The Rise of Cryptocurrency: What Is It and How Should It Be Regulated?
Within the past six months, the price of one Bitcoin has risen 174%, and other cryptocurrencies are experiencing similar increases. Andrew Hallam, Bitcoin Gains 174 Percent in Just Six Months: Should It Be Part of Your Portfolio?, Assetbuilder (June 21, 2017), https://assetbuilder.com/knowledge-center/articles/bitcoin-gains-174-percent-in-just-six-months-should-it-be-part-of-your-portfolio. Until recently, cryptocurrencies have had a reputation as mainly being used for illegal activity on the dark web. See Omri Marian, A Conceptual Framework for the Regulation of Cryptocurrencies, 82 U. Chi. L. Rev. 53, 56–57 (2015). Today, everyone from investors to legislators have begun to take note as cryptocurrencies gain popularity throughout the United States and across the world. See id; see also Hallam, supra.
What Is Cryptocurrency?
Cryptocurrency is “a form of digital currency based on mathematics in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds.” Shawn S. Amuial et al., The Blockchain: A Guide for Legal & Business Professionals, Glossary, Westlaw (database updated Oct. 2016). Cryptocurrency functions by using “blockchain” technology, which creates a digital ledger of transactions and shares those transactions among a distributed network of computers. Id. Transactions are completed through a process known as “mining,” which includes utilizing computer hardware to solve cryptographic problems in order to verify and add those transactions to a blockchain. Id. A “user” of cryptocurrency is defined by the Financial Crimes Enforcement Network (FinCEN) as “a person that obtains virtual currency to purchase goods or services on the user’s own behalf.” James Gatto & Elsa S. Broeker, Bitcoin and Beyond: Current and Future Regulation of Virtual Currencies, 9 Ohio St. Entrepreneurial Bus. L.J. 429, 434 (2015). One of the desirable traits for users and challenges for lawmakers is that the user is largely able to transact business with cryptocurrency anonymously. Marian, supra, at 54.
Is Cryptocurrency Money?
According to United States v. Faiella, the District Court for the Southern District of New York accepted that Bitcoin, a popular type of cryptocurrency, is a medium of exchange or means of payment and may be categorized as “money.” 39 F. Supp. 3d 544, 545 (S.D.N.Y. 2014). However, for tax purposes, the IRS treats cryptocurrency as property or commodities. Gatto & Broeker, supra, at 447–48; see Sarah Jane Hughes & Stephen T. Middlebrook, Advancing a Framework for Regulating Cryptocurrency Payments Intermediaries, 32 Yale J. on Reg. 495, 529 (2015). FinCEN has clarified that while cryptocurrencies are not “lawful money,” existing legislation such as anti-money laundering regulations and know-your-customer laws apply to exchanges of virtual currency. Hughes & Middlebrook, supra, at 531. While these regulations seem effective on the surface, Bitcoin and similar virtual currencies can be spent on goods and services without first exchanging it into lawful currency. Shawn S. Amuial et al., supra, § 2:27. Therefore, any transaction that would normally trigger anti-money laundering laws is eliminated. Id. Similarly, because cryptocurrency is treated as a commodity, the Commodities Futures Trading Commission (CFTC) has oversight of commodities trading transactions, but not the use of cryptocurrency as a method of payment. Hughes & Middlebrook, supra, at 529–30.
Cryptocurrency in the United States
While several states have provided guidance as to the application of existing regulations, few have designed new regulations that specifically address cryptocurrency. In California, the definition of money, as provided in California’s Money Transmission Act, only applies to currency that is designated as legal tender. Gatto & Broeker, supra, at 453. Because cryptocurrency is not legal tender, this Act on its face does not apply to transactions or exchanges involving cryptocurrency. Id. Similarly, the Texas Department of Banking also concluded that cryptocurrencies are not considered money under the Texas Money Services Act and thus, exchanging cryptocurrency for goods or services is not money transmission. Id. at 455. Additionally, Kansas has also determined that cryptocurrency does not have “‘monetary value’ . . . because cryptocurrency is not generally accepted throughout the entire economy nor does it have a recognized standard of value.” Id. at 457.
