IN BITCOIN WE DISTRUST: IS BITCOIN MORE TROUBLE THAN IT IS

WORTH?
Kevin Loux

Property Law Seminar

Kathy Moore

INTRODUCTION: WHAT IS BITCOIN?

This new digital era has begot change in all aspects of our life and often provides
us with new ways of spending our money, but what about new ways of acquiring and
storing money? Virtual currency is the digital equivalent of money, but up until recently,
many of these virtual currencies were just property. Bitcoin however differs from most
virtual currencies, and has stirred debate with some arguing it should be treated as a
currency, some arguing it should be illegal, and others saying it is still nothing more than
property. What exactly is Bitcoin, and why is it different from all of the other virtual
currencies that are clearly property?
Quintessentially, Bitcoin is the Cash of the Internet, or akin to the funds in your
PayPal balance.1 Bitcoin as a virtual currency is a digital medium of exchange that can
replace traditional currency online. Bitcoin is able to do this because its use is not limited
to a single marketplace, and it can be used as payment anywhere it is accepted as
payment. Bitcoin is not the only one of these new virtual currencies that has the potential
to be a true currency; it is just the most notable and popular. While Bitcoin is king, there
are also numerous similar Altcoins; a term used to describe all other less popular virtual
currencies that operate technically similar to Bitcoin. These technical aspects behind
Bitcoin are what muddle the legal issues and force us to ask if Bitcoin really is just
another piece of property.
When explaining these technical aspects a good place to start is with a term many
have probably already heard, the Bitcoin miner. A Bitcoin miner is someone who runs a
machine with Bitcoin software that is able to preform the complex equations required to
1 Bitcoin Foundation, Frequently Asked Questions,
https://bitcoin.org/en/faq#what-is-bitcoin (Last Visited November 23,
2014 11:46am).
1

encrypt Bitcoin. These miners act as the facilitators of the financial transactions in
Bitcoin by encrypting the information and creating the crypto-currency in exchange for
a small amount of Bitcoins for their work. At the heart of all virtual currency is what
these miners create, the blockchain. The blockchain is a secure encryption process that
through complex equations combines multiple transactions into a single block and ties all
Bitcoin transactions together. This encryption process makes the transactions largely
anonymous, and by combining multiple transactions into one ledger entry compounds
difficulty in reversing any transaction. This blockchain is the technical difference
between Bitcoin and other virtual currencies that cause some to question if it should
result in a different legal treatment.
Part I of this paper will look at the legal concerns relating to digital movement of
money and how Bitcoin fits into this existing legal structure. The technical components
of Bitcoin as discussed make Bitcoin different from other virtual currencies, but more
like other instrumentalities already regulated. Part I will determine which instrumentality
Bitcoin is most like and thus how the law should apply to it. Part II of this paper looks if
society should trust Bitcoin operating as a legal currency, and the corresponding legal
impact. By examining the true uses of Bitcoin, other historical types of currency, and how
Bitcoin compares to existing physical currency, this section considers if Bitcoin should be
illegal or subjected to special laws as a currency. This Part III of this paper concludes
how the law should ultimately treat Bitcoin in light of all of these considerations.
If Bitcoin is nothing more than the digital equivalent of physical cash, should the
law handle them the same, or does the digital nature inherently change the legal analysis?

The best place to start here is then comparing and contrasting Bitcoin with its other
digital counterparts.
I. BITCOIN AN ENIGMA WRAPPED IN A RIDDLE: IS IT A CURRENCY,
PROPERTY, OR PURELY VIRTUAL?
Bitcoin being another digital novelty presents regulatory issues
reminiscent of how the law struggled initially to adapt to the Internet
age and left justices with little technical expertise applying antecedent
concepts to these innovations. Bitcoin also faces issues similar to the
boon of the stock market in the 1920s, and the realization that this
new economic vehicle was also a boon to fraudsters. These legal issues
while initially seemingly tangential to property concerns are a
fundamental concern for any currency.
As the economy globalized people realized they needed to
transfer money across borders faster. While digital transfers of money
is nothing new, many of these traditional methods are clearly
regulated by banking and other laws. The rise of the Internet age
created a need for even more efficient and faster payment systems,
with even fewer jurisdictional concerns. This gave rise to systems such
as PayPal as a means of transferring currency digitally. In the world of
gaming, developers then created their own in game currencies bought
with real money circumventing the need for constant PayPal
transactions. Now completely autonomous systems not reliant on other

forms of currency like Bitcoin might have gone beyond a virtual

currency, and become its own currency.
The IRS reiterates what Economists universally agree on as the three components
of a currency as a medium of exchange, a unit of account, and/or a store of value.2 In
an economic sense, any asset recognized with universal value could be a currency.
While the evolution of digital currency has left a slew of legal
issues in its wake, the history of how the law handled this evolution
provides guidance for how to handle Bitcoin.
A. NON-TRADITIONAL CURRENCIES: REGULATION OF PRIVATELY ISSUED
CURRENCIES
While traditional currency or money brings government issued currency to the
forefront of the mind, the legality of non-government issued currencies is a murky area.
The constitution prevents states from issuing their own currency, and delegates the power
to coin currency to congress.3 Legally, some have taken this clause in conjunction with
the Stamp Payment Act of 1862 to mean that the federal government has an exclusive
authority over all issuances of currency.4 A prominent example used in support of this
conclusion is the prosecution of the creator of the Liberty Dollar.5 On this matter the FBI
2 IRS, Notice 2014-21, available at http://www.irs.gov/pub/irs-drop/n14-21.pdf (Last Visited November 27, 2014 3:01pm).
3 U.S. Const. art I 8.
4 Brian W. Smith & Ramsey J. Wilson, How Best to Guide the Evolution
of Electronic Currency Law, 46 Am. U. L. Rev. 1105, 1111 (1997); 18
U.S.C.A. 336.
5 Press Release, Federal Bureau of Investigation, Defendant Convicted
of Minting His Own Currency (Mar. 18, 2011), available at
http://www.fbi.gov/charlotte/press-releases/2011/defendant-convictedof-minting-his-own-currency (Last Visited November 23, 2014, 5:34
PM); Nikolei M. Kaplanov, Nerdy Money: Bitcoin, the Private Digital
Currency, and the Case Against Its Regulation, 25 Loy. Consumer L.
Rev. 111, 144 (2012).
4

