Bitcoin is a virtual currency which may be traded on online exchange for conventional currencies, including the U.S. dollar, or used to purchase goods and services online.  Bitcoin has no single administrator, or central authority or repository.

In Securities and Exchange Commission v. Shavers (E.D. Texas), the court described Bitcoin as follows:

Bitcoin is an electronic form of currency unbacked by any real asset and without specie, such as coin or precious metal.  It is not regulated by a central bank or any other form of governmental authority; instead, the supply of Bitcoins is based on an algorithm which structures a decentralized peer-to-peer transaction system.  Bitcoin was designed to reduce transaction costs, and allows users to work together to validate transactions by creating a public record of the chain of custody of each Bitcoin. Bitcoin can be used to purchase items online, and some retail establishments have begun accepting Bitcoin in exchange for gift cards or other purchases.  The value of Bitcoin is volatile and ranges from less than $2 per Bitcoin to more than $260 per Bitcoin.

In Morici v. Hashfast Technologies LLC (N.D. California), the court explained the electronic currency of Bitcoin as follows:

Bitcoin is a peer-to-peer payment network that uses digital currency known as Bitcoin (abbreviated as BTC). The Bitcoin network is decentralized, with no authority overseeing its operation, and uses open-source encryption software for transactions.  Payment transactions are processed by a network of private computers distributed throughout the world which, typically, have been specially configured for processing Bitcoin transactions. These computers are commonly referred to as Bitcoin computers, and the operators of such computers are known as miners.  Miners are partially compensated for the work they perform by receiving fees for the Bitcoin transactions that they process through their Bitcoin computers.

In Kleinman v. Wright (S.D. Florida), the court described the history of Bitcoin as follows:

On October 31, 2008, a white paper authored under the pseudonymous name Satoshi Nakamoto (the “Satoshi White Paper”) titled Bitcoin: A Peer-to-Peer Electronic Cash System was posted to a mailing list of cryptography enthusiasts.  This paper detailed novel methods of using a peer-to-peer network to generate what it described as “a system for electronic transactions without relying on trust.”  In May of 2016, Craig publicly claimed that he and Dave were the creators of Bitcoin.  Bitcoin is a decentralized digital currency that uses a ledger to track the ownership and transfer of every bitcoin in existence.   This ledger is called the “Bitcoin Blockchain.”  In order to complete a transaction with bitcoins, you must have a bitcoin wallet.  “Wallets” are computer files dedicated to storing bitcoin information. Id. Each bitcoin wallet has a “public key” that is used as the “address” to receive bitcoin from others. Id. Each wallet is also assigned a “private key.” To send bitcoin out of a wallet, an individual must have the private key associated with that bitcoin wallet.

There are two methods of acquiring bitcoins. The first is simply receiving bitcoins from someone.  The second way one can acquire a bitcoin is by “mining” them.  Bitcoin is designed without a centralized authority to curate the blockchain.  Therefore, “mining” is a process through which anyone with internet access can update the ledger and “mine bitcoins” by employing computer power to solve a complex computer problem.  The first “miner” who solves the problem gets the right to update the ledger by adding a block of recent transactions to the blockchain.  The protocol pays the successful miner in newly minted bitcoins, the number of which is determined by a pre-existing algorithm.

Since its beginning, Bitcoin has inspired the creation of over one thousand other digital currencies.  These new currencies often borrow from the initial Bitcoin program but make changes to the model in an attempt to create a new cryptocurrency with distinct functions or more suited to a specific market or niche. Id. In other cases, Bitcoin has been modified by individuals in a way they believed would improve the Bitcoin itself, such as by allowing more transactions into a single block of blockchain.  In these situations, the supporters of the new Bitcoin, have created a “fork” through which the original Bitcoin blockchain/ledger is divided into two distinct, but identical, copies, (i) the original Bitcoin, and (ii) the new Bitcoin.  The result is that any individual who owned the original Bitcoin now owns an identical amount of the new Bitcoin.

In Symphony FA Limited v. Thompson (E.D. Pennsylvania), the court had this to say about Bitcoin:

Bitcoin is the most prominent example of cryptocurrency, an electronic form of currency with no tangible format. Bitcoin grew out of an October 2008 whitepaper published by an unknown person—or group—under the alias Satoshi Nakamoto. The Bitcoin network (distinguished from the lowercase bitcoin, referring to one unit of the cryptocurrency), operates using blockchain technology, a shared public ledger reinforced by cryptography which records all confirmed transactions. Bitcoins are stored in “digital wallets,” similar to virtual bank accounts, that allow users to send or receive bitcoins. Bitcoin wallets keep a secret piece of data called a private key or seed, which is used to sign transactions.  This signature both prevents the transaction from being altered once it has occurred and allows the transacting parties to remain anonymous, as only the signatures are recorded in the public log. See generally How does Bitcoin work?, BITCOIN.ORG, https://bitcoin.org/en/how-it-works; Tal Yellin, Dominic Aratari, and Jose Pagliery, What is bitcoin?, CNN MONEY, (December 2013, updated August 8, 2018), https://money.cnn.com/infographic/technology/what-is-bitcoin/index.html.

