The legality and potential government regulation of bitcoin is a hotly contested matter. Here we’ll look at the different legal factors that come into play with regards to bitcoin’s existence, use, and regulation. Note that this section is specific to the legality of bitcoin in the United States.
Legal Regulation of Bitcoin
At the present, the federal government has a monopoly on issuing legal tender. That being said, there is historical precedent for the creation of private and localized currencies. So long as the local currency is intended to be entirely distinct from the US dollar and isn’t designed to appear similar enough to be accidentally used in place of federally issued tender, this has been found legally acceptable. With this precedent in mind, bitcoin itself is legally acceptable.
The question here is not whether bitcoin is legal – it’s whether or not the federal government can (and should) regulate the bitcoin system. Below, we’ll look at three possible avenues for government regulation of the bitcoin system: regulation under money transmitter laws, regulation of bitcoin as a commodity, and regulation under the Electronic Funds Transfer Act (EFTA).
TIP: New regulations are coming out all the time regarding cryptocurrency, so make sure to brush up on the latest changes before trading cryptocurrency. See: Legality of bitcoin by country or territory. Also see: Bitcoin.org on “can bitcoin be regulated?”
Regulation Under Money Transmitter Laws
Any business that transmits funds from one party to another in legally a money transmitter and must obtain a license to operate. As per the USA Patriot Act, it’s illegal to operate as an unlicensed money transmitter. Also, all money transmitters must oblige with the Bank Secrecy Act (BSA), which requires them to register FinCEN, implement anti-laundering programs, keep detailed records of all customers, and report suspicious transactions. These regulations are in place to protect the consumer and defend against money laundering and terrorist financing.
However, in March 2013, FinCEN released a guide on how the BSA applies to virtual currencies. In this guide, it divided cryptocurrency users into three categories:
- User — a person obtaining virtual currency to purchase goods and services. Users are not considered money transmitters.
- Exchanger — a person engaged as a business in the exchange or transfer of virtual currency for real currency, funds, or other virtual currency. These are legally considered money transmitters, and thus are subject to FinCEN’s regulations.
- Administrator — a person engaged as a business in issuing (putting into circulation) a virtual currency with the authority to redeem (withdraw) such currency from the system.
The problem with the above guidance is that it doesn’t map well on to the bitcoin system. For example, there’s no clear cut decision on what category you would fall under if you were to purchase bitcoin for some reason other than to spend it – for example, to speculate on its value or for remittances. Furthermore, bitcoin miners do not fall under the category of administrator since they cannot redeem bitcoins from the system, but may qualify as exchangers (and thus as money transmitters) if they sell the bitcoins they mine for a “real” currency.
Regulation as a Commodity
Another potential issue in the legality of bitcoin is Commodity Futures Trading Commission (CFTC) regulation. Bitcoin is both a currency and a commodity – as economist George Selgin put is, a “synthetic-commodity money.”
To regulate bitcoin as a currency, the CFTC would need to characterize bitcoin to be a foreign currency. This is unlikely, since the 2012 Dodd-Frank Wall Street Reform and Consumer Protection Act defines foreign currencies as “the currency of another government,” and bitcoin is the first truly decentralized money.
However, there may be potential for the CFTC to regulate bitcoin as a commodity. Commodities are defined as “goods and articles… and all services, rights, and interests… in which contracts for future delivery are presently or in the future dealt with.” The only complication in this type of regulation is the instantaneous nature of trading bitcoins for US dollars – this might preclude such a transaction from being legally construed as a futures contract.
Regulation Under the EFTA
The final avenue for federal regulation of bitcoin is the Electronic Funds Transfer Act (EFTA) and its application through the Federal Reserve’s Regulation E. However, as with regulation by the CFTC, there are complications that stem from the legislative definitions involved; specifically, the EFTA’s definition of “Electronic Funds Transfer” assumes the necessity of “financial institutions” and “accounts,” neither of which is a construct in the bitcoin system.
As a result of these ambiguities, many legislative grey areas arise. Some argue that online bitcoin wallet services can legally be seen as financial institutions, but others contend that the services do not initiate electronic funds transfers. Furthermore, the new rules from the Consumer Financial Protection Bureau (CFPB) amending Regulate E specifically target remittance transfer providers and mandate that consumers are afforded 30 minutes to cancel any given transfer. This is fundamentally incompatible with the permanent nature of a bitcoin transfer.
The Future of Bitcoin Legality
The legal future of bitcoin is not entirely certain. It can only be hoped that the federal government clarifies some of the ambiguous legislation that affects cryptocurrencies and finds a way to regulate bitcoin without restricting it in such a way that the network is stifled. We here at BitcoinFacts will be sure to keep you in the loop with all of the latest developments regarding the legality of bitcoin.