everyABitcoinAuser

sAencryptedAidentityAisA
maintainedAonAtheApublicAledger.AForAthisAreason
,
A
BitcoinAtransactionsAareAthoughtAtoAbeA
pseudonymous,AnotAanonymous.AAlthoughAtheAscaleAofABitcoinAuseAhasAincreasedAsubstantially,AitA
stillAremainsAsmallAinAcompa
risonAtoAtraditionalAelectronicApaymentsAsystems
,
A
suchAasAcreditAcards
,
A
andAtheAuseAofAdollarsAasAaAcirculatingAcurrency.A

CongressAisAinterestedAinABitcoinAbecauseAofAconcernsAaboutAitsAuseAinAillegalAmoneyAtransfers,A
concernsAaboutAitsAeffectAonAtheAabil
ityAofAtheAFederalAReserveAtoAmeetAitsAobjectivesAIofAstableA
prices,AmaximumAemployment,AandAfinancialAstabilityJ,AandAconcernsAaboutAtheAprotectionAofA
consumersAandAinvest
orsAwhoAmightAuseABitcoin
.A

BitcoinAoffersAusersAtheAadvantagesAofAlowerAtransaction
A
cos
ts,AincreasedAprivacy,AandAlong
-
termA
protectionAofAlossAofApurchasingApowerAfromAinflation.AHowever,A
it
A
alsoA
hasA
aAnumberAofA
disadvantagesAthatAcouldAhinderAwiderAuse.ATheseAincludeAsizableAvolatilityAofAtheApriceAofA
Bitcoins,AuncertainAsecurityAf
romAt
heftAandAfraud,AandAaAlong
-
termAdeflationaryAbiasAthatA
encouragesAtheAhoardingAofABitcoins.

InAaddition,ABitcoin
A
raisesAaAnumberAofAlegalAandAregulatoryAconcerns
,
A
includingAitsApotentialAforA
facilitatingAmoneyAlaundering,AitsAtreatmentAunderAfederalAsecuri
tiesAlaw,AandAitsAstatusAinAtheA
regulationAofAforeignAexchangeAtrading.

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

Contents

SomeABasicAQuestions

................................
................................
................................
.....................

R

WhatAIsABitcoin?

................................
................................
................................
........................

R

HowADoesAthe
A
BitcoinASystemAWork?

................................
................................
.......................

R

HowAAreABitcoinsAObtained?

................................
................................
................................
....

2

AreABitcoinATransactionsAAnonymous?

................................
................................
.....................

3

WhatAIsAtheAScaleAofABitcoinAUse?

................................
................................
.............................

3

WouldABitcoinsAAffectAtheAFed’sAConductAofAMonetaryAPolicy?

................................
...............

4

ArgumentsAForAandAAgainstAWiderAUseAofABitcoin

................................
................................
..........

5

WhyAWouldAOneAWantAtoAUseABitcoins?

................................
................................
...................

5

LowerATransactionACostsAforAElectronicAEconomicAExchanges

................................
..........

5

IncreasedAPrivacy

................................
................................
................................
................

6

NoAErosionAofAPurchasingAPowerAbyAInflation

................................
................................
....

6

WhatAFactorsAMightADeterAWidespreadABitcoinAUse?

................................
...............................

7

NotALegalATender

................................
................................
................................
................

7

DoesANotAEnjoyAtheADollar’sANetworkAExternalities

................................
...........................

7

PriceAVolatilityADiscouragesAItsAUseAasAMediumAofAExchange

................................
............

7

TheASystem’sALong
-
TermADeflationaryABiasAWillADi
scourageAItsAUseAasACurrency

...........

8

Bitcoin’sANetworkASecurityAIsAUncertain

................................
................................
............

8

LegalAandARegulatoryAIssues

................................
................................
................................
............

9

LegalAConsiderationsAGenerally

................................
................................
................................

9

PowerAofACongressAunderAArticleAIAofAtheAU.S.AConstitution

................................
...................

R0

RecentAActivity

................................
................................
................................
........................

R0

RecentALegislativeAActivity:ACongress

................................
................................
..............

R0

FederalA
RegulatoryAActivity

................................
................................
..............................

R2

FederalAReserveARegionalABankAActivities
................................
................................
........

R4

StateARegulatoryAActivity

................................
................................
................................
........

R4

NewAYorkAState

................................
................................
................................
.................

R4

California

................................
................................
................................
..........................

R6

Connecticut

................................
................................
................................
.......................

R6

ConferenceAofA
StateABankASupervisors
................................
................................
..............

R7

ApplicabilityAofASelectedALawsAtoADigitalACurrency

................................
................................
.....

R8

CounterfeitingACriminalAStatutes

................................
................................
.............................

R8

TheAStampAPayments
A
ActAofAR862,AR8AU.S.C.ASectionA336

................................
.....................

R9

TheAElectronicAFundATransferAAct,AR5AU.S.C.ASectionsAR693AetAseq.

................................
.......

R9

FederalATaxALaw

................................
................................
................................
......................

R9

FederalAAnti
-
MoneyALaunderingALaws

................................
................................
...................

2R

FinancialACrimesAEnforcementANetworkAIFINCENJAActions

................................
...........

2R

FederalAElectionACampaignAAct
................................
................................
...............................

23

FederalATradeACommissionAAct

................................
................................
...............................

24

FederalASecuritiesARegulation

................................
................................
................................
.

25

InvestmentsAPurchasedAwithABitcoins

................................
................................
...............

25

InvestingAinABitcoins

................................
................................
................................
.........

26

SecuritiesAInvestorAAlerts

................................
................................
................................
..

27

SelectedASECASanctions

................................
................................
................................
....

27

TexasAStateAAction

................................
................................
................................
...................

28

CommodityAFuturesATradingACommissionARegulation

................................
............................

28

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

InternationalALegalAIssues

................................
................................
................................
..............

29

EuropeanACentralABankAStudy

................................
................................
................................
.

29

FinancialAActionATaskAForceA20R4AGuidanceAandA20R5AReport

................................
...............

30

ConcernAAboutAInternationalAMonetaryAFundAAuthority

................................
.........................

3R


Contacts

AuthorAContactAInformation

................................
................................
................................
..........

32

Acknowledgments

................................
................................
................................
.........................

32


Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

1

heAdigitalAcurrencyAcalledABitcoinAhasAbeenAinAexistenceA
sinceA2009AandAforAmostAofAthatA
timeAitAremainedAlittleAmoreAthanAaAtechnologicalAcuriosityAofAinterestAtoAaAsmallAsegmentAofA
theApopulation.AHowever,AoverAtheAlastAyearAandAaAhalf,ABitcoinAuseAhasAgrownAsubstantially;A
attentionAbyAtheApressAhasAsurged,Aan
dArecentlyABitcoinAcaughtAtheAattentionAofACongress,AbeingAtheA
subjectAofAtwoASenateAhearings.
1
A

ThisAreportAhasAthreeAmajorAsections.ATheAfirstAsectionAanswersAsomeAbasicAquestionsAaboutABitcoinA
andAtheAoperationAofAtheABitcoinAnetworkAandAitsAinteraction
A
withAtheAcurrentAdollar
-
basedA
monetaryAsystem.ATheAsecondAsectionAsummarizesAlikelyAreasonsAforAandAagainstAwidespreadA
BitcoinAadoption.ATheAthirdAsectionAdiscussesAlegalAandAregulatoryAmattersAthatAhaveAbeenAraisedA
byABitcoinAandAotherAdigitalAcurrencies
.

2ome Basic 0uestions

6hat Is Bitcoin?


BitcoinAfirstAappearedAinAJanuaryA2009,AtheAcreationAofAaAcomputerAprogrammerAusingAtheA
pseudonymASatoshiANakamoto.
A
HisAinventionAisAanAopenAsourceAIitsAcontrollingAcomputerAcodeAisA
openAtoApublicAviewJ,ApeerAtoApee
rAItransactionsAdoAnotArequireAaAthird
-
partyAintermediaryAsuchAasA
PayPalAorAVisaJ,AdigitalAcurrencyAIbeingAelectronicAwithAnoAphysicalAmanifestationJ.
2

LikeAtheAU.S.Adollar,AtheABitcoinAhasAnoAintrinsicAvalue
A
inAthatAitAisAnotAredeemableAforAsomeA
amountAof
A
anotherAcommodity,AsuchAasAanAounceAofAgold.AUnlikeA
a
A
dollar,AaABitcoinAhasAnoA
physicalAform,AisAnotAlegalAtender,A
andAisAno
tAbackedAbyAanyAgovernmentAorA
anyA
otherAlegalAentity,A
andAitsAsupplyAisAnotAdeterminedAbyAaAcentralAbank.ATheABitcoinAsystemAisApri
vate,AbutAwithAnoA
traditionalAfinancialAinstitutionsAinvolvedAinAtransactions.AUnlikeAearlierAdigitalAcurrenciesAthatAhadA
someAcentralAcontrollingApersonAorAentity,AtheABitcoinAnetworkAisA
completelyAdecentralized
,AwithA
allApartsAofAtransactionsAperformedAb
yAtheAusersAofAtheAsystem.

How Does the Bitcoin 2ystem 6ork?

BitcoinAisAsometimesAreferredAtoAasAaA
cryptocurrencyA
becauseAitArelies
A
onAtheAprinciplesAofA
cryptographyAIcommunicationAthatAisAsecureAfromAviewAofAthirdApartiesJAtoAvalidateAtransactionsA
andAgov
ernAtheAproductionAofAtheAcurrencyAitself.AEachABitcoinAandAeachAuserAisAencryptedAwithAaA
uniqueAidentity
,
A
andAeachAtransactionAisArecordedAonAaAdecentralizedApublicAledgerAIalsoAcalledAaA
distributedAledgerA
orAa
A
blockchain
JAthatAisAvisibleA
toAallAcomputers
A
onAtheAnetwork
A
butAdoesAnotA
revealAanyApersonalAinformationAaboutAtheAinvolvedAparties.ACryptographicAtechniquesAenableA



1

On November 18, 2013, the Senate Committee on Homeland Security and Governmental Affairs held a hearing o
n
Beyond Silk Road: Potential Risks, Threats, and Promises
, available at
http://www.hsgac.senate.gov/
hearings/
beyond
-
silk
-
roa
d
-
potential
-
risks
-
threats
-
and
-
promises
-
of
-
virtual
-
currencies
. On November 19, the Senate Committee on
Banking, Housing, and Urban Affairs held a hearing on
The Current and Future Impact of Virtual Currencies
,

available at
http://www.banking.senate.gov/
public/
index.cfm?
FuseAction=
Hearings.Hearing&
Hearing_ID=
955322cc
-
d648
-
4a00
-
a41f
-
c23be8ff4cad
.

2

General background
discussions about Bitcoin can be found at Bitcoin, available at
http://bitcoin.org/
en/
; Jerry Brito
and Andrea Castillo,
Bitcoin:
A

Primer for Policymakers
,

Mercatus Center, George Mason University, 2013, available
at
http://mercatus.org/
publication/
bitcoin
-
primer
-
policymakers
; and Federal Reserve Bank of Chicago,
Chicago Fed
Letter
,

Bitcoin: A Primer, 2013, available at
http://www.chicagofed.org/
digital_assets/
publications/
2013/
cfldecember2013_317.pdf
; and the Bank of England,

The Eco
nomics of Digital Currencies,
Quarterly Bulletin,
Q3 2014, available at
http://www.bankofengland.co.uk/
publications/
Documents
/
quarterlybulletin/
2014/
qb14q3digitalcurrenciesbitcoin2.pdf
.

T

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

2

specialAusersAonAtheAbitcoinAnetwork,AknownAasA
miners
,
A
toAgatherAtogetherAblocksAofAnewA
transactionsAandAcompeteAt
oAverifyAthatAtheAtra
nsactionsA
are
A
valid

thatAtheAbuyerAhasAtheAamountA
ofABitcoinAbeingAspentAandAhasAtransferredAthatAamountAtoAthe
A
seller’s
A
account
.
A
ForAprovidingAthisA
service,AminersAthatAsuccessfullyAverifyAaAblockAofAtransactionsAareArewardedAbyAtheAnetwork

sA
controllingA
computerAalgorithmAwithA25AnewlyAcreatedABitcoins.
3
A

ThisAdecentralizedAmanagementAofAtheApublicAledgerAisAtheAdistinguishingAtechnologicalAattributeA
ofABitcoinAIandAotherAdecentralizedAcryptocurre
nciesJAbecauseAitAsolvesAtheAso
-
calledA
doubleA
spendingA
prob
lemAIi.e.,AspendingAmoneyAyouAdoAnotAownAbyAuseAofAforgeryAorAcounterfeitingJAandA
theAattendantAneedAforAaAtrustedAthirdApartyAIsuchAasAaAbankAorAcreditAcardAcompanyJAtoAverifyAtheA
integrityAofAelectronicAtransactionsAbetweenAaAbuyerAandAaAseller.APublicAl
edgerAtechnologyAcouldA
haveAimplicationsAnotAjustAforA
theAtraditionalApaymentsAsystem
A
butApossiblyA
alsoA
forAaAwideA
spectrumAofAtransactionsAIe.g.,Astocks,Abonds,AandAotherAfinancialAassetsJA
inAwhich
A
recordsAareA
storedAdigitally.A

How Are Bitcoins .btained?

ToAinteractAonAtheABitcoinAnetworkAusersAfirstAneedAtoAdownloadAtheAfreeAandAopen
-
sourceA
software.AOnceAconnectedAtoAtheAnetwork,AthereAareAthreeAwaysAtoAobtainABitcoins.AFirst,AaAuserAcanA
exchangeAconventionalAmoneyAIe.g.,Adollars,Ayen,AandAeurosJAforAaA
feeAonAanAonlineAexchangeAIe.g.,A
Okcoin,ACoinbase,AandAKrakenJ.ATheAexchangeAfeeAfallsAwithAtheAsizeAofAtheAtransaction,ArangingA
fromA0.5FAforAsmallAtransactionsAdownAtoA0.2FAforAlargeAtransactions.A

TheApriceAofABitcoinArelativeAtoAotherAcurrenciesAisAdet
erminedAbyAsupplyAandAdemand.AInAmid
-
JanuaryA20R5,AaAsingleABitcoinAwasAvaluedAatAaroundAE220.AHowever,AtheApriceAhasAbeenAquiteA
volatile,AhavingAbeenAlessAthanAE20AinAJanuaryA20R3,AaboveAER,R00AinADecemberA20R3,AandAaroundA
E320AasArecentlyAasAmid
-
December
A
20R4AIrepresentingAmoreAthanAaA30FAfallAinAvalueAinAaboutAoneA
monthJ.
4

Second,AaAuserAcanAobtainABitcoinsAinAexchangeAforAtheAsaleAofAgoodsAorAservices,AasAwhenAaA
merchantAacceptsABitcoinAfromAaAbuyerAforAtheAsaleAofAhisAproduct.

Third,AasAdiscussedAearli
er,AaAuserAcanAacquireAnewABitcoinsAbyAservingAasA
miner
A
andAapplyingA
hisA
orA
herAcomputer

sAprocessingApowerAtoAsuccessfullyAverifyAtheAvalidityAofAnewAnetworkA
transactions.ATheAprobabilityAofAanAindividualAdiscoveringABitcoinsAthroughAminingAisAproportiona
lA
toAtheAamountAofAcomputerAprocessingApowerAthatAcanAbeAapplied.AThisAprospectAisAlikelyAtoAbeAveryA
smallAforAtheAtypicalAofficeAorAhomeAcomputer.ATheAdifficultyAofAtheAverificationAproblemAincreasesA
soAthatABitcoinsAwillAbeAdiscoveredAatAaAlimi
tedAandApr
edictableArateAsystem
-
wide.AButAtheA
increasedAdifficultyAofAverificationAmeansAthatAtheAcomputationalAcostAofAthatAserviceAalsoArises.

Therefore,AtheAsupplyAofABitcoinsAdoesAnotAdependAonAtheAmonetaryApolicyAofAaAvirtualAcentralA
bank.AInAthisAregard,A
despiteAbeingA
aAcurrencyAwithAnoAintrinsicAvalue,AtheABitcoinAsystem

sA
operationAisAsimilarAtoAtheAgrowthAofAmoneyAunderAaAgoldAstandard,AalthoughAhistoricallyAtheA
amountAofAgoldAminedAwasAmoreAerraticAthanAtheAgrowthAofAtheAsupplyAofABitcoinsAisApurported
A
toA
be.ADependingAonAone

sAperspective
,
A
thisAattributeAo
f
A
theAbitcoinAnetworkAcanAbeAaAvirtueAorAaAvice.




3

To

mine

and validate a new block of transactions, miners compete to solve a difficult math problem. The miner that
solves the problem first validates the transactions in the block and broadc
asts his

or her

proof
-
of
-
work to the bitcoin
network. Other miners in the network check the successful miner

s results. If the miner

s work is found to be correct,
he

or she

is rewarded by the system with 25 new bitcoin
s
.

4

The current price of a Bitcoin
can be obtained from Bitcoin
-
Charts available at
http://bitcoincharts.com/
.

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

3

Currently,AaboutAR3.7AmillionABitcoinsAareAinAcirculation.AHowever,AtheAtotalAnumberAofABitcoinsA
thatAcanAbeAgeneratedAisAarbitrarilyAcappedAatA2RAmill
ionAcoins,AwhichAisApredictedAtoAbeAreachedAinA
2R40.AHowever,AbecauseAaABitcoinAisAdivisibleAtoA
eightA
decimalAplaces,AtheAmaximumAamountAofA
spendableAunitsAisAmoreAthanA
2Aquadrillion
A
Ii.e.,A2
,
000AtrillionJ.
5

PurchasedAorAminedABitcoinsAareAthereafterAstore
dAinAaAdigitalAwalletAonAtheAuser

sAcomputerAorAatA
anAonlineAwalletAservice.

Are Bitcoin 3ransactions Anonymous?

BitcoinAtransactionsAareAnotAtrulyAanonymous.
6
A
AnAexampleAofAanAanonymousAtransactionAisAanA
exchangeAforAcashAbetweenAtwoAstrangers.AInAthisAca
se,AnoApersonalAinformationAneedAbeArevealedA
norAdoesAthereAneedAtoAbeAaArecordAofAtheAtransaction.AAtAtheAotherAextremeAaAnon
-
anonymousA
transactionAisAaAtypicalAonlineApurchaseAusingAaAcreditAcard.AThisAtransactionArequiresAvalidationAbyA
aAthird
-
partyAint
ermediaryAtoAwhomAtheAbuyer

sAandAseller

sAidentitiesAandApertinentAfinancialA
informationAisAknownAandAwhoAmaintainsAaArecordAofAtheAtransaction.AAABitcoinAtransactionAfallsA
betweenAtheseAtwoAextremes.

WithAaABitcoinAtransactionAthereAisAnoAthird
-
partyAint
ermediary.ATheAbuyerAandAsellerAinteractA
directlyAIpeerAtoApeerJ,AbutAtheirAidentitiesAareAencryptedAandAnoApersonalAinformationAisAtransferredA
fromAoneAtoAtheAother.AHowever,AunlikeAaAfullyAanonymousAtransaction,AthereAisAaAtransactionA
record.AAAfullAtran
sactionArecordAofAeveryABitcoinAandAeveryABitcoinAuser

sAencryptedAidentityAisA
maintainedAonAtheApublicAledger.AForAthisAreasonABitcoinAtransactionsAareAthoughtAtoAbeA
pseudonymous,AnotAanonymous.

BecauseAofAtheApublicAledger,AresearchersAhaveAfoundAthat,Au
singAsophisticatedAcomputerAanalysis,A
transactionsAinvolvingAlargeAquantitiesAofABitcoinAcanAbeAtrackedAandAclaimAthatAifApairedAwithA
currentAlawAenforcementAtoolsAitAwouldAbeApossibleAtoAgainAaAlotAofAinformationAonAtheApersonsA
movingAtheABitcoins.
7
A
Also,
A
ifABitcoinAexchangesAIwhereAlargeAtransactionsAareAmostAlikelyAtoA
occurJAareAtoAbeAfullyAcompliantAwithAtheAbankAsecrecyAregulationsAIi.e.,Aanti
-
moneyAlaunderingA
lawsJArequiredAofAotherAfinancialAintermediaries,ABitcoinAexchangesAwillAbeArequiredAtoAcolle
ctA
personalAdataAonAtheirAcustomers,AlimitingAfurtherAtheAsystem

sAabilityAtoAmaintainAtheAuser

sA
pseudonymity.

6hat Is the 2cale of Bitcoin 4se?

