Student Voices: Bitcoin and the Law

“Bitcoin” and “law.” At first glance, the two concepts seem unlikely to appear together in a sentence, unless that sentence is “bitcoin exists outside the law” or “bitcoin was used to break the law.” Much of the mainstream media’s coverage of Bitcoin focuses on cases like the prosecution of the founder of Silk Road, a “Deep Web” marketplace where drugs were bought and sold using bitcoins. On the other hand, many within the Bitcoin community believe Bitcoin either cannot or should not be regulated.

Of course, when you fight the law, the law generally wins. In response to new innovations, legislators and regulators write new laws or adapt existing laws by analogizing new technologies to old ones. Bitcoin is no stranger to this phenomenon. Wary of bitcoin’s connections to illicit activities, countries like Bolivia, Ecuador, and Kyrgyzstan have banned Bitcoin outright. Russia also is considering a total ban, while China has instructed its financial institutions not to buy or sell bitcoins.

U.S. responses to Bitcoin at the federal and state levels have been characteristically piecemeal and uneven. The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has classified Bitcoin as a “virtual currency” and is regulating certain bitcoin transactions as “money transmissions” under the Bank Secrecy Act. By contrast, the Internal Revenue Service, which is also part of the Treasury Department, has ruled that bitcoins are property, not currency, and will be taxed accordingly at the federal level. The states have weighed in as well. Washington decided that bitcoins are money; Texas decided that they are not. New York has proposed a comprehensive BitLicense regulatory regime; California and Massachusetts have remained silent.

On Wednesday, December 2, I discussed these regulatory developments during a presentation to the MIT Bitcoin Club. Having spent the semester researching Bitcoin regulation and discussing it with my classmates and instructors in the Cyberlaw Clinic, I felt reasonably comfortable with the legal issues. I was, however, unsure of how a non-legal audience would respond to a presentation about money transmission and tax reporting.

My worries turned out to be unfounded. Most members of the audience were either starting bitcoin-related businesses or considering doing so. They asked questions that engaged with both overall policies and the logic behind them as well as the minutiae of regulations. I really enjoyed the challenge of trying to apply my knowledge of existing regulations to questions generated by non-lawyers.

One pattern emerged over the course of my exchange with the audience. While some of the audience questions were framed in terms of complying with existing laws and regulations, many focused on how to avoid U.S. law entirely by, for example, incorporating bitcoin businesses overseas. This focus on avoidance strategies is not surprising, given Bitcoin’s origins on the Internet and the current incoherence of U.S. approaches to regulating virtual currencies.

Bitcoin entrepreneurs may come to realize that complying with U.S. regulations is more profitable and cost-effective than avoiding them, and shift their focus toward regulatory reform. Already the industry has formed the Digital Asset Transfer Authority, a self-regulatory organization for virtual currencies. Should such efforts succeed, bitcoin has the potential to become an established part of the global financial system. If not, bitcoin may simply become a niche product for those seeking a decentralized alternative to traditional government-backed money systems.

Joe Milner, HLS ’16, was a student in the Cyberlaw Clinic during the fall semester, 2014. Image courtesy of Pixbay user Simon, CC0.