said, It is a violation of federal law for individuals . . . to create private coin or currency
systems to compete with the official coinage and currency of the United States.6 Yet, in a
Supreme Court case predating the Stamp Act the court held, [The Constitution] does not
prohibit private persons, or private partnerships, or private corporations (strictly so
called) from issuing bills of credit.7
This conclusion is easily squared away with the Liberty Dollar case once we
realize the reason for ruling the currency illegal was because it was so similar to
government issued currency that it could easily be confused.8 The relevant criminal
statute would 18 U.S.C.A. 485 likely would not apply to Bitcoin as it exists in a purely
digital state. The Liberty dollar was a physical coin with characteristics similar to a
government issued coin such as the phrase, USA, Liberty, Trust in God (instead of In
God We Trust).9 While Bitcoin does not intrinsically do anything that would cause a
reasonable person to confuse it with government circulated currency, third parties could
potentially use it in this manner. If an individual used Bitcoin online but the seller called
it a wire transfer of U.S. currency, they could be subject to the reach of this law. This
6 Press Release, Federal Bureau of Investigation, Defendant Convicted
of Minting His Own Currency (Mar. 18, 2011), available at
http://www.fbi.gov/charlotte/press-releases/2011/defendant-convictedof-minting-his-own-currency (Last Visited November 23, 2014, 5:34
PM).
7 Briscoe v. Bank of Commonwealth of Kentucky, 36 U.S. 257, 348, 9 L.
Ed. 709 (1837).
8 Nikolei M. Kaplanov, Nerdy Money: Bitcoin, the Private Digital
Currency, and the Case Against Its Regulation, 25 Loy. Consumer L.
Rev. 111, 144 (2012); Reuben Grinberg, Bitcoin: An Innovative
Alternative Digital Currency, 4 Hastings Sci. & Tech. L.J. 159, 186
(2012); 18 U.S.C.A. 485.
9 Press Release, Federal Bureau of Investigation, Defendant Convicted
of Minting His Own Currency (Mar. 18, 2011), available at
http://www.fbi.gov/charlotte/press-releases/2011/defendant-convictedof-minting-his-own-currency (Last Visited November 23, 2014, 5:34
PM).
5

however seems unlikely, and it is more likely any fraudulent enterprise would desire to
pretend to use Bitcoin and avoid the counterfeiting charge. As long as any virtual
currency avoids resembling existing currency, it will avoid the legal fate of the Liberty
Dollar.10
This brings the analysis to the Stamp Payment Act, which is a potential issue for
virtual currencies stating:
Whoever makes, issues, circulates, or pays out any note, check, memorandum,
token, or other obligation for a less sum than $1, intended to circulate as money or
to be received or used in lieu of lawful money of the United States, shall be fined
under this title or imprisoned not more than six months, or both.11
Therefore, in addition to the potential Constitutional concerns, any virtual currency
circulating for less than the value of $1 would be illegal. While the Liberty Dollar failed
because of its similarity to existing government issued currency, it appeared to be legal
under the Stamp Act. By never issuing currency with a value under $1, the Liberty Dollar
avoided violating the Stamp Act.12 Bitcoin is currently trading in excess of $350, and has
not been under $300 in over a year, thus easily avoiding the Stamp Act facially.13 A
problem could arise here however as users can exchange fractions of Bitcoins valued at
less than a dollar, and a strong case could be made that this violates the Stamp Act.14 The

10 18 U.S.C.A. 485.
11 18 U.S.C.A. 336.
12 See Susan Headley, What are NORFED Liberty Dollar Coins?: U.S.
Mint Warns About NORFED Liberty Dollar U.S. Coin Lookalikes!,
About.Com,
http://coins.about.com/od/coinbuyingadvice/qt/libertydollars.htm (Last
Visited November 23, 2014 7:04pm).
13 CoinDesk, Bitcoin Price Index Chart, http://www.coindesk.com/price/
(Last Visited November 23, 2014 6:04pm).
14 Derek A. Dion, I'll Gladly Trade You Two Bits on Tuesday for A Byte
Today: Bitcoin, Regulating Fraud in the E-Conomy of Hacker-Cash, U. Ill.
J.L. Tech. & Pol'y, Spring 2013, at 165, 175.
6