DespiteAsignificantAgrowthAsinceAitsAinception,ABitcoin

sAscaleAofAuseAremainsAthatAofAaA

niche

A
currency.AAsA
ofAmid
-
JanuaryA20R5,AtheAtotalAnumberAofABitcoinsAinAcirculationAgloballyAwasAaboutA
R3.7Amillion,AupAaboutARAmillionAcoinsAfromAaAyearAearlier.AWithAitsArecentAmarketApriceAofAnearA
E200,ABitcoin

sAcurrentAmarketAcapitalizationAIpriceA
×
A
numberAofAcoinsAinAc
irculationJAisAaboutA
E2.7Abillion.AHowever,AlargeAswingsAinAtheApriceAofABitcoinAhaveAcausedAthatAmarketAcapitalizationA
toAexhibitAsimilarlyAlargeAchangesAduringAtheAyear.AAsArecentlyAasADecemberA20R3,AwithABitcoinA
exchangingAatAnearAER,R00,AtheAmarketAcap
italizationAwasAaboveAER40Abillion.A
Although
A
numerousA



5

Because the supply of Bitcoin
s

is

fixed in the long run
,

sustain
ing

the payment of Bitcoin
s

to miners for providing
verification servic
es

will be impossible
. Without th
at subsidy,
the Bitcoin network
arguably
could face rising
transaction costs and a diminished attractiveness when compared with
traditional centralized payment

systems.

6

Joshua Brustein,

Bitcoin May Not Be Anonymous Afte
r All,


Bloomberg Business Week
,

August 27, 2013, available
at
http://www.businessweek.com/
articles/
2013
-
08
-
27/
bitcoin
-
may
-
not
-
be
-
so
-
anonymous
-
afte
r
-
all
.

7

Sarah Meiklejohn et al.,

A Fist Full of Bitcoins: Characterizing Payments Among Men with No Name,


University
of California, San Diego, December 2013, available at
http://cseweb.ucsd.edu/
~smeiklejohn/
.

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

4

vendorsAacceptABitcoin,AtheAvolumeAofAtransactionsAremainsAmodest.ADuringA20R4,AtheAvalueAofA
Bitcoin

sAglobalAdailyAtransactionAvolumeAfluctuatedAinAaArangeAofAbetweenAE40AmillionAandAE60A
million,Arepre
sentingAbetweenA50,000AandA90,000AdailyAtransactions.
8

ForAcomparison,AinAJuneA20R4,AtheAU.S.AmoneyAsupplyAItheAsumAofAcurrency,AdemandAdeposits,A
savingAdepositsAincludingAmoneyAmarketAsavingAaccountsJAwasAaboutAERR.3Atri
llionAIaboutAR,000A
timesAlarger
J
.
9
A
TheAcreditAcardAcompanyAVisaAreportsAthatAforA20R3AitsAtotalAdollarAvolumeAwasAE6.9A
trillion,AwithAanAaverageAnumberAofAdailyAindividualAtransactionsAofAnearA24Amillion.
10
A
InA20R3,A
daily
A
transactionsAinAdollarsAonAglobalAforeignAexchangeAmarketsAaveragedAov
erAE4Atrillion.
11

6ould Bitcoins Affect the Fed

s Conduct of ,onetary /olicy?

TheAFederalAReserveAconductsAmonetaryApolicyAtoAaffectAtheAflowAofAmoneyAandAcreditAtoAtheA
economyAtoAachieveAstableAprices,AmaximumAemployment,AandAfinancialAmarketAstability.AAt
A
Bitcoin

sAcurrentAscaleAofAuse,AitAisAlikelyAtooAsmallAtoAsignificantlyAaffectAtheAFed

sAabilityAtoA
conductAmonetaryApolicyAandAachieveAthoseAthreeAgoals.AHowever,AifAtheAscaleAofAuseAwereAtoAgrowA
substantiallyAlarger,AthereAcouldAbeAreasonAforAsomeAconce
rn.A
Conceptually
,ABitcoinAcouldAhaveAanA
impactAonAtheAconductAofAmonetaryApolicyAtoAtheAextentAthatAitAwouldAIRJAsubstantiallyAaffectAtheA
quantityAofAmoneyAorAI2JAinfluenceAtheAvelocityAIrateAofAcirculationJAofAmoneyAthroughAtheA
economyAbyAreducingAtheAdem
andAforAdollars.

RegardingAtheAmoneyAsupply,AifABitcoinAtransactionsAoccurAonAaA
pre
-
paid
A
basisAwherebyABitcoinsA
enterAintoAcirculationAwhenAdollarsAareAexchangedAandAthenAareAwithdrawnAfromAcirculationAwhenA
exchangedAbackAtoAdollars,AtheAnetAeffectAonAtheA
moneyAsupplyAwouldAbeAsmall.A

RegardingAtheAvelocityAofAmoney,AifAtheAincreaseAinAtheAuseAofABitcoinAleadsAtoAaAdecreaseAinAneedA
forAholdingAdollars,AitAwouldAincreaseAtheAdollar

sAvelocityAofAcirculationAandAtendAtoAincreaseAtheA
moneyAsupplyAassociatedAwi
thAanyAgivenAamountAofAbaseAmoneyAIcurrencyAinAcirculationAplusAbankA
reservesAheldAwithAtheAFedJ.AInAthisAcase,AforAtheAFedAtoAmaintainAtheAsameAdegreeAofAmonetaryA
accommodation,AitAwouldAneedAtoAundertakeAaAcompensatingAtighteningAofAmonetaryApolicy.AAtAa
A
minimum,AaAsubstantialAuseAofABitcoinsAcouldAmakeAtheAmeasurementAofAvelocityAmoreAuncertain,A
andAjudgingAtheAappropriateAstanceAofAmonetaryApolicyAuncertain.
12
A

InAaddition
,AaAsubstantialAdecreaseAinAtheAuseAofAdollarsAwouldAalsoAtendAtoAreduceAtheAsizeAo
fAtheA
Fed

sAbalanceAsheetAandAintroduceAanotherAfactorAintoAitsAconsiderationAofAhowAtoAaffectAshort
-
termA
interestAratesAItheAinstrumentAforAimplementingAmonetaryApolicyJ.AHowever,AtheAFed

sAabilityAtoA
conductAmonetaryApolicyArestsAonAitsAabilityAtoAincrea
seAorAdecreaseAtheAreservesAofAtheAbankingA



8

Bitcoin data from Bitcoin Charts available at
http://bitcoincharts.com/
.

9

Board of Governors of the Federal Reserve System,
Money Stock Measures
(
H
.6
),

available at
http://www.federalreserve.gov/
releases/
h6/
current/
default.htm
.

10

Visa, Inc., Fact Sheet, available at
http://corporate.visa.com/
_media/
visa
-
fact
-
sheet.pdf
.

11

Bank for International Settlements,

Foreign Exchange Turnover in April 2013: Preliminary Global Results,


Triennial Central Bank Survey, September 2013, at
https://www.bis.org/
publ/
rpfx13fx.pdf
.

12

Various categories of velocity are not directly observed; rather they are calculated from observed measures of the
money supply, inflation, and output. Thus, each measure of the money supply (M1, M2,
etc.
) has a corresponding
velocity. To the extent that actual transactions would occur with Bitcoin instead of a traditional measure of the money
supply, the pattern of velocity could mislead policymakers regarding the effectiveness of monetary policy. On
the other
hand, policymakers could incorporate Bitcoin and other electronic currency in a measure of the money supply. See

What Does Money Velocity Tell Us
A
bout Low Inflation in the U.S.?
”AYiAWenAandAMariaAArias,AFRBSL,ASeptemberA
1, 2014, available at
https://www.stlouisfed.org/
On
-
The
-
Economy/
2014/
September/
What
-
Does
-
Money
-
Velocity
-
Tell
-
Us
-
about
-
Low
-
Inflation
-
in
-
the
-
U
S
.

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

5

systemAthroughAopenAmarketAoperations.ASoAlongAasAthereAisAaAsizableAdemandAbyAbanksAforAliquidA
dollar
-
denominatedAreserves,AtheAFedAwouldAlikelyAcontinueAtoAbeAableAtoAinfluenceAinterestAratesA
andAconductAmonetar
yApolicy.
13
A
14

Again,AanyAsizableAeffectAonAtheAU.S.AmonetaryAsystemAisApredicatedAonABitcoin

sAscaleAofAuseA
becomingAsubstantiallyAgreaterAthanAitAisAatApresent.AAnAimportantAforceAthatAisAlikelyAtoAhinderA
suchAgrowthAinABitcoinAuseAisAtheAstrongApreferenceAforAdollarAuseAgeneratedAbyAwhatAeconomistsA
callA
networkAexternalities
A
Ii.e.,A
theAvalueAofA
aAproductAorAserviceAisAdependentAonAtheAnumberAofA
othersAusingAitJ.A
NetworkAexternalitiesAcreateAaAself
-
generatingAdemandAforAaAdominantAcurrency.A
TheAmoreAoftenAaAcurrencyAisAusedAasAaAmediumAofAexchange,AtheAmoreAliquidAitAbecomesAandAtheA
lowerAareAtheA
costsAofAtransactingAinAit,Aleading,AinAturn,AtoAitsAbecomingAevenAmoreAattractiveAtoA
newAusers.ANetworkAexternalitiesAcreateAaAtendencyAtowardAhavingAoneAdominantAcurrencyAandA
conferAaAsubstantialA
incumbencyAadvantage
A
toAtheAdollarAinAbothAdomesticAandAin
ternationalAuse.A
TheAlegalAtenderAstatusAofAtheAdollar,AdiscussedAbelow,AreinforcesAthisAadvantage.
15

TheAU.S.AeconomyAreapsAconsiderableAbenefitAfromAhavingAaAsingleAwell
-
definedAandAstableA
monetaryAunitAtoAworkAasAaAmediumAofAexchange,AaAstoreAofAvalue,Aa
ndAunitAofAaccountAtoAfacilitateA
itsAvastAnumberAofAdailyAeconomicAtransactions.AIfAgreaterAuseAofABitcoinAIandAotherA
cryptocurrenciesJAleadsAtoAmultipleAmonetaryAunitsAandAfragmentationAofAtheAeconomy

sAcurrencyA
system,AtheseAbenefitsAcouldAbeAthreatened.
A
However,ABitcoinAdoesAnotAcurrentlyAposeAaAsignificantA
challengeAtoAtheAdollarAasAtheAprincipalAcirculatingAcurrency.AAsAalreadyAdiscussed,ABitcoinAisA
curre
ntlyAaAminorAmediumAofAexchange.
A
I
tsAsubstantialApriceAvolatilityAmakesAitAaApoorAstoreAofA
valueAId
iscussedAmoreAfullyAbelowJ,AandAthereAisAlittleAevidenceAthatAitAisAbeingAusedAasAaAunitAofA
accountAIe.g.,AcompaniesApricingAproductsAexclusivelyAinABitcoinJ
.

Arguments

For and Against 6ider 4se of Bitcoin

6hy 6ould .ne 6ant to 4se Bitcoins?

BitcoinApurpor
tedlyAoffersAthreeApotentialAbenefitsAtoAusers:AlowerAtransactionAcosts,AincreasedA
privacy,AandAnoAerosionAofApurchasingApowerAdueAtoAinflation.

Lower 3ransaction Costs for Electronic Economic Exchanges

BecauseAthereAisAnoAthird
-
partyAintermediary,ABitcoin
A
transactionsAareApurportedAtoAbeAsubstantiallyA
lessAexpensiveAforAusersAthanAthoseAusingAtraditionalApaymentsAsystemsAsuchAasAPaypalAandAcreditA
cards,AwhichAchargeAmerchantsAsignificantAfeesAforAtheirAroleAasA
aAtrustedAthird
-
partyAintermediaryA
toAvalidate
A
electronicAtransactions.AInAaddition,ABitcoinAsalesAareA
non
reversible
,AwhichAremovesAtheA
possibilityAforAmisuseAofAconsumerAcharge
-
backs,AwhichAmerchantsAfindAcostly.AMerchantsAwouldA
presumablyApassAatAleastAsomeAofAtheseAsav
ingsAonAtoAtheAcustomer.AT
here
A
isAconsiderableA



13

See also European Central Bank, Virtual Currency Schemes, October 2012, pp. 33
-
39, available at
http://www.ecb.europa.eu/
pub/
pdf/
other/
virtualcurrencyschemes
201210en.pdf
.

14

then Fed c
hairman Bernanke
noted that virtual currencies have the potential to be beneficial, but also carry risks, and while not a direct regulatory
respons
ibility, are monitored by the Fed. He did not express any concern about virtual currencies hindering the Fed

s
ability to conduct monetary policy. Available at
http://online.wsj.com/
public/
resources/
documents/
VCurrenty111813.pdf
.

15

Hal R. Varian,
Economics of Information Technology
, University of California, Berkeley, March 23, 2003, available
at
http://www.s
ims.berkeley.edu/
~hal
.

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

6

anec
dotalAevidenceAtoAsupportAthisAassumption
,A
butA
noAcomprehensiveAdataA
existA
onAtheAsizeAofA
Bitcoin

sAtransactionAcostAadvantage.

SomeAofAtheAtransactionAcostAadvantageAcouldAbeAoffsetAbyAtheAslowAspeedAatAwhichABitcoinA
transactionsAcurr
entlyAoccur,Awhich,AdependingAonAtheAsizeAofAtheAtransaction,AcanAtakeAaAminimumA
ofAR0AminutesAorAasAlongAasAanAhour.
16

InAaddition,ABitcoin

sAadvantageAinAtransactionAcostAcouldAbeAoffsetAbyAtheAsubstantialAvolatilityAofA
Bitcoin

sAprice.AAArisingAdollarApr
iceAofABitcoinAisAlikelyAtoAdeterApotentialAbuyersAwhoAwouldA
expectAtoAseeAtheirApurchasingApowerAbeAgreaterAinAtheAfuture.AAAfallingABitcoinApriceAisAlikelyAtoA
deterApotentialAsellersAwhoAwouldAexpectAtoAseeAtheirApotentialAsalesAreceiptsAbeAgreaterAinAth
eA
future.

I
nAtheAlongArun
,
A
theABitcoinAsystemAwillAstopAcreatingAnewAcoins,AeliminatingAtheAsubsidyAtoAminersA
toAverifyAtransactions.AWithoutAthatAsubsidy,AtheAcostAofAverifyingAaAtransactionAisAlikelyAtoA
increase.

Increased /rivacy

ThoseAwhoAseekAaAheight
enedAdegreeAofAprivacyAmayAfindAmoreAcomfortAusingABitcoinsAforAtheirA
IlegalJAcommercialAandAfinancialAtransactions.ATheAriskAofAidentityAtheftAmayAalsoAbeAless,AandA
someAmayAfindAtheAremovalAofAgovernmentAfromAaAmonetaryAsystemAattractive.AHowever,AasA
dis
cussedAabove,ABitcoinAtransactionsAdoAnotAhaveAtheAanonymityAaffordedAbyAcashAtransactions,AasA
thereAisAaApermanentAandAcompleteAhistoricalArecordAofABitcoinAamountsAandAencryptedAidentitiesA
forAallAtransactionsAonAtheABitcoinAsystemAthatA
are
A
potentiallyAt
raceable.

No Erosion of /urchasing /ower by Inflation

InflationAisAdefinedAasAaAbroadAincreaseAinAtheApricesAofAgoodsAandAservices.AThisAisAequivalentAtoA
sayingAthatAthereAisAaAfallAinAtheAvalueAofAtheAcirculatingAcurrency.AThatAfallAinAvalueAmeansAthatA
eachAunitAofAtheAcurrencyAisAexchangeableAforAaAreducedAamountAofAgoodsAandAservices.AInflationAisA
commonlyAthoughtAtoAbeAaAmonetaryAphenomenonAinAwhichAtheAsupplyAofAtheAcurrencyAoutpacesA
theAdemandAforAtheAcurrencyAcausingAitsAunitAvalueAIinAtermsAofAwha
tAitAcanAbuyJAtoAfall.

MostAoftenAgovernmentsAIorAtheirAcentralAbankJAregulateAtheAsupplyAofAmoneyAandAcreditAandAmostA
oftenAsomeAdegreeAofAmismanagementAofAthisAgovernmentAfunctionAisAatAtheArootAofAaApersistentA
highAinflationAproblem.AInAtheAcaseAofABitc
oin,Ahowever,AthereAisAnoAgovernmentAorAcentralAbankA
regulatingAtheAsupplyAofABitcoins.ATheAsupplyAofABitcoinsAisAprogrammedAtoAgrowAatAaAsteadyArateA
regulatedAbyAtheAdegreeAofAminingAactivityAIaAprocessAlikelyAlinkedAtoAaAgrowingAdemandAforA
BitcoinJAandAt
henAisAcappedAatAaAfixedAamount.

InflationAcouldAoccurAifAtheAdemandAforABitcoinAdecreasesArelativeAtoAtheAfixedAsupply.AInflationA
couldAalsoAoccurAifAtheABitcoinAnetworkAdevelopsAfractionalAreserveAbankingAIi.e.,AbanksAthatAholdA
onlyAaAfractionAofAtheirAd
epositsAinAreserveAandAlendAoutAtheArestJ,AwhichAwouldAalsoAbeAaAvehicleA
thatAeffectivelyAincreasesAtheAsupplyAofAcirculatingABitcoins.
17
A
IfAtheseAdigitalAbanksAmoveAtoAaA
situationAwhereAheldAreservesAstabilize,AthisAsourceAofAinflationAwouldAdiminish.




16

See Data on transaction times at Blockchain, available at
http://blockchain.info/
charts/
avg
-
confirmation
-
time
.

17

Fractional reserves can occur when intermediari
es issue obligations and rely on the unlikelihood of simultaneous
redemption in order to fund additional activity. Put more simply, the firm keeps only a fraction of its assets in reserve
to honor all of its other obligations, and uses the rest to pursue m
ore earnings. In the case of Bitcoin, bank deposits and
similar, fractional reserve policies by intermediaries can increase the effective supply of money
-
like instruments, and
(continued...)

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

7

6hat

Factors ,ight Deter 6idespread Bitcoin 4se?

ThereAareAaAnumberAofAfactorsAthatAcouldAdiscourageAwidespreadAuseAofABitcoin.

Not Legal 3ender

TheAdollarAisAlegalAtenderAandAbyAlawAcanAbeAusedAtoAextinguishApublicAorAprivateAdebts.AAAcreditorA
isArequiredAtoA
acceptAlegalAtenderAforAtheAsettlementAofAaAdebt.AAtAaAminimum,AtheApaymentAofAtaxesA
forcesAU.S.AindividualsAtoAholdAdollars.AArguably,AforAmany,AsuchAaAgovernmentAendorsementAisA
comfortingAandAcreatesAaAstrongAunderlyingAdemandAforAtheAdollar.AByAcontrast
,AaAcurrencyAlikeA
BitcoinAthatAisAlinkedAtoAaAcomplexAcomputerAprogramAthatAmanyAdoAnotAunderstandAandAthatA
operatesAwithoutAaccountabilityAtoAanyAcontrollingAentityAcouldAbeAanAunattractiveAvehicleAforA
holdingAwealthAforAmanyApeople.

Does Not Enjoy the Do
llar

s Network Externalities

AsAnotedAabove,AtheAattractivenessAofAusingAaAdollarAisAdependentAonAtheAnumberAofApeopleAalreadyA
usingAit.AThusAwidespreadAuseAofAtheAdollarAencouragesAitsAcontinuedAuseAandAisAanAimpedimentA
IalthoughAnotAanAinsurmountableAbar
rierJAtoAtheAuseAofAotherAcurrencies,AincludingABitcoins.

/rice 5olatility Discourages Its 4se as ,edium of Exchange

Bitcoin

sApriceAhasAbeenAvolatileAsinceAitsAcreationAinA2009,AsubjectAtoAsharpAappreciationsAandA
precipitousAdepreciationsAinAvalue.ADuring
A
MarchA
20R3A
andAAprilA20R3,ABitcoin

sAdollarAexchangeA
rateA
roseAfromAaboutAE50AtoAE350
A
andA
thenAfellA
backAtoAnearAE70.ABitcoin

sApriceAmovedAupAevenA
moreAsharplyAduringAtheAfallAofA20R3,ArisingAfro
mAnearAE50AinASeptemberAtoAmoreAthan
A
ER,R00AbyA
earlyADecemb
er.ADuringA20R4
,
A
Bitcoin

sApriceAshowedAlarge
A
day
-
to
-
dayAvariations
A
butAgenerallyA
trendedAdown
.AB
yAmid
-
JanuaryA20R5
,
A
aABitcoinAwasApricedAnearAE200.AThisAisAaApriceApatternAmoreA
typicalAofAaAcommodityAthanAofAaAcurrencyAtoAbeAusedAasAaAmediumAofAexchangeAo
rAaAstoreAofAvalue.A
TheAvolatileApriceAbehaviorAsuggestsAtheAmarketAforABitcoinAisAcurrentlyAbeingAdrivenAbyA
speculativeAinvestors,AnotAbyAaAgrowingAdemandAforABitcoinAdueAtoAincreasedAtransactionsAbyA
traditionalAmerchantsAandAconsumers.

