The Legality of Bitcoin
Bitcoin was designed as an electronic cryptocurrency traded on a decentralized network as a way to move and hold money.
One of the unique features of Bitcoin as a traded currency is that its encryption algorithms allow a holder to remain anonymous. Because of this, the electronic currency has been associated with a growing number of illegal transactions in the sale of arms and illegal drugs; think of the now-defunct Silk Road.
Prior to its Silk Road notoriety, Bitcoin was largely unknown until 2013 when, due to the high volume of bitcoin trades in China, its price began to spike, reaching $1000 for a single Bitcoin. There is wide-spread speculation that Chinese investors are using Bitcoin to evade the capital controls of the Chinese government.
Bitcoin was designed to be traded on a closed network of tightly controlled servers. One of the issues that has cropped-up with the cryptocurrency as it approaches its ten-year mark is whether the network should be expanded. With a network purposely limited to conducting only 7 transactions per second, there is a significant and growing backlog of transactions.
Publicity of this price spike fostered another interesting aspect of cryptocurrency: Bitcoin mining. Bitcoin mining is where a network of dedicated computers perform calculations designed to seek out and acquire the newly released Bitcoins. The activity has become organized into mining pools; the largest ones are in China.
Bitcoin mining pools are acquiring clout as well as Bitcoins. These mining pools, consistent with the software design of the cryptocurrency, get votes on software changes and other administrative decisions affecting the currency.
Estimates predict that all Bitcoins will be "mined" within the next 10-years, lessening the reward for conducting such energy and time-consuming activity until such reward reaches zero. When this happens, the costs of Bitcoin transactions will increase.
In recent years, companies that have attempted to manage a Bitcoin exchange have been burned. Mt. Gox, a Japanese Bitcoin exchange, was hacked in 2014 and lost the equivalent of $350 million in Bitcoins; it promptly filed for bankruptcy.
On the other hand, processing fees for Bitcoin transactions are relatively low; about 15 cents. Transfers of the currency across boarders is done without the typical banking delays [3-5 business days] and higher fees associated with wire transfers and credit card purchases.
The terrorist group ISIS has posted requests for its financial supporters to send Bitcoins to pro-ISIS websites. It is unlikely, however, that such a cash of Bitcoin would be converted to hard currency.
Unlike cash, Bitcoin does still leave a digital trace that can be unraveled given sufficient time and resources. The undoing of the Silk Road, for example, took a specialized FBI and U.S. Treasury joint task force 18-months. As a result, the FBI is currently holding one of the largest cashes of Bitcoin in the world; estimated to be worth over $28 million.
Despite the stigma of criminal activity associated with cryptocurrencies, retailers such as Amazon and eBay have started to accept Bitcoin payments. Locally, the Bronx Deli in Pontiac has a sign in their door pronouncing Bitcoin as an accepted as a medium of exchange.
In a recent decision coming out of Miami, a trial court judge ruled that Bitcoin had a long way to go before it could be considered the equivalent of money. The criminal case involved allegations of money laundering and was dismissed because the judge concluded Bitcoin was not money therefore there could be no money laundering.
Thus, while Bitcoin may have attributes as a medium of exchange, it is not as solid as a unit of account; folks don't always know what the value of a Bitcoin is due to its tendency for flux. This makes the currency less attractive.
Will Bitcoin be as ubiquitous as Facebook, or as functional and accepted as the U.S. Dollar? Only time will tell.
We here at the Law Blogger will continue to monitor its development, advising our readers along the way.
Post Script: A week after this post, Bitcoin plunged in value relative to the U.S. Dollar because an exchange in Hong Kong was hacked; here is the NYT article detailing same.