Bitcoin and other cryptocurrencies are often lauded as innovative technology with a promising future. Decentralized and offering full transparency per transaction, some have welcomed cryptocurrency as a method of exchange, while others have openly criticized the fanfare that sometimes surrounds it. Regardless of personal opinions about the use of Bitcoin and other cryptocurrency, what are the legal ramifications of using this new form of commerce?
What is Cryptocurrency?
In order to explore the legalities of bitcoin and other cryptocurrency, it helps to start at the beginning in defining the technology that powers this new currency and how it is being used.
Also known as digital currency, cryptocurrency exists on something known as blockchain. Imagine, if you will, a chain built of blocks. Each block represents a transaction, and these are strung together in the order that each transaction occurs. In the case of cryptocurrency, the first block would be the first transaction, the second would be the next transaction, the third block – a third transaction, and so on. Now all of these blocks are displayed on a ledger so that anyone who looks at the ledger can very easily see the history of each transaction on that chain from its very first to its most recent.
The ledger and all of its blocks are built using a technology known as cryptography, which is a special kind of computer coding far more accurate and reliable than a human accountant. Blockchains are also connected to a broad network of computers, which make it extremely difficult for hackers to infiltrate the network and create fraudulent transactions. Since the network is also decentralized, no one person or computer controls it. Rather, an entire network requires that every new block added to a chain be simultaneously recorded by a team of computerized validators known as “nodes” spread throughout the network.
In viewing a blockchain ledger, a person is able to see the entire history of every Bitcoin in circulation. No one owns the ledger, but by virtue of its design, it is nearly impossible for anyone who uses it to cheat. For one, prior “blocks” (transactions) can never be edited. All anyone can do is amend a particular chain by adding new blocks to it. Tampering with an existing chain only serves to invalidate each of the blocks that follow an amended block.
What is Bitcoin?
Bitcoin is but one type of digital currency, known as cryptocurrency. It’s a brand name and is one of close to 1,000 peer-to-peer currencies used in modern-day commerce. Some others include:
So, imagine selling an apple to a person in exchange for one Bitcoin. Although used to make a trade, Bitcoin does not exist as a physical currency. So, since it is not something you can hold in your hands like traditionally legal tender, and this is not a regular transaction where you will see money deposited from the person’s bank (or a similar payment system) to yours, how will you know that the person you are selling to actually has a Bitcoin? And how will this digital currency transfer to you?
Well, when the person you are selling the apple to gives you a Bitcoin, a message is sent to all of the nodes in a network saying that one Bitcoin is going from that person’s account – or virtual wallet – to yours. What every node then does is amend the ledger to show one Bitcoin being subtracted from your customer’s account and showing where that Bitcoin has now been added to your account. This is all done through cryptography, so each transaction is recorded in exactly the same way and all of the networks must agree that the transaction is valid before proceeding to the final step of creating an actual block to add to the chain.
Now, before those transactions can be used to create a new block in the chain, the nodes must compete to solve a deeply complex mathematical equation. The first node to do so is the one that actually gets to place the next block in the chain. That block, of course, contains the information that all of the nodes recorded, but only one is rewarded with creating a block to be placed on the actual ledger. The whole process takes about 10 minutes from the time the transaction begins until it is completed and a block is added.
Is Bitcoin Legal?
Bitcoin and other cryptocurrencies are completely legal to use as a form of exchange. No special permission is needed for individual consumers to use a cryptocurrency. In fact, no government regulation applies to individual consumers who trade in digital currency, at all.
In the United States, virtual currencies are not regarded as legal tender. The same is true in most parts of the world. So far, only Japan and Switzerland have approved Bitcoin and other cryptocurrency as legal tender.
While the Financial Crimes Enforcement Network (FinCEN) does not regulate individual Bitcoin and cryptocurrency users, it does regulate individuals and companies who act as money exchangers or who act as transmitters just as they do with other transmitters like PayPal and Moneygram. Anyone acting in this capacity is required to register with FinCen. Registered transmitters are further required to report any individual user who makes a transaction of $10,000 or more in a day, even if this benchmark is reached through a series of smaller transactions.
Caution and Cryptocurrency
While virtual currencies are legal for individuals who want to trade digital currency in exchange for products or services, Bitcoin and other cryptocurrency do come with a bit of caution. Financial experts, legal professionals, and journalists routinely discuss dangers and illegal activities that may accompany cryptocurrency transactions. Here are just a few of the largest concerns legal and financial experts cite, which are more easily associated with cryptocurrency:
- Blockchain transactions can be completely anonymous, which opens the door to illegal sales and other transactions.
- Because blockchain is decentralized, its oversight does not designate anyone responsible for reporting suspicious or outright criminal activity.
- Due to sophisticated encryption methods, it is difficult to freeze Bitcoin and other cryptocurrencies when suspicious or criminal activity is discovered.
Notable Cyber Crimes Involving Cryptocurrency
In 2013, the Federal Bureau of Investigations shut down a black market known as Silk Road where bitcoin was a preferred method of trade. A marketplace for illegal weapons, drugs, and other prohibited goods and services, it was only when Silk Road’s owner, Ross Ulbricht, placed an ad on a Bitcoin forum using his own Gmail address that investigators were able to trace his whereabouts and arrest him. Currently serving life in prison without the possibility of parole, Ulbricht was convicted of seven different crimes relating to distributing illegal drugs, running a criminal enterprise, computer hacking, money laundering, and selling false identities.
In 2016, Arthur Budovsky plead guilty to money laundering as the former owner of Liberty Reserve. The digital currency which bore the same name as the company, was used to clean money for such cyber-criminal activities as computer hacking, credit card fraud, and trafficking stolen identities. Budovski is currently serving 20 years in prison for his crime.
In 2018, former stockbroker Theresa Lynn Tetley was sentenced to one year and a day for laundering drug money through an unlicensed Bitcoin exchange. In addition to her sentencing, Tetley received a fine of $20,000. Once released from prison, she will be placed on parole for an additional three years.
While there are multiple other cases of arrests and convictions relating to crimes involving Bitcoin and other cryptocurrencies, what is clear in these three is that some criminals rely heavily on the anonymity provided by virtual currencies and, in fact, use them as preferred tools of their respective trades. At the same time, authorities are well aware of the criminal use of digital currency. Despite cryptography used to encrypt transactions and shield user identities, regulations do apply to how this technology can be used and investigators diligently monitor blockchains as they search for any criminal activities linked to cyber trades.
Bitcoin and Other Cryptocurrency Are Perfectly Legal
The legalities of Bitcoin and other cryptocurrency may change over time, especially if more consumers begin using virtual currencies to pay for goods and services. For now, however, individuals engaging in legal trading for purchases and payments can assure they are within the law in doing so. For more information on Bitcoin and other cryptocurrency, please visit our article archives.