question is if these fractional Bitcoins are the appropriate measurement or if the whole
Bitcoin is the appropriate unit of measurement.
In Van Auken the court addressed the meaning of for a less sum than one
dollar.15 The court here focuses on the appropriate unit of measurement and focuses
defining sum as the sum of the money circulating.16 This suggests that the appropriate
time to measure the sum of money is when it is initially issued. Setting aside some
technical considerations with the issuance Bitcoin as they would only make the value
even more favorable, this case suggests there is no violation of the Stamp Act.
Furthermore, the language from the statute supports this conclusion as it uses the
terms issues, circulates, or pays out any note, check, memorandum, token, or other
obligation. This language helps us to determine when the measurement should take
place, as the terms issue and circulate, suggest the appropriate time to measure the
value is when currency is initially created. While existing systems such as PayPal do not
violate the Stamp Act, it is arguably different since official currency backs the transfer.17
This analysis however is incongruent with a strict reading of the statute, as PayPal clearly
exists in lieu: of official money despite being backed by it, much in the same way a
check does that the statute clearly applies to. When we consider that PayPal has never
been the subject of litigation under the Stamp Act it then seems likely that this civil war
era law is applied narrowly, and very relevant in modern society.18 The Stamp could force
15 United States v. Van Auken, 96 U.S. 366, 367, 24 L. Ed. 852 (1877).
16 Id. at 368.
17 Jonathan Lane, Bitcoin, Silk Road, and the Need for A New Approach
to Virtual Currency Regulation, 8 Charleston L. Rev. 511, 533 (2014).
18 Caleb Chen, The Stamp Payments Act Cannot Stamp Out Bitcoin;
Instead, It Highlights Why Bitcoin Is Sorely Needed,
https://www.cryptocoinsnews.com/stamp-payments-act-stamp-bitcoininstead-highlights-bitcoin-sorely-needed/ (Last Visited November 25,
2014 11:01am).
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Bitcoin to only allow fractions worth more than a dollar; however, when put in context
this seems unlikely to be an issue. Bitcoin does however offer other regulatory issues
with relevant concerns for a modern world.
B. SQUARE PEG IN A ROUND HOLE: VIRTUAL CURRENCY AND HOW
EXISTING REGULATIONS FOR CURRENCIES APPLY
One of the earliest ways to transfer currency electronically was through an
organization that had registered and received its Money Transmitter license. Electronic
funds transfers (EFTs) such as wire transfers, credit card payments, and MoneyGrams
enable one to transfer currency to another without having to physically move it.19 The
United States Government heavily regulates organizations that enable the transferring of
money.20 Organizations engaged in this business are called Money Service Businesses
(MSBs). 31 C.F.R. 1010.100(ff) defines MSBs to include money transmitters.21 The
statute goes on to define money transmitter as The term money transmission services
means the acceptance of currency, funds, or other value that substitutes for currency . . .
to another location or person by any means.22 This means that no matter the form of the
transaction as digital or physical the statue will apply. While the statute is fairly clear that
it applies to anything remotely resembling a currency, the definition of money
instruments per 31 C.F.R. 1010.100(dd) further clarifies this. Stating, that while money
19 Nicholas Godlove, J.D., Regulatory Overview of Virtual Currency, 10
Okla. J. L. & Tech. 70 (2014).
20 Kelsey L. Penrose, Banking on Bitcoin: Applying Anti-Money
Laundering and Money Transmitter Laws, 18 N.C. Banking Inst. 529,
536-37 (2014); UNITING AND STRENGTHENING AMERICA BY PROVIDING
APPROPRIATE TOOLS REQUIRED TO INTERCEPT AND OBSTRUCT
TERRORISM (USA PATRIOT ACT) ACT OF 2001, PL 10756, October 26,
2001, 115 Stat 272.
21 31 C.F.R. 1010.100(ff).
22 31 C.F.R. 1010.100(ff)(5)(i).
8

instruments include currency, it is broader than just currency.23 Virtual currency is

different from traditional digital transfers by eliminating the need for actual dollars
coming out of a bank account. This distinction leads to several radical issues when
applying these regulations, where the definitions of these statutory terms becomes key.
Virtual currency has come under scrutiny and those operating Bitcoin exchanges
have been charged with operating an unlicensed money transmitter business.24 The
Financial Crimes Enforcement Network (FinCEN) is the regulatory agency that deals
with money laundering issues. Much to the chagrin of Bitcoin exchange operators
FinCEN required them to register as money services businesses, and to adhere to the
requirements of the Bank Secrecy Act.25 This determination requires Bitcoin exchanges to
collect personally identifying information about users, and report that information to
FinCEN if they suspect money laundering.
In the cases litigating this issue the Bitcoin exchange operators argue that this law
should not apply to them. This argument is grounded in the assentation that Bitcoin is
money, and thus the money transmitter laws are not applicable. The court in Faiella
held that Bitcoin is money.26 In support of this conclusion, the court defined money as
something generally accepted as a medium of exchange, a measure of value, or a means
of payment.27 While the court concluded that the operators of Bitcoin would be
subjected to the statute even if Bitcoin were not money, as it satisfies the definition of
23 31 C.F.R. 1010.100(dd).
24 United States v. Faiella, No. 14-CR-243 JSR, 2014 WL 4100897, at *1
(S.D.N.Y. Aug. 19, 2014); Sec. & Exch. Comm'n v. Shavers, No. 4:13-CV416 (E.D. Tex. Aug. 6, 2013); 18 U.S.C.A. 1960.
25 P 76-114 VIRTUAL CURRENCY PAYMENT SYSTEM SUBJECT TO BANK
SECRECY ACT (Oct. 27, 2014); Pub. L. No. 91-508.
26 United States v. Faiella, No. 14-CR-243 JSR, 2014 WL 4100897
(S.D.N.Y. Aug. 19, 2014).
27 Id.
9

funds as well, the conclusion that it is money is still important.28 However, the decision
that Bitcoin is money, thus susceptible to these transmitter laws is not this simple. An
amicus brief from a Florida case asking if these money transmitter laws should apply to
Bitcoin provides the argument against applying this statute.29 On the issue of if Bitcoin is
money the Bitcoin Foundation argues, Bitcoin most certainly is not the coin and paper
money of the United States. Moreover . . . Bitcoin is also neither monetary value nor a
payment instrument.
Based on legal and practical realities, Bitcoin is money. The Bitcoin Foundation
cities no real legal authority supporting its position, and ignores the fact that Bitcoin
practically operates as a currency and their own website refers to Bitcoin as, The Cash
of the Internet.30 Bitcoin is clearly a medium of exchange that can be used to acquire
other goods easily, and that is in fact the intent of Bitcoins existence. The definition the
court in Faiella uses for money is virtually identical to the definition the IRS uses for
currency, yet both come to different conclusions on Bitcoin. Even if it could be argued
that there is a difference between the synonymous terms money and currency, or a
difference between tax and criminal law, the fact that these two arenas of law use the
same definition and come to different conclusions is mind-boggling. Bitcoin cannot be a
medium of exchange when it suits prosecutors, but suddenly not when it suits taxpayers.