In United States v. Faiella, 39 F. Supp. 3d 544 (S.D.N.Y. 2014), the court held that Bitcoin constituted “money” under the federal RICO statute:

“[M]oney” in ordinary parlance means “something generally accepted as a medium of exchange, a measure of value, or a means of payment.”  As examples of this, Merriam-Webster Online includes “officially coined or stamped metal currency,” “paper money,” and “money of account”—the latter defined as “a denominator of value or basis of exchange which is used in keeping accounts and for which there may or may not be an equivalent coin or denomination of paper money”  Further, the text of Section 1960 refers not simply to “money,” but to “funds.” In particular, Section 1960 defines “money transmitting” as “transferring funds on behalf of the public by any and all means.” Merriam-Webster Online defines “funds” as “available money” or “an amount of something that is available for use: a supply of something.”

Bitcoin clearly qualifies as “money” or “funds” under these plain meaning definitions. Bitcoin can be easily purchased in exchange for ordinary currency, acts as a denominator of value, and is used to conduct financial transactions. See, e.g., SEC v. Shavers, 2013 WL 4028182, at *2 (E.D.Tex. Aug. 6, 2013) (“It is clear that Bitcoin can be used as money. It can be used to purchase goods or services…. [I]t can also be exchanged for conventional currencies….”).

If there were any ambiguity in this regard—and the Court finds none—the legislative history supports application of Section 1960 in this instance. Section 1960 was passed as an anti-money laundering statute, designed “to prevent the movement of funds in connection with drug dealing.” Congress was concerned that drug dealers would turn increasingly to “nonbank financial institutions” to “convert street currency into monetary instruments” in order to transmit the proceeds of their drug sales.  Section 1960 was drafted to address this “gaping hole in the money laundering deterrence effort.” Indeed, it is likely that Congress designed the statute to keep pace with such evolving threats, which is precisely why it drafted the statute to apply to any business involved in transferring “funds … by any and all means.”

Finally, in Commodity Futures Trading Commission v. McDonnell, 287 F. Supp. 3d 213 (E.D.N.Y. 2018), the court explained the problems and regulation hurdles created by virtual currencies such as Bitcoin  as follows:

According to coinmarketcap.com (viewed Feb. 6, 2018, at approximately 9:10 a.m. EST), there were over 1500 virtual currencies. Bitcoin had the largest market capitalization, valued at $121,264,863,386.  A single Bitcoin was valued at $7,196.92. Id. The cheapest virtual currency, Strong Hands, was valued at $0.000001.

The combined market capitalization of all virtual currencies as of January 6, 2018, was roughly $795 billion; by Feb. 6, 2018, the total value had dropped to $329 billion . . .

The rise in users and value of virtual currencies has been accompanied by increased fraud and criminal activity. Edgar G. Sanchez, Crypto-Currencies: The 21st Century’s Money Laundering and Tax Havens, 28 U. Fla. J.L. & Pub. Pol’y 167, 169 (2017) (“[T]he newest growing concern with Bitcoin, and crypto-currencies in general, are their ability to wash money and conceal taxable income.”).

Silk Road, an online drug market that allowed for purchase through Bitcoin, was one of the earliest and most audacious examples of crime enabled by virtual currencies.

The largest case involving Bitcoin and illegal activity was the Silk Road case, which included billions of dollars in black market drug sales, two federal agents caught (and convicted for) stealing, and murder-for-hire attempts. While the U.S. government claimed a victory in curbing illegal activity facilitated with Bitcoin by shutting down the Silk Road’s massive black market for drugs, Bitcoin is still available, and other online black markets have tripled the industry since Silk Road’s closure.

Christopher Burks, Bitcoin: Breaking Bad or Breaking Barriers?, 18 N.C.J.L. & Tech. On. 244, 251-52 (2017) (internal citations omitted); see also U.S. Attorney’s Office EDNY, Long Island Woman Indicted for Bank Fraud and Money Laundering to Support Terrorists, Dec. 14, 2017 (The defendant allegedly “laundered and transferred the funds [using virtual currencies] out of the country to support the Islamic State …”).

Virtual currency exchanges have been victims of hacking and theft. Reuters Staff, The Coincheck Hack and the Issue With Crypto Assets on Centralized Exchanges, Jan. 29, 2018 (“Hackers have stolen roughly 58 billion yen ($532.6 million) from Tokyo-based cryptocurrency exchange Coincheck Inc., raising questions about security and regulatory protection in the emerging market of digital assets.”); Alex Hern, A History of Bitcoin Hacks, The Guardian, Mar. 18, 2014 (“25,000 bitcoins were stolen from their wallet after hackers compromised the Windows computer they were using. Even at the time, that sum was worth more than $500,000; it would now be worth a little less than £10m.”).

These and other criminal acts have led some to call for increased governmental oversight and regulation of virtual currency.

Having delved into the prevalence of money laundering and tax evasion both globally and in the United States, and the rise of crypto-currencies and their use in disguising real money, the question remains as to what steps can be taken to legitimize crypto-currencies, or at the very least, put an end to their use for illegal purposes . . .