OneAproblemAwithAh
avingAtheABitcoinAnetworkAdominatedAbyAspeculatorsAisAthatAitAgivesAusersAanA
incentiveAtoAhoardABitcoinsAratherAthanAspendAthem

justAtheAoppositeAofAwhatAwouldAneedAtoA
happenAtoAmakeAaAcurrencyAaAsuccessfulAmediumAofAexchangeAsuchAasAtheAdollar.
18

Speculati
onAcouldAbeAmoreAlikelyAtoAdominateAtheAmarketAforABitcoinsAbecauseAitsAvalueAcannotAbeA
anchoredAtoAsomeAunderlyingA

fundamental

A
suchAasAanAamountAofAsomeAphysicalAcommodityAsuchA
asAgold,AtheAvalueAofAanAearningsAstreamAthatAundergirdsAtheApriceAofAaAcompany

sAstock,AorAtheA
perceivedAbasicAsoundnessAandAstabilityAofAanAeconomyAandAitsAgoverningAinstitutionsAIasAis,A
arguably,AtrueAf
orAtheAdollarJ.




(...continued)

therefore contribute to inflation.

18

Felix Salmon,

The Bitcoin Bubble and the
Future of Currency,


Medium
,

April 2013, available at
https://medium.com/
money
-
banking/
2b5ef79482cb
.

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

8

3he 2ystem

s Long
-
3erm Deflationary Bias 6ill Discourage Its 4se as
Currency

BecauseAtheAsupplyAisAcappedAinAtheAlongArun,AwidespreadAuseAofABitcoinAwouldAmeanAthatAtheA
demandAforABitcoinAwouldAlikelyAoutstripAsupply,AcausingABitcoin

sApric
eAtoAsteadilyAincrease.ATheA
corollaryAofAthatAincreaseAisAthatAtheABitcoinApriceAofAgoodsAandAservicesAwouldAsteadilyAfallA
causingAdeflation.AFacedAwithAdeflation,AthereAisAaAstrongAincentiveAtoAhoardABitcoinsAandAnotA
spendAthem,AcausingAtheAcurrentAlevelA
ofAtransactionsAtoAfall.
19

IfAgeneralizedAtoAanAeconomy
-
wideAphenomenonAdeflationAcouldAcauseAslowerAthanAnormalA
economicAgrowthAandAhigherAthanAnormalAunemployment.

ThisApossibleAoutcomeAhighlightsAtheAlikelyAimportanceAofAtheAeconomy

sAprincipalAcurrencyA
beingA
elastic
,AitsAsupplyAincreasingAandAdecreasingAtoAmeetAtheAchangingAneedsAofAtheAeconomy,AandAofA
theAimportantAroleAofAtheAcentralAbankAinAimplementingAsuchAaAmonetaryApolicy.ATheAperilsAofAanA
inelasticAcurrencyAwereAevident,AforAaAperiodAfromAaboutAR
880AtoAR9R4,AwhenAtheAUnitedAStatesA
monetaryAsystemAoperatedAunderAaAgoldAstandard.AAtAthisAtime,AtheAdeflationaryAbiasAofAanAinelasticA
supplyAofAgoldAledAtoAelevatedArealAinterestArates,AcausedAperiodicAbankingApanics,AandAproducedA
increasedAinstabilityAo
fAoutput.ATheAFederalAReserveAwasAcreatedAinAR9R3AtoAprovideAanAelasticA
currency.AInAparticular,AtheAgenerallyAgoodAeconomicAperformanceAofAtheApost
-
warAeraAspeaksAtoA
theAbenefitsAofAhavingAaAcentralAbankAtoAadministerAanAelasticAcurrency,AnotAonlyAtoAmeet
A
theA
changingAtransactionAneedsAofAtheAeconomy,AbutAalsoAtoAproactivelyAuseAmonetaryApolicyAtoA
stabilizeAoutputAandAinflation.A

Bitcoin
’s Network

2ecurity Is 4ncertain

Although
A
counterfeitingApurportedlyAisAnotApossible,ABitcoinAexchangesAandAwalletAservic
esAhaveA
atAtimesAstruggledAwithAsecurity.ACashAandAtraditionalAelectronicApaymentAsystemsAalsoAhaveA
periodicAsecurityAproblems,AbutAaAhighAincidenceAofAsecurityAproblemsAonAaAsystemAtryingAtoA
establishAitselfAandAgainAcustomerAconfidenceAcouldAbeAmoreAdama
ging.ASomeAnotableAexamplesAofA
securityAbreachesAonAtheABitcoinAnetworkAhaveAincludedAtheAfollowing:



InAJanuaryA20R5,ABitstamp,AaAlargeAEuropeanABitcoinAexchange,AsuspendedA
servicesAafterAaAsecurityAbreachAinvolvingAtheAlossAofAR9,000ABitcoin,AvaluedAatA
ab
outAE5Amillion.
20



HackersAmountedAaAmassiveAseriesAofAdistr
ibutedAdenial
-
of
-
serviceA
attacksAagainstA
theAmostApopularABitcoinAexchange,AMt.AGox,AinA20R3.AAboutA850,000ABitcoinA
valuedAatAoverAE400AmillionAwereAstolen.AMt.AGoxAsubsequentlyAdeclaredA
bankruptcy.
21



InAlateAAugustA20R2,AanAoperationAtitledABitcoinASavingsAandATrustAwasAshutAdownA
byAtheAowner,AallegedlyAleavingAaroundA
E5.6Amillion
A
inAbitcoin
-
basedAdebts.
22




19

Dan Kervick,

Bitcoin

s Deflationary Weirdness,


New Economic Perspectives
, April 2013, a
vailable at
http://neweconomicperspectives.org/
2013/
04/
talking
-
bitcoin.html
.

20

Mariella Moon ,

Bitcoin Exchange Loses $5 Million in Security Breach,


Engadget,
available at

http://www.engadget.com/
2015/
01/
06/
bitstamp
-
bitcoin
-
exchange
-
hack/
.

21

Mitt Clinch,

Bitcoin Hacked: Price Stumbles After Buying Frenzy,


CNBC
, April 4, 2013, available

at
http://www.cnbc.com/
id/
100615508
.

22

Adrianne Jeffries,

Suspected Multi
-
Million Dollar Bitcoin Pyramid Scheme Shuts Down, Investors Revolt,


The
Verge
, August 27, 2012, available at
http://www.theverge.com/
2012/
8/
27/
3271637/
bitcoin
-
savings
-
trust
-
pyramid
-
scheme
-
shuts
-
down
.

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

9



InASeptemberA20R2,ABitfloor,AaABitcoinAexchange,AreportedAbeingAhacked,AwithA
24,000ABitcoinsAIr
o
ughlyAequivalentAtoAE250,000
JAstolen.AAsAaAresult,ABitfloorA
temporarilyAsuspendedAoperations.
23



OnAAprilA3,A20R3,AInstawallet,AaAweb
-
basedAwalletAprovider,AwasAhacked,AresultingA
inAtheAtheftAofAoverA35,000ABitcoins.AWithAaApriceAofA
ER29.90AperA
BitcoinAatAth
eA
time,AorAnearlyA
E4.6Amillion
A
inAtotal,AInstawalletAsuspendedAoperations.
24



OnAAugustARRA20R3,AtheABitcoinAFoundationAannouncedAthatAaAbugAinA
theA
softwareA
withinAtheAAndroidAoperatingAsystemAhadAbeenAexploitedAtoAstealAfromAusers

A
wallets.
25



OctoberA
23AandA
26,A20R3,AaABitcoinAbank
A
operatedAfromAAustraliaAb
utAstoredAonA
serversAinAtheAUnitedAStates
A
wasAhacked,AwithAaAlossAofA4,R00ABitcoins,AorAoverARA
millionA
AustralianAdollars
.
26

Legal and Regulatory Issues

Legal Considerations Generally

InAorderAtoAprovideA
someAinformationAonArecentAeffortsAbyAfederal,Astate,AandAinternationalA
authoritiesAtoAstudy,Amonitor,AorAregulateAdigitalAcurrencies,AthisAsectionAofAtheAreportAIRJAidentifiesA
theAclauseAinAtheAU.S.AConstitutionAgivingApowerAtoACongressAoverAmoney;AI2JAde
scribesAsomeAofA
theArecentAfederal,Astate,AandAinternationalAactivitiesAandAstudiesAdealingAwithAdigitalAmoney;AandA
I3JAidentifiesAsomeAofAtheAfederalAlawsAthatAmightAbeAimplicatedAorAthatAhaveAbeenAusedAwithA
respectAtoAdigitalAmoney.

InAprovidingAthisAinf
ormation,AweAhaveAidentifiedAsomeAfederalAstatutesAandAregulatoryAregimesA
thatAmayAhaveAsomeAapplicabilityAtoAdigitalAcurrency,AalthoughAnoneAcontainsAexplicitAlanguageAtoA
thatAeffectAorAexplicitlyAmentionsAcurrencyAnotAissuedAbyAaAgovernmentAauthority.ASo
meAfederalA
statutes,AbecauseAofAtheirAbroadAcoverage,AareAlikelyAtoAbeAheldAbyAcourtsAtoAapplyAinAconnectionA
withAdigitalAcurrency.AForAexample,AcourtsAareAlikelyAtoAholdAthatAtheAfederalAcriminalAmailAandA
wireAfraudAstatutesAapplyAtoAfraudulentAschemesAde
signedAtoAresultAinAmonetaryAlossesAinA
connectionAwithAbuying,Aselling,AorAtradingAdigitalAcurrencies.
27
A
FederalAstatutesAprovidingA
consumerAprotectionAwithArespectAtoAconsumerAfinancialAtransactions,Ahowever,AsuchAasAtheATruthA



23

Vitalik Burterin,

Bitfloor Hacked, $250,000 Missing,


Bitcoin Magazine
, September 4, 2012, available at
http://bitcoinmagazine.com/
2139/
bitfloor
-
hacked
-
250000
-
missing/
.

24

Joe Weisenthal,

Bitcoin Service Instawallet: We

ve Bee
n Hacked and are Suspending Service Indefinitely,


Business Insider
, April 3, 2013, available at
http://www.businessinsider.com/
instawallet
-
suspended
-
2013
-
4
.

25

Richard Chirgwen,

Android Bug Batters Bitcoin Wallets,


The Register
, August 12, 2013, available at
http://www.theregister.co.uk/
2013/
08/
12/
android_bug_batters_bitcoin_wallets/
.

26

Ben Grubb,

Australian Bitcoin Bank Hacked: $1 Million + Stolen,


Brisbane Times
, November 8, 2013, available at
http://www.
brisbanetimes.com.au/
it
-
pro/
security
-
it/
australian
-
bitcoin
-
bank
-
hacked
-
1m
-
stolen
-
20131108
-
hv2iv.html
.

27

These include 18 U.S.C. 1341 (mail fraud) and 1343 (wire fraud). The wire fraud statute, for example, applies to

[w]hoever, having devised or inte
nding to devise any scheme or artifice to defraud, or for obtaining money or property
by means of false or fraudulent pretenses, representations, or promises, transmits or causes to be transmitted by means
of wire, radio, or television communication in int
erstate or foreign commerce, any writings, signs, signals, pictures, or
sounds for the purpose of executing such scheme or artifice.


Regulation Z, 12 C.F.R. 226, implementing the Truth in
Lending Act (TILA) is premised on credit transactions, interest, and fees in terms of U.S. money. At present it is a
matter of pure speculation as to whether the Consumer Financial Protection Board (CF
PB), the agency charged with
implementing TILA, could reasonably interpret the statute, given its language, structure, and legislative history, as a
basis for issuing regulations to cover transactions in digital money.

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

10

inALendingAAct
28
A
andAtheATruth
A
inASavingsAAct,
29
A
includeAnoAlanguageAspecificallyAreferencingA
digitalAcurrencyAtransactions.
30

/ower of Congress under Article I of the 4ǯ2ǯ Constitution

OneAofAtheAdirectApowersAofACongressAunderAtheAU.S.AConstitution,AtheAgrantAofAauthorityA

toAcoinA
Mone
y

A
andA

regulateAtheAValueAthereof,

31
A
appearsAtoAprovideAsufficientAauthorityAforAextensiveA
oversightAandAcontrolAofAdigitalAmoney.ATheASupremeACourtAhasAinterpretedAthisAclauseAbroadly.A
TheAclauseAhasAbeenAupheldAtoAauthorizeAlegislationAcharteringAtheAFi
rstABankAofAtheAUnitedAStatesA
andAgivingAitApowerAtoAissueAcirculatingAnotes.
32
A
LegislationArequiringAU.S.ATreasuryAnotesAtoAbeA
treatedAasAlegalAtenderAforAantecedentAdebts
33
A
andAlegislationAthatAabrogatedAgoldAclausesAinAprivateA
contracts
34
A
haveAalsoAbeenAup
heldAonAtheAbasisAofAthisAclauseAofAtheAConstitution.ATheAbreadthAofA
theApowerAcanAbeAdiscernedAfromAaAstatementAofAtheACourtAinAtheALegalATenderACasesAwhenAtheA
CourtAopinedAthatA

[e]veryAcontractAforAtheApaymentAofAmoneyAsimplyAisAnecessarilyAsubjectAtoAt
heA
constitutionalApowerAofAtheAgovernmentAoverAtheAcurrency,AwhateverAthatApowerAmayAbe,AandAtheA
obligationAofAtheApartiesAisAthereforeAassumedAwithAreferenceAtoAthatApower.

35

Recent Activity

ThisAsectionAprovidesAaAbriefAsurveyAofAsomeAofAtheAconcernsAand
A
activitiesAofAfederal,Astate,AandA
internationalAgovernmentalAentitiesAwithArespectAtoAtheAemergenceAofAdigitalAcurrencies.

Recent Legislative ActivityDZ Congress

InACongress,AinterestAinAvirtualAcurrenciesAisAatAtheAexploratoryAstage.ATheASenateAFinanceA
Co
mmitteeAdirectedAtheAGovernmentAAccountabilityAOfficeAIGAOJAtoAreviewAanyAtaxA
requirementsAandAcomplianceArisksAimplicatedAandAtoAassessAtheAInternalARevenueAServiceAIIRSJA
effortsAatAinformingAtheApublicAinAviewAofAtheAoffshoreAandAInternetAsourcesAofAthes
eAcurrencies.AOnA
MayAR3,A20R3,AGAOAreleasedAaAsurvey
36
A
describingAtheAtypesAofAvirtualAcurrencies,AtheAinadequacyA
ofAavailableAdataAonAthem,AandAtheAextentAofAIRSAefforts.AItAnotedAthatAIRSAguidanceAonAvirtualA
currencies
37
A
concentratesAonAcurrenciesAusedAinAvirtualAcommunities,AsuchAasALindenADollarsAinA
SecondALife,AandAoverlooksAcurrencies,AsuchAasABitcoin,AthatAcanAbeAusedAinAtheArealAeconomy.A
GAOAalsoAnotedAthatAtheAtaxAcodeAlackedAclarityAaboutAhowAvirtualAcurrencyAisAt
oAbeAtreatedAforA
reportingApurposes.AIsAitAproperty,Abarter,AforeignAcurrency,AorAaAfinancialAinstrument?




28

15 U.S.C. 1601
et seq.

29

12 U.S.
C. 4301
-
4313. (This applies to deposits held at depository institutions, i.e., banks, thrifts, savings
associations, and credit unions.)

30

A list of the regulations implementing federal laws providing consumer protection for financial transactions can be

found on the Consumer Financial Protection Bureau

s
ICFPB’sJA
website at
http://www.consumerfinance.gov/
regulations/
#ecfr
.

31

U.S. Const.,
A
rt. I, 8, cl. 5.

32

McCulloch v. Maryland, 17

U.S. (4 Wheat.) 316 (1819); Veazie Bank v. Fenno, 75 U.S. (8 Wall.) 533 (1869).

33

Legal Tender Cases (Knox v. Lee), 79 U.S. (12 Wall.) 457(1871); Juilliard v. Greenman, 110 U.S. 421 (1884).

34

Norman v. Baltimore & Ohio R.R., 294 U.S. 240 (1935).

35

Legal T
ender Cases (Knox v. Lee), 79 U.S. (12 Wall.) 457, 549 (1871).

36

U.S. Government Accountability Office,
Virtual Economies and Currencies: Additional IRS Guidance Could Reduce
Tax Compliance Risks
,

GAO
-
14
-
496,
May 2013.

37

Internal Revenue Service,

Tax Cons
equences of Virtual World Transactions,


at
http://www.irs.gov/
Businesses/
Small
-
Businesses
-
&
-
Self
-
Employed/
Tax
-
Consequences
-
of
-
Virtual
-
World
-
Transactions
.

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

11

TheASenateAHomelandASecurityAandAGovernmentalAAffairsACommitteeAhasAbegunAtoAlookAintoAhowA
federalAagenciesAareAconfrontingAtheAriseAofAvirtualAcurren
cies.AOnAAugustAR2,A20R3,AtheA
committee
’sAc
hairmanAandArankingAMemberAsentAletters
38
A
toAseveralAfederalAagencies,AincludingAtheA
DepartmentsAofAJusticeAIDOJJ,AtheATreasury,AandAHomelandASecurity;AtheASecuritiesAandAExchangeA
CommissionAISECJ;AtheACommodityAFu
turesATradingACommissionAICFTCJ;AandAtheAFederalA
Reserve,AseekingAinformationAonAtheirAvirtualAcurrencyApolicies,Ainitiatives,Aactivities,Aguidelines,A
orAplansAregardingAvirtualAorAdigitalAcurrency.ATheAcommitteeAenvisionsAaAgovernment
-
wideA
approachAtoAthe
A
threatsAandApromisesAofAdigitalAcurrency.ATheAcommitteeArequestedAthatAtheAGAOA
examineApossibleApolicyAissuesArelatedAtoAtheAemergencyAofAdigitalAcurrency.

InAresponseAtoAtheASenateAHomelandASecurityAandAGovernmentalAAffairsACommitteeArequest,AGAOA
issuedA
aAGAOAreportAinAMayA20R4,A
VirtualACurrencies:AEmergingARegulatory,ALawAEnforcement,A
andAConsumerAProtectionAChallenges
.
39
A
TheAGAOAreportAdetailsAtheAresponsibilitiesAofAandAeffortsA
undertakenAbyAvariousAfederalAfinancialAservicesAregulatorsAandAlawAenforcem
entAagenciesAtoA
addressAtheAimplicationsAofAvirtualAcurrency.
40
A
TheAreportAincludesAaAchartAthatAlistsAinteragencyA
workingAgroupsAalongAwithAtheirAparticipatingAagencies,Amissions,AandAhowAtheyAareAaddressingA
virtualAcurrencies.AGAO

sAevaluationAofAtheAcurr
entAresponsibilitiesAofAtheAvariousAfederalA
agencies,AtheAworkAofAtheAinteragencyAworkingAgroups,AandAtheAkindsAofAactionsAundertakenAtoAdateA
ledAitAtoAfocusAonAtheAlackAofAeffortsAtoAtackleAconsumerAprotectionAissuesArelatedAtoAvirtualA
currencies.ATheArep
ortAnotedAthatAtheAfederalAagencyAchargedAwithAimplementingAtheAfederalAlawsA
thatAcoverAfinancialAservicesAprovidedAtoAconsumers,AtheAConsumerAFinancialAProtectionABureauA
ICFPBJ,
41
A
wasAnotAheavilyAinvolvedAinAtheAinteragencyAtaskAforces.ATheAreport,Atherefo
re,A
recommendedAmoreAattentionAtoAconsumerAprotectionAandAincreasedACFPBAparticipationAinA
interagencyAtaskAforces:

recent events suggest that consumer protection is an emerging risk, as evidenced by the
loss or theft of bitcoins from exchanges and virtual
warnings issued by nonfederal and non
-
U.S. entities. However, federal interagency
working groups addressing virtual currencies have thus far not emphasized consumer
-
protection issues, and participation by the federal governmen
t

s lead consumer financial
protection agency, CFPB, has been limited.
42

TheACFPBArespondedAbyAindicatingAthat,AasAofAtheAdateAofAtheAGAOAinquiry,AallAofACFPB

sAeffortsA
toAdealAwithAvirtualAcurrencyA
had
A
beenAinformalAexchangesAwithAfederal,Astate,AandAinter
nationalA
regulators.AItAassuredAGAOAthat,AinAtheAfuture,AitA
would
A

identifyAinteragencyAworkingAgroupsA
addressingAvirtualAcurrenciesAwhereAtheACFPB

sAparticipationAwouldAenhanceAitsAownAworkA...AandA
...AcontributeAvaluableAconsumerAprotectionAexpertiseAtoA
thoseAefforts.

43
A
Subsequently,AonAAugustA



38

See
http://www.hsgac.senate.gov/
reports/
.

39

See
http://www.gao.gov/
products/
GAO
-
14
-
496
.

40

Agencies included are the Board of Governors of the Federal Reserve System, the
CFPB
, the Commodity Futures
Trading Commission, the Department of Homeland Security (including the U.S. Immigration and Customs
Enforcement and the U.S. Secret Service), the D
epartment of Justice (including the Federal Bureau of Investigation),
the Department of the Treasury (including the Financial Crimes Enforcement Network and the Office of the
Comptroller of the Currency), the Federal Deposit Insurance Corporation, the Nati
onal Credit Union Administration,
and the Securities and Exchange Commission.