In contrast, Idaho does recognize virtual currencies as payment instruments. Id. at 458–59. New York recently enacted even more progressive legislation that specifically defines virtual currency and addresses consumer protection concerns. See id. at 459; 23 N.Y. Comp. Codes R. & Regs. tit. 23, § 200.19 (2017). Florida recently enacted a bill defining virtual currency as a monetary instrument, which is covered under Florida’s Money Laundering Act. H.R. 1379, 2017 Leg., 119th Reg. Sess. (Fla. 2017); see Jacob Rasch, Florida Legislature Passes Law Reclassifying Bitcoin Transactions to Prevent Money Laundering, 33 Int’l Enforcement L. Rep. 184, 184 (2017). West Virginia has also updated its money laundering statute within the past year to include a definition for cryptocurrency. H.D. 2585, 83d Leg., Reg. Sess. (W. Va. 2017).
Cryptocurrency Around the World
Globally, cryptocurrency is becoming more widely accepted and solves the need for financial infrastructure in less developed countries where up to 95% of adults do not have a bank account with a formal financial institution. Adam Norrie, Building Bitcoin, One BRIC at a Time, Cryptocoinsnews (Dec. 8, 2017), https://www.cryptocoinsnews.com/building-bitcoin-one-bric-time/. The advent of Bitcoin and other cryptocurrencies allows these individuals to engage in business regardless of their location. Id. In India, over 200 million people are without a bank account and will eventually find transacting with cash extremely difficult due to the Indian government’s demonetization plans. Id. Because of the ubiquity and affordability of smartphones in India, there is already an infrastructure in place which will allow Bitcoin and other cryptocurrencies to thrive. Id. Due to corruption, scandal, and political instability in Brazil, the use of Bitcoin is expected to grow exponentially in the coming years because it allows users to avoid traditional banking institutions, which have historically been intertwined with corruption. Id. Bitcoin is so popular in Russia that the country plans to launch its own cryptocurrency in the future. Id. Burger King has even announced that they will accept Bitcoin as payment in its Russian restaurants. Id. Although Bitcoin and China have had a rocky history, China houses the largest scale Bitcoin mines in the world. Id.
By 2018, Bitcoin may be a formally recognized form of payment in Vietnam. Stan Higgins, Vietnam is Preparing to Legally Recognize Bitcoin, Coindesk (Aug. 25, 2017), https://www.coindesk.com/vietnam-preparing-legally-recognize-bitcoin-2018/. Once an assessment is concluded detailing how the government should approach this process, the country’s central bank, Ministry of Finance, and Ministry of Public Safety will create a legal framework around cryptocurrencies, as well as a framework for tax treatment of cryptocurrencies. Id. Switzerland is even more accepting of cryptocurrency as it is home to “Crypto Valley,” a major hub for entrepreneurs working with virtual currencies. Sonia Zhuravlyova, The Future of Money: Bitcoin and Other Cryptocurrency Technologies Are a Way of Life in this Small Swiss Town, Newsweek (July 11, 2017, 10:16 AM), http://www.newsweek.com/2017/07/21/zug-switzerland-crypto-valley-bitcoin-digital-currency-634524.html. Switzerland also contains the world’s first Bitcoin ATMs, which demonstrates the growing acceptance of cryptocurrency. Id. While Canada is not quite ready to declare cryptocurrency legal tender, the country is considering classifying cryptocurrency as securities in order to begin forming regulations. Darryn Pollock, Canada Looking to Classify Digital Currencies As Securities, Cointelegraph (Aug. 25, 2017), https://cointelegraph.com/news/canada-looking-to-classify-digital-currencies-as-securities.
The Future of Cryptocurrency in United States
In August of 2017, United States lawmakers announced the drafting of a bill that would protect cryptocurrencies in compliance with minimum requirements and prevent them from being used for nefarious purposes. Joshua Althauser, US Lawmakers Draft Bill Protecting Cryptocurrencies from Gov Interference, Cointelegraph (Aug. 20, 2017), https://cointelegraph.com/news/us-lawmakers-draft-bill-protecting-cryptocurrencies-from-gov-interference. The goal of the bill is to make virtual currencies part of the mainstream like the dollar, and it will focus on preventing cryptocurrency from being treated like a security or investment. Id. Although the exact future of cryptocurrency is unknown, the future application of cryptocurrency and blockchain technology is almost analogous to the creation and evolution of the Internet. Marian, supra, at 54. The treatment and regulation of cryptocurrency in the United States will be a determining factor in how we use cryptocurrency and transact business in the years to come.
*Christina Martin is a third-year evening law student at the University of Baltimore School of Law, where she is a staff editor for Law Review and serves as the treasurer for the Student Bar Association. Christina is also a member of the Royal Graham Shannonhouse III Honor Society.