Tales from the Cryptocurrency:

On Bitcoin, Square Pegs, and Round

Holes

ERIC P. PACY

ABSTRACT
Bitcoin is a technologically advanced, decentralized, virtual form of
money that is transferred (almost) instantly and (almost) anonymously
using a peer-to-peer network supported by a certain number of computer
geeks willing to expend massive amounts of computing power in exchange
for new bitcoins. Yet it is still money. However, regulators and scholars
have been reticent to treat cryptocurrencies like Bitcoin as money, electing
instead to attempt to fit this new technology into an existing regulatory
framework as something other than money. By doing this, they create
unnecessary complexity and sometimes absurd results. This Note argues
that Bitcoin is most logically characterized as money and that the law
should evolve to embrace this new technology.

Candidate for Juris Doctor, New England Law | Boston (2015). B.A., cum laude, English,
University of MassachusettsDartmouth (2011). I would like to thank my family and friends
for all of their love and support. In particular, I would like to thank my amazing wife, Caleigh.

New England Law Review Scribes Award Winner, 20132014.

121

122

New England Law Review

v. 49 | 121

INTRODUCTION

itcoin is money.1 It is a technologically advanced, decentralized, and

virtual form of money that is transferred (almost) instantly and
(almost) anonymously using a peer-to-peer network supported by a
certain number of computer geeks willing to expend massive amounts of
computing power in exchange for new bitcoins.2 Yet it is still money.
Prior to 1972, mail meant communicationpersonal letters,
important documents, and packages which needed to be sent to another
person would be given to a courier to arrive some days later. 3 In 1972, Ray
Tomlinson brought us electronic mail.4 Today, the majority of
communications, once physically written and delivered, are passed from
one individual to another using email and the Internet. 5 Email changed the
way we think about mail; it was a new and more efficient way of sending
documents, yet it has always been considered an electronic form of mail,
not something else.6
1 See infra Part V (discussing the specific features of traditional money and how bitcoin is
the functional equivalent).
2

See infra notes 1834 and accompanying text.

See Randolph E. Schmid, You Never Write Anymore; Well, Hardly Anyone Does Anymore,
NBC NEWS (Oct. 3, 2011, 7:15 PM), http://www.nbcnews.com/id/44760552/ns/technology_and
3

_science-tech_and_gadgets/t/you-never-write-any-more-well-hardly-anyone-does/#.UwfqBvR
DuSo.
4 See Ian Peter, The History of Email, NETHISTORY, http://www.nethistory.info/History%20of
%20the%20Internet/email.html (last visited Mar. 17, 2015). In 1965, researchers at the
Massachusetts Institute of Technology created a program to send messages on the same
computer. Id. Whats more, Ray Tomlinsons contribution of figuring out how to specify a
mail recipient did not put email into the mainstream on its ownmany other developers
contributed critical features of what we recognize today as email. See id. Tomlinson said, any
single development is stepping on the heels of the previous one and is so closely followed by
the next that most advances are obscured. I think that few individuals will be remembered.
Id.
5 See THE RADICATI GROUP, INC., EMAIL STATISTICS REPORT, 2013-2017, at 23 (Sara Radicati,
ed., 2013), available at http://www.radicati.com/wp/wp-content/uploads/2013/04/EmailStatistics-Report-2013-2017-Executive-Summary.pdf (presenting statistics indicating the
ubiquity of email, particularly in the business context).
6 See Email, WEBOPEDIA, http://www.webopedia.com/TERM/E/e_mail.html (last visited
Mar. 17, 2015). The nomenclature of email (you send it, you receive it in your mailbox,
etc.) suggests that we still consider it mail. See id. Further, some courts have recognized that
the Fourth Amendment protections traditionally applied to mail, see Ex Parte Jackson, 96 U.S.
727, 733 (1877), are also extended to email. United States v. Warshak, 631 F.3d 266, 28586 (6th
Cir. 2010) (Given the fundamental similarities between email and traditional forms of
communication, it would defy common sense to afford emails lesser Fourth Amendment
protection.).

2014

Tales from the Cryptocurrency

123

However, when it comes to virtual currencies, commentators and

regulators have been reticent to allow the money label to stick.7
Consequently, there is some confusion about what regulations might apply
to Bitcoin and other virtual currencies.8 For instance, the Securities
Exchange Commission (SEC) has made comments reserving the
possibility that Bitcoin could be regulated as a type of security, and
scholars have made some compelling arguments to that effect. 9 The
Commodity Futures Trading Commission (CFTC) would have
jurisdiction if the United States concludes that Bitcoin is best categorized as
a commodity, as some other countries have done.10
Underpinning this tug-a-war is the definition of money and how
Bitcoin fits that definition.11 If we apply existing black-letter legal
definitions, Bitcoin is not exactly money, currency, or foreign
currency, and Bitcoin users do not hold accounts with financial
institutions.12 However, in the world of economics, it appears inescapable
that virtual currency is moneyalbeit with certain technology-enabled
advantages to the medium.13
This Note argues that regulators should treat virtual currency the same
as real currencies in order to conform to the common understanding of
money. Part I attempts to instill a working knowledge of the Bitcoin
protocol, highlighting its strengths and weaknesses. Part II gives a brief
survey of some potential existing regulatory frameworks which may apply
to Bitcoin and the consequences of classifying it. Part III argues that Bitcoin
is not a security or a commodity. Part IV examines the legal definition of
money, while Part V analyzes the economic definition of money and
demonstrates that Bitcoin satisfies that definition.

7 See, e.g., I.R.S., NOTICE 2014-21, at 12 (2014), available at http://www.irs.gov/pub/irsdrop/n-14-21.pdf (stating that virtual currencies are considered property for income tax
purposes).
8

See, e.g., Todd P. Zarega & Thomas H. Watterson, United States: Regulating Bitcoins: CFTC
vs. SEC?, MONDAQ (Jan. 2, 2014), http://www.mondaq.com/unitedstates/x/283878/
Commodities+Derivatives+Stock+Exchanges/Regulating+Bitcoins+CFTC+vs+SEC.
9 See id.; Derek A. Dion, Ill Gladly Trade You Two Bits on Tuesday For a Byte Today: Bitcoin,
Regulating Fraud in the E-conomy Of Hacker-Cash, 2013 U. ILL. J.L. TECH. & POL'Y 165, 192 (2013).
10

See infra Part II.D.

See, e.g., Zarega & Watterson, supra note 8.
12 See infra Part IV.
13 See infra Part V.
11

124
I.

New England Law Review

v. 49 | 121

Background
A. Bitcoin: A Peek Under the Hood

Bitcoin was developed and unveiled in 2008 by a programmer, or

consortium of programmers, going by the moniker Satoshi Nakamoto.14
Some idealists view Bitcoins genesis as a populist reaction to the global
financial crisis of 20072008.15 Aside from the timing, Bitcoins creator
seemed to have been making a statement about the bailouts of various
too-big-to-fail financial institutions.16 The first ever Bitcoin transaction
(between Nakamoto and Hal Finney) carried a simple messagea
newspaper headline: The Times 03/Jan/2009 Chancellor on Brink of
Second Bailout for Banks.17
Whatever the inspiration, Bitcoins genius is its ability to solve the
double-spending problem without the aid of a trusted third party.18 The
double-spending problem simply means that, in order to complete an
electronic transaction, there must be a way to verify that the funds
transferred have not already been spent. 19 If we imagine a unit of virtual
currency, which is no more than a computer file, double spending would
be as simple as creating copies of the same file and sending them to
different merchants, destroying faith in the currency. 20 Traditionally, this
problem has been solved with the use of a trusted third party, like Paypal,

