Even though there are currently no laws specifically about cryptocurrency, accepting cryptocurrencies as payment for business transactions can present many legal issues. Not all of these issues are even defined or identified, yet cryptocurrencies continue to grow in popularity.
Bitcoin and Ethereum are currently the most popular cryptocurrency today. Issues seem to arise because cryptocurrencies tend to fluctuate in value very rapidly. Purchasing something with Bitcoin or another cryptocurrency is very similar to buying something with shares of a volatile stock that you own. Similarly, while it could be valuable today, tomorrow, it could be worth half as much or even double.
As we have learned in this course, Bitcoins are stored in various digital or paper wallets. Obviously, these wallets are individually maintained and are not insured by the FDIC. As such, any Bitcoins in your personally maintained wallet, although encrypted or secured with other forms of security measures, are not truly protected. In real terms, any Bitcoins in your personally maintained wallet are not insured by the United States government against the digital wallet company going out of business or in the event your personally maintained wallet is stolen or compromised. Bitcoin transactions are anonymous because each transaction is tied to a “digital wallet ID” rather than an actual name and identity. Not having actual names tied to the transaction is primarily why marketplaces specializing in selling illegal products and services, like the now-defunct “Silk Road,” accept Bitcoin as payment.
To further explain the dilemma, Bitcoin and other cryptocurrencies have unique characteristics that make them different from traditional money. First, most major credit card companies will impose a transaction fee of around 3%. While mining fees have become somewhat the norm in cryptocurrency, Bitcoin allows individuals and merchants to transact directly without a fee. This tends to lower the overall cost of the transaction. Additionally, unlike the U.S. Dollar, Bitcoins cannot be mined infinitely. In fact, there are only 21 million Bitcoins that can be mined in total. Once miners have unlocked this many Bitcoins, the planet’s supply will essentially be tapped out unless Bitcoin’s protocol is changed to allow for a larger supply. In any event, the direct power of Congress under Article I, Section 8 of the U.S. Constitution, is the authority “to coin Money” and “regulate the value thereof” and thus may provide oversight and control of cryptocurrencies.
In a notice issued by the Internal Revenue Service (IRS) in March of 2014, a decision was rendered that provided that virtual currency be treated as property for U.S. federal tax purposes. This means that Cryptocurrencies adhere to the same general property transaction tax principles. Additionally, wages paid with cryptocurrency are taxable to an employee, must be reported by the employer on a W-2 Form, and are subject to federal income tax withholding and payroll taxes. Payments to independent contractors made with cryptocurrencies are also taxable, and self-employment tax rules generally apply. Gain or loss from the sale or exchange of cryptocurrency depends on whether the virtual currency is a capital asset in the hands of the particular taxpayer. Finally, any payments made with virtual currency are subject to information reporting to the same extent as any other payment made in property.
The IRS also determined that an individual can receive income in money, property, or services. If you receive more income from the virtual world than you spend, you may be required to report the gain as taxable income. IRS guidance also applies when you spend more in a virtual world than you receive, you generally cannot claim a loss on an income tax return.
Under title 18 U.S.C. Sections 470-477 and 485-489, counterfeiting and forging the U.S. or foreign coins, currency, and obligations are subject to criminal sanctions. However, there is nothing that expressly applies to a currency in digital form. Whether the United States government can prosecute for the use of cryptocurrency under one of the counterfeiting criminal statutes is quite unclear.
The Electronic Transfer Fund Act (ETFA), 15 U.S.C. Sections 1693 applies to transfers of money electronically but is limited and does not appear specifically applicable to a digital currency without a financial institution involved. The Act applies to transfers of funds initiated by electronic means from a consumer’s account held at a financial institution. Since cryptocurrencies use a peer-to-peer network, eliminating the need for a financial institution, it is unlikely that this legislation would apply.
The Stamps Payments Act criminalizes the issuance, circulation, or payout of “any note, check, memorandum, token or other obligation, for a less sum than $1, intended to circulate as money or to be received or used in place of lawful money of the United States.” The language seems to apply to tangible forms of currency rather than cryptocurrency. Still, if Bitcoin or another cryptocurrency were to become a legitimate competitor of the U.S. Dollar, this statute might apply.
Engaging in financial transactions that involve proceeds of illegal or terrorist activities (or designed to finance such activities) is prohibited under federal criminal anti-money laundering laws. The Bank Secrecy Act (BSA) imposes record-keeping requirements on financial institutions to fight these illegal and terrorist-related financial transactions. All “money services businesses” (MSBs) must implement anti-money laundering programs to identify and stop such crimes, and MSBs must also file reports of cash transactions exceeding $1,000.
A currency dealer or exchanger, check casher, an issuer of traveler’s checks, money orders, stored value, seller or redeemer of traveler’s checks, money orders or stored value, money transmitter, and U.S. Postal Service all fall under the umbrella of MSBs. Businesses and individuals that change Bitcoin into U.S. Dollars, or other foreign currency, must register with the Department of Treasury and comply with BSA reporting requirements. This is where many of the start-up bitcoin exchanges make their mistake. By failing to register with the Department of Treasury and comply with the BSA reporting requirements, they are usually in violation of not registering as a licensed money transmitter.
In August 2013, the U.S. District Court for the Eastern District of Texas held that it had subject matter jurisdiction over possible fraud in investments purchased with Bitcoin. This means that based on the court’s finding, investments purchased with Bitcoin are securities, and therefore may subject all investments purchased with Bitcoin to SEC regulations.
Finally, unfair or deceptive acts or practices in or affecting commerce are prohibited by the Federal Trade Commission (FTC) Act. This act does apply to cryptocurrencies. In September of 2014, the FTC brought a civil action under the FTC Act against Butterfly Lab in the U.S. District Court for the Western District of Missouri. The company was charged with engaging in deceptive practices in violation of Section 5(a) of the FTC Act. It was alleged that Butterfly misled consumers who prepaid thousands of dollars for Bitcoin mining machines that could not produce bitcoins. In the eyes of the FTC, Butterfly was unjustly enriched, and the court had to intervene to stop a continuing substantial injury to consumers.
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