Congress has yet to authorize a system to regulate virtual currency.  As the CFTC recently admitted, U.S. law does not provide for direct comprehensive U.S. regulation of virtual currencies.  To the contrary a multi-regulatory approach is being used.

The CFTC, and other agencies, claim concurrent regulatory power over virtual currency in certain settings, but concede their jurisdiction is incomplete.  Current law does not provide any U.S. Federal regulator with such regulatory oversight authority over spot virtual currency platforms not involving fraud operating in the United States or abroad. Roosevelt continued to regard the judicial system as an ineffective arena for controlling giant corporation.  Regulation, he believed, promised a far better remedy. The design should be to prevent the abuses incident to the creation of unhealthy and improper combinations instead of waiting until they are in existence and then attempting to destroy them by civil or criminal proceedings.  Types of regulatory responses to a crisis may vary along many dimensions. These responses may be robust or cosmetic. They may be structural (reorganizing government or instrumental (changing policy tools) . . .

Until Congress acts to regulate virtual currency the following alternatives appear to be available:

  1. No regulation. See, e.g., Nikolei M. Kaplanov, Nerdy Money: Bitcoin, the Private Digital Currency, and the Case Against Its Regulation, 25 Loy. Consumer L. Rev. 111, 113 (2012) (“This Comment will show that the federal government has no legal basis to prohibit bitcoin users from engaging in traditional consumer purchases and transfers. This Comment further argues that the federal government should refrain from passing any laws or regulations limiting the use of bitcoins … applying any sort of regulation to bitcoin use, [] would be ineffective and contrary to the interest of the United States consumers.”).
  2. Partial regulation through criminal law prosecutions of Ponzi-like schemes by the Department of Justice, or state criminal agencies, or civil substantive suits based on allegations of fraud. See, e.g., United States v. Faiella, 39 F.Supp.3d 544, 545 (S.D.N.Y. 2014)(“Defendants in this case are charged in connection with their operation of an underground market in the virtual currency `Bitcoin’ via the website `Silk Road.’”); United States v. Lord, No. CR XX-XXXXX-XX/02, 2017 WL 1424806, at *2 (W.D. La. Apr. 20, 2017) (“Counts 2-14 charged Defendants with various other crimes associated with operating their bitcoin exchange business.”).
  3. Regulation by the Commodity Futures Trading Commission (“CFTC”). See infra Part III.D.2.
  4. Regulation by the Securities and Exchange Commission (“SEC”) as securities. See, e.g., SEC v. Plexcorps, 17-CV-7007, 2017 WL 5988934 (E.D.N.Y. Filed Dec. 1, 2017) SEC Compl., ECF No. 1 (“This is an emergency action to stop Lacroix, a recidivist securities law violator in Canada, and his partner Paradis-Royer, from further misappropriating investor funds illegally raised through the fraudulent and unregistered offer and sale of securities called `PlexCoin’ or `PlexCoin Tokens’ in a purported `Initial Coin Offering.’”); see also Jon Hill, Accused Fraudster Says Cryptocurrencies Aren’t Securities, Feb. 27, 2018 (“According to the government, those blockchain based tokens were securities…”).
  5. Regulation by the Treasury Department’s Financial Enforcement Network (“FinCEN”). See, e.g., FinCEN, Treasury’s First Action Against a Foreign-Located Money Services Business, U.S. Department of the Treasury, Jul. 27, 2017 (“The Financial Crimes Enforcement Network (FinCEN), working in coordination with the U.S. Attorney’s Office for the Northern District of California, assessed a $110,003,314 civil money penalty today against BTC-e [a virtual currency exchange] for willfully violating U.S. anti-money laundering laws.”).
  6. Regulation by the Internal Revenue Service (“IRS”). See, e.g., United States v. Coinbase, Inc., No. 17-CV-01431-JSC, 2017 WL 3035164, at *1 (N.D. Cal. July 18, 2017) (“In March 2014, the IRS issued Notice 2014-21, which describes how the IRS applies U.S. tax principles to transactions involving virtual currency. (Case No. 3:16-cv-06658-JSC, Dkt. No. 2-4 at 3 ¶ 6.) In Notice 2014-21, the IRS stated its position: virtual currencies that can be converted into traditional currency are property for tax purposes, and a taxpayer can have a gain or loss on the sale or exchange of a virtual currency, depending on the taxpayer’s cost to purchase the virtual currency.”).
  7. Regulation by private exchanges. See, e.g., Asian Review, Japan Tries Light Touch in Bringing Cryptocurrencies out of Regulatory Limbo, NIKKEI, Sept. 30, 2017 (“[T]here is a growing need for exchange operators to self-police to protect investors from taking on too much risk and other dangers.”).
  8. State regulations. See, e.g., Press Release, DFS Grants Virtual Currency License to Coinbase, Inc., N.Y. Department of Financial Services, Jan. 17, 2017 (“DFS has approved six firms for virtual currency charters or licenses, while denying those applications that did not meet DFS’s standards. In addition to bitFlyer USA, DFS has granted licenses to Coinbase Inc., XRP II and Circle Internet Financial, and charters to Gemini Trust Company and itBit Trust Company.”).
  9. A combination of any of the above.