14 See SATOSHI NAKAMOTO, BITCOIN: A PEER-TO-PEER ELECTRONIC CASH SYSTEM 1 (2008),

available at www.bitcoin.org/bitcoin.pdf. The name Satoshi Nakamoto is in all likelihood a
pseudonym; it translates in English to something like thinking clearly inside the foundation.
Alec Liu, Who is Satoshi Nakamoto, the Creator of Bitcoin?, MOTHERBOARD (May 22, 2013,
9:45AM), http://motherboard.vice.com/blog/who-is-satoshi-nakamoto-the-creator-of-bitcoin.
Much effort has been devoted to attempting to identify Nakamoto, who has been in contact
with Bitcoin users and developers as recently as 2010, in spite of his opaque identity. See Alec
Liu, What Satoshi Said: Understanding Bitcoin Through the Lens of Its Enigmatic Creator,
MOTHERBOARD (Jan. 16, 2014, 5:30AM), http://motherboard.vice.com/blog/quotes-fromsatoshi-understanding-bitcoin-through-the-lens-of-its-enigmatic-creator.
15 See Jeff Desjardines, The Definitive History of Bitcoin, VISUAL CAPITALIST (Feb. 13, 2014,
8:00PM), http://www.visualcapitalist.com/the-definitive-history-of-bitcoin.
16 See Leah McGrath Goodman, The Face Behind Bitcoin, NEWSWEEK (Mar. 6, 2014, 6:05AM),
http://www.newsweek.com/2014/03/14/face-behind-bitcoin-247957.html.
17

See Liu, What Satoshi Said, supra note 14. Some speculate that Bitcoin was released
partially out of anger resulting from the bailouts given to large financial institutions. See id.
18 See NAKAMOTO, supra note 14.
19 See Double Spending, INVESTOPEDIA, http://www.investopedia.com/terms/d/double
spending.asp (last visited Mar. 17, 2015).
20 See Michael Nielsen, How the Bitcoin Protocol Actually Works, MICHAELNIELSEN (Dec. 6,
2014), www.michaelnielsen.org/ddi/how-the-bitcoin-protocol-actually-works.

2014

Tales from the Cryptocurrency

125

that can verify the transaction and prevent double spending by keeping a
ledger of the users transactions.21
Bitcoin solves the problem another wayusing cryptographic proof
instead of trust.22 Bitcoin relies on a peer-to-peer network23 to create and
maintain a public ledger, known as the block chain. 24 Each transaction
contains two public keysone each from the transferor and transferee
proving that the funds were transferred.25 Both parties sign the
transaction with their private key, and the transaction is recorded in a
block.26 The block is then verified by the network through a process called
mining before being added to the block chain. 27 Mining is the process
of matching a portion of the code of a block of transactions with a previous
block, using increasingly complex mathematical algorithms, in order to
ensure that transactions in a block are legitimate. 28 If the miner verifies a
block, it consummates the transactions therein by adding it to the block
chain, at which time the miner is rewarded with newly-minted bitcoins.29
This incentivizes miners to remain honest and support the system, in
addition to increasing the total money supply.30
There are a couple of quirks intentionally built into the Bitcoin
protocol: first, as bitcoins are mined over time, the bounty received is
reduced, yet the difficulty of solving the algorithms increases;31 second,
there is a hard cap of 21 million bitcoins that will ever be placed into

21 JERRY

BRITO & ANDREA CASTILLO, BITCOIN: A PRIMER FOR POLICYMAKERS 34 (2013),

available at http://mercatus.org/sites/default/files/Brito_BitcoinPrimer_v1.3.pdf [hereinafter
Primer].
22

NAKAMOTO, supra note 14.

This simply means two or more computers are directly connected to share resources
without the use of an intermediary server, as was used in file-sharing networks such as
Napster. See James Cope, QuickStudy: Peer-to-Peer Network, COMPUTERWORLD (Apr. 8, 2002,
1:00AM), http://www.computerworld.com/s/article/69883/Peer_to_Peer_Network,.
23

24

Primer, supra note 21, at 4.

Id. at 5.
26 Id.
27 Danton Bryans, Bitcoin and Money Laundering: Mining for an Effective Solution, 89 IND. L.J.
441, 446 (2014).
28 Id. at 446 n.37; see NAKAMOTO, supra note 14, at 34.
29 Bryans, supra note 27, at 446.
30 See NAKAMOTO, supra note 14, at 4. It is possible that, if a single node controlled 51% of
the processing power in the network, the attacking node could reverse previous transactions,
create new bitcoins, or effectively double spend. See id. at 34.
25

31

The first block was mined by Nakamoto. The block, referred to as the genesis block,
carried a bounty of 50 bitcoins. At the time of this writing, a successfully mined block yields
25 bitcoins. See Desjardines, supra note 15.

126

New England Law Review

v. 49 | 121

circulation.32 These features make Bitcoin behave more like a commoditybacked currency, like gold, than traditional paper money. 33 Eventually,
when the last bitcoin is mined (projected to occur in 2140), miners will no
longer mint new bitcoins, but they will still collect small transaction fees as
incentive to continue supporting the system.34
B. Bitcoin Pros
Nakamoto presents Bitcoin as offering a solution to the inherent
weaknesses of the trust based model.35 Nakamoto cites the fact that
electronic transactions conducted through a third party cannot be truly
irreversible, forcing third parties to mediate disputes and consequently
increasing transaction costs.36 Beyond this innovation in trust, enthusiasts
have cited a number of potential benefits Bitcoin may contribute. 37
Nakamotos humble idea appears to have caught on, as some
businesses have integrated38 Bitcoin into their payment options, citing
efficiency and low costs.39 Bitcoin presents an attractive alternative for
small businesses that would prefer to avoid the cost of opening a market

32 Samantha Sharf, Bitcoin Gets Valued: Bank of America Puts a Price Target on the Virtual
Tender, FORBES (Dec. 5, 2013), http://www.forbes.com/sites/samanthasharf/2013/12/05/bitcoingets-valued-bank-of-america-puts-a-price-on-the-virtual-tender.
33

See DAVID FRIEDMAN, GOLD, PAPER, OR . . . IS THERE A BETTER MONEY? 13 (1982), available
at http://object.cato.org/sites/cato.org/files/pubs/pdf/pa017.pdf; See also Ken Tindell, Geeks Love
the Bitcoin Phenomenon Like They Loved the Internet in 1995, BUSINESS INSIDER (Apr. 5, 2014),
http://www.businessinsider.com/how-bitcoins-are-mined-and-used-2013-4.
34

See Tindell, supra note 33.

NAKAMOTO, supra note 14, at 1.
36 Id.
37 See Jerry Brito, Bitcoin: More than Money, REASON (Nov. 19, 2013, 7:00 AM),
http://reason.com/archives/2013/11/19/bitcoin-more-than-money/print (Bitcoins are money.
But bureaucrats, like many observers since the digital currency burst on the scene in January
2009, are likely missing the larger implications. Bitcoin is much, much more than just
money.).
38 As of this writing, the most significant American businesses to incorporate Bitcoin into
their payment systems are the Sacramento Kings franchise of the National Basketball
Association, Porn.com, and Overstock.com. See Raymond Hackney, Bitcoin, Porn, and
Basketball, THE DOMAINS (Jan. 17, 2014), http://www.thedomains.com/2014/01/17/bitcoin-pornand-basketball; Fani Kelesidou, Overstock Sales Ramp Up After Accepting Bitcoin; Will Amazon
Follow Suit?, THE MOTLEY FOOL (Jan. 16, 2014), http://www.fool.com/investing/general/20
35

14/01/16/overstock-sales-ramp-up-after-accepting-bitcoin-wi.aspx.
39 Bailey Reutzel, Why Some Merchants Accept Bitcoin Despite the Risks, PAYMENTS SOURCE
(May 21, 2013), http://www.paymentssource.com/news/why-some-merchants-accept-bitcoindespite-the-risks-3014183-1.html.