28 Id.
29 Brief for the Bitcoin Foundation as Amicus Curiae, Florida v. Reid,
CASE NO. F14-2935, available at https://bitcoinfoundation.org/wpcontent/uploads/2014/07/Amicus-Brief-7-31-14-000728921.pdf (Last
Visited November 25, 2014 1:01pm)
30 Bitcoin Foundation, Frequently Asked Questions,
https://bitcoin.org/en/faq#what-is-bitcoin (Last Visited November 23,
2014 11:46am).
10

The next question is if these laws should still apply to Bitcoin. The brief cites the
dissent in Thompson suggested that laws should be applied narrowly when faced with
new technology stating, It is not our job to broadly construe [a statute] to reflect new
technological situations. 31 The brief also pints to Gilbert which says, Where, as here,
the enactment of the statute preceded any possible legislative consideration of the public
policy issues, the proper course of action is to await legislative judgment, not to engage
in an uncertain attempt to anticipate it.32
Unfortunately allowing Bitcoin to operate practically as a currency yet evade
regulation under the money transmitter laws would undermine the effectiveness of these
laws entirely. While Bitcoin is likely a medium of exchange and money, another
possibility is that Bitcoin is more analogous to other virtual properties. While Bitcoin
operates as a currency in the virtual world, there are other virtual currencies that do the
same thing yet avoid the legal implications under the Money Transmitter laws.
i. BITCOIN AND OTHER VIRTUAL CURRENCIES: FROM FREEMIUM GAME
COINS TO BITCOINS
One of the most notable forms of virtual currency comes from games. Games such as
World of Warcraft, Framville, Second Life, and many other freemium33 games are now
31 Brief for the Bitcoin Foundation as Amicus Curiae, Florida v. Reid,
CASE NO. F14-2935, available at https://bitcoinfoundation.org/wpcontent/uploads/2014/07/Amicus-Brief-7-31-14-000728921.pdf (Last
Visited November 25, 2014 1:01pm); Cf. United States v. Thompson,
281 F.3d 1088, 1099 (10th Cir. 2002) (Seymour, J., dissenting).
32 Brief for the Bitcoin Foundation as Amicus Curiae, Florida v. Reid,
CASE NO. F14-2935, available at https://bitcoinfoundation.org/wpcontent/uploads/2014/07/Amicus-Brief-7-31-14-000728921.pdf (Last
Visited November 25, 2014 1:01pm); People v. Gilbert, 414 Mich. 191, 204-05,
324 N.W.2d 834, 840 (1982).
33 Term used to describe an app that is free initially but to get
premium features users must pay money
11

following suit with virtual currencies.34 These in game currencies cost users actual
money, and in exchange enable them to purchase items in game.35 Issuing virtual in game
currency is a popular method among game developers to generate a constant stream of
revenue while offering the game initially for free helps bring in users. In the case of
Second Life, user-to-user transactions totaled $567 million in U.S. currency in 2009.36
With all this money at stake, it is worth asking if these transactions are just purchases of
property, or really currency transactions in disguise.
To see if these exchanges are merely purchases of property it helps to look at the
bundle of rights one acquires with these virtual currencies. Essentially, there are two
possible forms this transaction can take, a closed-flow transaction, or an open-flow
transaction.37 In a closed-flow transaction, the user gives up real currency in exchange for
a currency that can only be used to purchase virtual goods and services, as opposed to
real goods, services, and real currency. However, in an open-flow transaction the user
receives this virtual currency as compensation and is then able to exchange this virtual
currency for real goods, services, or currency. A virtual currency within a closed-flow
34 Report to the Committee on Finance, U.S. Senate, VIRTUAL
ECONOMIES AND CURRENCIES: Additional IRS Guidance Could Reduce
Tax Compliance Risks, http://www.gao.gov/assets/660/654620.pdf (Last
Visited November 24, 2014 5:45pm).
35 Lesley Smith, The Daily Grind: What do you think of 'freemium'
MMOs?, http://massively.joystiq.com/2009/05/09/the-daily-grind-whatdo-you-think-of-freemium-mmos/ (last visited November 21, 2014,
11:34 AM)
36 Michael Rosenwald, Second Life's virtual money can become reallife cash, http://www.washingtonpost.com/wpdyn/content/article/2010/03/07/AR2010030703524.html (Last Visited
November 24, 2014 5:35pm).
37 Report to the Committee on Finance, U.S. Senate, VIRTUAL
ECONOMIES AND CURRENCIES: Additional IRS Guidance Could Reduce
Tax Compliance Risks, http://www.gao.gov/assets/660/654620.pdf (Last
Visited November 24, 2014 5:45pm).
12

transaction places some limitations of use on the owners bundle of rights leaving them
with an asset that is clearly property. While closed-flow transactions enable the user to
possess, use, and exclude others from using the property by removing the stick from the
bundle that allows for unrestricted right transfer it can never be a currency. The right to
transfer is imperative for any currency, and without the ability to realize any gain in real
life, it is hard to justify a real life taxation of this as income. It is important to note that
closed-flow transactions that limit purchase to digital property in a controlled market can
become a hybrid-flow transaction when users sell their entire account. However, this does
not create a new issue, as the IRS longstanding definition of income from Glenshaw
Glass is instances of undeniable accessions to wealth, clearly realized, and over which
the taxpayers have complete dominion.38 Much like self-preformed services those who
create virtual assets through work in the virtual world would not have income until they
sold it in the marketplace, or converted it into a hybrid-flow transaction.39
This closed versus open distinction helps determine if virtual currency in Second
Life should be subject to taxation in your first life. With Glenshaw Glass in mind, income
would be an accession to wealth that makes a taxpayer more able to pay tax. If the
taxpayer is in a closed-flow transaction and can only use his virtual currency to buy
virtual property, he virtually has no income. However, if he can sell the car he bought in
his Second Life, for a real car in his first life, this open-flow transaction could be income.
Most of these virtual currencies in games are at least intended to be closed-flow
transactions, however Bitcoin has no such restrictions. While it makes sense to treat those
38 C.I.R. v. Glenshaw Glass Co., 348 U.S. 426, 431(1955).
39 Joseph M. Dodge, Accessions to Wealth, Realization of Gross
Income, and Dominion and Control: Applying the "Claim of Right
Doctrine" to Found Objects, Including Record-Setting Baseballs, 4 Fla.
Tax Rev. 685, 691-692 (2000).
13

