Tuesday, April 01, 2014

Bitcoin - What is it? Did you buy any? How is it currently regulated?

Bitcoin – What type of currency is it? Did you buy any? Curious about how the currency is or isn't regulated? What happened to Mt. Gox, one of the largest overseas bitcoin exchanges? Have you heard that investors are now looking to put their holdings in real safes vs. relying on bitcoin exchanges to maintain their accounts?

Bitcoin is a virtual currency which first appeared in 2009. Considered a cryptocurrency, it "uses cryptography to control the creation and transfer of money."

Why should one be concerned about their existence? In August, 2013, the Superintendent of New York's Department of Financial Services sent subpoenas to 22 digital currency companies to "determine whether new regulations should be adopted to govern the emerging industry." In a Bloomberg article, Benjamin Lawsky, Superintendent of New York's Department of Financial Services, was quoted saying, "If virtual currencies remain a virtual Wild West for narco-traffickers and other criminals, that would not only threaten our country's national security, but also the very existence of the virtual currency industry as a legitimate business enterprise."

Currently unregulated in the United States, take a look at the Law Library of Congress’ January 2014 report on the “Regulation of Bitcoin in Selected Jurisdictions.” Covering forty foreign jurisdictions, it notes that only China and Brazil “have specific regulations applicable to bitcoin use."

The Massachusetts Office of Consumer Affairs recently posted a Consumer Alert stating "Buy Bitcoins at Your Own Risk."

The Washington Post article entitled "Japanese bitcoin exchange files US bankruptcy case" wrote how Mt. Gox,  once one the world’s largest exchange specializing in bitcoins,  filed for bankruptcy on February 28th. The exchange froze its users’ accounts and then shut down after acknowledging it couldn’t account for 850,000 bitcoin. The company’s CEO Robert Karpeles blamed most of the losses on computer hackers who took advantage of the exchange’s flawed software. 

According to court documents filed, the missing currency, valued at $473 million at the time of the company’s bankruptcy filing in Japan, represents about 7 percent of all bitcoin in worldwide circulation.

Recently bitcoin posted they had found 200,000 missing bitcoin[s] representing $119 m. A statement on their website said it found the 200,000 bitcoins in an old-format digital wallet.

The article noted that “Market regulators, including the SEC, are still evaluating whether bitcoin[s] falls under their jurisdiction. Agencies that oversee banks and payment systems are monitoring bitcoin[s], but Federal Reserve Chairwoman, Janet Yellen, said in this article that "the Fed has no authority to regulate the virtual currency as long as it ‘doesn’t touch’ banks the Fed oversees".

Do you have a Trial Court Law Library card? If so, you can access the following articles via our Hein Online law journal database:

·       Bitcoin and Money Laundering: Mining for an Effective Solution, 89 Indiana Law Journal,   pages 441-472, c. 2014
·       Halting a Shift in the Paradigm: The Need for Bitcoin Regulation, Trinity College Law Review, vol. 16, pages 67-90, c. 2013.
·       I’ll Gladly Trade You Two Bits on Tuesday for a Byte Today: Bitcoin, Regulating Fraud in the E-conomy of Hacker-Cash, vol. 2013, Issue 1, University of Illinois Journal of Law, Technology & Policy.

Did you know that if you’re a Massachusetts Court employee with a .jud e-mail address, you can apply for a Trial Court Law Library in order to access the Hein Online database? Click here for the link.

Everyone else is welcome to visit any of our Trial Court Law Libraries to apply for a Library card to access our remote databases. This is the link to our locations and hours of operation

Want to read more about bitcoin[s]?

Did you know that currently Bitcoin and other such online money systems will be treated as property for income tax purposes?  Purchasers will have to deal with reporting requirements as they do with stocks.  Wages paid in bitcoin would be treated as taxable income.

If you bought a product with bitcoin, you would have to calculate the change in value from the date of purchase to the date it was spent.

The IRS Guide can be found here, and Notice 2014-21 contains explanations and Questions and Answers.

As one of my colleagues said, just in time for Tax Day.
Seemed appropriate to write about this exchange on April Fool’s Day. As the saying goes, Caveat emptor - Let the buyer beware!

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