2014

Tales from the Cryptocurrency

127

account with a credit card company and evade the various fees associated
with accepting credit card payments.40
Further, while some may malign the permanent nature of Bitcoin
transactions (transactions added to the block chain are irreversible),
merchants may see this as relief from charge-back fraud.41 Charge-back
fraud occurs when a purchaser charges a payment to a credit card and
collects the product purchased, but then challenges the transaction to
recoup the purchase price.42 The burden then falls on the merchant to
verify the transaction (which can be difficult to do) or else suffer a loss. 43
Bitcoin eliminates charge-back fraud, and therefore lowers transaction
costs by making transactions permanent, as if the transaction was
conducted in cash.44
Finally, Bitcoin can serve as an alternative for citizens of countries with
oppressive financial regimes.45 Some commenters have extolled Bitcoin as a
safe-haven currency for the economically oppressed.46 When Cyprus
declared a bank holiday and seized its citizens deposits in March 2013,
many citizens turned to Bitcoin for relief.47 Similarly, Bitcoin may offer
relief to Argentinians, whose governments policies have led to 25% (and
growing) annual inflation, combined with price and capital controls
preventing Argentinians from changing currencies.48
C. Bitcoin Risks
Bitcoins growth has also revealed some ostensible risks to individual
consumers and the criminal justice system, which are inherent in the
decentralized virtual currency.49

40

Primer, supra note 21, at 10.

Id. at 11.
42 See Emily Maltby, Chargebacks Create Business Headaches, WALL ST. J. (Feb. 10, 2011, 12:01
AM), http://online.wsj.com/article/SB10001424052748704698004576104554234202010.html.
41

43

Id.
See Primer, supra note 21, at 12.
45 See Jeff Fong, Bitcoin Price 2013: How Bitcoin Could Help the Worlds Poorest People,
POLICYMIC (May 14, 2013), http://www.policymic.com/articles/41561/bitcoin-price-2013-how
-bitcoin-could-help-the-world-s-poorest-people.
46 Is Bitcoin the New Safe-Haven Currency? Bitcoins Surge After Cyprus Bank Raid,
ACTIVISTPOST (Mar. 19, 2013), http://www.activistpost.com/2013/03/cyprus-bank-raidbitcoins.html.
44

47

See Desjardines, supra note 15. The value of a bitcoin shot up to $100 on April 1, 2013, and
$200 on April 8, 2013. Id.
48 Jon
Matonis, Bitcoins Promise in Argentina, FORBES (Apr. 27, 2013),
http://www.forbes.com/sites/jonmatonis/2013/04/27/bitcoins-promise-in-argentina.
49

See infra Part I.C.12.

128

New England Law Review

1.

v. 49 | 121

Bitcoins Market Volatility Problem

One significant risk to consumersand probably the biggest hurdle to

Bitcoins legitimacyis price volatility.50 One reason Bitcoins valuation is
so volatile is its newness.51 While consumers are unsure of Bitcoins real
value, novice investors rush to quench their own FOMO 52 in reaction to
media coverage.53 Some commentators have also noted that, while Bitcoin
has a hard market cap, there is nothing preventing other brands of
cryptocurrency from being produced to compete with and undermine the
value of the bitcoin.54 Volatility is a critical hurdle preventing some from
adopting cryptocurrencies as their preferred store of value.55 However, it is
possible that the volatility will be less dramatic as more businesses accept
payment in bitcoin and speculation steadies.56
2.

Anonymity, or Pseudonymity, Strictly Speaking

One perspective is that Bitcoin is inherently dangerous as a payment

system because it is almost entirely anonymous.57 This idea is based on
the observation that Bitcoin users have no central authority with which to
register, and the only identifying information a person records on the block

50 See Timothy B. Lee, An Illustrated History of Bitcoin Crashes, FORBES (Apr. 11, 2013),
http://www.forbes.com/sites/timothylee/2013/04/11/an-illustrated-history-of-bitcoin-crashes
(illustrating wild fluctuations in Bitcoin value between June 2011 and April 2013). As of this
writing, the value of a bitcoin has been hovering around $290 USD. See Blockchain,
http://markets.blockchain.info (last visited Mar. 17, 2015). In fact, the value of a bitcoin has
fluctuated so significantly it was named the Worst Investment of 2014. See Matt Phillips,
Bitcoin Is the Worst Investment of 2014, Quartz (Dec. 15, 2014), http://qz.com/312598/bitcoin-isthe-worst-investment-of-2014/.
51 See Matthew OBrien, Bitcoin Is No Longer a Currency, THE ATLANTIC (Apr. 11, 2013),
available
at
http://www.theatlantic.com/business/archive/2013/04/bitcoin-is-no-longer-acurrency/274859.
52 Or fear of missing out, a term associated with the cultural jealousy cultivated by
modern social networks. See John M. Grohol, FOMO Addiction: The Fear of Missing Out,
PSYCHCENTRAL (Apr. 14, 2011), www.psychcentral.com/blog/archives/2011/04/14/fomoaddiction-the-fear-of-missing-out.
53 See Felix Salmon, The Bitcoin Bubble and the Future of Currency, MEDIUM (Apr. 3, 2013),
https://medium.com/money-banking/2b5ef79482cb.
54 Sharf, supra note 32. However, this phenomenon is presently well underway, and market
valuations exist for at least seventy-six different cryptocurrencies. See Crypto-Currency Market
Capitalizations, COINMARKETCAP, http://coinmarketcap.com/ (last visited Mar. 17, 2015).
55

See OBrien, supra note 51.

See Adam Gurri, Bitcoins, Free Banking, and the Optional Clause, MLAUT (May 6, 2013),
http://theumlaut.com/2013/05/06/bitcoins-free-banking-and-the-optional-clause.
57 Peter Twomey, Halting a Shift in the Paradigm: The Need for Bitcoin Regulation, 16 TRINITY
C.L. REV. 67, 70 (2013).
56

2014

Tales from the Cryptocurrency

129

chain is his or her public keywhich can be changed from transaction to

transaction.58 This has led some to fear that Bitcoin transactions could
impede criminal investigations and provide a safe haven for money
launderers.59
The most commonly cited example of the nefarious ways Bitcoin could
be used is the Silk Road, an online black market which traded only in
Bitcoins and where anonymous users 60 could buy and sell illicit goods and
services.61 Because Bitcoin was the preferred payment system, law
enforcement struggled to police transactions on the Silk Road. 62
Determining the owner of bitcoins is not impossible.63 Because a
persons identity is tied to his or her public key and the public key is tied to
every transaction, which is forever publicly available in the block chain,
transactions cannot truly be anonymous. 64 It is thus inherent in the Bitcoin
protocol that transactions recorded on the block chain must be more public
than cash transactions, which can be totally anonymous. 65 Most merchants
collect identifying information about buyers when a transaction is made. 66
And even if they do not, law enforcement may be able to use a metadatatype analysis to determine the owner of transacted bitcoins by analyzing
the block chain.67 Notably, the block chain is always available for
investigation without the need for a subpoena or probable cause. 68
Therefore, while using Bitcoin is closer to being anonymous than
conventional electronic payment systems, it is still less anonymous than
cash.69

58

Id. at 6970.
Id. at 70.
60 Certain parts of the Internet, collectively called the Deep Web, are only reachable by
using software that makes users anonymous, like The Onion Router, which essentially
scrambles a users Internet Protocol address and makes them (nearly) unidentifiable. Jivan
Achreja, Privacy, TOR, BTC, and What the Silk Road Crackdown Means to You: The Latest in the
Battle for Internet Anonymity, EXITEVENT (Nov. 12, 2013), http://exitevent.com/article/privacytor-btc-and-what-the-silk-road-crackdown-means-to-you-131112.
59

61

Twomey, supra note 57, at 7172.

