In January 2015, one Bitcoin was worth $177.28. As of mid-December, the currency is worth $463.67. Bitcoin is experiencing a resurgence, and it may now be worthwhile to spend some time learning about the virtual currency.
It is likely that less than 1% of all attorneys understand how Bitcoin, and the blockchain technology underpinning the cryptocurrency, really work. That is not due to the collective ineptitude of the bar, but the immense complexity and cutting edge nature of the subject matter.
This is not necessarily an issue of importance to lawyers, as cryptocurrencies are not likely to have an immediate impact on most law practices. Clients are not going to start paying bills in Bitcoin, and if they did, a cursory Google search would provide instructions on how to cash out.
Below is a brief explanation of Bitcoin, and the laws that currently intersect with the complicated technology:
Bitcoin is a decentralized virtual currency. The U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) defines virtual currencies as,
“A medium of exchange that operates like a currency in some environments but does not have all the attributes of real currency. In particular, virtual currency does not have legal tender status in any jurisdiction. A convertible virtual currency either has an equivalent value in real currency, or acts as a substitute for real currency. In other words, it is a virtual currency that can be exchanged for real currency.”
Bitcoin is a convertible virtual currency that is not issued or regulated by a central government or authority. Instead, transactions of Bitcoin are collectively verified by a peer-to-peer network, called the blockchain. This is where things get complicated.
The vast majority of legislators, like attorneys, do not have an understanding of the fundamental principles at work behind cryptocurrencies. This has led to a void of regulations that are focused on issues that arise out of the use of cryptocurrencies.
To date, the word “blockchain” is absent from all federal and state statutes. Bitcoin is mentioned only once, in a California statute that criminalizes the sale of raffle tickets in exchange for “Bitcoin or any other cryptocurrency.” Cal. Penal Code § 320.6.
In 2014, the state legislature of Oklahoma added an official comment to a statute to address the transfer of Bitcoin, and its impact on secured transactions. Okla. Stat. Ann. § 1-9-332 states that a transferee of money, or of funds from a deposit account, takes the money or funds free of a security interest, unless the transferee acts in collusion with the debtor in violation of the rights of the secured party.
The official comment to Okla. Stat. Ann. § 1-9-332 now states:
“As of 2015, the use of so called ‘bitcoins’ and the like have gained traction as a form of “currency,” i.e., as a payment method. Some sellers of goods or services are willing and able to accept bitcoins in payment. If that payment instead were made in cash, or by a check or other transfer out of a deposit account, any security interest in that, e.g., as proceeds of the deposit account based on the claim of a secured party that has a security interest in inventory, would not impair the payment to the seller or other transfers to a third party. See section 1-9-332 and section 1-9-315(a)(2), (c) and (d). This is a consistent policy under UCC Article 9—see, for example, sections 1-9-320 and section 1-9-321, and is particularly strong with respect to ‘currency.’ However, section 1-9-332 cannot be construed to protect the receiver of bitcoins.”
Interestingly, the Oklahoma legislature has determined that a seller who accepts Bitcoin does not take the cryptocurrency free of an existing security interest. It is unclear what policy supports this distinction under Oklahoma law.
Bitcoin and the blockchain’s absence from federal and state statutes does not mean that it is outside the purview of legislation passed prior to the launch of Bitcoin in 2009. FinCEN has designated virtual currency exchanges and administrators as money transmitters, subject to an array of federal and state regulation.
Furthermore, state regulatory agencies have promulgated rules that impact businesses involved with cryptocurrencies. Recently, the North Carolina Commissioner of Banks has taken steps to make the state an attractive place for virtual currency businesses to open up shop, including exemptions from certain licensing requirements.
The New York Department of Financial Services, on the other hand, has recently launched a “BitLicense” plan, which requires virtual currency businesses to apply for a license, which comes with a $5,000 price tag. The New York rules are lengthy, and the impact on virtual currency businesses is yet to be determined, but one provision is clear: if your application is denied, the $5,000 application fee will not be refunded.
The National Conference of Commissioners of Uniform State Laws has published a draft of the Regulation of Virtual Currencies Act, with the goal of harmonizing state laws regulating virtual currencies. Such regulation aims to both protect consumers and encourage innovation.
Whether or not the uniform act will gain traction is unclear, but the future of Bitcoin seems bright.
About the Author
Benjamin Katz is an associate in the Nashville office of Frost Brown Todd, LLC. Ben primarily works on complex cases involving business disputes for an array of clients, including clients in the payments industry.