41

12 U.S.C. 5491(a).

42

GAO
-
14
-
496, at 39
-
40.

43

I
bi
d., at 49, Letter to Lawrence Evans, Jr.,
d
irector Financial Markets and Community Investment, U.S. Government
Accountability Office, from William Wade
-
Grey,
a
cting
a
ssistant
d
irector, Card and Payment Markets,
CFPB

(May 6,
2014).

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

12

RR,A20R4,AtheACFPBAissuedAaAconsumerAadvisoryAidentifyingAcharacteristicsAofABitcoinAandA
describingApitfallsAandAissuesAofAvirtualAcurrency,AinAgeneral,AandABitcoin,AinAparticular.
44

Federal Regulatory Activity

Feder
alAregulatorsAareAincreasinglyAscrutinizingAhowAvirtualAcurrencyAandABitcoinArelateAtoAtheirA
mandates.ALawAenforcementAagenciesAhaveAhadAtoAconfrontAcriminalAhackingAofABitcoinAwalletsA
andAkidnappersArequiringAransomApaymentAinABitcoins.
45
A
Moreover,AtheADep
artmentAofAtheA
TreasuryAstatedAthatAterroristsAareAembracingABitcoin.
46
A

InAaAJuneA26,A20R5,AspeechAatAaAconferenceAonAdigitalAcurrencies,AaADepartmentAofAJusticeAofficialA
providedAaAbriefAsketchAofAsomeAfederalABitcoinAprosecutionsAandAcalledAuponAtheAfina
ncialA
servicesAindustryAtoAbeAalertAtoApossibleAabusesAinvolvingAdigitalAcurrencies.
47
A
SomeAfederalA
agencies,AincludingAtheACFPB,AareAcontemplatingAfurtherAaction.AAfterAissuingAaAconsumerA
advisoryAonAtheApitfallsAassociatedAwithABitcoin,AtheACFPBAbeganAacc
eptingAconsumerAcomplaintsA
onAvirtualAcurrencyAandABitcoinAissues.
48

OtherAfederalAregulatoryAactivityAincludesAguidance
49
A
issuedAbyATreasury

sAFinancialACrimesA
EnforcementANetworkAIFINCENJAandAaAWinkelvossABitcoinATrustAregistrationAstatement
50
A
filedA
withAth
eASEC.AInAaddition,AtheASECApublishedAadvisoriesAforAinvestorsAinA20R3
51
A
andA20R4
52
A
onAtheA
threatAofAvirtualAcurrencyAscamsAonAtheAInternet;AfiledAaAcriminalAfraudAcomplaint
53
A
chargingAaA
BitcoinAexchangeAwithAengagingAinAaAPonziAscheme;AandAsuccessfullyAconvi
ncedAaAfederalAdistrictA
courtAthatABitcoinsAareAmoney.ATheAcourtAreasonedAthatAbecauseABitcoinsAareAusedAasAmoneyAtoA
purchaseAgoodsAorAservicesAandAcanAbeAexchangedAforAconventionalAcurrencies,AtheyAareAmoney,A
and,Athus,AaAcontractAforAtheAinvestmentAofABi
tcoinsAisAanA

investmentAcontract,

A
and,Atherefore,AaA



44

CFPB
,

CFPB Warns Consumers About Bitcoin
,


August 11, 2014
,

http://www.consumerfinance.gov/
newsroom/
cfpb
-
warns
-
consumers
-
about
-
bitcoin/
.

45

See

KasiaAKlimasinska,A“TerroristsAEyingABitcoin,ASocialAMediaAtoAFundAJihad,AU.S.ASays
,”A
Bloomberg BNA Banking
Daily
,

JuneAR5,A20R5;ANathanielAPopper,A“
For Ransom, Bitcoin Replaces the Bag of Bills
,”A
New York Times Deal Book
,

July 25, 2015,
http://www.nytimes.com/
2015/
07/
26/
business/
dealbook/
for
-
ransom
-
bitcoin
-
replaces
-
the
-
bag
-
of
-
bills.html
.

46
DepartmentAofAtheATreasury,A“NationalATerroristARiskAAssessment,”AatApp.A57
-
58 (2015),
http://www.treasury.gov/
press
-
center/
press
-
releases/
Pages/
jl0072.aspx
.

47

U.S. Department of Justice
,

“AssistantAAttorneyAGeneralALeslieAR.ACaldwellADeliversARemarksAatAtheAABA’sANationalA
Institute on Bitcoin
and Other Digital Currencies
,


press release,

June 26, 2015,
http://www.justice.gov/
opa/
speech/
assistant
-
attorney
-
general
-
leslie
-
r
-
caldwell
-
delivers
-
remarks
-
aba
-
s
-
national
-
institute
.

48

The
CFPB

has

announced that consumers who encounter a problem with a virtual currency product or service can
now submit a compl
aint with the Bureau
.”ASee

CFPB
,

CFPB Warns Consumers About Bitcoin
,


August 11, 2014
,
http://www.consumerfinance.gov/
newsroom/
cfpb
-
warns
-
consumers
-
about
-
bitcoin
/
.

49

U.S.

Department of the Treasury, Financial Crimes Enforcement Network,

Application of FinCEN

s Regulations to
Persons Administering, Exchanging, or Using Virtual Currencies,


March 18, 2013,
http://www.fincen.gov/
statutes_regs/
guidance/
html/
FIN
-
2013
-
G001.html
.

50

Form S
-
1 Registration Statement, Winkelvoss Bitcoin Trust,
http://www.sec.gov/
Archives/
edgar/
data/
1579346/
000119312513279830/
d562329ds1.htm
.

51
U.S. Securities and Exchange Commission
,

Office of Investor Education and Advocacy,

Investor Alert: Ponzi
S
chemes Using
V
irtual Currencies
,”

SEC Pub. No. 153 (7
/13); U.S. Securities and Exchange Commission
,


SEC
Charges Texas Man with Running Bitcoin
-
Denominated Ponzi Scheme


p
ress
r
elease 2013
-
132,
July 23, 2013,
http://www.sec.gov/
News/
PressRelease/
Detail/
PressRelease/
1370539730583
.

52

U.S. Securities and Exchange Commission,

Investor Alert: Bitcoin and Other Virtual Currency
-
Related
Investments
,


May 7, 201
),
http://investor.gov/
news
-
alerts/
investor
-
alerts/
investor
-
alert
-
bitcoin
-
other
-
virtual
-
currency
-
related
-
investments#.U7rMyCgYCZQ
.

53

See
http://www.sec.gov/
litigation/
complaints/
2013/
comp
-
pr2013
-
132.pdf
.

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

13

securityAunderAfederalAsecuritiesAlaw.
54
A
InAanotherAenforcementAaction,AtheADepartmentAofA
HomelandASecurityAchargedAMt.AGox,AwhichAisAtheAJapanese
-
basedAlargestABitcoinAexchangeAinAtheA
UnitedAStates,Awit
hAoperatingAanAunlicensedAmoneyAservicesAbusinessAinAviolationAofAR8AU.S.C.A
SectionAR960AandAseizedAitsAbankAaccount.ASubsequently,AMt.AGoxAfiledAforAbankruptcyAinAJapan,A
andAonAJuneAR4,A20R4
,A
aAfederalAbankruptcyAjudgeAapprovedAitsApetitionAunderAChapterA
R5AofAtheA
U.S.ABankruptcyACode,AallowingAtheAU.S.AbankruptcyAcourtAtoAprotectAitsAU.S.AassetsAwhileAtheA
bankruptcyAproceedingsAcontinueAabroad.
55
A

TheAfederalAbankingAregulatorsAhaveAyetAtoAissueAguidanceAorAregulationsAgoverningAhowAbanksAareA
toAdealAwithA
Bitcoin,AoutsideAofAtheAanti
-
moneyAlaunderingAframework.AUnderAcurrentAlaw,AtheA
federalAbankingAregulatorAwithAtheAgreatestAresponsibilityAoverAtheApaymentAsystemAisAtheABoardAofA
GovernorsAofAtheAFederalAReserveASystem.
56
A
InAFebruaryA20R4,AFederalAReserveAC
hairAJanetA
YellenAtoldAtheASenateABankingACommitteeAthatA

BitcoinAisAaApaymentAinnovationAthat

sAtakingA
placeAoutsideAtheAbankingAindustry.AToAtheAbestAofAmyAknowledgeAthere

sAnoAintersectionAatAall,AinA
anyAway,AbetweenABitcoinAandAbanksAthatAtheAFederalAR
eserveAhasAtheAabilityAtoAsuperviseAandA
regulate.

57
A
Nonetheless,AtheAFederalAReserveABoard,AinAitsAMayA9,A20R4,AjointAmeetingAwithAitsA
FederalAAdvisoryACouncil,AconsideredABitcoin

sApotentialAasA

aAthreatAtoAtheAbankingAsystem,A
economicAa
ctivity,AorAfinanc
ialAstability”
A
andAappearsAtoAhaveAadoptedAaApolicyAthatAmayAbeA
characterizedAasAwatchfulAwaiting.
58
A
T
hatApolicyAproducedAnoAregulatoryAissuancesAinA20R4
.A
However,
A
studiesAofAtheAtec
hnicalAaspectsAofABitcoin
A
wereAfeaturedAinAthreeAresearchApapers,AtwoA
issue
dAbyAFederalAReserveAregionalAbanks
59
A
andAone
A
publishedAbyAtheAFederalAReserveABoard

sA
DivisionsAofAResearchA
and
A
StatisticsAandAMonetaryAAffairs
.
60




54

Securities and Exchange Commission v. Shavers, 2013 WL4028182, No. 4:13
-
CV
-
416 (E.D. Tex. August 6, 2013).
This appears
to be the first ruling addressing the question of whether digital currency issued without the backing of a
government or other official entity is to be legally considered money.

55

Michael Balthon,

Mt. Gox U.S. Bankruptcy Approved to Help Bitcoin Hunt,


Bl
oomberg News
,

June 17, 2014,
http://www.bloomberg.com/
news/
2014
-
06
-
17/
mt
-
gox
-
u
-
s
-
bankruptcy
-
approved
-
to
-
help
-
bitcoin
-
hunt.html
.

56

A section

of the U.S. Code is entitled

Regulatory responsibility of Board for payment system,
”AR2AU.S.C.A§
4008.
Under that provision, which was enacted as part of the Expedited Funds Availability Act of 1987, Congress has
delegated to the Board of Governors of the

Federal Reserve System

responsibility to regulate ... any aspect of the
payment system, including the receipt, payment, collection, or clearing of checks, and any related function of the
payment system with respect to checks.


57

Senate Committee on Banki
ng, Housing, and Urban Affairs, Semiannual Monetary Policy Report to the Congress,
February 27, 2014, available at
http://www.banking.senate.gov/
public/
index.cfm?
Fu
seAction=
Newsroom.Video
.

58

Federal Advisory Council and Board of Governors of the Federal Reserve System, Record of Meeting
,

May 9, 2014
,

http://www.federalreserve.gov/
aboutthefed/
fac.ht
m/
. The Record of the Meeting at p. 10 includes the following
statement with respect to Bitcoin:

Systemically, Bitcoin

s nascency makes it more curiosity than threat. Its greatest
near
-
term hazards are its avoidance of consumer protection measures and il
licit use, both of which support increased
regulation. Medium
-

to long
-
term effects could be more pronounced as the network self
-
refines and adoption increases,
requiring traditional payment processors to adapt and respond.


59

Franois R. Velde,

Bitcoin:
A Primer,


Chicago Fed Letter
,

December 2013
,

https://www.chicagofed.org/
publications/
chicago
-
fed
-
2013/
december
-
317
;

and Stephanie Lo and J. Christina W
ang,

Bitcoin as Money,


Federal Reserve Bank of Boston, Current Policy Perspectives, No. 14
-
4
,

http://www.bostonfed.org/
economic/
current
-
policy
-
perspectives/
2014/
cpp1404.htm
;AandATimASablik,A“DigitalACurrency:ANewAPrivateACurrenciesALikeABitcoinAOfferA
Potential

andAPuzzles,”AFederalAReserveABankAofARichmondAEconFocusAI3dAQuarterA20R3J.

60

Anton Badev and Matthew Chen,
Bitcoin: Technical Background and Data Ana
lysis
, Federal Reserve Board,
Divisions of Research & Statistics and Monetary Affairs, Finance and Economics Discussion Series 2014
-
10
,

October
7, 2014
,

http://www.fed
eralreserve.gov/
econresdata/
feds/
2014/
files/
2014104pap.pdf
.

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

14

Federal Reserve Regional Bank Activities

AtAleastAthreeAFederalAReserveAeconomistsAareAstudyingAdigitalAcurren
ciesAandABitcoinAinA
particular.
61
A
Moreover,AaA
d
irectorAofARisk,APolicy,AandAAnalyticsAinAtheABanking,ASupervisionA
and
A
RegulationADivisionAofAtheAFederalAReserveABankAofASanAFranciscoArecentlyApublishedAanAarticleA
gearedAtoAalertingAcommunityAbankersAtoAtheA
implications,AincludingAtheA

potentialAopportunitiesA
andArisks.”
62
A

2tate Regulatory Activity

StateAauthoritiesAmovingAinAtheAdirectionAofAre
gulatingAvirtualAcurrenciesAsometimesAdiscover
A
problemsAinAapplyingAexistingAlawsA
toA
technologicalAcurrencies.A
Three
A
states

NewAYork
,A
California
,AandA
Connecticut

haveAtakenAstepsAtoAdeviseAaAregulatoryAframeworkAthatAcouldAusherA
inA
increasedAuseAofAdigitalAcurrencies,
63
A
providedAadequateAconsumerAprotectionsAandAregulatoryA
safeguardsAcanAbeAdeveloped.
64
A
InAanAeffortAtoAassistAstatesAinAdevelopingAregulationsAtoAlicenseAandA
superviseAvirtualAcurrencyAoperations,A
theAConferenceAofAStateABankASupervisorsAICSBSJ,
65
A
releasedAaA
CSBSAModelARegulatoryAFrameworkAforAStateARegulationAofACertainAVirtualACurrencyA
Acti
vities
A
ICSBSAModelAFrameworkJ
66
A
onASeptemberAR5,A20R5.AAccordingAtoAtheACSBS,AtheA
CBSBAModelARegulatoryAFrameworkA“includesAcomponentsAthatACSBSAhasAidentifiedAasAkeyAtoAaA
virtualAcurrencyAregulatoryAregimeAthatAprotectsAconsumersAandAtheAlargerAmarketplace
,AwhileA
supportingAresponsibleAinnovation.”
67

New 8ork 2tate

OnAJuneA3,A20R5,ANewAYorkAStateAbecameAtheAfirstAstateAtoAestablishAaAframeworkAforAregulatingA
digitalAcurrencyAbusinessesAwhenAtheANewAYorkAStateADepartmentAofAFinancialAServicesA
INYSDFSJAissuedA
regulationsAprovidingAforAprudentialAsupervisionAofAvirtualAcurrencyAbusinessesA
operatingAinANewAYorkAState.
68
A
Moreover,AonAMayA7,A20R5,ANewAYorkAStateAissuedAitsAfirstAvirtualA
currencyAlicenseAtoAaABitcoinAexchange,AitBitATrustACompany,ALLC,AwhichAalsoArec
eivedAaAlicenseA



61

Franois R. Velde,

Bitcoin: A
P
rimer,


Chicago Fed Letter
,

December 2013,
http://www.chicagofed.org/
digital_assets/
publications/
2013/
cfldecember2013_317.pdf
; Stephanie Lo and J. Christina Wang,

Bitcoin as Money,


Federal Reserve Bank of Boston, Current Policy Perspectives, No. 14
-
4
,

http://www.bostonfed.org/
economic/
current
-
policy
-
perspectives/
2014/
cpp1404.htm
.

62

WallaceAYoung,A“WhatACommunityABankersAShouldAKnowAAboutAVirtualACurrencies,”A
Federal Reser
ve Bank of San
Francisco Community Banking Connections
”AI2dAQuarter,A20R5J.

63

Evan Weinberger,

NY Bitcoin Rules Put Virtual Currency On Path to Legitimacy,


Law 360 (July 17, 2014)
,

http://www.law360.com/
articles/
558472?
utm_source=
rss&
utm_medium=
rss&
utm_campaign=
articles_search
.

64

Michael Bobelian,

New York

s Financi
al Regulator, Benjamin Lawsky, Maintains Lead
o
n Bitcoin Regulation,


Forbes (July 25, 2014)
,

http://
www.forbes.com/
sites/
michaelbobelian/
2014/
07/
25/
new
-
yorks
-
financial
-
regulator
-
benjamin
-
lawsky
-
maintains
-
lead
-
on
-
bitcoin
-
regulation/
.

65

The Conference of State Bank Supervisors
(CSBS)
is an organization representing state banking regulators.
See
http://www.csbs.org/
about/
what/
Pages/
default.aspx
.

66

CSBS
,

“StateARegulatorsAIssueAModelARegulatoryAFrameworkAforAVirtualACurrencyAActivities
,”AmediaArelease,A
September 15, 2014
,

https://www.csbs.org/
news/
press
-
releases/
pr2015/
Pages/
PR091515.aspx?
PF=
1
.

67

Ibid.

68

New York Department of Financial Services, Superintendent Benjamin A. Lawsky,

NY
S
DFS
Announces Final
Bitlicense Framework for Regulating Digital Currency Firms
,
”A
speech,
June 3, 2015
,
http://www.dfs.ny.gov/
about/
speeches/
sp1506031.htm
. (Contains a link to New Yor
k Codes, Rules and Regulations, Tit. 23, Ch. I, Regulations of
the Department of Financial Services, Part 200, Virtual Currencies.)

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

15

toAoperateAasAaAtrustAunderANewAYorkAStateAbankingAlaw.
69
A
InASeptember
A
20R5
,
A
NewAYorkAgrantedA
t
heAfirstABitLicenseAapplicationAtoA
aAvirtualAcurrencyAfirm,ACircleAInternetAFinancial.
70
A
OnAOctoberA
5,A20R5,AaA
NewAYorkA
licenseAtoAoperateAasAaAtru
stAwasAissuedAtoAaABitcoinAexchange,A
Gemini
A
TrustA
CompanyALLC,AwhichAwasA
foundedAbyACameronAandATylerAWinlevoss.
71

TheANewAYorkAregulationsAareAtheAresultAofAeffortsAofAtheANYSDFSAthatAbeganAinA20R4AwithAtheA
issuanceAofAsubpoenasAseekingAinformationAonAaAra
ftAofAvirtualAcurrencyAissues.
72
A
OnAJanuaryA28
-
29,A20R4,
A
73
A
theANYSDFSAheldApublicAhearingsAonApossibleAregulationAofAvirtualAcurrenciesAand,AonA
JulyAR7,A20R4,Aissued,AforApublicAcomment,AaAproposalAtoAlicenseAandAregulateAvirtualAcurrencyA
businessesAoperati
ngAinANewAYorkAState.
74
A
AArevisedAproposalAwasAissuedAinAFebruaryA20R5.
75

TheAfinalAregulationsArequireAthatAbusinessesAinvolvedAinAtransmitting,Astoring,Abuying,Aselling,A
exchanging,Aissuing,AorAadministeringAaAvirtualAcurrencyAmustAbeAlicensedAbyAtheA
NYSDFS.A
LicensesAareAnotArequiredAforAdigitalAcurrenciesAusedAexclusivelyAinAanAonlineAgamingAenvironmentA
orAforAdigitalAcurrenciesAthatAcanAbeAredeemedAforAgoodsAandAservices,AprovidedAtheyAcannotAbeA
exchangedAforAfiatAmoneyAIsuchAasAU.S.AcurrencyJ.ALicen
sesAareAnotArequiredAforAsoftwareA
developersAorAmerchantsAinvestingAinAvirtualAcurrenciesAorAusingAvirtualAcurrenciesAsolelyAtoAbuyA
andAsellAgoodsAandAservices.AAAstate
-
charteredAbankAmayAbeAapprovedAbyAtheANYSDFSAtoAoperateA
asAaAvirtualAcurrencyAexchangeA
withoutAsecuringAaAvirtualAcurrencyAlicense.