Id.
63 Primer, supra note 21, at 18.
64 See id.
65 Id.
66 Id.
67 Joshua Brustein, Bitcoin May Not Be So Anonymous, After All, BUSINESSWEEK (Aug. 27,
2013), http://www.businessweek.com/articles/2013-08-27/bitcoin-may-not-be-so-anonymousafter-all.
62

68
69

Id.
Id.

130

New England Law Review

v. 49 | 121

II. Regulatory Pretenders Competing to Control Bitcoin

Today, Bitcoin arguably falls within the purview of several existing
regulatory frameworks, and the Federal Government is actively seeking to
integrate Bitcoin.70 However, Bitcoin lacks any central governing body and
exists only as a peer-to-peer network, making direct regulation
impossible.71 If the United States is interested in regulating virtual
currencies like Bitcoin, it should focus its efforts on the various exchanges.72
The Bitcoin exchanges are the best candidates for regulation because: (1)
they are tangible business entities, sometimes incorporated in the United
States and dealing in fiat73 money; and (2) Bitcoin would not be nearly as
practical without the exchanges.74 While Bitcoin is a new technology,
uncontemplated by existing law, several regulatory frameworks may apply
to the exchanges depending on how we define virtual currencies. 75
A. Securities Regulation
If Bitcoin is classified as a security, then Bitcoin exchanges would be
considered securities exchanges subject to the requirements of the
Securities Act of 1933 and the Exchange Act of 1934.76 The Securities Act of
1933 explicitly applies to investments, commodities, notes, and stocks. 77 It
punishes those who with intent to defraud, passes, utters, publishes, or
sells, or attempts to pass, utter, publish, or sell, or with like intent brings
into the United States or keeps in possession or conceals any falsely made,
forged, counterfeited, or altered obligation or other security of the United
States.78

70

See infra Parts II.AD.

See Twomey, supra note 57, at 75.
72 Id. at 7576.
73 As opposed to commodity money, fiat money refers to the currency issued by
governments and not backed by physical commodities. Fiat money has value because the
issuing
government
dictates
that
it
does.
Fiat
Money,
INVESTOPEDIA,
www.investopedia.com//terms/f/fiatmoney.asp (last visited Mar. 17, 2015). Of course, the
government can only produce money by fiat insofar as the governed agree that the money is
valuable. This means that all money is arguably fiat money in that it has value because people
agree that it does. See Pascal-Emmanuel Gobry, All Money Is Fiat Money, FORBES (Jan. 8, 2013),
http://www.forbes.com/sites/pascalemmanuelgobry/2013/01/08/all-money-is-fiat-money/.
74 Twomey, supra note 57, at 76.
75 See infra Parts II.AD.
76 Securities Act of 1933, 15 U.S.C. 77b(a)(1) (2012); Securities Exchange Act of 1934, 15
U.S.C. 78c(a)(10) (2012).
71

77
78

15 U.S.C. 77b(a)(1) (2012).

18 U.S.C. 472 (2012).

2014

Tales from the Cryptocurrency

131

The reporting requirements of the Securities and Exchange Acts are

comprehensive and require that: (1) investments be registered with the
SEC;79 and (2) the issuer of such investment comply with the SEC reporting
requirements.80
B. Bank Secrecy Act
The Bank Secrecy Act (BSA)81 evolved from Congresss first attempt
to curb money laundering with the Bank Records and Foreign Transactions
Act.82 Money laundering refers to the process by which individuals render
dirty money clean, so that it may be used for legal activities.83 The BSA
expressly gives authority to the Secretary of the Treasury to promulgate
rules and issue monetary penalties for violations.84 The Secretary of the
Treasury then delegated that authority to a Treasury Department bureau
called the Financial Crimes Enforcement Network (FinCEN).85 Under the
BSA, financial institutions must report any transactions over $10,000, 86 and
may be designate[d] . . . as [agents] of the United States Government for
the purpose of reporting activities in any circumstances prescribed by
FinCEN.87 Further, any institution which qualifies as a money-services
business must register with FinCEN, even if it is not located in the United
States.88 Importantly, money transmitters are considered money-services
businesses.89 FinCEN has issued guidance stating that Bitcoin exchanges

79

15 U.S.C. 77f(a) (2012).

17 C.F.R. 229.601 (2012) (outlining the table of required SEC reporting exhibits).
81 Although technically comprised of other provisions in the United States Code (e.g., 12
U.S.C. 1818(s), 1818(i)(2)(A)(ii) and 1829(b), and 18 U.S.C. 1956 and 1957), the provisions
codified at 31 U.S.C. 53115330 are commonly understood as the Bank Secrecy Act.
Stephens B. Woodrough, Civil Money Penalties and the Bank Secrecy ActA Hidden Limitation of
Power, 119 BANKING L.J. 46, 47 n.6 (2002).
80

82

See id. at 4647 & n.6.

Shawn Turner, U.S. Anti-Money Laundering Regulations: An Economic Approach to
Cyberlaundering, 54 CASE W. RES. L. REV. 1389, 1391 (2004).
83

84

Woodrough, supra note 81, at 47.

Treas. Order 180-01 (Mar. 24, 2003).
86 31 C.F.R. 103.22 (2010); see 31 U.S.C. 5313(a) (2012).
87 See 31 U.S.C. 5313(b).
88 Bank Secrecy Act Regulations, 76 Fed. Reg. 43,585, 43,588 (July 21, 2011) (to be codified at
31 C.F.R. pts. 101, 1021, and 1022) ("[A]n entity qualifies as an MSB based on its activity within
the United States, not the physical presence of one or more of its agents, agencies, branches or
offices in the United States. This proposal arose out of the recognition that the Internet and
other technological advances make it increasingly possible for persons to offer MSB services in
the United States from foreign locations.").
85

89

31 C.F.R. 1010.100(ff) (2011).

132

New England Law Review

v. 49 | 121

are money transmitters and Bitcoin miners may be money transmitters in

certain circumstances.90
Title III of the USA PATRIOT Act broadened the existing federal
money-laundering legislation.91 Importantly, the Patriot Act criminalized
operating an unlicensed money-transmitting business.92 Further, the Patriot
Act forces additional requirements on financial institutions, including the
designation of an internal compliance officer, the establishment of an
ongoing employee training program and . . . implement[ion of] an
international minimum customer information standard called Know Your
Customer.93 The expanded Know Your Customer requirements under
the Patriot Act require financial institutions to verify the identities of
parties (and keep record of the same) in connection with the opening of an
account.94 Bringing Bitcoin exchanges within the oversight of FinCEN via
the BSA, as modified by the Patriot Act, is an effective way to regulate
Bitcoin users through the Bitcoin exchanges and solve potential money
laundering concerns raised by the pseudonymity of virtual currency. 95
C.