closed-flow transactions as property so that the only income realized is when the user
converts it to a hybrid-flow transaction just like any other sale of property, Bitcoin is
inherently different. Bitcoin is an open-flow transaction that enables holders to purchase
real goods and services similar to traditional currencies. Yet, when the IRS rules that
Bitcoin is property unsophisticated users might simply believe these transactions result in
no income. There is a lot of conflicting information surrounding the taxation Bitcoin
transactions, and classifying Bitcoin as property could lead taxpayers to believe that
transacting in virtual currencies relieves them of their responsibilities to report and pay
taxes. Under this transactional analysis, affording Bitcoin the tax protections associated
with gains in property is inconsistent with its true nature, and results in lost tax revenue
for the government.
ii. BITS OF DATA, BITS OF COIN, BITS OF LAW, AND BITCOIN: VIRTUAL
PROPERTY AND HOW IT ALL FITS IN.
Bitcoin is markedly different from other virtual currencies that are actually
property, so perhaps it is more similar to other virtual property. While the chattel is
virtual, the legal protection is real, Virtual property shares three legally relevant
characteristics with real world property: rivalrousness, persistence, and
interconnectivity.40 Legal scholars have argued that property rights should extend into
the virtual-world for your virtual car just as they exist in the real-world, and courts have
agreed.41 This means that although your property information stored digitally as opposed
40 Joshua A.T. Fairfield, Virtual Property, 85 B.U. L. Rev. 1047, 1053
(2005).
41 Leandra Lederman, "Stranger Than Fiction": Taxing Virtual Worlds,
82 N.Y.U. L. Rev. 1620, 1632 (2007); Joshua A.T. Fairfield, Virtual Property, 85
B.U. L. Rev. 1047, 1062 (2005); Bragg v. Linden Research, Inc., 487 F. Supp. 2d 593,
595 (E.D. Pa. 2007).
14

to information expressed in a physical item, the law applies the same. Considering this,
would a realization event for property in the digital world, result in a real life accession to
wealth? Just as property rights are recognized in intangible assets, and the sale of these
constitutes a realization event, any virtual property with the same real life rights
theoretically should have the same tax consequence. Therefore, a like kind exchange
would be exempt from tax, but sales, or exchanges not of like kind could result in taxable
income.42 This result would largely depend on if property rights exist for these digital
items.43 While some virtual property only grants users a license, the focus here is on
digital property with the same rights as physical property.
While the tax implications of gains from virtual property is a convoluted area, the
goal is simply to maximize equity between property delivering real value that exists
digitally and its physical counterpart. While the open-flow versus closed-flow distinction
helps illustrate what gains are real, the important part of the analysis is if Bitcoin is
virtual property. Bitcoin is Rivalrous in nature as one users possession of a coin naturally
precludes another user from having property rights in that same coin. Bitcoin is designed
to be persistent as obviously no one wants to worry about their money randomly
vanishing from existence. Lastly, Bitcoin is interconnected with the real world and other
users as they can be transferred, account balances can be viewed, and the very nature of
Bitcoins existence depends on this interconnectivity. Yet, all of these classifications rest
on the presumption of a problem that simply does not exist for Bitcoin.
This legal analysis ultimately leads to the conclusion that while Bitcoin meets the
technical definition; it does not need to rely on the virtual property doctrine to avail itself
42 26 U.S.C.A. 1001 (West); 26 U.S.C.A. 1031 (West).
43 See Generally Leandra Lederman, "Stranger Than Fiction": Taxing
Virtual Worlds, 82 N.Y.U. L. Rev. 1620 (2007).
15

to the protections of property law. While Bitcoin is a virtual asset, and it is considered
property in the real world, it is a currency in the virtual world, and not virtual property.
While the law is able to sort this conclusion out, this is a confusing situation for most
people. Essentially, because Bitcoin can be used as a tool in the real world, its existence
is not limited to a digital world. The legal distinction with virtual property should only
apply to the small subsection of digital material that does not interact with the real world.
Therefore, with Bitcoin not seeming to fit anywhere perhaps just as virtual property is
analogous to physical property, true virtual currency is analogous to physical currency.
II. BITCOIN: TO BE OR NOT TO BE A CURRENCY?
Most currencies are commodity based, government backed, or both. These
mechanisms are in place to build trust in the currency, leaving Bitcoin in a difficult
position to build trust without these mechanisms. Individuals however do place trust in
Bitcoin, just as some individuals greatly distrust Bitcoin. This section will explore the
legal issues surrounding trust in Bitcoin operating as a currency, and if this trust is
ultimately misplaced.
A. CONFIDENCE IN BITCOIN: CRIME STILL PAYS EVEN IF IT IS IN
BITCOIN, SO IS BITCOIN A CRIME?
Since currency needs trust to be successful, and trust is dependent on perceptions,
perception is naturally an important consideration when deciding the legal classification
of Bitcoin. A casual observer of Bitcoin will often hear it associated with illegal activity
such as drug trade, and other criminal activity on the deep-web.44 Some articles suggest
that even the FBI has the same fears. An article citing an internal FBI memo on Bitcoin
44 E.J. Fagan, Bitcoin and international crime [Commentary],
http://www.baltimoresun.com/news/opinion/oped/bs-ed-bitcoin20131125-story.html (Last Visited November 25, 2014).
16