TheAregulationsAprescribeAstandardsAforAvirtualAcurrencyAbusinessesAandAestablishAproceduresAforA
theANYSDFSAtoAuseAinAapproving,A
sus
pending,AorArevokingAvirtualAcurrencyAlicenses
.A
BeforeA
grantingAaAlicense,AtheA
NYSDFSAmustAinvestigateAtheAfinancialAcondition,Acharacter,AandAgeneralA
fitnessAofAanyAapplicant.AAAlicenseAmayAbeAgrantedAonlyAwhenAitAhasAbeenAdeterminedAthatAtheA
businessAwillAbeAconductedA“honestly,Afairly,Aequitably,Acarefully,AandAefficientlyA...Aand
A
inAaA
mannerAcommandingAtheAconfidenceAandAtrustAofAtheAcommunity.”
76

TheAregulationsAprovideAtheANYSDFSAwithAbroadAauthorityAtoAprescribeAminimumAcapitalA
requirementsAandAtoAsubjectAlicenseesAtoAanyAconditionAdeemedA“appropriate.”ATheAlicensingA
processAreq
uiresAtheAsubmissionAofAdetailedAinformationAonAprincipalAofficers,AprincipalA
stockholders,AprincipalAbeneficiaries,AandAmembersAofAtheAboardAofAdirectors,AandAfingerprintsA
fromAcertainAofficersAandAemployeesAwithAaccessAtoAcustomerAfunds.AApplicantsAareAa
lsoArequiredA
toAsupplyAinformationAonAbankingAarrangements;AfulfillmentAofAtaxAobligations;AmethodologyAforA
valuingAtheAvirtualAcurrency;AandAproductsAandAservicesAtoAbeAoffered.ATheAregulationArequiresA



69

New York State Department of Financial Services,
p
ress
r
elease,A“NYDFSAGrantsAFirstACharterAtoAaANewAYorkA
Virtual Currency

Company
,
”AMayA7,A20R5,A
http://www.dfs.ny.gov/
about/
press/
pr1505071.htm
.

70

New York State Department of Financial Services,
p
ress
r
elease,A“NYSDFSAAnnouncesAApprovalAofAFirstABitlicenseA
from a Virtual Curre
ncyAFirm,”ASeptemberA22,A20R5,A
http://www.dfs.ny.gov/
about/
press/
pr1509221.htm
.

71

New York State Department of Financial Services,
p
ress
r
elease,A“NYSDFSAGrantsACharterA
toA‘Gemini’ABitcoinA
Exchange Founded by Cameron and Tyler Winkelvoss
,
”AOctoberA5,A20R5,A
http://www.dfs.ny.gov/
about/
press/
pr1510051.htm
.

72

New York State

Department of Financial Services,

Notice of Inquiry on Virtual Currencies,


August 12, 2013,
http://www.dfs.ny.gov/
about/
press2013/
memo1308121.pdf
.

73

See
http://www.dfs.ny.gov/
about/
hearings/
vc_01282014_indx.htm
.

74
New York State Department of Financial Services, Proposed Regulations Submitted for a 45
-
Day Notice and
Comment Period to Solicit Public Feedback
,

http://www.dfs.ny.gov/
about/
press2014/
pr1407171.html
.

75

The text of the original proposal, the revised proposal, and the final regulations, together with public comments, may
be found at the New York Department of Finan
cial Services website at
http://www.dfs.ny.gov/
legal/
vcrf_comments_3749_up.htm
.

76
NYCRR, Tit. 23, sec. 200.6; 37 N.Y. Reg. 7 (June 24, 2015).

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

16

regulatoryAperiodicAexaminations;AfinancialAdisclosur
es;AandAapprovalAofAchangeAofAcontrolAandA
mergersAorAacquisitions.A

ThereAareAanti
-
moneyAlaunderingAprovisionsAinAadditionAtoAthoseArequiredAunderAfederalAlaw,
77
A
cyberAsecurity,AandAanti
-
fraudArequirements,AandAanAarrayAofAconsumerAprotectionAprovisions.A
Cu
stomersAmustAbeAprovidedAwithAdisclosuresAthatAaddressAsuchAmattersAas
A
priceAvolatility;A
whetherAtransactionsAareAreversible;AriskAofAfraud;AliabilityAforAunauthorizedAtransactions;AandAtheA
possibilityAthatAfutureAlegislationAwillAhaveAanAadverseAimpact.AU
nderAtheAregulations,AeachAvirtualA
currencyAbusinessAoperatingAinANewAYorkAwillAbeArequired,AbeforeAeachAtransaction,AtoAdiscloseA
specifiedAinformationAinAwritingAandAhaveAtheAdisclosureAacknowledgedAbyAtheAcustomer.A

Start
-
upAvirtualAcurrencyAbusinessesAw
illAbeAableAtoAqualifyAforAaAconditionalAlicenseAthatAwouldAbeA
issuedAforAtwoAyearsAthatAwouldAbeArenewableAatAtheAdiscretionAofAtheANewAYorkAStateA
SuperintendentAofAFinancialAServices.ABeforeAaAconditionalAlicenseAisAissued,AtheANYSDFSAmustA
considerAvario
usAfactors,AincludingAtheApotentialArisksAandAmeasuresAtoAbeAtakenAtoAmitigateAthem;A
whetherAtheAbusinessAisAaAregulatedAorAlicensedAfinancialAserviceAprovider;AandApreviousAbusinessA
experienceAofAtheAapplicant.

California

CaliforniaAhasAenactedAlegislatio
nAopeningAtheAwayAforAvirtualAcurrencyAtoAbeAusedAtoApurchaseA
goodsAandAservices.ACaliforniaAAssemblyAbillAno.AR29,AsignedAintoAlawAbyAGovernorAJerryABrownA
onAJuneA29,A20R4,ArepealsAaAprovisionAofACaliforniaAlawAthatAoutlawedAanythingAcirculatingAasA
moneyA
otherAthanAtheAlawfulAmoneyAofAtheAUnitedAStates.
78
A
InAaddition,AitAappearsAthatAtheA
CaliforniaADepartmentAofABusinessAOversightAisAinAtheAprocessAofAconsideringAwhetherAtoAregulateA
virtualAcurrencyAbusinesses.
79

Connecticut

OnAJuneAR9,A20R5,AConnecticutAena
ctedAlegislation
80
A
amendingAtheAConnecticutAMoneyA
TransmissionAAct
81
A
toArequireAlicensesAforAallAvirtualAcurrencyAbusinessesAoperatingAinA
Connecticut.ATheAlegislationAnotAonlyAsubjectsAthemAtoArequirementsAimposedAonAmoneyAservicesA
businesses,AsuchAasAcurren
cyAexchangesAandAmoneyAtransmitters,AitAincludesAprovisionsA
establishingAadditionalAstandardsAforAvirtualAcurrencyAbusinesses.ATheAlegislationAdefinesA“virtualA
currencyAbusiness”AtoAmeanA“anyAtypeAofAdigitalAunitAthatAisAusedAasAaAmediumAofAexchangeAorAaA
f
ormAofAdigitallyAstoredAvalueAorAthatAisAincorporatedAintoApaymentAsystemAtechnology.”
82
A
VirtualA
currencyAusedAsolelyAforAonlineAgamingAandAvirtualAcurrencyAthatAisApartAofAaAconsumerArewardsA



77

See

RaveenaABenepal,A“
Money Laundering
Emerges as Contentious BitLicense Provision
,”A
Bloomberg BNA Banking
Daily
,

July 29, 2015. Included in the requirements are appointment of a compliance officer and annual compliance
audits.

78

See
http://leginfo.legislature.ca.gov/
faces/
billNavClient.xhtml?
bill_id=
201320140AB129
.

79

See

CaliforniaADepartmentAofABusinessAOversight,A“WhatAYouAShouldAKnowAAboutAVirtualACurrencies”AIAprilA22,A
20R4J,AandA“
DBO Comm
issionerAOwenAClarifiesACoinbaseAExchange’sARegulatoryAStatusAinACalifornia
”AIJanuaryA27,A
20R5J.ATheAlatterAstatesAthatA“
The California Department of Business Oversight has not decided whether to regulate

virtual currency transactions,
or the businesses th
atAarrangeAsuchAtransactions,AunderAtheAstate’sAMoneyATransmissionA
Act.
”ABothAareAavailableAatA
http://www.dbo.ca.gov/
search.
asp?
q=
virtual+currency&
cx=
001779225245372747843%3Ayckvhkzkpng&
cof=
FORID%3A10&
ie=
UTF
-
8
.

80

Conn. Pub. Act No. 15
-
53 (June 19, 2015),
http://www.cga.ct.gov/
2015/
act/
p
a/
2015PA
-
00053
-
R00HB
-
06800
-
PA.htm
.

81

Conn. Gen. Stat. 36a
-
595 to 36a
-
612,
http://www.cga.ct.gov/
current/
pub/
chap_668.htm#sec_36a
-
595
.

82

Conn. Gen. Stat. 36a
-
596(14).

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

17

programAthatAcannotAbeAconvertedAintoAfiatAcurrencyA
are
A
notAcover
edAbyAtheAdefinition.AUnderAtheA
legislation,AvirtualAcurrencyAbusinessesAmustAmaintainAaAsuretyAbondAsufficientAtoAaccountAforAtheA
potentialAvolatilityAofAtheAdigitalAcurrency.AUnderAtheAlegislation,AtheAConnecticutABankingA
CommissionerAhasAbroadAauthority
A
toAimposeAconditionsAwhenAgrantingAaAvirtualAcurrencyAlicenseA
andAmayAdisapproveAanAapplicationAuponAdeterminingAthatAissuingAtheAlicenseAwouldAsubjectA
“undueAriskAofAfinancialAlossAtoAconsumers,AconsideringAtheAapplicant’sAproposedAbusinessA
model.”
83
A

Con
ference of 2tate Bank 2upervisors

OnADecemberAR4,A20R4,At
heACSBSA
issuedAitsA
DraftAModelARegulatoryAFramework
84
A
inAanAattemptA
toAbeginAaAprocessAforAstatesAtoAdevelopAsomeAlevelAofAconsistencyAinAtheirAapproachesAtoAtheA
regulationAofAvirtualAcurrencyAbusines
sesAwhileAemphasizingAtheAneedAforAflexibility.ATheAreleaseA
ofAtheAdraftAframeworkAwasAaccompaniedAbyArequestsAforApublicAcommentAonA
20AquestionsAthatA
attempt
ed
A
toAdiscernA
suchAmattersAasA
theAextentAtoAwhichAregulatoryAframeworksAthatAcoverAmoneyA
servicesA
businessesAmustAbeAtailoredAtoAcoverAcompaniesAhandlingAdiverseA
virtualAcurrencyA
activities.AIssuesAcoveredAinAtheAquestionsArange
d
A
fromAtheAadvisabilityAofAone
-
size
-
fits
-
allA
regulationAtoAsuchAmattersAasAhowAtoAdenominateAcapitalArequirements

dollarsAorAv
irtualA
currency.

AfterAreviewingA
commentsAreceivedA
fromAtheApublicAandAconductingA
consultationsAwithAregulatorsA
andAotherAstakeholders,A
theACSBSAfinalizedAtheAdraftAframeworkAandAreleasedAtheA“CSBSAModelA
RegulatoryAFrameworkAforAStateARegulationAofACertain
A
VirtualACurrencyAActivities”AI
M
odelA
FrameworkJAo
nASeptemberAR5,A20R5
.
85
A
TheAModelAFrameworkAsetsAaAstandardAforAstateAregulationA
ofAvirtualAcurrencyAactivitiesAbyAentitiesAnotAincludedAinAstateAregulationAofAdepositoryAinstitutions.
A
ItArecommendsAthatAstat
esAadoptAlawsAtoAcoverAfirmsAandAactivitiesAhandlingAvirtualAcurrencyAthatA
parallelAtheirAlawsAgoverningAfirmsAandAactivitiesAinvolvingAsovereignAcurrency.A
TheA
ModelA
Framework,Atherefore,
A
cover
sAfirmsA
transmittingAvirtualAcurrency
A
andAfirmsA
exchangingA
virtualA
currency.AItAalsoAincludes
A
firmsAprovidingAservicesA
toA
virtualAcurrencyAtransmittersAandAexchanges,A
suchAasA
purveyorsAofA
wallets,ApaymentAprocess
ors,AandA
merchantAacquirers
.
A
TheAModelA
Framework,Ahowever,AdoesAnotAincludeAaAspecialAregimeAforAstartu
pAcompanies
.AInstead,A
theACSBSA
advisesAanyAstateAthatAchoosesAtoAincludeAseparateAarrangementsAforAnewAcompaniesAtoAdeviseA
adequateAconsumerAprotections.

T
he
A
ModelAFramework
’sAdefinitionAofA
v
irtualAcurrency
86
A
begins
A
byAstatingAthatA“[v]irtualAcurrencyA
isA
aA
digitalArepresentationAofAvalueAusedAasAaAmediumAofAexchange,AaAunitAofAaccount,AorAaAstoreAofA



83

Conn. Gen. Stat. 36a
-
600(7)(c).

84

Conference of State Bank Supervisors,

State Regulatory Requirements for Virtual Currency Activities; CSBS Draft
Model Regulatory Framework and Request for Public Comment
,”ADecemberAR6,A20R4,

http://www.csbs.org/
regulatory/
ep/
Pages/
framework.aspx
.

85

CSBS,A“StateARegulatorsAIssueAModelARegulatoryAFrameworkAforAVirtualACurrencyAActivities
,


media release,

September 15, 2014,
https://www.csbs.org/
news/
press
-
releases/
pr2015/
Pages/
PR091515.aspx?
PF=
1
.

86

Ibid. The definition is as follows:

Virtual Currency is a digital representation of va
lue used as a medium of exchange, a unit of
account, or a store of value, but does not have legal tender status as recognized by the United States
Government. Virtual Currency does not include the software or protocols governing the transfer of
the digital

representation of value. Virtual Currency does not include stored value redeemable
exclusively in goods or services limited to transactions involving a defined merchant. Virtual
Currency does not include units of value that are issued in affinity or rewar
ds programs and that
cannot be redeemed for either fiat or virtual currencies. Virtual currency, as used in this framework,
includesA“digitalAcurrency”AandA‘cryptocurrency.

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

18

value,AbutAdoesAnotAhaveAlegalAtenderAstatusAasArecognizedAbyAtheAUnitedAStatesAgovernment.”
A
TheA
definitionAexcludes
A
theA
software
A
employedAinAvirtualAcurrencyAop
erationsAandAc
ertainAstoredAvalueA
andArewardsAprograms
A
asAwellAasAtheA
followingAtypesAofAactivities:

Merchants and consumers who use virtual currencies solely for the purchase or sale of
goods or services;

Activities that are not financial in nature but ut
ilize technologies similar to those used by
digital currency
;

Activities involving units of value that are issued in affinity or rewards programs and that
cannot be redeemed for either fiat or virtual currencies; or

Activities involving units of value
that

are
used solely within online gaming platforms
and have no

87

T
heAModelAFrameworkA
embodiesAaAre
gulatoryAschemeAthatA
isAsimilarAtoAtheAtypesAofAregulationA
currentlyAapplicableAunder
A
stateAlawAtoAfinanc
ialAfirmsAhandlingAtransactionsAinvolvingAU.S.AdollarsA
orAotherAfiatAmoney.ATheAModelAFrameworkAincludes
A
requirementsA
forAs
upervision,Aexamination,A
andAenforcementAauthorit
yAoverAvirtualAcurrencyAbusinessesAandAactivities.AIt
A
specifiesAthatA
aA
state
’s
A
virtualAcurrencyAregulatoryA
regimeAshouldAcoverAlicensing
,
A
capital
A
and
A
investment
A
standards
,
A
consumerAprotection
,
A
cyberAs
ecurity
,
A
andAcomplianceAstandards.AAlthoughAtheAModelAFrameworkA
includesArequirementsAforAsuretyAbonds,AitAdoesAnotArequireAcyberAinsur
ance
.

Applicability of 2elected Laws to Digital Currency

Counterfeiting Criminal 2tatutes

TheAbasicAgovernmentalAinterestAinAenactingAlawsAagainstAcounterfeitingAobligationsAofAtheAUnitedA
StatesAisAprotectingAtheAvalueAofAtheAdollarAandAtheAmonetaryAsystem
.AUnderAtitleAR8AU.S.C.A
SectionsA470
-
477AandA485
-
489AcounterfeitingAandAforgingAofAU.S.Acoins,Acurrency,AandAobligationsA
isAsubjectAtoAcriminalAsanctions,AandAunderAR8AU.S.C.ASectionsA478
-
483,AcriminalAsanctionsAareA
prescribedAforAcounterfeitingAforeignAco
ins,Acurrency,AandAobligations.ANoneAofAtheseAstatutes,A
however,AappliesAexpresslyAtoAaAcurrencyAthatAexistsAonlyAonAtheAInternetAandAinAcomputersAinAaA
digitalAform.AAlthoughAtheAusualAprosecutionAunderAtheseAstatutesAinvolvesAattemptsAtoAreplicateA
Federal
A
ReserveAnotesAorAcoinsAproducedAbyAtheAU.S.AMint,AatAleastAoneAcaseAinvolvedAaAconvictionA
forAissuingAandAcirculatingALibertyADollars,AdesignedAasAsimilarAtoAbutAdistinguishableAfromAU.S.A
dollarsAandAintendedAtoA

limitArelianceAon,AandAtoAcompeteAwith,AUn
itedAStatesAcurrency.

88
A
WhetherAaAdigitalAcurrency,AevenAifAitAisAdesignedAtoAattackAtheAvalueAofAU.S.AlegalAtender,AcouldAbeA
prosecutedAunderAtheAcurrentAlanguageAofAtheseAstatutesAisAnotAclear.
89




87

Ibid.

88

U.S. Attorney

s Office, Western District of North Carolina
,

Defendant Co
nvicted of Minting His Own Currency,


p
ress
r
elease,

March 18, 2011,
http://www.fbi.gov/
charlotte/
press
-
releases/
2011/
defendant
-
convicted
-
o
f
-
minting
-
his
-
own
-
currency
.

89

For a discussion, see,
Derek A. Dion,

I

ll Gladly Trade You Two Bits on Tuesday for a Byte Today: Bitcoin,
Regulating Fraud in the E
-
C
onomy of Hacker
-
Cash,


University of Illinois
,

Journal of Law, Technology and Policy
,
vol.
2013

(Spring 2013).

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

19

3he 2tamp /ayments Act of 1862, 18 4ǯ2ǯCǯ 2ection 336

TheAS
tampAPaymentsAActAmakesAitAaAcrimeAtoAissue,Acirculate,AorApayAoutA

anyAnote,Acheck,A
memorandum,AtokenAorAotherAobligation,AforAaAlessAsumAthanAER,AintendedAtoAcirculateAasAmoneyAorA
toAbeAreceivedAorAusedAinAlieuAofAlawfulAmoneyAofAtheAUnitedAStates.

A
This
A
lawAwasAenactedAinA
R862AtoAprotectApostageAstampsAfromAcompetitionAbyAprivateAtokens.ACongressAhadAapprovedA
stampsAasAcurrencyAforAfractionsAofAERAbecauseAmetalAcoinsAwereAbeingAhoardedAandAwereAvirtuallyA
outAofAcirculation.
90
A
ItAdoesAnotAseemAlikelyAthatA
aAcurrency
91
A
thatAhasAnoAphysicalityAwouldAbeAheldA
toAbeAcoveredAbyAthisAstatuteAevenAthoughAitAcirculatesAonAtheAInternetAonAaAworldwideAbasisAandAisA
usedAforAsomeApaymentsAofAlessAthanAER.ATheAlanguageAofAtheAstatute,A

note,Acheck,Amemorandum,A
token,

A
see
msAtoAcontemplateAaAconcreteAobjectAratherAthanAaAcomputerAfile;Amoreover,AaAdigitalA
currencyAsuchAasABitcoin,AwithoutAaAthird
-
partyAissuer,AcannotAbeAsaidAtoAbeAanAobligation.A
However,AthereAareAsomeAargumentsAthatAcouldAbeAmade,AparticularlyAshouldAaAdig
italAcurrencyA
becomeApervasiveAenoughAtoAbeAconsideredAaApossibleAcompetitorAtoAU.S.AofficialAcurrency.
92

3he Electronic Fund 3ransfer Act, 15 4ǯ2ǯCǯ 2ections 1693 et seqǯ

TheAElectronicAFundATransferAActAIEFTAJAestablishesAaAframeworkAforAtransfersAofAmone
yA
electronically,AbutAitsAcoverageAisAlimitedAinAsuchAaAwayAthatAitAappearsAnotAtoAbeAapplicableAtoAaA
digitalAcurrencyAinAtransactionsAinvolvingAnoAdepositoryAinstitution.ATheAEFTAAspecificallyAappliesA
toAtransfersAofAfundsAinitiatedAbyAelectronicAmeansAfr
omAaAconsumer

sAaccountAheldAatAaAfinancialA
institution.AItAcoversAtransfersA

initiatedAthroughAanAelectronicAterminal,AtelephonicAinstrument,AorA
computer.