Electronic Funds Transfer Act and Regulation E

The Electronic Funds Transfer Act (EFTA) and the Federal Reserves
Regulation E provide another potential regulatory framework that
would rein in cryptocurrencies, depending on their definition.96 Congresss
intent in enacting the EFTA was to provid[e] a framework of law
regulating the rights of consumers as against financial institutions in
electronic funds transfers.97 In furtherance of that purpose, the Federal

90 See DEPT OF THE TREASURY FIN. CRIMES ENFORCEMENT NETWORK, FIN-2013-G001,

APPLICATION OF FINCENS REGULATIONS TO PERSONS ADMINISTERING, EXCHANGING, OR USING
VIRTUAL CURRENCIES 3, 5 (Mar. 18, 2013) [hereinafter FINCEN GUIDANCE]. The guidance
explains that Bitcoin exchanges are money-services businesses, and Bitcoin miners are moneyservices businesses only to the extent that they sell mined bitcoins to another for real currency.
Id. at 5. To the extent that miners use mined bitcoins for their own benefit, they are a user of
the virtual currency and not a money-services business. See Milly Bitcoin, FinCEN Issues
Bitcoin-Friendly Ruling for Miners, COINTEXT (Dec. 27, 2013), http://cointext.com/fincen-issuesbitcoin-friendly-ruling-for-miners/. This is true even if the miner converts mined bitcoins into
fiat currency before using them for personal reasons. See id.
91

See Uniting and Strengthening America by Providing Appropriate Tools Required to

Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001, Pub. L. No. 10756, 115
Stat. 272 (2001).
92

18 U.S.C. 1960 (2012).

Twomey, supra note 57, at 77 (internal citation omitted).
94 USA PATRIOT Act of 2001 326(a); 31 U.S.C. 5318(l) (2012).
95 See Twomey supra note 57, at 76.
96 C.f. Electronic Fund Transfers (Regulation E), 12 C.F.R. 205.1205.20 (2011).
97 Shawmut Worcester Cnty. Bank v. First Am. Bank & Trust, 731 F. Supp. 57, 61 (D. Mass.
93

2014

Tales from the Cryptocurrency

133

Reserves board of governors announced Regulation E, which applies to

any electronic transaction in which a consumer allows a financial
institution to debit or credit a consumers account.98 Regulation E
effectively mandates financial institutions to make various disclosures 99
and institutes various practices deemed to advance the interests of
consumer protection.100
As of October 28, 2013, the Consumer Financial Protection Bureau
amended Regulation E to include additional requirements for remittance
transfers.101 Specifically, the amendment requires the disclosure of: the
exchange rate, fees and taxes collected by the companies, fees charged
by the companies agents abroad and intermediary institutions, the
amount of money expected to be delivered abroad, not including certain
fees charged to the recipient or foreign taxes, and, sometimes, a disclosure
regarding additional fees.102 In addition, the amendment requires financial
institutions to give consumers thirty minutes in which to cancel a
transaction,103 investigate alleged mistakes, and assume liability for
mistakes made by certain people who work for [the financial
institution].104 Most importantly, characterizing Bitcoin and various
Bitcoin actors in a way that brings the cryptocurrency under the umbrella
of the EFTA subjects those entities to the Consumer Financial Protection
Bureau for future regulation.105
D. Commodity and Futures Regulation
The Commodity Exchange Act requires futures contracts 106 to be
executed on a federally sanctioned exchange. 107 The 1974 amendments to

1990).
98

See 12 C.F.R. 205.1(b), 205.3(b).

Here is a tremendous over-simplification of the Regulation E disclosure requirements:
financial institutions must inform the consumer regarding the consumers liability, rights (to
documentation, confidentiality, et cetera), ATM and non-ATM fees associated with the
transaction, and conflict resolution options. See 12 C.F.R. 205.7.
99

100 While this topic is beyond the scope of this Note, let it suffice to say that the
requirements are thorough and one can appreciate the competitive advantages of a
decentralized virtual currency cut from Bitcoins cloth. See generally 12 C.F.R. 205.5205.20.
101 See CONSUMER FINANCIAL PROTECTION BUREAU, SUMMARY OF THE FINAL REMITTANCE
TRANSFER RULE (AMENDMENT TO REGULATION E)
1
(2013),
available
at
http://files.consumerfinance.gov/f/201305_cfpb_remittance-transfer-rule_summary.pdf.
102 Id.
103 Id. at 2. Recall that Bitcoin transactions are naturally irreversible, placing this
requirement fundamentally at odds with the Bitcoin protocol. See NAKAMOTO, supra note 14.
104

See CONSUMER FINANCIAL PROTECTION BUREAU, supra note 101, at 2.

See 12 C.F.R. 205.1; CONSUMER FINANCIAL PROTECTION BUREAU, supra note 101.
106 Contracts for purchase or sale of a commodity to be delivered and/or accepted in the
105

134

New England Law Review

v. 49 | 121

the Act give exclusive authority to the Commodity Futures Trading

Commission to regulate futures contracts.108
Businesses operating as contract markets must submit an application to
the Commodity Futures Trading Commission in order to become a board
of trade.109 The applicant must prove to the Commission that the contract is
not contrary to the public interest 110 and that the business has adequate
mechanisms in place to prevent price manipulation.111
For transactions in foreign currency, the Commission has no
jurisdiction to regulate off-exchange transactions under the Treasury
Amendment to the Commodity Exchange Act. 112 This exclusion spawned
from congressional belief that transactions in foreign currency, being
typically conducted on an informal basis, are better supervised through
bank regulation.113 However, an exception to this rule exists when the
transaction is entered into on a leveraged or margined basis, or [similarly]
financed and a party involved is not an eligible contract participant.114 It
is important to note that foreign currency transactions do not escape
regulationthey are simply outside the jurisdiction of the Commodity
Futures Trading Commission.115

future. BLACKS LAW DICTIONARY 746 (9th ed. 2009).

107

See 7 U.S.C. 2a(ii) (1982).

Commodity Futures Trading Commission Act of 1974, Pub. L. No. 93-463, 101, 102, 88
Stat. 1389 (codified as amended in scattered sections of 7 U.S.C.).
108

109

See 7 U.S.C. 7a (1982).

Roberta Romano, A Thumbnail Sketch of Derivative Securities and Their Regulation, 55 MD.
L. REV. 1, 23 (1996).
111 Id.
112 See Dunn v. Commodity Futures Trading Comm'n, 519 U.S. 465, 469 (1997) (describing
the Treasury Amendments applicability to foreign currency options).
110

113

S. REP. NO. 93-1131, at 201 (1974), reprinted in 1974 U.S.C.C.A.N. 5843, 5863.
7 U.S.C. 2(c)(2)(C)(i)(I)(aa)(bb) (2012); Nikolei M. Kaplanov, Nerdy Money: Bitcoin, the
Private Digital Currency, and the Case Against Its Regulation, 25 LOY. CONSUMER L. REV. 111, 148
(2012).
115 Retail foreign exchange participants must register as either futures commission
merchants or retail foreign exchange dealers. See Kaplanov, supra note 114, at 148. Further,
these participants must adhere to certain disclosure, record-keeping, financial reporting and
minimum capital standards. Christopher Doering & Roberta Rampton, U.S. CFTC Issues Final
Forex Exchange Market Rule, REUTERS (Aug. 31, 2010), http://www.reuters.com/article/2010/08/
114

31/financial-regulation-forex-idUKN3121025420100831.

2014

Tales from the Cryptocurrency

135

ANALYSIS
It is evident that classifying Bitcoin is crucial to enforcing a coherent
regulatory framework against those acting in the Bitcoin economy. 116 At
times, the law has found various facts and circumstances tests useful
when determining how to treat a particular asset. 117 However, this type of
treatment can lead to complex litigation and inconsistent results. 118 Further,
failure to properly recognize what cryptocurrency is at a fundamental level
may result in confusion and inadequacy; a regulation which may make
perfect sense as applied to conventional financial instruments may be a
complete non sequitur when applied to the Bitcoin protocol.119
III. Bitcoin Cannot Logically Be Defined as a Security or Commodity
A. Bitcoin Cannot be Classified as a Security
In a letter addressed to the committee on Homeland Security and
Governmental Affairs, Securities and Exchange Chairperson Mary Jo White
stated that whether a virtual currency is itself a security will be based on
the facts and circumstances of a specific case. 120 She also stated that
interests in companies holding virtual currencies would likely be
securities.121 By leaving open the possibility that Bitcoin could be a security,
White effectively reserves the right to regulate virtual currencies going
forward.122

116

See supra Part II.

