Friday, July 29, 2016

Does the Future of Bitcoin Lie with Its Classification

By  LXBN | July 29, 2016
Bitcoin is known for being volatile and hard to predict. Unsurprisingly, its legal definition is no different.
Earlier this week, a judge in Florida threw out state money-laundering charges against a man who had been accused of illegally selling upwards of $1,500 in bitcoins to undercover detectives. According to the judge, the man couldn’t be guilty as bitcoin doesn’t qualify as money. Strange as this may seem for a “virtual currency,” it’s actually pretty par for the course on how bitcoin is seen around the world. Or at least, the debate is.

The Florida case started back in 2013, when a man using the name “Michaelhack” allegedly sold bitcoin to an undercover detective. The Miami-Dade State Attorney’s office says they’re still looking into whether they should appeal the decision, but Judge Teresa Mary Pooler seems very clear on the merits of their case. She held that the court was “unwilling to punish a man for selling his property to another, when his actions fall under a statute that is so vaguely written.”
“Bitcoin may have some attributes in common with what we commonly refer to as money, but differ in many important aspects,” Pooler said in the ruling. “They are certainly not tangible wealth and cannot be hidden under a mattress like cash and gold bars.”
Photo Credit: btckeychain cc
Photo Credit: btckeychain cc
What’s more she’s not alone. In many places around the world, virtual currency falls outside of laws and, thus, outside of the definition of legal tender. South African legal tender can only be issued by the South African Reserve Bank in bank notes and coins, and their definition of legal tender does not include virtual currency. Germany and Sweden both view virtual currencies as commodities.
But confusion abounds, even in countries where there’s an effort to get on board with cryptocurrencies. The United Kingdom has long debated the merits of virtual currency, and the Bank of England has possibly hinted at creating its own. And as Madiha Zuberi notes on Copyright, Content, and Platforms, there’s a bit of a patchwork around how bitcoin is defined by governmental entities in the U.S. as well—in fact, in the bankruptcy case Zuberi reports on, both parties were able to cite U.S. regulator precedent to support their treatment of bitcoin:
The SEC treats Bitcoin as a security or money. In the Bitcoin-Ponzi prosecution by the SEC against Trendon Shavers and his company Bitcoin Savings and Trust (BSTC), the SEC treated Bitcoin as a security. In its decision, the U.S. District Court sided with the SEC, finding “no reason to conclude…that Bitcoin is not money.”
FinCEN treats Bitcoin as currency. The Financial Crimes Enforcement Network has also clarified its definition of the digital currency, considering it “a medium of exchange that operates like a currency in some environments.” FinCEN regulates money services businesses, which are required to obtain money transmitter licenses—an expensive process that few startups can afford and few Bitcoin service providers have been able to complete.
The IRS treats Bitcoin as property. The IRS recently issued guidance stating that it will treat virtual currencies, such as Bitcoin, as property for federal tax purposes. As a result, general tax principles that apply to property transactions apply to transactions using virtual currency.
The CFTC treats Bitcoin as a commodity. In a press release, the CFTC declared that “[t]he definition of a ‘commodity’ is broad, [and] Bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities.”
Of course, it’s been two years since the IRS, whose definition was referenced by Judge Pooler, released their position on the tax treatment of bitcoin and other virtual currencies; during that time, more questions have popped up about what users should expect. But additionally during that time, two cases have sought to deal with the definition: This Florida case, and a California court earlier this year that reached a similar conclusion. So judicial sensibility seems at least a bit consistent, even if it’s at odds with the laws on hand.
“Right now, we’re left with a real split in Florida,” said attorney Marco Santori to Coindesk. “We’ve got a regulator that says, you need a license to do direct purchase and sale of bitcoin in Florida. But we’ve got a judicial system that refuses to convict anybody who does that.”
Which is exactly why Keith MillerJ. Dax Hansen and Laurie Rosini of the Virtual Currency Report think that the ultimate resolution of the Florida case will be limited to Floridian laws which don’t address bitcoin’s place yet, not a sweeping national policy change around digital currency (even if it should be):
Despite much hype over the ruling by a Florida court that bitcoin is not money, the likeliest outcome of Monday’s decision will be legislative amendments to Florida’s money transmitter laws, rather than the sweeping impact envisioned by some.
…Puzzling, however, is the court’s finding that Espinoza did not engage in the sale of a “payment instrument.”  Although Florida’s money transmitter law does not define “money,” many state laws define “money” as a medium of exchange issued by a government, leaving little doubt that Bitcoin is not “money” under state law.  Decentralized digital currencies, such as Bitcoin, typically fall within the definition of “monetary value,” which is almost universally defined as “medium of exchange, whether or not redeemable in currency.”[2]  Although “monetary value” is listed within Florida’s definition of “payment instrument,” [3] the court swept past that analysis, focusing instead on determining whether Bitcoin is “money.”  Rather than considering that Bitcoin could be monetary value, the judge concluded “‘[v]irtual currency’ is not currently included in the statutory definition of a ‘payment instrument;’ nor does Bitcoin fit into one of the defined categories listed.”
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