states, If Bitcoin stabilizes and grows in popularity, it will become an increasingly useful
tool for various illegal activities beyond the cyber realm.45 Even United States Senator
Joe Manchin recently sent federal regulators a letter echoing these concerns over the use
of Bitcoin calling it a haven for criminal activity.46
With all of these concerns in mind exactly what criminal activity does Bitcoin facilitate,
and to what extent are these legal violations actually happening? If Bitcoin simply
facilitates criminal activity such as the purchase of drugs and money laundering as some
suggest, then those responsible for its creation would likely be criminally liable. Courts
have had no problem applying money laundering statutes against those who have used
Bitcoin in furtherance of criminal activity.47 In Ulbricht the defendant used Bitcoin to
facilitate narcotics trafficking, and money laundering among other crimes in connection
with his operation of the deepweb48 site known as The Silk Road.49 The court said, The
fact that Bitcoins allow for anonymous transactions does not ipso facto mean that those
transactions relate to unlawful activities. The anonymity by itself is not a crime.50 The
defendant tried to argue that Bitcoin is not money citing the IRS decision, and thus the
money laundering statutes should not apply.51 The court said that the money laundering
45 Kim Zetter, FBI Fears Bitcoins Popularity with Criminals,
http://www.wired.com/2012/05/fbi-fears-bitcoin/ (Last Visited November
25, 2014 8:02pm).
46 Manchin Demands Federal Regulators Ban Bitcoin,
http://www.manchin.senate.gov/public/index.cfm/2014/2/manchindemands-federal-regulators-ban-bitcoin (Last Visited November 28,
2014 6:46pm).
47 United States v. Ulbricht, No. 14-CR-68 KBF, at *1 (S.D.N.Y. July 9, 2014).
48 Sites on this network are only available to those using Tor, software
and a network that allows for anonymous, untraceable Internet
browsing
49 United States v. Ulbricht, No. 14-CR-68 KBF, at *1 (S.D.N.Y. July 9, 2014).
50 Id. at *23.
51 Id. at *23.
17

statute should apply to Bitcoin and it defined money broadly as an object used to buy
things.52 As the court suggests, the uses for Bitcoin go beyond these illegal markets from
money laundering and drug purchases and there are legitimate purposes to use Bitcoin.53
With potential legitimate uses in conflict with illegal uses of Bitcoin any regulation
should weigh these competing interests against each other.
A good place to start this analysis is by examining how large of a role Bitcoin
plays in the illegal markets. Annual drug transaction statistics show how insignificant
Bitcoin is in this market. A UN report from a decade ago estimated the global drug trade
generated $321 billion dollars annually.54 While a RAND report looking at years 20002010 estimated the U.S. drug market totaled over $100 billion annually.55 Bitcoin total
market value as of October 2014 totals just under $5 billion.56 Therefore, even if every
last Bitcoin goes towards this illegal market, it still represents only about 1-5%57 of all
illegal transactions.
Furthermore, looking at the numbers indicates that a very small percentage of
Bitcoin transactions actually go towards these illegal transactions. While there are
52 Id. at *24.
53 STATE BANKING LAW REPORTER LETTER NO. 156, 2014 WL 1668211.
54 Niklas Pollard, UN report puts world's illicit drug trade at estimated
$321b, Boston Globe
http://www.boston.com/news/world/europe/articles/2005/06/30/un_repo
rt_puts_worlds_illicit_drug_trade_at_estimated_321b/ (Last Visited
November 28, 2014 11:36am).
55 Beau Kilmer et al, How Big Is the U.S. Market for Illegal Drugs?,
http://www.rand.org/pubs/research_briefs/RB9770.html (Last Visited
November 28, 2014 11:46am).
56 Blockchain.info, Market Capitalization,
https://blockchain.info/charts/market-cap (Last Visited November 28,
2014 11:56am).
57 $5 Billion market value of Bitcoin (See Footnote 52) divided by $321
Billion and $100 Billion drug market estimations (See Footnotes 50 and
51).
18

numerous other illegal websites that use Bitcoin to facilitate illegal transactions, there is
no denying that Silk Road as operated by Ulbricht was the most widely adopted and
utilized marketplace and all other transactions mediums pale in comparison to this
marketplace. At the height of the Silk Road just before it was shutdown, it generated an
estimated $30-45 million annually.58 In percentage of the total Bitcoin value, this
represents only .9% of all transactions.59
While Bitcoin can be used in connection with illegal activities the courts can
address the activity as long as Bitcoin is considered money and there is no need for a
complete regulatory ban on Bitcoin. The fact that Bitcoin is not predominately a criminal
currency should help to instill confidence in the currency, but there are other legal
concerns in placing confidence in Bitcoin.
While some legal precedent from Texas has said, Bitcoin is an electronic form of
currency, other legal authority is completely antithetical to this idea.60
B. FIAT 500: GOLD, COMMODITIES, AND PLAYING IT FAST AND LOSE
WITH CURRENCY
One reason to users distrust Bitcoin is that unlike most other modern currencies,
the government does not legally back it. This section explores if the legal backing of
currency is something that users should demand from the currency before they put their
58 Andy Greenberg, Meet The Dread Pirate Roberts, The Man Behind
Booming Black Market Drug Website Silk Road,
http://www.forbes.com/sites/andygreenberg/2013/08/14/meet-thedread-pirate-roberts-the-man-behind-booming-black-market-drugwebsite-silk-road/ (Last Visited November 27, 2014 1:48pm).
59 $45 million Silk Road value (See Footnote 53) divided by the $5
Billion market value of Bitcoin (See Footnote 52).
60 Sec. & Exch. Comm'n v. Shavers, No. 4:13-CV-416 (E.D. Tex. Aug. 6,
2013); But See Nicholas Godlove, J.D., Regulatory Overview of Virtual
Currency, 10 Okla. J. L. & Tech. 70 (2014).
19

