Bitcoins and the Law, Part I
“Introduction to Virtual Currencies”
By: Raphael Qiu
You may have heard that Bitcoin reached an all-time high of $19,783.06 on December 17, 2017. This peak was caused by increasing popularity among Asian consumers, but the value has significantly dropped in recent weeks. This drop occurred due to formal investigations of a number of bitcoin exchanges. In spite of the uncertainty resulting from these investigations, more companies, online sites, and marketplaces are accepting bitcoins at an exponential rate. Moreover, the number of bitcoin ATMs doubled since 2016. The volatile nature of bitcoins has raised questions among consumers regarding its future and financial value especially with regard to buying or using virtual currency. Thus, it is important to engage in due diligence or seek out a legal firm like Marcum, P.C. before deciding whether to accept or use virtual currencies like bitcoin. This topic will be discussed in four separate blog articles.
The advent of the digital era has not only popularized online transactions but has also led to the development of virtual currencies to expedite business transactions. The Financial Action Task Force, an independent intergovernmental body, defines virtual currency as “a digital representation of value that can be digitally traded and functions as a medium of exchange, and/or a unit of account, and/or a store of value, but does not have legal tender in any jurisdiction. It is not issued or guaranteed by any jurisdiction and fulfills the above functions only by agreement within the community of users of the virtual currency.”
Virtual currencies can be divided into both convertible and nonconvertible currencies in that nonconvertible currencies cannot be exchanged for fiat currency. These currencies can be further divided into centralized and decentralized currencies because centralized currencies have a single administrating authority that directly controls the system. Bitcoin, the most popular virtual currency right now, is a convertible decentralized currency because it has no central administrating authority and thus no centralized monitoring system. As such, different strategies are required in order to regulate Bitcoin as opposed to centralized virtual currencies where top down based regulation would be easier.
Virtual currencies are unregulated money that are electronically stored and created so that control lies with the developers rather than a central bank. The main limitations on virtual currency are that it is not generally considered legal tender and is only accepted in certain establishments online—for example one cannot pay their U.S. tax bill in bitcoin. However, this decentralized nature has also led to the growth of virtual currencies in that more merchants are accepting them due to the low transaction fees, security benefits, and overall payment freedom.
“FATF Report on Virtual Currencies”. June 2014. http://www.fatf-gafi.org/media/fatf/documents/reports/virtual-currency-key-definitions-and-potential-aml-cft-risks.pdf