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Introduction Recently there has been widespread interest in the propagation of virtual currency based payment systems, including most notably, Bitcoin. Bitcoin advocates suffered a significant setback in February when Mt. This article will briefly explore the intersection of efforts to develop a new and improved digital wired magazine bitcoin article in nysed of exchange and the existing regulatory and commercial law environment.
As will be seen, existing law provides only partial answers as to the rights, remedies, and obligations of parties using virtual currencies. It was intended to be an electronic peer-to-peer payment system based upon cryptographic proof. How Bitcoin Works The Bitcoin system was designed to create an electronic trail for each bitcoin back to its point of origin. This type of trail would make double spending a bitcoin extremely difficult. The block chain maintains a record of every transaction ever processed, allowing Bitcoin users to authenticate each transaction.
Bitcoin exchanges and money transmitters evolved to facilitate these transactions by offering Bitcoin users a platform for the purchase and sale of bitcoins using different currencies.
At one time, Mt. Gox was the largest of these exchanges. The recipients of these newly minted bitcoins are known as miners. However, because bitcoin is not a physical currency, bitcoins can be divided infinitely. Regulation of Bitcoin Since Bitcoin is not created by any government or central bank, wired magazine bitcoin article in nysed that regulate banking and the financial industry may not be applicable to Bitcoin and Bitcoin transactions.
For example, the FDIC has indicated, in at least one context, that a money transmitter such as PayPal is not acting as a bank for purposes of federal banking laws. Notwithstanding the current lack of government regulation, it is believed that Bitcoin and other virtual currencies, especially when traded through an exchange, are subject to money-laundering rules under the Bank Secrecy Act.
Treasury Department released a statement that virtual currency administrators and transmitters i. But for these same reasons, it is unclear how a Bitcoin exchange can fully comply with such reporting requirements since Bitcoin transfers are anonymous by design.
The recent charges brought by the U. Bitcoin exchange BitInstant, highlight the potential complications involved in regulating Bitcoin and prosecuting illegal Bitcoin activity. Treatment of Bitcoin under Existing Commercial Law Just as in the regulatory sphere, there is uncertainty as to how Bitcoin and related wired magazine bitcoin article in nysed will be regarded under existing commercial laws that were not enacted or designed to specifically address virtual payment systems.
A fundamental inquiry becomes, what exactly is a bitcoin? It does not have a tangible or physical manifestation, yet it has the capacity to act as a store wired magazine bitcoin article in nysed value and a financial medium for the exchange of goods and services.
In a bankruptcy contextbitcoin held by a debtor upon filing, would likely qualify as wired magazine bitcoin article in nysed of a bankruptcy estate since the debtor would have a legal or equitable interest therein. Trustees would also be well advised to question debtors as to existing or past Bitcoin investments or wired magazine bitcoin article in nysed. As such, a creditor seeking to take bitcoin as collateral would need a security agreement with the debtor sufficiently identifying the collateral.
Perfection of the security interest will require the filing of a UCC-1 Financing Statement in the state where the debtor is located as prescribed under the UCC. In light of the significant fluctuations in value of bitcoin and the difficulty secured creditors may experience in gaining control over and liquidating bitcoin, the use of bitcoin as collateral in conventional lending transactions remains highly suspect. Gox filed for bankruptcy in Tokyo in February after nearly half a billion dollars worth of cryptocurrency at that time disappeared from customer accounts.
Gox was sued in federal court in Chicago by an Illinois resident alleging a class action lawsuit for misappropriation and fraud, among other claims. Bankruptcy Code, which allows debtors to shield U. Gox and increased awareness regarding the possible security pitfalls of Bitcoin and other cryptocurrencies, it remains to be seen whether virtual currencies and the exchanges that trade them will survive and how they might evolve.
Conclusion The above limited analysis demonstrates that parties currently conducting transactions using Bitcoin or similar cryptocurrencies [41] are subject to significant risk and uncertainty as to their rights, remedies, and obligations under current statutes, regulations, and commercial law. Future legislation and case law development will likely provide more clarity on many issues.
Until this occurs, however, parties should exercise a high degree of caution when contemplating virtual currency transactions. Gox resulted from skimming by hackers over several years. How Does Bitcoin Work? What is Bitcoin mining? Y Press Release, Manhattan U. The term includes payment intangibles and software.
Gox KK, et al. May 2,ECF No.
