As the bitcoin community is gearing up for “Bitcoin Black Friday” on Friday, November 29, some explanation of exactly what are bitcoins and what legal and business issues they may present in the global marketplace may be helpful. As Chairman Thomas R. Carper D (DE) recently stated:
Virtual currencies, perhaps most notably Bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of many of us.
Bitcoins are perhaps the most notable form of virtual currency, and have been the subject of recent controversy. As we reported last month, the “Silk Road” website, infamous for allowing users to traffic in illicit substances and pirated goods around the world using bitcoins, was shut down by the FBI. Since then, the first U.S. congressional hearing on how to regulate virtual currencies, called “Beyond Silk Road: Potential Risks, Threats and Promises of Virtual Currencies,” took place just last week on November 18 before the Senate Committee on Homeland Security and Governmental Affairs. In that hearing, a panel of witnesses from various agencies, companies and academia met to discuss the potential implications of virtual currencies.
Now, this begs the question – what exactly is virtual currency? In the hearing, Chairman Thomas R. Carper D (DE) stated that:
Virtual currency can best be described as digital cash. It is generated by computers, lives on the internet, and can be used to purchase real and digital goods across the world.
Although online virtual currencies have been around for some time in one form or another, it is perhaps the novel feature of bitcoins that allows transactions to be conducted person-to-person, without the need for an intermediary (what some describe as a technological breakthrough) that has more recently brought the concept of virtual currency into mainstream popularity.
Like any other form of new technology, virtual currency such as bitcoins presents new legal and business issues.
For example, as of this month, there are over 12 million bitcoins in circulation, and the total market capitalization of the bitcoin economy now exceeds $8 billion based on recent prices, according to the website Bitcoincharts.com. Something with this much value that exists only in cyberspace naturally presents data security issues.
Virtual currency also raises implications under the banking laws. In March 2013, FinCEN issued Guidance (FIN-2013-G001) clarifying the applicability of the regulations implementing the Bank Secrecy Act (“BSA”) to persons dealing in virtual currencies. Although virtual currency users are not subject to regulation under the BSA, an administrator or exchanger that accepts and transmits a “convertible” virtual currency (one that has an equivalent value in, or acts as a substitute for, real currency), or buys or sells convertible virtual currency, is generally deemed a money transmitter under FinCEN’s regulations, and thus subject to all of the requirements and restrictions thereunder.
Bitcoins and other virtual currency can also present securities issues depending on the context in which it is used. In a recent investor alert, the SEC stated that:
any investment in securities in the United States remains subject to the jurisdiction of the SEC regardless of whether the investment is made in U.S. dollars or a virtual currency.
One can imagine countless other issues associated with virtual currency as well. Of course, besides the risks and implications that go along with virtual currency, dealing in virtual currency can also present benefits to businesses. Introducing virtual currency can open a new avenue for conducting transactions in e-commerce. For example, e-commerce businesses that accept virtual currency as payment may attract a “tech-savvy” customer-base, and encourage a more spontaneous method of making purchases. A number of e-commerce merchants are accepting bitcoin as payment because transaction fees can be lower than those that normally accompany credit or debit card processing. Some proponents also believe that virtual currencies can present value to those in developing countries without access to stable financial systems.
Only time will tell the future of virtual currency such as bitcoin. But one thing is sure – companies who are considering dealing in virtual currency must carefully weigh the risks and benefits of this new technology before taking the “virtual plunge.”