For instance, when determining the tax-exempt status of non-profits, courts must
determine whether, under all the facts and circumstances, the organization was involved in a
political campaign. See Elizabeth J. Kingsley, Challenges to Facts and CircumstancesA
Standard Whose Time has Passed?, J. TAXN EXEMPTS, Mar./Apr. 2010, available at
www.harmoncurran.com/library/BK%20TOE-Circumstances.pdf.
117

118 See Richard J. Kovach, Bright Lines, Facts and Circumstances Tests, and Complexity in
Federal Taxation, 46 SYRACUSE L. REV. 1287, 1300 (1996) ([W]hen key tax determinations are
based on facts and circumstances analyses, the task of professionals becomes difficult enough
to result in great variations of skill.).
119

See infra Part III.A.

Letter from Mary Jo White, Chair, Securities and Exchange Commission, to Thomas R.
Carper, Chairman, Comm. on Homeland Sec. and Governmental Affairs 1 (Aug. 30, 2013),
available at http://online.wsj.com/public/resources/documents/VCurrenty111813.pdf.
120

121

Id.
See Lewis D. Lowenfels & Alan R. Bromberg, What is a Security Under the Federal
Securities Laws?, 56 ALB. L. REV. 473, 483 (1993) ([I]t is generally acknowledged that currency
is not a security.). It follows that foreign currencies are likewise not considered currencies.
See Proctor & Gamble Co. v. Bankers Trust Co., 925 F. Supp. 1270, 1280 n.4 (S.D. Ohio 1996).
122

136

New England Law Review

v. 49 | 121

The strongest catch-all provision that would allow Bitcoin to be

classified as a security is the investment-contract category.123 The
investment-contract classification depends on the satisfaction of the fourpart test set out in S.E.C. v. W.J. Howey Co.:124 (1) it involves a contract,
transaction or scheme whereby a person invests his money; (2) the
investment is made in a common enterprise; (3) the investor was led to
expect profits; and (4) said profits are realized solely from the efforts of
the promoter or a third party . . . .125 In the context of a virtual currency,
the following analysis using the four-part test above could ensue: a person
buys bitcoins with the hope that the value of bitcoins will increase, a
contract in which the investor is led to expect profits; in a common
enterprise, because the many users of Bitcoin benefit from the protocol
itself (and since other users likewise hope for the value to increase); and
benefits are realized solely on third-party efforts, since the Bitcoin system
relies on miners and developers to keep the system running, and bitcoin
prices rise in part because of speculators.126
Even in this narrow circumstance, the argument that Bitcoin is a
security is flawed.127 An investment in a common enterprise means that the
investment allows the enterprise to function and create revenue.128 Bitcoin,
on the other hand, does not grow and gain value due to the investment of
capitalthe Bitcoin protocol demands only the investment of computing
power to function.129 Therefore, it would be inaccurate to say that the
typical purchaser of bitcoins, even one speculating on its appreciation, has
invested in Bitcoin in any meaningful sense. 130 Further, Bitcoin does not
possess characteristics of a common enterprise. 131 There is no pooling of an

123

See Zarega & Watterson, supra note 8.

328 U.S. 293, 29899 (1946).
125 Id.; see also Twomey, supra note 57, at 81.
126 See Zarega & Watterson, supra note 8.
127 See infra notes 130135 and accompanying text.
128 See BLACKS LAW DICTIONARY 902 (9th ed. 2009) (defining investment as an expenditure
to acquire property or assets to produce revenue; a capital outlay).
124

129 See John William Nelson, Why Bitcoin Isn't a Security Under Federal Securities Law, LEX
TECHNOLOGIAE (June 26, 2011, 11:49 PM), http://www.lextechnologiae.com/2011/06/26/whybitcoin-isnt-a-security-under-federal-securities-law.
130

See id.
See Hocking v. Dubois, 885 F.2d 1449, 1455 (9th Cir. 1989) (explaining that a common
enterprise might exist if there is either vertical or horizontal commonality). Vertical
commonality means that the investor and a promoter are involved in a common venture,
without the need for additional investors. See Hocking v. Dubois, 839 F.2d 560, 566 (9th Cir.
1988). Horizontal commonality means that a group of investors have placed their assets in a
pool from which they will distribute gains on a pro-rata basis. See id. There is a circuit split as
to which form of commonality is acceptable, but as a rule of thumb, horizontal commonality is
131

2014

Tales from the Cryptocurrency

137

investor groups assets in a typical Bitcoin transaction; in fact, the identities

of the parties to a transaction are obscured by the protocol.132 And there
cannot be vertical commonality since Bitcoin is a decentralized peer-to-peer
currency with no central office, no financial department, and thus no
promoter with whom the investor collaborates.133
The analysis for the fourth element also fails because the protocol does
not rely on a third party, and each party acting in the Bitcoin system acts
wholly in self-interest.134 This is not to say there could be no securities
involving bitcoins; indeed, equity interests in exchanges or other
businesses dealing in the periphery of the Bitcoin economy would
obviously be securities.135
B. Cryptocurrency Is Not Quite a Commodity
As noted above, the CFTC may have general regulatory authority over
contracts for future delivery of commodities, but not foreign currencies. 136
The first commodity futures contracts were known as to arrive contracts,
and they were used for the delivery of grain to terminal markets.137 The
to arrive contracts were supplanted by time contracts, which became
forward and futures contracts, allowing speculators to ply grain prices.138
At nearly every point in history, leaders have feared the effect of
speculation through futures contracts on prices of commodities.139 The
principle fear behind the regulation of commodity speculation is subjecting
the public to unduly high prices because of the speculation.140
The Commodity Exchange Act defines commodities, highlighting
the terms agricultural roots:
The 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,
and all other fats and oils), cottonseed meal, cottonseed, peanuts,
soybeans, soybean meal, livestock, livestock products, and frozen

required by stricter courts and vertical commonality is less uniformly accepted. See id.
132

See supra Part I.C.2.

See Primer, supra note 21, at 5. One would imagine that a decentralized peer-to-peer
network would make a lousy promoter, anyways. See id.
134 See supra Part I.A.
135 See Letter From Mary Jo White, Chair, supra note 122.
136 See supra Part II.D.
137 JERRY W. MARKHAM, LAW ENFORCEMENT AND THE HISTORY OF MARKET MANIPULATION
17 (2014).
133

138

Id.
See id. at 4, 8.
140 See id. at 58.
139

138

New England Law Review

v. 49 | 121

concentrated orange juice, and all other goods and articles, except
onions . . . and motion picture box office receipts . . . and all
services, rights, and interests . . . in which contracts for future delivery
are presently or in the future dealt in.141

However, the final portion of this definition suggests that commodity

has expanded to encompass anything that is or could be the subject of a
futures contract.142 This is limited by the Treasury Amendment, which
excludes transactions in foreign currency between financial institutions. 143
Under this expansive definition, Bitcoin is arguably a service, right [or]
interest in which [futures contracts] are . . . in the future dealt in.144 Those
who argue that Bitcoin should be treated as a commodity emphasize the
favorable comparison to gold and its inherently finite supply. 145 However,
it appears several countries have designated Bitcoin a type of virtual
commodity, simply because of an unwillingness to call it a currency.146
The CEA definition of commodities hints at the obviouscommodities
are almost always tangible goods with inherent value. 147 Clearly, Bitcoin
does not comport with this understanding of commodity.148 Bitcoins are
strings of code that represent a part of a transaction.149 No tangible
property exists in the annals of cyber space. 150 Further, Bitcoins value is
mainly in its potential as a medium of exchangeit has no inherent
value.151

141
142

7 U.S.C. 1a(9) (2012) (emphasis added).

See Conroy v. Andeck Resources 81 Year-End Ltd., 484 N.E.2d 525, 530 (Ill. App. Ct.

