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Bitcoin confounds lawmakers as they try to figure out what it is and how it should be regulated. The Bitcoin Foundation notes that Bitcoin is an innovative payment network and a new kind of money. But is it money? Some call it a new form of virtual currency.
Others have lauded it as a new type of payment system. So what is it? And why does it matter? What we call it may not matter much in casual conversation, but how it is categorized does have significant implications when it comes to regulation.
From banking laws to anti-money-laundering laws and tax regulations—whether these laws apply to the use of Bitcoin depends on how Bitcoin is classified. At present there is no consensus as to what we should call Bitcoin or how it should be defined for purposes of applying legal rules.
This conflicts with basic definitions of money, found in both economics texts and in dictionaries. If certain laws are meant only to deal with government-issued currencies, then perhaps we should revise statutory definitions to make such distinctions clearer.
I have discussed how Bitcoins are generated in prior columns. As for a definition, Bitcoin does refer to itself as money or currency—issued, however, not by a government, but instead in a decentralized manner. It is the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen. From a user perspective, Bitcoin is pretty much like cash for the Internet.
So—does Bitcoin qualify as money or currency? Its proponents believe that it is. But to answer that question, one needs to first consider how money is defined. Popular definitions of money also focus on the idea of a purchasing unit—often denominated in bills and coins that can be used to purchase goods and services.
The key distinction is that money allows for transactions that move beyond barter where parties exchange goods and services for other goods and services. So—when looking at definitions—money does not need to be linked to a sovereign or government issuer.
It just has to be something that is circulated and is used for exchange. Currency, by contrast, appears to have a link to a particular country.
So upon first glance, Bitcoin, would qualify as money or currency; it is a medium of exchange and a unit of account. It just has no link to a particular sovereign. The question remains, however, whether Bitcoin qualifies under legal definitions of money. And this is where lawmakers and judges have diverged. Shavers promised investors an incredible weekly return of 7 percent, according to a federal criminal complaint, but shut down his site after collecting more than , Bitcoins.
Securities and Exchange Commission SEC charged Shavers with operating an illegal Ponzi scheme, his response was that Bitcoin was not actual currency and therefore his actions were not covered by SEC regulations. Shavers also contends that his transactions were all Bitcoin transactions and that no money ever exchanged hands.
The only limitation of Bitcoin is that it is limited to those places that accept it as currency. However, it can also be exchanged for conventional currencies, such as the US dollar, Euro, Yen and Yuan. Therefore, Bitcoin is a currency or form of money, and investors wishing to invest in BTCST provided an investment of money. More recently, in August , another federal judge, Katherine Forrest, of the U.
The defendant, Ross Ulbricht—the creator of the infamous website for trade in illegal goods and narcotics, Silk Road—was charged in with unlawfully operating an unlicensed money transmitting business. Silk Road accepted Bitcoin as means of payment. So in at least two instances, judges have interpreted federal statutes to encompass a more general definition of money that does not restrict the term solely to government-issued money.
In June , a court in the Netherlands issued a ruling in a civil lawsuit as to that has how Bitcoin should be treated under Dutch law.
The Dutch case involved a Bitcoin sales transaction and contract between two unnamed parties that was not fully performed. The buyer had attempted to buy 2, Bitcoins from the defendant seller but only received Bitcoins.
After repeated delays in the delivery of the remaining Bitcoins, the buyer sued the seller. The court discussed the nature of Bitcoin in its ruling, noting that it is neither electronic money nor legal tender in the Netherlands.
The court reportedly cited statements made by the Dutch Minister of Finance when ruling that Bitcoin does not meet the definition of electronic money. Ultimately, the judge concluded that none of the definitions of common money under the Dutch Civil Code apply to Bitcoin.
The judge did acknowledge that Bitcoin can be accepted as a form of payment in the Netherlands. Had Bitcoin been deemed money, the transaction would have been considered a foreign exchange contract, and thus the buyer might have been entitled to exchange rate loss. In the United States, the IRS announced that it would treat Bitcoin as property rather than currency for tax purposes.
A Bitcoin transaction was akin to a barter arrangement, whether conducted online or in brick-and-mortar shops, and therefore had similar tax consequences, the ATO said.
According to news reports, some Australian businesses that accept Bitcoin as payment for goods or services had been hoping that it would be treated under tax law as an equivalent to money. This is because it would make record keeping and tax compliance easier. Lawmakers will be examining their laws on the books to see whether Bitcoin transactions will be covered by different types of statutes and regulations—for civil, criminal, and administrative purposes.
As they do so, it will be important for policymakers to reexamine their statutory definitions of money and currency—to see whether they are being used in a way that makes sense. If lawmakers intend for certain rules to apply only to legal tender—that is, government-issued money—then perhaps statutes should be clear on this point.
A Bitcoin company called Bitonic has launched a crowd-funded campaign aimed to support efforts to define Bitcoin as money in the Netherlands. The cause enjoys the support of the Dutch Bitcoin Foundation. As legislators and agencies across the world attempt to understand, classify, and regulate Bitcoin, one can only hope that they will provide clearer guidance so that those who engage in Bitcoin transactions can anticipate how the law might affect those transactions.
Share Tweet Share Share Share. What Is Money or Currency Anyway? Unit of account, that is, provide a common base for prices; or Medium of exchange, something that people can use to buy and sell from one another. What Is the Way Forward?
More Commentary by Anita Ramasastry. The opinions expressed in Verdict are those of the individual columnists and do not represent the opinions of Justia.