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School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies

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16 East 34th Street, 4th floor--------------------Stuart Basefsky

New York, NY 10016 -------------------------------Director, IWS News Bureau

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Congressional Research Service (CRS)

 

Bitcoin: Questions, Answers, and Analysis of Legal Issues

Craig K. Elwell, Specialist in Macroeconomic Policy

M. Maureen Murphy, Legislative Attorney

Michael V. Seitzinger, Legislative Attorney

January 28, 2015

http://www.fas.org/sgp/crs/misc/R43339.pdf

[full-text, 30 pages]

 

Summary

Bitcoin first appeared in January 2009, the creation of a computer programmer using the

pseudonym Satoshi Nakamoto. His invention is an open-source (its controlling computer code is

open to public view), peer-to-peer (transactions do not require a third-party intermediary such as

PayPal or Visa) digital currency (being electronic with no physical manifestation). The Bitcoin

system is private, with no traditional financial institutions involved in transactions. Unlike earlier

digital currencies that had some central controlling person or entity, the Bitcoin network is

completely decentralized, with all parts of transactions performed by the users of the system.

 

With a Bitcoin transaction there is no third-party intermediary. The buyer and seller interact

directly (peer to peer), but their identities are encrypted and no personal information is transferred

from one to the other. However, unlike a fully anonymous transaction, there is a transaction

record. A full transaction record of every Bitcoin and every Bitcoin user’s encrypted identity is

maintained on the public ledger. For this reason, Bitcoin transactions are thought to be

pseudonymous, not anonymous. Although the scale of Bitcoin use has increased substantially, it

still remains small in comparison to traditional electronic payments systems, such as credit cards,

and the use of dollars as a circulating currency.

 

Congress is interested in Bitcoin because of concerns about its use in illegal money transfers,

concerns about its effect on the ability of the Federal Reserve to meet its objectives (of stable

prices, maximum employment, and financial stability), and concerns about the protection of

consumers and investors who might use Bitcoin.

 

Bitcoin offers users the advantages of lower transaction costs, increased privacy, and long-term

protection of loss of purchasing power from inflation. However, it also has a number of

disadvantages that could hinder wider use. These include sizable volatility of the price of

Bitcoins, uncertain security from theft and fraud, and a long-term deflationary bias that

encourages the hoarding of Bitcoins.

 

In addition, Bitcoin raises a number of legal and regulatory concerns, including its potential for

facilitating money laundering, its treatment under federal securities law, and its status in the

regulation of foreign exchange trading.

 

Contents

Some Basic Questions ..................................................................................................................... 1

What Is Bitcoin? ....................................................................................................................... 1

How Does the Bitcoin System Work? ....................................................................................... 1

How Are Bitcoins Obtained? ..................................................................................................... 2

Are Bitcoin Transactions Anonymous? ..................................................................................... 3

What Is the Scale of Bitcoin Use? ............................................................................................. 3

Would Bitcoins Affect the Fed’s Conduct of Monetary Policy?................................................ 4

Arguments For and Against Wider Use of Bitcoin .......................................................................... 5

Why Would One Want to Use Bitcoins? .................................................................................... 5

Lower Transaction Costs for Electronic Economic Exchanges .......................................... 5

Increased Privacy ................................................................................................................ 6

No Erosion of Purchasing Power by Inflation ..................................................................... 6

What Factors Might Deter Widespread Bitcoin Use? ................................................................ 6

Not Legal Tender ................................................................................................................. 6

Does Not Enjoy the Dollar’s Network Externalities ........................................................... 7

Price Volatility Discourages Its Use as Medium of Exchange ............................................ 7

The System’s Long-Term Deflationary Bias Will Discourage Its Use as Currency ........... 7

Bitcoin’s Network Security Is Uncertain ............................................................................. 8

Legal and Regulatory Issues ............................................................................................................ 9

Legal Considerations Generally ................................................................................................ 9

Power of Congress under Article I of the U.S. Constitution ..................................................... 9

Recent Activity ........................................................................................................................ 10

Recent Legislative Activity: Congress .............................................................................. 10

Federal Regulatory Activity .............................................................................................. 11

State Regulatory Activity .................................................................................................. 13

Federal Reserve and European Central Bank Studies ....................................................... 15

Applicability of Selected Laws to Digital Currency ...................................................................... 15

Counterfeiting Criminal Statutes ............................................................................................. 15

The Stamp Payments Act of 1862, 18 U.S.C. Section 336 ...................................................... 16

The Electronic Fund Transfer Act, 15 U.S.C. Sections 1693 et seq. ....................................... 16

Federal Tax Law ...................................................................................................................... 17

Federal Anti-Money Laundering Laws .................................................................................... 18

Federal Election Campaign Act ............................................................................................... 20

Federal Trade Commission Act ............................................................................................... 20

Federal Securities Regulation .................................................................................................. 21

Investments Purchased with Bitcoins ................................................................................ 21

Investing in Bitcoins.......................................................................................................... 22

SEC Sanctions for Non-Registration of Bitcoin Venues ................................................... 23

Commodity Futures Trading Commission Regulation ............................................................ 24

International Legal Issues .............................................................................................................. 25

Concern About International Monetary Fund Authority ......................................................... 26

 

Contacts

Author Contact Information........................................................................................................... 27

 

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