1985).
143

See supra notes 11215.

See 7 U.S.C. 1a(9) (2012).
145 See NAKAMOTO, supra note 14, at 34; See, e.g., Avi Mizrahi, Look at Bitcoin as a Commodity,
Like Digital Gold, Rather than a Currency, FOREXMAGNATES (Nov. 25, 2013),
http://forexmagnates.com/exclusive-interview-with-ron-cao-co-founder-and-managingdirector-at-lightspeed-china-partners/.
144

146 See Kati Pohjanpalo, Bitcoin Judged Commodity in Finland After Failing Money Test,
BLOOMBERG (Jan. 20, 2014), http://www.bloomberg.com/news/2014-01-19/bitcoin-becomescommodity-in-finland-after-failing-currency-test.html; BTC China, The People's Bank of China
and Five Associated Ministries Notice: "Prevention of Risks Associated with Bitcoin,
https://vip.btcchina.com/page/bocnotice2013 (last visited Mar. 17, 2015). In other words, the
commodity classification appears to be a catch-all. See id.
147 See ALAN R. BROMBERG & LEWIS D. LOWENFELS, 1 SECURITIES FRAUD & COMMODITIES
FRAUD 82.103 (1993).
148

See infra notes 15055 and accompanying text.

See supra Part I.A.
150 Cf. Jonathan Bick, Different Kind of Property Right, BICKLAW (Aug. 8, 2005),
http://www.bicklaw.com/publications/internetassets.htm.
151 See Brad DeLong, Watching Bitcoin, Dogecoin, Etc . . ., WASH. CENTER FOR EQUITABLE
GROWTH (Dec. 28, 2013, 1:24 PM), http://equitablegrowth.org/2013/12/28/1466/watching149

2014

Tales from the Cryptocurrency

139

IV. Defining Money: Money, Monies, Currency, and Foreign Currency

in the Law
Unsurprisingly, courts and legislatures have determined the meaning
of the word money on various occasions.152 The Uniform Commercial
Code (UCC) defines money and ties money-status to government
genesis: Money means a medium of exchange currently authorized or
adopted by a domestic or foreign government . . . [including] a monetary
unit of account established by an intergovernmental organization or by
agreement between two or more countries.153 Bitcoin is at odds with this
definition of money because it is decentralized.154 Similarly, the Treasury
Department has defined currency, making it clear that money must be
created by government fiat.155 The Treasury Departments regulation goes
further, insisting that currency must have legal tender status somewhere.156
Bitcoin is not, nor will it ever be legal tender 157 in any country since it is not
backed by any nations central bank.158
FinCEN approaches this issue by distinguishing between real currency
and virtual currency.159 Whereas real currency has legal tender status in a
jurisdiction, virtual currency acts as a substitute for real currency in some
circumstances and may be convertible to real currency. 160 Similarly, the
Internal Revenue Service has announced that, for income tax purposes,
virtual currencies are treated as non-monetary assets.161 Under this
approach, taxpayers include as income the fair market value of bitcoins the

bitcoin-dogecoin-etc (Underpinning the value of gold is that if all else fails you can use it to
make pretty things . . . . Placing a floor on the value of bitcoins is . . . what, exactly?).
152 See In re Hokulani Square, Inc., 460 B.R. 763, 768 (B.A.P. 9th Cir. 2011); see, e.g., U.C.C.
1-201(b)(24) (2012); 31 C.F.R. 1010.100(m) (2014).
153 U.C.C. 1-201(b)(24).
154 See Frequently Asked Questions, BITCOIN, http://bitcoin.org/en/faq#what-is-bitcoin (last
visited Mar. 17, 2015).
155

See 31 C.F.R. 1010.100(m). The coin and paper money of the United States or of any
other country that is designated as legal tender and that circulates and is customarily used
and accepted as a medium of exchange in the country of issuance. Id.
156 Id.
157 Meaning, of course, currency which must be accepted in satisfaction of debts. See 31
U.S.C. 5103 (2012). In the United States, the only legal tender is U.S. currency and Federal
Reserve notes. Id.
158

See, e.g., David George-Cosh, Canada Says Bitcoin Isnt Legal Tender, WALL ST. J. (Jan. 16,
2014, 4:26 PM), http://blogs.wsj.com/canadarealtime/2014/01/16/Canada-says-bitcoin-isntlegal-tender/ (indicating that Canada has declared that Bitcoin is not considered legal tender).
159

FINCEN GUIDANCE, supra note 90, at 1.

Id.
161 I.R.S., NOTICE 2014-21, supra note 7.
160

140

New England Law Review

v. 49 | 121

moment they are earned.162 Each strategy treats Bitcoin as a placeholder for
real currency.163
The EFTA and Regulation E, meanwhile, apply only to financial
institutions, defined as a State or National bank, a State or Federal savings
and loan association, a mutual savings bank, a State or Federal credit
union, or any other person who, directly or indirectly, holds an account
belonging to a consumer.164 Further, the EFTA applies to electronic
transfers which credit or debit a consumer account. 165 Yet, Bitcoin does not
comport with notions of holding an account belonging to a consumer. 166 In
fact, the key innovation distinguishing Bitcoin is the lack of financial
institutions and accounts, since Bitcoin transactions occur on a peer-to-peer
basis and are verified on a peer-to-peer network.167 The Bitcoin network
itself, and the addresses associated with funds, cannot be deemed a
financial institution because it is not a company or legal institution. 168 So,
the Bitcoin protocol is fundamentally at odds with the legal framework of
money.169
V. Defining Money: Economics and Philosophy
A. Bitcoin Satisfies the Economic Definition of Money
Economists, the mavens of money, have a time-honored, formulaic
definition of what money is and what it is used for. 170 Money can be
stratified into three characteristics: a medium of exchange, a unit of
account, and a store of value.171 Each of these characteristics needs some
unpacking.172
There is some legal discourse to the effect that money is a medium of
exchange.173 For instance, in In re Hokulani Square, the bankruptcy court was
162

See id.
See FINCEN GUIDANCE, supra note 90, at 3, 5; see also I.R.S. Notice 2014-21, supra note 7.
164 15 U.S.C. 1693a(9) (2012).
165 See Voeks v. Pilot Travel Ctrs., 560 F.Supp. 2d 718, 720 (E.D. Wis. 2008).
166 See Primer, supra note 21, at 32.
167 Id.
168 Id.
169 See supra notes 16670 and accompanying text.
170 See Maria Pia Paganelli, What Is Money for?, INTERCOLLEGIATE REV. 15 (Spring 2012),
available at http://www.mmisi.org/ir/47_01/paganelli.pdf.
163

171 Id. (So we use money to exchange things of different value and to compare the values
of different things, and with it we are able to do so, not only now, but also in the future.); see
also Lewis J. Spellman, Book Review, 54 TEX. L. REV. 458 (1976) (reviewing JOHN KENNETH
GALBRAITH, MONEY: WHENCE IT CAME, WHERE IT WENT (1975)).
172
173

See infra notes 177212 and accompanying text.

See infra notes 177212 and accompanying text.

