A recent court decision has thrown up even more confusion about the legal status of digital currency. A state judge in Florida dismissed criminal charges against a man accused of selling $2,000 in Bitcoin. An undercover police officer had posed as a buyer, and after making two small transactions, revealed that he (the undercover agent) intended to use the Bitcoin to purchase stolen credit card numbers. The officer then said he wanted to buy $30,000 of Bitcoin. The two met to discuss the transaction, but before it was consummated, police arrested the man. He was charged with running an unlawful money services business, and two counts of money laundering.
“Virtual” or “digital” currency, also known as cryptocurrency, defies easy categorization. Is it money? Is it property? Or is it just some lines of computer code? Digital currency clearly has some features in common with money (also known as “fiat currency,” in the lingo): both have a defined value, can be exchanged for other forms of currency, and can be used to buy goods or services. On the other hand, digital currencies are not the legal tender of any government, and often (but not always) are not issued or controlled by any centralized body at all. Bitcoin, the most well-known digital currency, is famously “decentralized,” meaning that there is no company or government that issues it, keeps track of it, or polices it. Plus, you can’t put digital currency in your pocket.
Digital currencies have numerous advantages over traditional money: contrary to the mass perception that it is “anonymous,” payment trails and record keeping is usually more complete for digital currencies since the “blockchain” (or analogous technology) publicly records all transactions, and transaction costs – especially for cross-border transactions – are dramatically lower than for conventional currencies. For this reason, banks and regulators alike are looking at the technology underlying Bitcoin as a possible infrastructure for all sorts of asset settlements, such as securities transactions.
Increasingly, digital currency is also being accepted by vendors, of both the on-line and brick-and-mortar variety. For example, the popular mobile app “Fold” allows anyone to buy their morning coffee from Starbucks in Bitcoin, and this very website has previously explained how consumers can use Bitcoin to buy gift cards for retailers such as Home Depot, CVS, Kmart, Sears, and Amazon. Some retailers, like Overstock.com, allow shoppers to pay directly with Bitcoin. So how could a Florida court determine that Bitcoin is not money, after all?
The Florida court dismissed the charges against the man accused of selling Bitcoin to the undercover police officer, although not for the reasons you might suspect. The court didn’t find that the defendant had been entrapped, or that the evidence he intended to do anything unlawful – as opposed to selling his own property – by selling Bitcoin was wanting, nor did the court find that the prosecution was a waste of state and federal resources (Florida police worked hand-in-hand with the Secret Service).
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Instead – and what is notable about the court’s decision – is that it effectively held that Bitcoin is not money. Specifically, the court observed that “[n]othing in our frame of references allows us to accurately define or describe Bitcoin,” and held that under Florida law, Bitcoin is neither a “payment instrument” (under the money services business law) nor a “monetary instrument” (under the money laundering laws). The court concluded that it was “unwilling to punish a man for selling his property to another, when his actions fall under a statute that is so vaguely written that even legal professionals have difficulty finding a singular meaning.”
This decision stands in contrast to guidance from the federal government, including a March 2013 publication from the Treasury Department’s Financial Crimes Enforcement Network – the agency responsible for enforcing the federal anti-money laundering laws – that concluded explicitly that for many purposes, federal law “does not differentiate between real currencies and convertible virtual currencies,” i.e., digital currencies such as Bitcoin that can be exchanged for “real” money. In fact last year, FinCEN (as the federal agency is known) settled its first-ever anti-money laundering investigation against a company for selling digital currency to a buyer. FinCEN determined that the company had historically acted as a money services business, and required as part of a civil settlement that the company pay a fine and obtain a license to act as a money services business. (Full disclosure: I represented the company in that case).
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Put differently, the Florida decision is entirely at odds with federal anti-money laundering law concerning whether Bitcoin and other digital currencies are money. If this most recent decision is correct, it raises the possibility that Bitcoin and other digital currency exchangers operating in Florida do not need to obtain a state license, though a federal one is surely required. (As it turns out, though, the Florida man arguably would not have been guilty under federal law either, although for a different reason: FinCEN has said that a “user” of digital currency who exchanges it for goods and services is not a money transmitter, nor is an individual who exchanges digital currency “on an infrequent basis and not for gain or profit.”).
The Florida court’s decision is not likely to have far-reaching impact by itself – and certainly not outside of Florida – even assuming that prosecutors don’t appeal it. But the continued confusion around the legal status of digital currency, as illustrated by last month’s decision, matters. It matters to the banks and other financial institutions that facilitate digital currency transactions, vendors that might wish to (or do) accept payment in digital currency, and of course to owners and investors in digital currencies. Until the government speaks clearly about what digital currency is – a proposition that is in many ways entirely inconsistent with the whole idea of digital currency – the prospects of inconsistent and unforeseeable regulation and prosecution will threaten the growth of a potentially important technology.
For example, federal regulators other than FinCEN have issued their own digital currency guidance, creating even more confusion. Although the Florida court did not address the FinCEN guidance at all, it did point to IRS guidance that treats digital currency as “property” rather than “currency” for tax purposes . That has created a significant impediment to the widespread use of digital currency as money, because (among other things), digital currency owners become responsible for paying capital gains. Imagine the hassle of having to pay capital gains taxes as the value of the dollar fluctuates and you can see why the IRS’s position has created an incentive for users to view digital currency as an investment, rather than currency. Worse, the IRS guidance has raised its own questions, many of which were set forth in a request for clarification and further guidance to the IRS from the American Institute of CPAs. Similarly, the Commodity Futures Trading Commission has issued guidance that (no surprise here) classifies digital currencies as “commodities.”
Questions about the legal status of Bitcoin also raise the more philosophical question of what constitutes money in the first place. For example, the U.K. House of Lords last month held hearings on digital currencies, including the possibility that the Bank of England could issue its own brand – popularly referred to as “Britcoin,” of course. Unlike Bitcoin and other extent digital currencies, “Britcoin” would be issued by a central bank – but would it be money? Under the rationale of the Florida court, perhaps not, since the absence of a central authority was just one of several factors that it found differentiated Bitcoin from money. But under the court’s decision, it is not clear which factors or combination of factors differentiate money from property. Simply put, as long as the legal status of digital currency remains murky, it will be difficult for the technology to be widely accepted.
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