faith in it. Currency has a rich history that has seen it evolve greatly. While traditionally
currency conjures images of cash, what makes Tide detergent, or cigarettes, or the US
dollar, or Bitcoin, or whatever, a currency, is simply common agreement that . . . an item
of currency is valuable.61 Throughout history, gold, cowry shells, and giant stones have
all been currency.62 While some legal precedent views Bitcoin as currency, other legal
authority is completely antithetical to this idea.63 While it is not inherently illegal to issue
currency without government backing, the question is if Bitcoin should be illegal as a
currency without it.
To determine if Bitcoin should be illegal, an appropriate place to begin is with
potential for deception of users. Some refer to the fact that Bitcoin is neither a
commodity, nor backed by gold to argue that Bitcoin itself is nothing more than a
valueless scam.64 A few jurisdictions have responded by making Bitcoin in its entirety
illegal, and this section examines if the United States should follow suit.65
The argument against Bitcoin as a currency is generally along the lines of it has
more characteristics in common with commodities than with currency, except for the
61 Pascal-Emmanuel Gobry, All Money Is Fiat Money,
http://www.forbes.com/sites/pascalemmanuelgobry/2013/01/08/allmoney-is-fiat-money/ (Last Visited November 24, 2014 5:05pm).
62 A, The History of Money,
http://www.pbs.org/wgbh/nova/ancient/history-money.html; Milton
Friedman, The island of Stone Money (February 1991), available at
http://hoohila.stanford.edu/workingpapers/getWorkingPaper.php?
filename=E-91-3.pdf (Last Visited November 24, 2014 5:25pm).
63 Sec. & Exch. Comm'n v. Shavers, No. 4:13-CV-416 (E.D. Tex. Aug. 6,
2013); But See Nicholas Godlove, J.D., Regulatory Overview of Virtual
Currency, 10 Okla. J. L. & Tech. 70 (2014).
64 Chris Matthews, Bit Con? Veteran fraud expert sets his sights on
Bitcoin, http://fortune.com/2014/10/24/bitcoin-fraud-scam/ (Last Visited
November 25, 2014 7:34pm).
65 http://www.coindesk.com/bolivias-central-bank-bans-bitcoin-digitalcurrencies/(Last Visited November 25, 2014 8:34pm).

20

most essential: It has no inherent value.66 The idea that currency needs to be a
commodity is not an absurd argument, as society has often used commodities such as
gold as currency.67 Many people historically held the same fears that if a currency did not
have inherent value it was not an adequate store of value. With the Gold Standard act of
1900 the USD became backed by gold and any dollar was redeemable for a set amount of
gold reinforcing this commodity currency idea.68 Backing a currency with a commodity
such as gold is a great way to instill faith in the currency as people are not asked to have
faith in the currencys value, but just trust in the commoditys value. Therefore, it is
reasonable to say that Bitcoin is not a currency since it is not a commodity, a commodity
does not back it, nor does the government back it. Legally as we have seen however this
is not required for a currency, and even official government issued currency is no longer
backed by gold.69
Currency that is not backed by gold but instead by government law is referred to
as fiat currency.70 While the commodity currency theory was historically valid, today
almost all currencies are fiat.71 Fiat currency has value because it is legal tender that can
66 Nicholas Godlove, J.D., Regulatory Overview of Virtual Currency, 10
Okla. J. L. & Tech. 70 (2014); Chris Matthews, Bit Con? Veteran fraud
expert sets his sights on bitcoin, http://fortune.com/2014/10/24/bitcoinfraud-scam/ (Last Visited November 24, 2014 5:15pm).
67 NOVA, The History of Money,
http://www.pbs.org/wgbh/nova/ancient/history-money.html (Last Visited
November 25, 2014 8:14pm).
68 Act of Mar. 14, 1900, ch. 41, 1, 31 Stat. 45, 45 (current version at
31 U.S.C. 314 (1976)).
69 Gold Reserve Act of 1934, ch. 6, 5, 48 Stat. 337, 340 (current
version at 31 U.S.C. 315b (1976)).
70 US State Department, Nixon and the End of the Bretton Woods
System, 19711973, https://history.state.gov/milestones/19691976/nixon-shock (Last Visited November 25, 2014 9:10pm).
71 Pascal-Emmanuel Gobry, All Money Is Fiat Money,
http://www.forbes.com/sites/pascalemmanuelgobry/2013/01/08/allmoney-is-fiat-money/ (Last Visited November 25, 2014 9:02pm).
21

pay legal debts including the taxes that might be levied against the holders of virtual
currency.72 As discussed earlier there are no laws that inherently preclude a private party
from issuing its own fiat currency.
In light of the history of currency, the absence of gold or government backing
should not concern regulators enough to ban Bitcoin. A well-respected legal and
economic theorist, Professor Eric Posner agrees with this position noting the long
history of unregulated currencies.73 The absence of these mechanisms to instill
confidence does not preclude the legitimacy of the currency and imply a scam. The issue
is thus not a legal issue, but a currency issue, and if people will still trust Bitcoin without
these assurances. Since Bitcoins success as a currency is dependent on of trust unlike
most modern currencies, many economists think it could become currency, but it is not
there yet.74 Jurisdictions that have outlawed Bitcoin wrongly made this decision of trust
for their people, and the proper decision is to allow the users to decide if Bitcoin becomes
a currency. This is not to say Bitcoin should be immune from regulation, as we have
already seen laws that apply to other currencies should also be applied to Bitcoin.
Considering that Bitcoin violates no existing law on currency, the law should simply not
make the determination for the market of if Bitcoin should survive as a currency.
Considering Bitcoin a currency however could potentially open up Bitcoin to the all of
the regulations intended to regulate the banking Industry.
72 Julia Alpert Gladstone, Exploring the Role of Digital Currency in the
Retail Payments System, 31 New Eng. L. Rev. 1193, 1196 (1997).
73 Interview with Eric Posner, TOP OF MIND (Goldman Sachs Global
Investment Research Paper), Mar. 11, 2014, Issue 21, at 4. Available at
http://www.paymentlawadvisor.com/files/2014/01/GoldmanSachs-BitCoin.pdf (Last Visited November 27, 2014 3:10pm).
74 Economic Policy Journal, Is Bitcoin Money?: What Economists Have
To Say, http://www.economicpolicyjournal.com/2013/10/is-bitcoinmoney-what-economists-have.html (Last Visited November 25, 2014).
22