93
A
ItsAapplicationAisAlimitedAtoAdepositAaccountsA

establishedAprimarilyAforApersonal,A
family,AorAhou
seholdApurposes,

94
A

heldAbyAaAfinancialAinstitution,

95
A
withA

financialAinstitution

A
limitedAtoAbanks,Athrifts,AsavingsAassociations,AandAcreditAunions.
96

Federal 3ax Law

DigitalAcurrenciesAhaveAcharacteristicsAofAtraditionalAtaxAhavenAjurisdictions:A
earningsAareAnotA
reportedAtoAtheAIRSAandAusersAareAprovidedAsomeAlevelAofAanonymity.AUnlikeAtraditionalAtaxA
havens,Ahowever,AdigitalAcurrenciesAareAableAtoAoperateAwithoutAinvolvingAaAfinancialAinstitution.
97
A



90

For further exposition of the genesis, legislative history, and analysis of the Stamp Payments Act, including the
possibility that it may apply to electronic currency,
see

Thomas P. Vartanian, Robert H. Ledig, and Yolanda
Demianczuk,
Echoes of the Past with Implications for the Future: The Stamp Payments Act of 1862 and Electronic
Commerce
,

67
BNA’sABankingAReport

(September 23, 1996).

91

Virtual currencies, such as Linden Dollars, are not likely to conflict with this statute because they do not appear to

circulate as money or be received in lieu of lawful money,


within the meaning of the statute. They circulate only in a
limited environ
ment and are redeemable only in virtual goods, and, thus, are similar to the tokens and tickets
redeemable in goods and services on a limited basis that courts have found not to have been issued in violation of the
Stamp Payments Act. United States v. Mono
ngahela Bridge Co., 26 F. Cas. 1292 (W.D. Pa. 1863) (No. 15796); United
States v. Roussopulous, 95 F. 977 (D. Minn. 1899).

92

See Vartanian et al., supra, n. 8, and Reuben Grinberg,

Bitcoin: An Innovative Digital Currency,


5 Hastings
Science & Technology
Law Journal 159 (2012).

93

15 U.S.C. 1693a(6).

94

15 U.S.C. 1693a(2).

95

15 U.S.C. 1693a(2).

96

15 U.S.C. 1693a(11).

97

For further information
,

see Marian, Omri,

Are Cryptocurrencies Super Tax Havens?,


112 Michigan Law Review
First Impressions 38 (2013).

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

20

UntilAMarchA20R4,AtheAIRSAprovidedAlimitedAguida
nceAonAtheAtaxAconsequencesAofAactivitiesA
involvingAtheAvirtualAworld.AItAcautioned:A

[i]n general, you can receive income in the form of money, property, or services. If you
receive more income from the virtual world than you spend, you may be required to

report the gain as taxable income. IRS guidance also applies when you spend more in a
virtual world than you receive, you generally cannot claim a loss on an income tax
98


TheAguidanceAwasAlimitedAandAdidAnotAappearAtoAtargetAaAdigitalAcurrencyAsuc
hAasABitcoinAthatAisA
usedAasAaAmediumAofAexchangeAforAgoodsAandAservicesAinAtheArealAworld.AAAGAOAreportAinA20R3A
hadAfoundAinadequateAIRSAeffortsAtoAaddressAtaxAimplicationsAofAvirtualAcurrenciesAnotAusedAwithinA
aAvirtualAeconomy.
99
A
GAOArecommendedAthatAIRS
A
takeAaAstepAtoAcounterAmisinformationA
circulatingAaboutAvirtualAcurrenciesAinAviewAofAtheApossibilityAforAgrowthAinAsuchAcurrencies.A
RatherAthanArecommendingAaAcostlyArigorousAcomplianceAapproach,AGAOArecommendedAthatAIRSA

findArelativelyAlow
-
costAwaysAto
A
provideAinformationAtoAtaxpayers,AsuchAasAtheAwebAstatementAIRSA
developedAonAvirtualAeconomies,AonAtheAbasicAtaxAreportingArequirementsAforAtransactionsAusingA
virtualAcurrenciesAdevelopedAandAusedAoutsideAvirtualAeconomies.

100

ItAappearsAthatAtheAIRSAheede
dAtheAGAOArecommendation.AOnAMarchA25,A20R4,AtheAIRSApostedAonA
itsAwebsiteAaAnotice,A
IRSAVirtualACurrencyAGuidance:AVirtualACurrencyAisATreatedAasAPropertyAforA
U.S.AFederalATaxAPurposes;AGeneralARulesAforAPropertyATransactionsAApply
.
101
A
TheAguidanceA
advisesA
U.S.AtaxpayersAthatAvirtualAcurrencyAisAtreatedAasApropertyAforAfederalAtaxApurposesAandA
providesAanswersAtoAR6AFrequentlyAAskedAQuestions.
102
A
ItAadvisesAtaxpayersAonAaArangeAofAmattersA
suchAasAwhenAtoAincludeAtheAfairAmarketAvalueAofAvirtualAcurrencyAinAcom
putingAgrossAincome;AhowA
toAdetermineAtheAfairAmarketAvalueAofAvirtualAcurrency;AandAwhetherApaymentsAmadeAusingAvirtualA
currencyAareAsubjectAtoAbackupAwithholding.AAccordingAtoAtheAIRS,AsomeAofAtheAgeneralA
implicationsAofAtheArequirementAthatAvirtualAcurr
encyAbeAtreatedAasApropertyAforAfederalAtaxA
purposesAare

Wages paid to employees using virtual currency are taxable to the employee, must be
reported by an employer on a Form W
-
2, and are subject to federal income tax
withholding and payroll taxes.

Payment
s using virtual currency made to independent contractors and other service
providers are taxable and self
-
employment tax rules generally apply. Normally, payers
must issue Form 1099.

The character of gain or loss from the sale or exchange of virtual curren
cy depends on




98

Internal Revenue Service,

Tax Consequences of Virtual World Transactions,


http://www.irs.gov/
Businesses/
Small
-
Businesses
-
&
-
Self
-
Employed/
Tax
-
Consequences
-
of
-
Virtual
-
World
-
Transactions
.

99

U.S. Government Accountability Office,

Virtual Economies and Currencies: Additional IRS Guidance Could
Reduce Tax Compliance Risk
,


GAO
-
13
-
516,
May
15,
2013.

100

Ibid.

101

IRS Notice 2014
-
36 (M
arch 25, 2014)
,


IRS Virtual Currency Guidance: Virtual Currency Is Treated as Property
for U.S. Federal Tax Purposes; General Rules fo
r Property Transactions Apply,


http://www.i
rs.gov/
uac/
Newsroom/
News
-
Releases
-
for
-
March
-
2014
.
(
Hereinafter, IRS Notice 2014
-
36.
)

102

IRS Notice 2014
-
21, at
http://www.google.com/
url?
sa=
t&
rct=
j&
q=
&
esrc=
s&
source=
web&
cd=
2&
ved=
0CCcQFjAB&
url=
http%3A%2F%2Fwww.irs.gov%2Fpub%2Firs
-
drop%2Fn
-
14
-
21.pdf%3Futm_source%3D3.31.2
014%2BTax%2BAlert%26utm_campaign%3D3.31.14%2BTax%2BAlert%26utm_m
edium%3Demail&
ei=
SV
-
9U8rNNq_fsAS53oKIAw&
usg=
AFQjCNGA0SLTV8u_FVS4mR2drXjThS1BHg&
bvm=
bv.70138588,d.cWc
.

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

21

A payment made using virtual currency is subject to information reporting to the same
extent as any other payment made in property.
103

Federal Anti
-
,oney Laundering L
aws

UnderAtheAcriminalAanti
-
moneyAlaunderingAlaws,
104
A
engagingAinAfinancialAtransactionsAthatAinvolveA
proceedsAofAillegalAorAterroristAactivitiesAorAthatAareAdesignedAtoAfinanceAsuchAactivitiesAisA
prohibited.AMoneyAlaunderingAcrimesAgenerallyAinvolveAtransac
tionsAprocessedAbyAfinancialA
institutions,AwhichAisAwhyAtheABankASecrecyAActAIBSAJAimposesAvariousArecordkeepingA
requirementsAonAbanksAandAotherAfinancialAinstitutions.
105
A
UnderAtheACurrencyAandAForeignA
TransactionAReportingAAct
106
A
componentAofAtheABSA,Afinanc
ialAinstitutionsAmustAfileAreportsAofA
cashAtransactionsAexceedingAamountsAsetAbyAtheASecretaryAofAtheATreasuryAinAregulations,AandAfileA
suspiciousAactivityAreportsAISARsJAforAtransactionsAmeetingAaAcertainAmonetaryAthresholdAorA
intendedAtoAevadeAreportingA
requirements.AFinancialAinstitutions,AasArequiredAbyAtheASecretaryAofA
theATreasury,AmustAalsoAdevelopAandAfollowAanti
-
moneyAlaunderingAprogramsAandAcustomerA
identificationAprograms.AAllAofAtheseArequirementsAapplyAtoA
moneyAservicesAbusinesses
A
IMSBsJ,AaA
cat
egoryAofAfinancialAinstitutionA
that
A
mustAregisterAwithAtheADepartmentAofAtheATreasury.
107
A
MSBsA
includeAaAvarietyAofAbusinesses,AincludingAdealersAinAforeignAexchange,AcheckAcashers,Atraveler

sA
checkAissuers,AprovidersAofAprepaidAaccessAcards,AandAmoneyAtrans
mitters.
108
A
TheseAentitiesAmustA
registerAwithAtheADepartmentAofAtheATreasuryAandAcomplyAwithABSAArequirements.A

Financial Crimes Enforcement Network (FINCEN) Actions

FINCEN Guidance

OnAMarchAR8,A20R3,ATreasury

sAFinancialACrimesAEnforcementANetworkA
I
FINCEN
J
A
issuedA
interpretativeAguidance
109
A
requiringABitcoinAexchanges

individualsAandAbusinessesAthatAchangeA
BitcoinsAintoAU.S.A
orAforeignAcurrency

toAregisterAasA
MSBs
A
pursuantAtoAtheABSA.ASubsequently,A
FINCENAissuedArulingsAindicatingAthatAIRJAindividualsAorAcompan
iesAthatAmineABitcoins,AuseAthem
,
A
andAconvertAthemA
in
toArealAcurrencyAforAtheirAownAuseAareAnotAexchangesAandAdoAnotAhaveAtoA
registerAasA
MSBs
110
A
andAI2JAcompaniesAinvestingAinABitcoinsAexclusivelyAforAtheirAownAaccountAareA
notAexchangesAandAdoAnotAhaveAtoAre
gisterAasA
MSBs
.
111
A




103

IRS Notice 2014
-
36.

104

18 U.S.C. 1956 and 1957.

105

Titles I and II of P.L. 91
-
508,

including 12 U.S.C. 1829b, and 1951
-
1959; 31 U.S.C. 5311 et seq.

106

31 U.S.C. 5311
et seq.

107

Bank Secrecy Act requirements for money services businesses are listed on the Financial Crimes Enforcement
Network

s website at
http://www.fincen.gov/
financial_institutions/
msb/
msbrequirements.html
.

108

31 C.F.R. 1010.100(ff).

109

U.S. Department of the Treasury, Financial Crimes Enforcement Network,

Application of FinCEN

s
Regulations to
Persons Administering, Exchanging, or Using Virtual Currencies,


(March 18, 2013),
http://www.fincen.gov/
statutes_regs/
guidance/
html/
FIN
-
2013
-
G001.html
.

110

FIN
-
2014
-
R001,

Application of FinCEN

s Regulations to Virtual Currency Mining Operations


(January 30,
2014)
,

http://www.fincen.gov/
news_room/
rp/
rulings/
html/
FIN
-
20
14
-
R001.html
.

111

FIN
-
2014
-
R002,

Application of FinCEN

s Regulations to Virtual Currency Software Development and Certain
Investment Activity


(January 30, 2014)
,

http://www.
fincen.gov/
news_room/
rp/
rulings/
html/
FIN
-
2014
-
R002.html
.

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

22

FINCEN Administrative Rulings

OnAOctoberA27,A20R4,AFINCENAreleasedAtwoAadministrativeArulingsAdenyingAexemptionsAfromA
MSBAregulationsAforAtwoAcompaniesAinvolvedAinAvirtualAcurrencyAactivities.
112
A
OneArulingAappliedA
toAaAbusinessAproposingAtoAactAasAanAintermediaryAbetweenAcreditAcard
A
holdersAandAhotelsAdealingA
onlyAinABitcoins;AtheAotherAproposedAtoAsetAupAaAtradingAplatformAtoAmatchAoffersAtoAbuyAandAsellA
virtualAcurrencyAforAlegalAtender.AInAbot
hAcases,AFINCENAruledAthatAtheAcompaniesAqualifiedAasA
moneyAtransmittersAunderAtheAMSBAregulationsAandAdidAnotAmeetAtheAcriteriaAforAexemptionAasA
paymentAprocessors.

Specifically,AFINCENAruledAthatAaAcompanyAthatAsetsAupAaApaymentAsystemAtoAfacilitateApaym
entsA
betweenAU.S.AcreditAcard
A
holdersAandAcertainAbusinessesAthatAdealAonlyAinAvirtualAcurrenciesA
qualifiesAasAaA
MSBAandAmustAregister
A
andAbeAsubjectAtoAregulationAasAsuch.A
InAtheAfirstAruling,Athe
A
businessAinAquestionAwasAproposingAtoAofferAU.S.AcreditAca
rd
A
holdersAaAmeansAofApayingAforA
reservationsAinAcertainALatinAAmericanAhotelsAthatAoperateAsolelyAonAtheAbasisAofABitcoinsAandAdoA
notAacceptAcreditAcardApaymentsAorApaymentsAinAdollarsAorAotherAsovereignAcurrencies.AAccordingA
toAtheAinformationA
provided
A
t
oAFINCEN,AtheAcompanyAwouldAsupplyAtheAhotelsAwithAsoftwareA
throughAwhichAcreditAcardAchargesAwouldAbeAdirectedAtoA
theAcompanyAratherAthanAtoAtheAhotel.ATheA
company
A
wouldA
thenA
payAtheAhotelAinABitcoins,AafterAdeductingAaAfee,AusingABitcoinsAthatAitAhadA
pur
chased
A
fromABitcoinAexchangesAatAwholesale.ATheA
company
A
wouldAchargeAtheAcreditAcardA
holdersAtheAdollarAequivalentAofAtheAhotelAchargesAandAbearAtheAriskAofAexchangeArateAfluctuationA
betweenAtheAtimeAofAtheAcreditAcardAchargeAandApaymentAtoAtheAhotel.ATheA
company
A
arguedAthatAitA
didAnotAmeetAFINCEN

sAdefinitionAofA
virtualAcurrencyAexchanger
A
and
A
thatAitAwasAactingAasAaA
paymentAprocessorAandAnotAaAmoneyAtransmitter.AFINCENAruledAthatAtheAproposedAactivitiesAfallA
squarelyAwithinAtheAregulatoryAdefinitionAofA
mon
eyAtransmissionAservices
113
A
and,AbecauseAtheA
businessAdoesAnotAoperateAthroughAaAclearingAandAsettlementAsystemAinvolvingAonlyAbusinessesA
regu
latedAunderAtheABSA
,A
theAcompany
A
doesAnotAqualifyAforAanAexceptionAasAaApaymentA
processor.
114

InAtheAsecondAruling,AFI
NCENA
determinedAonAOctoberA27,A20R4,AthatAaAcompanyAproposingAtoAsetA
upAaAvirtualAcurrencyAtradingAplatformAwouldAbeArequiredAtoAregisterAasAa
n
A
MSB.AUnderAtheA
proposal,AcustomersAwouldAdepositAU.S.AdollarsAandAvirtualAcurrencyAinAaccountsAthatAwouldAbeA
mai
ntainedAseparatelyAinAtheirAnamesAandAcould
A
beAusedAtoAexecuteAordersA
toAtheAcompanyAtoAbuyA
orAsellAtheAcurrencyAatAaAgivenAprice.AOrdersAwouldAbeAexecutedAautomaticallyAthroughAtheA
platform
,
A
whichAwouldAattemptAtoAmatchAbuyAandAsellAordersAfromAamongAtheA
customersA
maintainingAaccountsAwithAtheAcompany.AIfAnoAmatchA
was
A
foundAatAtheAgivenAprice,AnoAtransactionA
wouldAbeAexecuted.ATheAcompanyAarguedAforAanAexemptionAfromAtheAMSBAregulationsAonAtheA
grounds
A
thatAits
A
operationsAwereAsimilarAtoAthose
A
ofAcommoditie
sAorAsecuritie
sAexchangesAandAthatA
it
A
wasAnotAtransmittingAmoneyAtoAcounterparties.AFINCENAcharacterizedAtheseAargumentsAasA
irrelevant.AInstead,AFINCENAlookedAtoAtheAregulatoryAdefinitionAofA
moneyAtransmitter
A
andAfoundAitA
toAcoverAtheAcompany

sAactivities.
A
AccordingAtoAFINCEN,A

inAeachAtradeAconductedAthroughAtheA



112
FIN
-
2014
-
R011,

Request for Administrative Ruling on the Application of FinCEN

s Regulations to a Virtual
Currency Trading Platform, and FIN
-
2014
-
R012,


Application for Administrative Ruling on

the Application of
FinCEN

s Regulation to a Virtual Currency Payment System,


http://www.fincen.gov/
statutes_regs/
rulings/
.
(Hereinafter FIN 2014
-
R2011 or

FIN
-
2014
-
R012.)

113


The term
money

transmission services

means the acceptance of currency, funds, or other value that substitutes for
currency from one person and the transmission of currency, funds, or other value that substitutes for currency to
another location or person by any means.
”A
31 C.F.R.
1010.100(ff).

114

31 C.F.R.
1010.100(ff)(5)(ii)(B) and FIN
-
2013
-
R2002,

Whether a Company That Offers a Payment Mechanism
Based on Payable
-
Through Drafts to Its Commercial Customers Is a Money Transmitter (November 13, 2013).

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

23

Platform,AtwoAmoneyAtransmissionAtransactionsAoccur:AoneAbetweenAtheACompanyAandAtheA
CustomerAwishingAtoAbuyAvirtualAcurrency,AandAanotherAbetweenAtheACompanyAandAtheACustomerA
wishingAtoAsellAsuchA
virtualAcurrencyAatAtheAsameAexchangeArate.

115

FINCEN
-
Department of Justice Enforcement Action

OnAMayA5,A20R5,AFINCENAbroughtAitsAfirstAenforcement
116
A
actionAagainstAaAvirtualAcurrencyA
exchange,ARippleALabs,AInc.AIRippleJ,AwhichAsellsAXRPAI“ripples”J,AaAvirtu
alAcurrencyAwithAmarketA
capitalizationAsecondAtoAthatAofABitcoins.ATheAchargesAagainstARipple,AbyAbothAFINCENAandAtheA
U.S.AAttorneyAforAtheANorthernADistrictAofACalifornia,AinvolveAfailureAtoAregisterAasAaAmoneyA
servicesAbusinessAandAtoAmaintainAanAadequat
eAanti
-
moneyAlaunderingAprogram.ATheADOJAhadA
investigatedARippleAforAoperatingAanAunlicensedAmoneyAservicesAbusinessAinAviolationAofAaAfederalA
criminalAstatute.
117
A
UnderAanAagreementAreachedAwithAFINCENAandADOJ,ARippleAisAsubjectAtoAaA
totalApenaltyAofAE700,0
00,AE450,000AofAwhichAisAtoAbeAforfeitedAtoADOJAandAtheAremainderApaidAtoA
theAU.S.ATreasury.AInAaddition,ARippleAhasAagreedAtoAtakeAcertainAremedialAmeasures.AUnderAtheA
settlementAagreement,ADOJAwillAnotAprosecuteARippleAforAanyAofAtheAconductAdetailedAinA
aA
StatementAofAFactsAandAViolations,AandARippleAhasAagreedAtoAcontinueAtoAcooperateAwithADOJAinA
relatedABankASecrecyAActAIBSAJAinvestigationsAofAtheAconductAofARippleA“andAitsAofficers,A
directors,Aemployees,Aagents,AandAconsultants.”ARippleAhasAalsoAagreed
A
toAtakeAcertainAremedialA
steps
,
A
includingAcontinuingAtoAimplementAandAimproveAitsABSAAcomplianceAprogramAandAtoAmoveA
oneAofAitsAorganizationalAcomponentsAtoAaAmoneyAservicesAbusinessAregisteredAwithAFINCEN.AThatA
componentAfunctionsAinAsuchAaAwayAthatAitsA“endAusers

A
areAableA“toAinterac
tAwithAtheARippleA
protocolAtoAviewAandAmanageAtheirAXRPAandAfiatAcurrencyAbalances.”

