The news in the past few months has seen a rise in the use of the term “Bitcoin.” In particular, Bitcoins recently gained notoriety in relation to the shutdown of the online drug market, the Silk Road, where nearly 150,000 Bitcoins were seized with a value of about $33.6 million.
Bitcoins have been around long before the Silk Road, with the first Bitcoin transaction occurring in 2010 and the concept developing well prior to that time. In the most basic sense Bitcoin is a digital currency that operates on a peer to peer payment network with no central authority to oversee its use. As of mid-November there are almost 12 million Bitcoins in circulation with a price of nearly $900 per Bitcoin.
While Bitcoin has been operating to some extent in other countries such as China, Japan, and Europe, it’s had a slower start in the United States. Federal regulators are currently conducting hearings in an attempt to determine how to deal with the digital currency. Many are concerned that Bitcoins present a multitude of illicit financial risks, particularly exploitation by malicious actors.
Despite the current apprehension, many speculate that Bitcoins and other virtual currency will gain more mainstream acceptance in the United States. Many US investors are already allocating investments into Bitcoins and the Winklevoss twins (known for their infamous lawsuit against Facebook founder Mark Zuckerberg) created a Bitcoin ETF. Additionally, Virgin Atlantic is now accepting Bitcoin as payment for its commercial space flight venture and even a small number of law firms are accepting Bitcoins as payment for services.
Bitcoins have create a gray area in the legal world since little is known about how they will be regulated. Several boutique law firms have sprung up solely focusing on the legal issues surrounding Bitcoins. Potential issues include:
- Classification of Bitcoins. Should they be classified as commodities or securities? Once classified the government will be able to determine which agency has the authority to monitor the virtual currency.
- Imposition of Taxes. The IRS has not issued any specific rules as of yet regarding the reporting of transactions using Bitcoins, relying on the self-reporting requirements already in place. As the use of Bitcoin in the US rises, many expect the IRS to change that policy.
- Money Laundering. Because Bitcoin is transferred anonymously to some extent, many are concerned about use by scam artists and other criminals laundering funds.
- Consumer Protection. Not only is the value of Bitcoin very volatile but it is also susceptible to hackers.
Though the future regulations of Bitcoin in the US are uncertain, the rise of Bitcoin in the US marketplace will undoubtedly bring about a wide array of legal issues for individuals and businesses alike.