2014

Tales from the Cryptocurrency

141

tasked with interpreting the term money disbursed in a statute limiting

the compensation of a trustee in a bankruptcy context. 174 After noting that
the plain meaning of the term money was a medium of exchange, the
court went on to hold that medium of exchange generally meant
anything commonly agreed upon as a token of value used in
transactions.175 It is hard to dispute that bitcoins are accepted among those
who own bitcoinsas well as an ever-increasing number of merchants
who accept bitcoin paymentsas a token of value used in transactions.176
The second function of money, the accounting function, means that the
ostensible currency is a common unit of monetary measure that . . .
enable[s] the translation of values between different classes of and markets
for assets, where those classes and markets may be segmented
economically, geographically, or politically.177 The Bitcoin protocol not
only satisfies, but is also superior to, fiat money in regard to the
commonality and translatability requirements because the Internet has no
jurisdictional boundaries.178 However, virtual currencies struggle to be a
consistent unit of measure because the value of a single unit fluctuates. 179
This volatility is temporary in nature and a symptom of the currencys
youththere is nothing to suggest that Bitcoin would fail as a reliable unit
of account once it stabilizes.180 In the interim, Bitcoin relies on the operation
of exchanges to tie the value of a bitcoin to the value of another, more
stable currency.181
The third function of money is the ability to act as a store of value,
meaning it predictably maintains or increases in value over time. 182 Again,
because of price volatility, some critics assert that Bitcoin fails as an
effective monetary store of value 183 because there is nothing tangible

174

See In re Hokulani Square, Inc., 460 B.R. 763, 77071 (B.A.P. 9th Cir. 2011); see also 11
U.S.C 326 (2012).
175 See Hokulani, 460 B.R. at 77071 (noting that legal and non-legal dictionaries, as well as
the UCC, define money as a medium of exchange).
176 See Kelesidou, supra note 38 and accompanying text.
177 David G. Oedel, Why Regulate Cybermoney?, 46 AM. U. L. REV. 1075, 1078 (1997).
178 See Dan L. Burk, Jurisdiction in a World Without Borders, 1 VA. J.L. & TECH. 3, 3 (1997).
179 See David D. Friedman & Kerry L. Macintosh, The Cash of the Twenty-First Century, 17
SANTA CLARA COMPUTER & HIGH TECH. L.J. 273, 275 (2001) (If the value of money changes
rapidly, it becomes difficult to use information about past prices to judge present prices.).
180

See Timothy B. Lee, These Four Charts Suggest that Bitcoin Will Stabilize in the Future,
WASH. POST (Feb. 3, 2014), http://www.washingtonpost.com/blogs/the-switch/wp/2014/02/03/
these-four-charts-suggest-that-bitcoin-will-stabilize-in-the-future.
181 See id.
182 Friedman & Macintosh, supra note 179.
183 See, e.g., Paul Krugman, Bitcoin Is Evil, N.Y. TIMES (Dec. 28, 2013, 2:35 PM),
http://krugman.blogs.nytimes.com/2013/12/28/bitcoin-is-evil (complaining that Bitcoin

142

New England Law Review

v. 49 | 121

(commodity or legislation) supporting it.184 However, others argue that

virtual currencies have the potential to be superior stores of value
compared to government-backed currencies.185 Since governments
(through their central banks) sometimes find it beneficial to cause inflation,
decreasing the value of their money relative to the money of other
countries, traditional currencies can be unreliable as a store of value.186
And, because private consumers can select from a plethora of virtual
cryptocurrencies, the market can set its tolerance for price volatility,
encouraging growth in those currencies which maintain a store of value. 187
Bitcoin is an effective store of value, and it will become more so in the
future.188 Because Bitcoin has a limited supply built into its protocol, unlike
fiat currency, it can never be artificially inflated.189 Further, Bitcoin is
designed to mimic gold, which is often considered the consummate store of
value.190 And while Bitcoin does not have the tangible, inherent utility that
traditional commodity-based money has, its utility exists in its superiority
to other forms of payment.191 In other words, Bitcoins inherent value lies in
its ability to avoid high transaction costs (with which other payment forms
cannot compete); therefore, merchants are able to make more money on
each transaction.192 So, once speculation-based price volatility subsides,
Bitcoin will likely be a superior store of value, even to fiat currency.193
B. Bitcoin Increases Economic Autonomy
In modern, commercialized societies, however, money is more
important than this cookbook definition suggests.194 For commercial
societies like ours, money is the manifestation of liberty in the

enthusiasts are not able to explain why Bitcoin is a reliable store of value).
184

See DeLong, supra note 151.

Kerry Lynn Macintosh, How to Encourage Global Electronic Commerce: The Case for Private
Currencies on the Internet, 11 HARV. J.L. & TECH. 733, 762 (1998) (examining the possibilities of
virtual currencies well before the advent of the decentralized cryptocurrencies).
185

186

Id.
Id. at 76263.
188 See Lee, supra note 180.
189 See supra notes 3134 and accompanying text.
190 See PRADEEP DUBEY, JOHN GEANOKOPLOS, & MARTIN SHUBIK, COWLES FOUND. FOR RES.
ECON.YALE U., COWLES FOUND. DISCUSSION PAPER NO. 1031R, IS GOLD AN EFFICIENT STORE OF
VALUE? 13 (2002) (arguing that gold is not an efficient money, despite its ability to store
value and display utility without being consumed).
187

191

See supra notes 1830 and accompanying text.

See supra notes 1830 and accompanying text.
193 See Macintosh, supra note 185, at 762 63.
194 See Paganelli, supra note 170.
192

2014

Tales from the Cryptocurrency

143

marketplace.195 This freedom is born of the impersonal trade and economic

autonomy money allows.196 Personal trade is the idea that non-monetary
bartering limits the number of trade partners you could have to only those
who want what you have to trade and, in turn, have what you need.197 On
the other hand, money allows impersonal tradeexpanding the pool of
potential trade partners to anyone with something you need, giving you
more liberty.198
Economic autonomy is the freedom to purchase what you want. 199 This
means that money allows us to make our own choices in what types of
things we want to hold, without imposing that decision upon anybody else
(in contrast with a situation, for example, where individuals simply vote on
what things we will make and possess). 200 Because the Bitcoin protocol is
decentralized and avoids a trusted third party, transaction fees are low or
nonexistent.201 This means that microtransactions, or small payments, are
economically viable.202 To illustrate, many businesses require a minimum
purchase for consumers to use their credit cards because it costs retailers
money to accept cards, [so] small transaction amounts can make accepting
cards unprofitable . . . .203 So consumers often cannot purchase less
expensive items (like a $10 lunch) using their credit card or other methods
of electronic transfer in many cases. 204 However, with Bitcoin, people have
the economic autonomy to make these small transactions.205

CONCLUSION
Whether Bitcoin is the next great innovation in trust or an obscure
libertarian scam, it certainly appears that virtual currencies are going to be
involved in the future of money. Even Bitcoin moderates, who hold that
the Bitcoin system is no more than an improved payment system, know
that it requires the existence of bitcoinsa separate unit of measure. As
195 Id. at 1617 (arguing that money is coined liberty, a term borrowed from Fyodor
Dostoyevsky).
196

Id. at 1718.
Id. at 17.
198 See id.
199 Id. at 18.
200 See Paganelli, supra note 170, at 18.
201 See supra text accompanying notes 3540 and accompanying text.
202 See supra notes 3540.
203 Dana Dratch, Merchants May Require up to $10 Minimum Credit Card Purchase,
CREDITCARDS, http://www.creditcards.com/credit-card-news/credit-card-minimum-paymentpurchases-law-1282.php (last visited Mar. 17, 2015).
197

204
205

See id.
See supra notes 3540.

144

New England Law Review

v. 49 | 121

long as users need to own bitcoins, the law must understand that those
units of account are, in fact, money.