Federal Election Campaign Act

InAwhatAtheA
Washington
A
Post
A
characterizedAasA

oneAofAtheAfirstArulingsAbyAaAgovernmentAagencyAonA
howAtoAtreatAtheAvirtualAcurrency,

118
A
theAFed
eralAElectionACommissionAIFECJAvotedAunanimouslyA
toApermitAaAnonconnectedApoliticalAcommitteeAtoAacceptABitcoinAcontributionsAandAtoApurchaseA
BitcoinsAasAanAinvestment.ATheAFECAreleasedAanAAdvisoryAOpinion
119
A
onAMayAR3,A20R4,AthatA
focusesAonAtheAspecificsAof
A
theAparticularArequestAthatAtheAFECAwasAapproving.AWhetherAtheArulingA
willAbeAlimitedAwithArespectAtoAIRJAtheAamountsAthatAmayAbeAreceivedAfromAeachAcontributorAperA
electionAandAI2JAtheAscreeningAproceduresAspecifiedAinAtheArequestAapprovedAbyAtheAFECAapp
earsAtoA
beAuncertain.ATheArequestAcameAfromAMakeAYourALawsAPAC,AInc.AIMYLJ,AaAnonconnectedA
politicalAactionAcommitteeAIPACJAregisteredAwithAtheAFEC.AMYLAsoughtAandAreceivedApermissionA
toAacceptABitcoinsAofAupAtoAER00AperAcontributorAperAelection.AMYLApropo
sedAtoAobtainAonlineAtheA
contributor

sAname,Aaddress,AoccupationAandAemployer,AasAwellAasAanAaffirmationAthatAtheAdonorAisA
notAaAforeignAnationalAandAisAtheAownerAofAtheABitcoins.ATheseAscreeningAproceduresAsatisfiedAtheA
FECAasAadequateAwithArespectAtoAMYL

sAobligationAtoAexamineAcontributionsAandAdetermineA
eligibilityAofAcontributors.AMYLAalsoAreceivedApermissionAtoAbuyABitcoinsAandAtoAholdABitcoinsAforA



115

FIN
-
2014
-
R1011, a
t 3.

116

FinancialACrimesAEnforcementANetwork,A“FinCENAFinesRipleALabsAInc.AinAFirstACivilAEnforcmentAActionAAgainstAaA
Virtual Exchanger
,
”AMayA5,A20R5,A
http://www.fincen.gov/
news_room/
nr
/
html/
20150505.html
.

117

18 U.S.C. 1960(b)(1)(B).

118

Matea Gold,

Federal Election Commission
A
pproves
B
itcoin
D
onations to
P
olitical
C
ommittees,


Washington
P
ost
,

May 8, 2014
,
http://www.washingtonpost.com/
blogs/
post
-
politics/
wp/
2014/
05/
08/
federal
-
election
-
commission
-
approves
-
bitcoin
-
donations
-
to
-
political
-
committees/
.

119

FEC AO 2014
-
02

Political Committee May Accept Bitcoins as Contributions
,


http://www.fec.gov/
pages/
fecrecord/
2014/
june/
ao2014
-
02.shtml
.

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

24

sale.APermissionAwasArefusedAwithArespectAtoAusingABitcoinsAtoApayAexpenses.AUnderAtheArulingAtheA
Bitcoi
nsAareAtoAbeAtreatedAasAcontributionsAofA

anythingAofAvalue,

120
A
asAauthorizedAunderAtheA
FederalAElectionACampaignAAct.
121
A
TheyAmayAbeAheldAinAMYL

sABitcoinAwalletAuntilAliquidated,A
whenAtheyAareAtoAbeAdepositedAinAaAcampaignAdepository.

Federal 3rade Commissi
on Act

TheAFederalATradeACommissionA
IFTCJA
Act
122
A
prohibitsA

unfairAorAdeceptiveAactsAorApracticesAinAorA
affectingAcommerce

123
A
andAauthorizesAth
eAFTC
A
toAenforceAthoseA
prohibitions.AOnASeptemberAR5,A
20R4,AtheAFTCAbroughtAaAcivilAactionAunderAtheAFTCAActAagainst
A
ButterflyALab,
A
aAWyomingA
corporationAwithAKansasAandAMissouriAoffices.ATheAsuitAwasAfiledAinAtheAU.S.ADistrictACourtAforAtheA
WesternADistrictAofAMissouri.AItAchargedAButterflyALabAwithAengagingAinAdeceptiveApracticesAinA
violationAofASectionA5IaJAofAtheAFT
CAAct.
124
A
TheAcomplaintAallegedAthatAButterflyAmisledA
consumersAwhoAprepaidAforABitcoinAminingAmachinesAandAservicesAthatAtheAcompanyAsoldAonAtheA
Internet.AAccordingAtoAtheAallegations,AencryptionAmachinesAandAservicesAthatAButterflyAsoldAfromA
itsAwebsiteAan
dAthroughAFacebookAandATwitterAwereAeitherAnotAdeliveredAasApromisedAor,AifA
delivered,AfailedAtoAproduceABitcoinsAprofitably,AasAadvertised.AWithoutAhearingAfromAtheA
defendant,AtheAcourt,AonASeptemberAR8,A20R4,AissuedAaAtemporaryAorderAfreezingAButterfly’s
A
assets,A
appointingAaAreceiver,AandAgrantingAtheA
FTC
A
immediateAaccessAtoAtheA
company’sApremisesAandA
records
.
125

TheAFTC

sAallegationAchargesAButterflyAwithAreceivingAupfrontApaymentsAamountingAtoAthousandsA
ofAdollarsAfromAconsumersAwhoArespondedAtoAfalseAand
A
misleadingAadvertisementsAclaimingAthatA
theAmachinesAwouldAconductAcomplexAcomputationsAatAhighAspeed,AusingAlowAelectricalApower.
A
AccordingAtoAtheAcomplaint,
126
A
buyersAofAtheseAmachinesAwereAmisledAbyAassertionsAthatAtheA
machinesAwouldAsolveAtheAmathematic
alApuzzlesAinvolvedAinAminingABitcoinsAandAthatAbuyersAofA
theAButterflyAmachinesAorAservicesAwouldAreceiveABitcoinsAasArewardsAforAsolvingAtheseApuzzlesAatA
aArateAtoAmakeAupAforAtheAcostAofAtheAinitialAoutlayAand,AinAshortAorder,AshowAaAprofit.AInstead,Aso
meA
ofAtheAmachinesApromisedAwereAneverAdelivered;AothersAwereAnotAdeliveredAasApromisedAorAwereA
defectiveAwhenAdelivered.ATheAresult,AaccordingAtoAtheAFTC,AwasAthatAconsumersAcouldAnotA
produceABitcoins,AtheAcompanyAwasAunjustlyAenriched,AandAtheAcourt

sAin
terventionAwasArequiredA
toAstopAaAcontinuingAsubstantialAinjuryAtoAconsumers.ATheAcourtAfoundAthatAtheAFTCAhadAofferedA
sufficientAevidenceAforAtheAcourtAtoAconcludeAthatAButterflyAhadAlikelyAviolatedAandAwouldAcontinueA
toAviolateAtheAFTCAAct.ATheAcourtAfur
therAconcludedAthatAconsumersAwouldAlikelyAsufferA

immediateAandAcontinuingAharm

A
unlessAtheA
courtAstoppedAtheA
Butter
flyAoperation
.ABecauseAtheA
courtAfoundAthatAirreparableAdamageAtoAconsumersAwasAlikelyAifAtheAdefendantAwereAnotifiedAofAtheA
caseAandAableA
toAtransferAassets,AtheAcourtAfoundAthatAthereAwasAgoodAcauseAtoAappointAaAreceiverA
andAtoAallowAtheAFTCAimmediateAaccessAtoAtheAcompanyAandAitsArecordsAto,AamongAotherAthings,A
identifyAitsAassets.A




120

2 U.S.C. 431(8)(A)(i); 11 C.F.R. 100.52(a) and 100.52(d)(1).

121

2 U.S.C. 431
et seq.

122

15 U.S.C. 41
-
58.

123

15 U.S.C. 45.

124

15 U.S.C. 45(a).

125

Federal Trade Commission v. BF Labs, In
c., no. 4:14
-
cv
-
00815
-
BCW (W.D. Mo. filed Sept. 18, 2014).
http://www.ftc.gov/
enforcement/
cases
-
proceedings/
1423058/
bf
-
labs
-
inc
.

126

A Federal Trade Commission webpage c
ontains a link to the complaint
,

at
http://www.ftc.gov/
enforcement/
cases
-
proceedings/
1423058/
bf
-
labs
-
inc
.

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rs, and Analysis of Legal Issues


Congressional Research Service

25

Federal 2ecurities Regulation

SecuritiesAregulationA
focusesAonAtwoAdifferentAlegalAissuesAinvolvingABitcoins

investmentsA
purchasedAwithABitcoinsAandAinvestingAinABitcoins.ATheASECAhasAbeenAactiveAinAinvestigatingA
issuesArelatedAtoABitcoinsAandAhasApublishedAanAinvestorAalertAonABitcoinAandAotherAvirtualA
cur
rency
-
relatedAinvestments.

Investments /urchased with Bitcoins

TheAUnitedAStatesADistrictACourtAforAtheAEasternADistrictAofATexasAheldAinAAugustA20R3AthatAitAhadA
subjectAmatterAjurisdictionAoverApossibleAfraudAinAinvestmentsApurchasedAwithABitcoinsAbecause
A
ofA
itsAdeterminationAthatAinvestmentsApurchasedAwithABitcoinsAareAsecurities.
127
A
TheASecuritiesAandA
ExchangeACommissionAISECJAallegedAthatAtheAdefendantAhadAviolatedAprovisionsAofAtheASecuritiesA
ActAofAR933
128
A
andAtheASecuritiesAExchangeAActAofAR934
129
A
andAhadA
conductedAaAkindAofAPonziA
scheme.AAccordingAtoAtheAfactsAstatedAbyAtheASEC,AtheAdefendant,ATrendonAT.AShavers,AwhoAwasA
theAfounderAandAoperatorAofABitcoinASavingsAandATrustAIBTCSTJ,AhadA

madeAaAnumberAofA
solicitationsAaimedAatAenticingAlendersAtoAinvestAin
A
Bitcoin
-
relatedAinvestmentAopportunities.

A
ShaversAhadAadvertisedAthatAheAsoldABitcoinsAandAthatAheAwouldApayAanAinvestorAupAtoARFAinterestA
dailyAuntilAtheAinvestorAwithdrewAtheAfundsAorAuntilABTCSTAcouldAnoAlongerAbeAprofitable.A
InvestorsAlostAaAconsider
ableAamountAofAmoney,AandAtheASECAbroughtAsuit.AShaversAdefendedAthatA
theABTCSTAinvestmentsAwereAnotAsecuritiesAunderAfederalAsecuritiesAlawsAbecauseABitcoinsAareAnotA
moneyAandAareAnotAregulatedAbyAtheAUnitedAStates.AShaversAseemedAalsoAtoAargueAthat,Abeca
useAtheA
investmentsAwereAnotAsecurities,AtheAcourtAhadAnoAjurisdictionAoverAaAlawsuitAallegingAviolationsAofA
theAfederalAsecuritiesAlaws.ATheASECAarguedAthatAtheABTCSTAinvestmentsAwereAinvestmentA
contracts,AthusAbringingAthemAwithinAtheAdefinitionAofA

secu
rities

A
andAthereforeAsubjectAtoA
regulationAbyAtheASEC.

TheAcourtAheldAthatAitAdidAhaveAjurisdictionAoverAtheAcaseAbecauseAofAitsAdeterminationAthatA
investmentsApurchasedAwithABitcoinsAareAsecurities.A
R5AU.S.C.AS
ectionA77bAdefinesAaA

security

A
inA
aAveryAbr
oadAwayAasA

anyAnote,Astock,AtreasuryAstock,AsecurityAfuture,Asecurity
-
basedAswap,AbondA...A
[or]AinvestmentAcontract.

A
CasesAsuchAasASECAv.AW.J.AHoweyAGACo
130
A
andALongAv.ASchultzACattleA
Co.
131
A
haveAsetAoutAaAkindAofAtemplateAforAanAinvestmentAcontract:AAnAinve
stmentAcontractAinvolvesA
IRJAanAinvestmentAofAmoneyAI2JAinAaAcommonAenterpriseAI3JAwithAtheAexpectationAofAprofitsAfromA
theAeffortsAofAaApromoterAorAaAthirdAparty.AThus,AaccordingAtoAtheAcourt,AitAhadAtoAdetermineAwhetherA
theABTCSTAinvestmentsAwereAanAinve
stmentAofAmoney.ATheAcourtAfoundAthat,AbecauseABitcoinsAcanA
beAusedAtoApurchaseAgoodsAorAservicesAandAevenAusedAtoApayAforAindividualAlivingAexpenses,AtheyA
areAaA

currencyAorAformAofAmoney

A
andAthatA

investorsAwishingAtoAinvestAinABTCSTAprovidedAanA
investm
entAofAmoney.

A
TheAcourtAalsoAfoundAthatAthereAwasAaAcommonAenterpriseAbecauseAtheA
investorsAwereAdependentAuponAShavers

sAexpertiseAinABitcoinAmarketsAandAthatAShaversApromisedA
aAsignificantAreturnAonAtheirAinvestments.AFinally,AtheAEasternADistrictAofATe
xasAfoundAthatAtheAthirdA
prongAofAtheAinvestmentAcontractAtemplateAwasAmetAbecauseAtheABTCSTAinvestorsAhadAanA
expectationAofAderivingAprofitsAfromAtheirAinvestments.ABecauseAitAfoundAthatAtheABTCSTA



127

Securities and Exchange Commission v. Shavers
, No. 4:13
-
CV
-
416 (E.D. Tex. August 6, 2013).

128

15 U.S.C. 77a
et seq.

129

15 U.S.C. 78a
et seq.

130

328 U.S. 293 (1946).

131

881 F.2d 129 (5
th

Cir. 1989).

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

26

investmentsAsatisfiedAtheAinvestmentAcontractAdefinition,A
theAcourtAheldAthatAitAhadAsubjectAmatterA
jurisdictionAoverApossibleAfraudAinAinvestmentsApurchasedAwithABitcoins.

OnASeptemberA2R,A20R5,AShaversApledAguiltyAtoAaAcountAofAsecuritiesAfraudAinAU.S.ADistrictACourtA
forAtheASouthernADistrictAofANewAYork.
132

Inve
sting in Bitcoins

TheASECAisAconductingAinvestigationsAintoAbitcoinAinvestments.AForAexample,AinAJuneA20R4,AtheA
SECAchargedAtheAco
-
ownerAofAtwoABitcoin
-
relatedAwebsitesAwithAofferingApubliclyAtradedA
securitiesAwithoutAregisteringAthem.
133
A
AnASECAinvestigatio
nAfoundAthatAaAco
-
ownerAofAtheA
websitesApublishedAprospectusesAonAtheAInternetAandAsolicitedAinvestorsAtoAbuyAsharesAinA
SatoshiDICEAandAFeedZeBirds.AHowever,AtheAco
-
ownerAhadAnotAregisteredAtheAofferingsAwithAtheA
SEC.AInvestorsApaidAforAtheirAsharesAwithAB
itcoins.ATheAchargesAwereAsettled,AwithAdisgorgementAofA
theAprofitsAplusAaApenalty.AAndrewAJ.ACeresney,AdirectorAofAtheASEC

sADivisionAofAEnforcement
,
A
stated,A

All issuers selling securities to the public must comply with the registration provisions of
the

securities laws, including issuers who seek to raise funds using Bitcoin. We will
continue to focus on enforcing our rules and regulations as they apply to digital
currencies.
134

TheASECAisAconsideringAanAapplicationAfiledAbyACameronAandATylerAWinkelvossAto
A
formAaApublicA
exchange
-
tradedAfundAIETFJAforABitcoins.
135
A
AccordingAtoAtheAfilings,AtheAETFAwillAbeAtradedAonA
theANASDAQAOMXAunderAtheAsymbolA

COIN.

A
TheASEC

sAwebsiteAstatesAthatAanAETFAisAoftenA
registeredAasAanAopen
-
endAinvestmentAcompanyAorAunitAinvestme
ntAtrustAunderAtheAInvestmentA
CompanyAActAofAR940.ATheAregulatoryArequirementsAforAETFsAincludeAtheAfollowing:

As investment companies, ETFs are subject to the regulatory requirements of the federal
securities laws as well as certain exemptions that are ne
cessary for ETFs to operate under
requirements that are designed to protect investors from various risks and conflicts
associated with investing in ETFs.

For example, ETFs,

like mutual funds, are subject to statutory limitations on their use of
leverage and transactions with affiliates. ETFs also are subject to specific reporting
requirements and disclosure obligations relating to investment objectives, risks, expenses,
and
other information in their registration statements and periodic reports.

In addition, ETFs are subject to oversight by boards of directors.
136

TheAWinkelvossAbrothersAhaveAmadeAamendmentsAtoAtheirAfilings,AandAtheASECAappearsAtoAbeAstillA
reviewingAthem.

InAA
prilA20R5,AOverstock.com,AanAonlineAretailerAheadquarteredAnearASaltALakeACity,AfiledAaA
registrationAstatementAwithAtheASECAtoAregisterAE500AmillionAworthAofAequityAinAOverstockAasAtheA
firstAdigitalAstock.
137
A
TheASECAisAreviewingAtheAapplication.




132

See

http://www.justice.gov/
usao
-
sdny/
pr/
texas
-
man
-
pleads
-
guilty
-
manhattan
-
federal
-
court
-
operating
-
bitcoin
-
ponzi
-
scheme
.

133

See
http://www.sec.gov/
News/
PressRelease/
Detail/
PressRelease/
1370541972520#.U7r1cii816Y
.

134

Ibid.

135

See
http://www.coindesk.com/
winklevoss
-
bitcoin
-
etf
-
trade
-
nasdaq
-
coin
-
symbol
.

136

See
http://www.sec.gov/
investor/
alerts/
etfs.pdf
.

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

27

2ecurities
Investor Alerts

InAMayA20R4
,
A
theASEC

sAOfficeAofAInvestorAEducationAandAAdvocacyAissuedAanAinvestorAalertAtoA
attemptAtoAmakeAinvestorsAawareAaboutAtheApotentialArisksAofAinvestmentsAinvolvingABitcoinAandA
otherAformsAofAvirtualAcurrency.
138
A
InAtheAalert,AtheA
SECAexpressedAconcernAthatABitcoinAandAotherA
virtualAandAdigitalAcurrencies,AasAnewAproductsAorAtechnologies,AhaveAtheApotentialAtoAcreateAfraudA
andAhigh
-
riskAinvestmentAopportunities.

rns in a new
and cutting
-
edge.
139

TheANorthAAmericanASecuritiesAAdministratorsAAssociation,AanAinternationalAinvestorAprotectionA
organization,AhasAincludedAdigitalAcurrencyAo
nAitsAlistAofAmajorAthreatsAtoAinvestors.
140

2elected 2EC 2anctions

InADecemberA20R4,AtheASECAissuedAaArelease
141
A
inAwhichAitAannouncedAthatAitAwasAimposingA
sanctionsAonAaAcomputerAprogrammer,AEthanABurnside,AforAhisAonlineAoperationAofAtwoAvenuesAthatA
tradedA
securitiesAusingAtheAvirtualAcurrenciesABitcoinAandALitecoin.
A
AccordingAtoAtheASEC,AtheA
sanctionsAwereAnecessaryAbecauseABurnsideAhadAneverAregisteredAtheAvenuesAasAstockAexchangesAorA
broker
-
dealers.
A
InAaddition,AtheASECAsanctionedABurnsideAforAconductingA
unregisteredAofferings.
A
TheASECAorder
142
A
indicatesAthatABurnsideAcooperatedAinAtheAagency

sAinvestigationAandAagreedAtoA
disgorgeAE68,000,AmadeAupAofAprofits,Ainterest,AandApenalties,AandAtoAaAbarAfromAparticipatingAinAtheA
securitiesAindustry.

InAtheAviewAofA
theASEC,ABurnside

sAnotAregisteringAtheAvirtualAcurrencyAvenuesAviolatedAseveralA
statutes.
A
BecauseAofAtheAenlistmentAofAsecuritiesAissuersAtoAofferAinvestmentsAforApurchaseAorAsaleAtoA
theApublic,AtheAnon
-
registrationAisAaAviolationAofA
S
ectionA6AofAtheASecu
ritiesAExchangeAAct.
143
A
ThisA
statuteArequiresAthatA

[a]nAexchangeAshallAnotAbeAregisteredAasAaAnationalAsecuritiesAexchangeAunlessA
theACommissionAdeterminesAthat

A
variousArequirementsAassuringAinvestorAprotectionAandAotherA
criteriaAareAmet.
A
DespiteAmakingAso
licitationsAtoAtheApublicAtoAopenAaccountsAandAtradeAsecurities,A
BurnsideAdidAnotAregisterAtheAvenuesAasAbroker
-
dealers,AapparentlyAaAviolationAofA
S
ectionA
202IaJIRRJAofAtheAInvestmentAAdvisersAAct.
144
A
TheASEC

sAorderAfoundAthatABurnsideAviolatedAotherA
provis
ionsAofAtheAfe
deralAsecuritiesAlaws,AsuchAasAS
ectionsA5IaJAandA5IcJAofAtheASecuritiesAAct,
145
A
concerningArequirementsArelatedAtoAsecuritiesAtradingAinAinterstateAcommerce,AandA
S
ectionsA5
146
A



(...continued)

137

See
http://www.sec.gov/
Archives/
edgar/
data/
1130713/
000104746915003890/
a2224281zs
-
3.htm
.