C. LEGAL PROTECTION: EXISTING CURRENCY VS BITCOIN

Concerns about the ability of thieves to transfer Bitcoin quickly and anonymously leads
to the question of if the protections from existing property law are adequate. While it is
true that Bitcoins can be stolen with little hope of them ever being returned to the true
owner, it is important to determine how different this is in practice from other currencies.
Thus, before getting into existing legal protections a comparison between existing
currency and Bitcoin will help to illustrate whether or not Bitcoin needs additional legal
protection.
While it is true that theft of physical money can often leave physical evidence
such as fingerprints, video evidence, or other clues as to who targeted the victim, often
times these thefts go unsolved, or the property is never returned.75 These FBI statistics
show that only about ten to twenty percent of theft and burglary cases are closed.
76

Throughout this paper the analogy comparing Bitcoin to paper currency has held true,

so it is fair to ask if it holds here as well. Statistics on returned stolen property are
difficult to find, and are compounded by the fact that sometimes reports are never filed.
In Great Britain, a study with lost wallets yielded the following results, Only two in ten
of the wallets were returned to their owners and only around half of those (55 percent)
contained the original sum of money. While there are clearly unique technical challenges
to returning Bitcoin to the true owner, it is also difficult for victims of stolen physical
currency to have it returned.

75 FBI, Offenses Cleared, http://www.fbi.gov/about-us/cjis/ucr/crime-inthe-u.s/2010/crime-in-the-u.s.-2010/clearances (Last Visited November

27, 2014 3:20pm).
76 Id.
23

Generally a victim has a right to have stolen property returned to them. However, as
under the Uniform Commercial Code (UCC), a person who in good faith and without
knowledge that the sale to him is in violation of the ownership rights . . . of a third party
in the goods buys in ordinary course from a person in the business of selling goods of that
kind.77 From a property law standpoint we want to protect the true owners interests, yet
we also do not want to punish those who think they are simply buying something.78 The
UCC exception for goods is narrow, and limited to merchants so generally stolen property
is returned to the true owner. Currency however is treated differently than property, as
arguably, it is harder for the receiver to tell when it is stolen, there are no concerns about
uniqueness as there are with property, and arguably a contrary rule would discourage
transactions.79 While value must be given and the receiver must be acting in good faith to
keep currency, this generally is not an issue. The difference between currency and
property is thus either limiting the victim to a claim against the wrongdoer for value, or a
right to reclaim the original property from whoever has it. With the difference between
categorizing Bitcoin as property or currency resulting in this vastly different legal
treatment, it is important to get the definition right.
The policy concern desiring for certainty in transactions that precludes victims
from getting physical currency back should extend into the digital world with Bitcoin.
III. CONCLUSION
77 U.C.C. 1-201(9).
78 Patricia Youngblood Reyhan, A Chaotic Palette: Conflict of Laws in
Litigation Between Original Owners and Good-Faith Purchasers of
Stolen Art, 50 Duke L.J. 955, 974 (2001).
79 See Generally Porter v. Roseman, 165 Ind. 255, 74 N.E. 1105, 1105
(1905); Consumer Financial Protection Bureau, 153-308 CFPB WARNS
CONSUMERS ON VIRTUAL CURRENCY AND WILL ACCEPT COMPLAINTS,
(Aug. 11, 2014).
24

Bitcoin exists in a legal gray area, being currency when convenient for convictions, yet
property when prudent for tax purposes. Despite the digital nature of Bitcoin and the
number of facial differences between it and physical currency, when digging deeper the
similarities between the two are staggering. This plus other policy concerns favor legally
treating Bitcoin as a currency. Bitcoin does not violate any laws surrounding a private
issuance of currency, there is no fraud being committed without it being a commodity or
government back, and it operates in the digital world much like physical currency
operates in the real-world. Treating Bitcoin as a currency makes it clear to those
operating exchanges that they are subject to money transmitter regulations, as well as
money laundering statutes. Taxing Bitcoin as a currency instead of property also prevents
taxpayers from potentially using losses to offset other capital gains, or using other losses
to offset gains in Bitcoin. The fact that the market does use Bitcoin as a currency in some
circumstances suggests that from a policy standpoint not taxing it in the same manner
confuses exchange operators into thinking they are immune from regulation, and provides
a tax haven. While Bitcoin is still in an infantile state and the market volatility has
already illustrated some potential concerns about Bitcoin as an adequate store of value,
this is an economic issue and not a legal one. These economic considerations are not to be
ignored by policy makers, but the legal precedent along with the ability to provide legal
clarity to users outweighs these potential economic issues. The need for clear legal
standards and regulation of Bitcoin is something that many agree on for various reasons,
and despite the global nature of Bitcoin it appears jurisdictional issues can be
circumvented with applying existing laws regulating currency to Bitcoin. Thus, because

25

of similarities to existing physical currency and the fact that Bitcoin does not violate any
existing laws, suggest legal treatment as a currency.

26