138

See
http://www.sec.gov/
oiea/
investor
-
alerts
-
bulletins/
investoralertsia_bitcoin.html#.U7sE_Ci816Y
.

139

Ibid.

140

See
http://www.nasaa.org/
3752/
top
-
investor
-
threats
.

141

See
http://www.sec.gov/
News/
PressRelease/
Detail/
PressRelease/
1370543655716#.VKMTKcnivSE
.

142

See
http://www.sec.gov/
litigation/
admin/
2014/
33
-
9685.pdf
.

143

15 U.S.C. 78f.

144

15 U.S.C.
80b
-
2(a)(11).

145

15 U.S.C.
77e(a) and 77e(c).

146

15 U.S.C.
78e.

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

28

ItransactionsAonAunregisteredAexchangesJAandAR5
147
A
IregistrationAandAreg
ulationAofAbrokersAandA
dealersJAofAtheASecuritiesAExchangeAAct.

InAitsAreleaseAannouncingAtheAsanctionsAimposedAonABurnside,AtheASECAemphasizedAtheAimportanceA
ofAinvestorAprotectionAinAanAareaAthatAmayAbeAnewAtoAtheAinvestingApublic.
A
TheAagencyAstatedAthat

Burnside operated two online enterprises that weren

t properly registered to engage in the
securities business they were conducting
....
The registration rules are vitally important
investor protection provisions, and no exemption applies simply because an

entity is
operating on the Internet or using a virtual currency in securities transactions.

InAFebruaryA20R4,AtheASECAsuspendedAtradingAofAImogoAMobileATechnologies’AsecuritiesAbecauseA
ofAissuesAconcerningAtheAadequacyAandAaccuracyAofAitsApublicA
disclosures.
148
A
BeforeAtheA
suspension,AImogoAannouncedAthatAitAwasAinAtheAprocessAofAdevelopingAaAmobileABitcoinAplatform
.A
ThisAannouncementAcreatedAincreasedAmovementAinAtheAtradingApriceAofAImogo’sAsecurities.

InAtheAMatterAofASandAHillAExchange,AGerrittAH
all,AandAElaineAOu
,AalthoughAnotAprimarilyAfocusedA
onABitcoin,AdidAhaveAaABitcoinAcomponent.
A
149
A
InAJuneA20R5,AtheASECAissuedAaAsettledAceaseAandA
desistAorderAagainstAthisAwebsiteAoperatorAandAitsAtwoAprincipalsAwhoAclaimedAtoAofferAanA
opportunityAtoAanyoneA
toAmakeAprofitsAbasedAonAtheAperformanceAofAcompaniesAthatAwereAnotAyetA
publiclyAtraded
.A
TheAmajorAissueAconcernedAtheAwebsite’sAsaleAofAcomplexAfinancialAinstrumentsAtoA
personsAwhoAwereAnotAeligibleAtoApurchaseAthem
.A
TheAprincipalsAofAtheAwebsiteAtriedAto
A
findApeopleA
toAfundAitsAaccountsAwithAeitherAdollarsAorABitcoins,AperhapsAaddingAtoAtheAcomplexityAandA
uncertaintyAofAtheAinvestments.

3exas 2tate Action

InAMarchA20R4,AtheATexasAStateASecuritiesABoardAIBoardJAenteredAanAemergencyAceaseAandAdesistA
orderAa
gainstAaATexasAoilAandAgasAexplorationAcompany,ABalancedAEnergyALLC,AthatAclaimedAtoAbeA
theAfirstAcompanyAinAtheAindustryAtoAacceptABitcoinAfromAinvestors.
150
A
AccordingAtoAtheABoard,A
BalancedAEnergyAfailedAtoAdiscloseAtoAitsAinvestorsAthatAthereAareArisksAin
volvedAinAusingABitcoinA
forAinvestmentsAandAthatAtheAcompanyAwasAinAviolationAofAtheATexasAsecuritiesAlawsAforAnotA
disclosingAtheseArisksAtoAinvestors.

Commodity Futures 3rading Commission Regulation

TheACommodityAFuturesATradingACommissionAICFTCJAhasA
authorityAtoAregulateAcommoditiesA
futures
,
A
theirAmarkets
,
A
andAcertai
nAforeignAexchangeAinstruments.AOnASeptemberAR7,A20R5,AtheA
CFTCA
issuedAanAorderAagainstAanAonlineAplatformAforAfacilitatingAtheAtradingAofABitcoinAoptionsA
contracts.
151

InAMarchA20R4,A
theADe
rivabitAplatformA
becameAavailableAasAaAriskAmanagementAplatformAenablingA
transactionsAinABitcoinA
optionsAandAfuturesAcontracts.A
AlthoughAtheAstrikeAandAdeliveryApricesAwereA
inAU.S.Adollars,AtheApremiumsAandAsettlementApaymentsAwereAinABitcoins.ATheACFTCAch
argedA
Coinflip,AwhichAwasAtheAoperatorAofAtheADerivabitAplatform,AandAFranciscoARiordan,AtheA
CEOAofA
Coinflip
A
I
r
espondentsJ
,AwithAviolatingAcertainAprovisionsAofAtheACommodityAExchangeAAct
A
ICEAJ
,A



147

15 U.S.C.
78o.

148

See
http://www.sec.gov/
litigation/
suspensions/
2014/
34
-
71568.pdf
.

149

SEC Administrative Proceeding File No. 3
-
16598 (June 17, 2015).

150

See
http://www.ssb.state.tx.us/
Enforcement/
files/
1731.pdf
.

151

In the Matter of Coinflip, Inc. and Francisco Riordan, CFTC Docket No. 15
-
29 (Sept. 17, 2015).

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

29

suchAasAtheAprohibition
s
A
onAtradingAunregulatedAoptions
152
A
and
A
onAunregistered
A
swapAexecutionA
facilities.
153
A
TheA
r
espondentsAconsentedAtoAtheACFTC’sAorderAwithoutAadmittingAorAdenyingAtheA
charges.

InAtheAorder,AtheACFTCAsetAoutAholdingsAandAfindingsAthatAestablishAitsApositionAonAtheAregulatoryA
characterizationAofA
Bitcoin.AAmo
A
A
theseAholdingsAandAfindingsAareAtheAfollowing:
A
IRJAInAnoteA2AofA
theAorder,AtheACFTCAstatedAthatABitcoinAisAaAvirtualAcurrencyAandAdefinedAvirtualAcurrencyAasAaA
“digitalArepresentationAofAvalueAthatAfunctionsAasAaAmediumAofAexchange
,AaAunitAof
A
account,Aand/orA
aAstoreAofAvalue,AbutAdoesAnotAhaveAlegalAtenderAstatusAinAanyAjurisdiction;”AI2JATheACFTCAwentAonA
inAtheAnoteAtoAdistinguishAvirtualAcurrenciesAfromA“real”Acurrencies,AwhichAitAstatedAareAtheA“coinA
andApaperAmoneyAofAtheAUnitedAStatesAorA
anotherAcountryAthatAareAdesignatedAasAlegalAtender,A
circulate,AandAareAcustomarilyAusedAandAacceptedAasAaAmediumAofAexchangeAinAtheAcountryAofA
issuance;”Aand
,AperhapsAmostAimportantly,
A
I3JA
TheACFTCAquotedAtheAdefinitionAofA
commodity
A
fromA
S
ectionARaI9JAofA
theA
CEA
154
A
andAnotedAthat,AbecauseAtheAdefinitionAisAveryAbroad,A“BitcoinAandA
otherAvirtualAcurrenciesAareAencompassedAinAtheAdefinitionAandAproperlyAdefinedAasA
commodities.”
155

ThereAmayA
alsoA
beA
theApossibilityAthatAtheACFTCAcouldAincludeAsuchAaAdigitalAcurre
ncyAwithinAitsA
foreignAexchangeAregulationsAbecauseAtheACEAAdoesAnotAdefineA
foreignAcurrency
A
orA
foreignA
exchange
,AalthoughAitAcoversAandAdefinesA
foreign
-
exchangeAforwards
A
andA
foreign
-
exchangeA
swaps
.
156

International Legal Issues

European Central Bank 2tudy

T
heAUnitedAStatesAisAnotAtheAonlyAnationAtakingAanAinterestAinAtheApotentialAimpactAofAincreasedAuseA
ofABitcoin.
157
A
BecauseAdigitalAcurrencyAknowsAnoAnationalAboundaries,AitAmayArequireAanA
internationalAsolutionAand,Athus,AhasAdrawnAtheAattentionAofAinternati
onalAregulators.ATraditionalA
paymentAsystemsA
areAbasedAonAstatutory
-
basedAmonetaryAsystems,AoverseenAbyAcentralAbanksAthatA
processAtransactionsAofAdepositoryAbanksA
andAotherAauthorizedAorAcharteredAfinancialAinstitutions.A
WithAvirtualAcurrencies,Ahowever,A
noAlawsAandAregulationsAdefineAtheAdutiesAandAobligationsAofA
parties
A
or
A
provideAforAfinalityAofAsettlement,AresolutionAofAdisputes,AorAsupervisionAofAservicesA



152

7 U.S.C. 6c(b).

153

7 U.S.C. 7b
-
3(a)(1).

154

7 U.S.C. 1a(9). It reads:

T
he term
commodity

means wheat, cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill feeds, butter,
eggs,
Solanum tuberosum

(Irish potatoes), wool, wool tops, fats and oils (including lard, tallow, cottonseed oil, peanut
oil, soybean oil, a
nd all other fats and oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal, livestock,
livestock products, and frozen concentrated orange juice, and all other goods and articles, except onions (as provided
by section 13

1 of this title) and
motion picture box office receipts (or any index, measure, value, or data related to
such receipts), and all services, rights, and interests (except motion picture box office receipts, or any index, measure,
value or data related to such receipts) in which

contracts for future delivery are presently or in the future dealt in
.

155

In the Matter of Coinflip, Inc. and Francisco Riordan, CFTC Docket No. 15
-
29, at 3.

156

7 U.S.C. 1a(24) and (25).

157

A report by the Law Library of Congress

surveys forty foreign jur
isdictions and the European Union, reporting on
any regulations or statements from central banks or government offices on the handling of bitcoins as well as any
significant use of bitcoins in business transactions.
”ASeeA
Law Library of Congress, Global

Leg
al

Research Center,
Regulation of Bitcoin in Selected Jurisdictions
, January 2014, at

http://www.loc.gov/
law/
help/
bitcoin
-
survey/
regulation
-
of
-
bitcoin.pdf
.

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

30

provided.AAnAOctoberA20R2AstudyAofAdigitalAcurrenciesAbyAtheAEuropeanACentralABankAisApremisedA
on
A
theApossibilityAthatAgrowthAofAdigitalAcurrenciesAwillAcarryAwithAitAaAneedAforAinternationalA
cooperationAinAdevelopingAaAregulatoryAframework.
158
A
AccordingAtoAtheAstudy
,AtheAcurrentAlevelAofA
virtualAcurrenciesAposesAlittleAriskAtoApriceAstability;AthereA
are,Ahowever,ArisksAtoAusersAandAaA
potentialAforAcriminalAschemes.
159
A
TheAstudyAalsoAnotesAthatA
neitherAtheAEuropeanAMonetaryA
DirectiveAnorAtheAEuropeanAPaymentAServicesADirectiveAclearlyAappliesAtoAvirtualAcurrenciesAsuchA
asABitcoin.
160

Financial Action 3ask
Force 2014 Guidance
and

2015 Report

TheAFinancialAActionATaskAForce,AanAinter
-
governmentalAorganizationAofAwhichAtheAUnitedAStatesA
isAaAmember,AreleasedAaAreportAassessingAtheArisksAthatAvirtualAcurrenciesApresentAtoAglobalAeffortsA
toAcombatAmoneyAlaunderi
ngAandAfinancingAofAterroristsAinAJuneA20R4
161
A
andA“GuidanceAforAaARisk
-
BasedAApproachAtoAVirtualACurrencies”AIFATFAGuidanceJAinAJuneA20R5.
162
A
TheA20R4AreportA
providesAaAglossaryAofAkeyAdefinitions,AsuchAasAdigitalAcurrency,AvirtualAcurrency,AconvertibleAIorA
o
penJAcurrency,AandAnon
-
convertibleAIorAclosedJAcurrency.AItAincludesAsectionsAonAlegitimateAusesA
ofAvirtualAcurrencyAandApotentialArisksAofAvirtualAcurrency.AItAsummarizesAthreeAlawAenforcementA
actionsAinvolvingAvirtualAcurrency,AallAspearheadedAbyAtheAU.S
.ADepartmentAofAJustice.
163

TheA20R5AFATFAGuidanceAisAaimedAatAexplainingAhowAFATF’sArisk
-
basedAapproachAtoAstandardsA
forAanti
-
moneyAlaunderingAandAanti
-
terroristAfinancingAapplyAtoAexchangesAofAvirtualAcurrenciesA
thatAcanAbeAconvertedAintoAfiatAmoney.ATheAg
oalAisAtoAaidAnationalAauthoritiesAseekingAtoAdevelopA
regulatoryAregimes.ATheAFATFAGuidanceArecommendsAspecificAstandardsAforAcountriesAtoAtakeAaA
risk
-
basedAapproachAtoAidentifyAandAmitigateAmoneyAlaunderingAandAterroristAfinancingArisksA
implicatedAinAvirt
ualAcurrencyAactivities.AItAincludesAsummariesAofAapproachesAtakenAinAcertainA
jurisdictions

Canada,AChina,AtheAEuropeanABankingAAuthority,AFrance,AGermany,AHongAKong,A
Italy,ARussia,ASingapore,ASouthAAfrica,ASwitzerland,AUnitedAKingdom,AandAtheAUnitedAState
s.
164




158

European Central Bank,

Virtual Currency Schemes,


October 2012,
http://www.ecb.europa.eu/
pub/
pdf/
other/
virtualcurrencyschemes201210en.pdf
. (Hereinafter, Europea
n Central Bank Report.)

159

Ibid.

160

European Central Bank Report,
p.

43. The report noted that there are attempts in some of the countries belonging to
the European Union to develop a means of regulating such currencies. Apparently courts in France are looki
ng into
whether Bitcoin transactions are subject to electronic money regulations. See
Finextra.
http://www.finextra.com/
news/
fullstory.aspx?
newsitemid=
22921
.

161

Financial Action

Task Force,

Virtual Currencies: Key Definitions and Potential AML/CFT Risks
,


June 2014,
http://www.fatf
-
gafi.org/
topics/
methodsan
dtrends/
documents/
virtual
-
currency
-
definitions
-
aml
-
cft
-
risk.html
.
(Hereinafter, FATF Report.)

162

FinancialAActionATaskAForce,A“GuidanceAforAAARisk
-
Based Approach [to] Virtual Currencies
,
”AJuneA20R5,A
https://www.google.com/
search?
q=
Guidance+for+a+Risk
-
Based+Approach+virtual+Currencies&
ie=
utf
-
8&
oe=
utf
-
8
.
(Hereinafter FATF Guidance.)

163

The three law enforcement actions are (1) the pro
secution of Liberty Reserve by the Department of Justice (DOJ)
and its designation by the U.S. Department of the Treasury as a financial institution of primary money laundering
concern, cutting it off from the U.S. banking system; (2) the DOJ

s indictment
of the owner of Silk Road and seizure of
its website and more than 600,000 Bitcoins resulting from its sale of drugs and other illegal operations; and (3) the DOJ
and Manhattan District Attorney

s investigation and indictment of felons associated with West
ern Express
International

s

global identity theft/cyberfraud scheme.


FATF Report, at 10
-
12/.

The U.S. Marshals Service has
conducted two auctions of Bitcoins seized in connection with the Silk Road prosecution and is

expected to sell the
remainder. See

S
ydney Ember,

At an Auction of Bitcoins Seized From Silk Road, One Exchange Wins Big,


New
York Times
Dealbook
,
December 10, 2014, p. B3
.

164

FATF Guidance, at p. 115
-
22.

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

31

OnAJulyA4,A20R4,AtheAEuropeanABankingAAuthorityAIEBAJ,
165
A
theAEuropeanAUnionAauthorityA
chargedAwithAmonitoringAfinancialAactivitiesAandAmakingArecommendationsAforAregulatingAbankingA
concernsAforAsafetyAandAsoundnessApurposes,AreleasedArecommendationsAfor
A
stepsAtoAaddressAtheA
problemsAassociatedAwithAtheAriseAofAvirtualAcurrencies,A“EBAAOpinionAonA‘virtualAcurrencies.”
166
A
InAthisAdocument,AtheAEBAAidentifiedA70Arisks
167
A
associatedAwithAvirtualAcurrency,AmultipleA
difficulties
168
A
ofAcraftingAaAregulatoryAregimeAad
dressingAthoseArisks,AandAsomeAinterimAmeasuresA
forAtheAmemberAstatesAofAtheAEuropeanAUnionAtoAinstitute.AAsAinterimAmeasures,AtheAEBAA
recommendedAIRJAsubjectingAvirtualAcurrencyAexchangesAtoAtheAanti
-
moneyAlaunderingAandA
counter
-
terroristAfinancingArequir
ementsAandAI2JAdiscouragingAcreditAinstitutions,ApaymentA
institutions,AandAe
-
moneyAinstitutionsAfromAbuying,Aholding,AorAsellingAvirtualAcurrencies.
169
A

Concern About International ,onetary Fund Authority

OneAissueAthatAhasAreceivedAsomeAattentionAisAtheAabi
lityAofAtheAInternationalAMonetaryAFundAIIMFJA
toAdefendAaAtraditionalAcurrencyAofAoneAofAitsAmemberAcountriesAfromAaAspeculativeAattackA
involvingAaAdigitalAcurrencyAsuchAasABitcoinA
because
A
theAIMF

sAArticlesAofAAgreementAdoAnotA
explicitlyApermitAitAtoAacqu
ireAaAcurrencyAnotAissuedAb
yAoneAofAitsAmembers.AA
tAleastAoneA
commentary
170
A
examines
A
possibleAoptionsAforAamendingAorAreinterpretingAtheAIMF

sAauthority.







165

The European Banking Authority, established in 2011, is a European Union authority tasked with

creation of a
European Single Rulebook in banking whose objective is to provide the single set of harmonised prudential rules for
financial institutions throug
hout the EU. The EBA was established on 1 January 2011 as part of the European System
of Financial Supervision (ESFS),


http://www.eba.europa.eu/
about
-
us
;jsessionid=F0A9FFE1AE5B85CF9C57D284FB06BBAC
.

166

Euro
pean Banking Authority.

EBA Opinion on

virtual currencies
’”

(July 4, 2014). Available on European
Banking Authority webpage, under heading

EBA proposes potential regulatory regime for virtual currencies, but also
advises that financial institutions shou
ld not buy, hold or sell them whilst no such regime is in place,


https://www.eba.europa.eu/
-
/
eba
-
proposes
-
potential
-
regulatory
-
regime
-
for
-
virtual
-
currencies
-
but
-
also
-
advises
-
that
-
financial
-
institutions
-
should
-
not
-
buy
-
hold
-
or
-
sell
-
them
-
whilst
-
n
. (Hereinafter, EBA Opinion.)

167

According to the EBA Opinion,

[t]he ri
sks include the fact that a [virtual currency] ... scheme can be created, and
then its function subsequently changed, by anyone, and in the case of decentralised schemes, such as Bitcoins, by
anyone with a sufficient share of computational power; that paye
r and payee can remain anonymous; that [virtual
currency] ... schemes do not respect jurisdictional boundaries and may therefore undermine financial sanctions and
seizure of assets; and that market participants lack sound corporate governance arrangements.
”AEBAAOpinion,Ap.

5.

168

According to the EBA Opinion,

[a] regulatory approach that addresses these drivers comprehensively would
require a substantial body of regulation, some components of which are untested. It would need to comprise, amongst
other eleme
nts, governance requirements for several market participants, the segregation of client accounts, capital
requirements and, crucially, the creation of

scheme governing authorities


that are accountable for the integrity of a ..
[virtual currency] scheme a
nd its key components, including its protocol and transaction ledge.


EBA Opinion,
p.

5.

169

EBA Opinion,
p.

6.

170

Nicholas Plassarus,

Regulating Digital Currencies: Bringing Bitcoin within the Reach of the IMF,


14 Chicago
Journal of International Law 377 (2013),
https://papers.ssrn.com/
sol3/
papers.cfm?
abstract_id=
2248419
.

Bitcoin: Questions, Answe
rs, and Analysis of Legal Issues


Congressional Research Service

32

Author Contact Information


Edward V. Murphy

Specialist in Financial Economics

tmurphy@crs.loc.gov
,
7
-
6201


Michael V. Seitzinger

Legislative Attorney

mseitzinger@crs.loc.gov
,
7
-
7895

M. Maureen Murphy

Legislative Attorney

mmurphy@crs.loc.gov
,
7
-
6971




Acknowledgments

The economic analysis in this report is the work of Craig K. Elwell, former CRS Specialist in
authors wish to thank him for his significant
contribution
.



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