1. Feds Acknowledge Bitcoin Is Legal – That Probably Means More Regulation On The Way


    “Significantly, the criminal complaint itself notes that ‘Bitcoins are not illegal in and of themselves and have known legitimate uses.’” (Perkins Coie

    Last week, when the FBI shut down the global black market Silk Road and arrested its alleged founder Ross Ulbricht, they seized $3.6 million worth of Silk Road’s bitcoin assets. The FBI wasn’t looking to shut down the use of bitcoins, however. On the contrary: in their complaint against Ulbricht, the feds acknowledged the legitimacy of bitcoins as an alternative currency.

    It’s the latest signal that the government intends to allow the use of virtual currencies provided that the industry can legitimize itself by complying with existing and future regulations on money transfers, money laundering, illegal activity, and other financial and criminal laws.

    For your reference, here’s a look of recent commentary and analysis from attorneys writing on JD Supra on the broad topic of federal and state regulation of virtual currencies:

    The Future Of Virtual Currencies: Competition And Regulation (Michael Volkov):

    “Virtual currencies have to be regulated – there is no doubt. Otherwise, criminals and other unsavory elements can rely on virtual currencies to facilitate criminal activities, store the proceeds of crime and evade all anti-money laundering laws. The virtual currency industry knows that they only way to survive is to negotiate appropriate regulations. The United States is already taking clear action to address the risks they pose. The U.S. Financial Crimes Enforcement Network published guidelines on the use of virtual currencies, classifying anyone dealing with them as ‘money transmitters,’ which requires the entity to obtain an official license and maintain appropriate capital reserves.” Read on»

    Government Brings Important Case Against Illegal Marketplace “Silk Road;” Government Acknowledges Lawful Uses Of Bitcoin (Perkins Coie):

    “Although Ulbricht’s arrest only adds to the growing number of enforcement actions involving virtual currency-based businesses, including those actions against Mt. Gox, Liberty Reserve and Trendon Shavers, it is clear that the government’s actions do not target virtual currency itself. Rather these are prosecutions of criminals that happen to have used virtual currencies to accomplish their unlawful ends.” Read on»

    GAO Issues Report On Tax Compliance Issues Regarding Virtual Economies and Currencies (Davis Wright Tremaine LLP):

    “The GAO guide recognizes that virtual currencies pose various tax compliance risks, but acknowledges that the actual degree of noncompliance is not known and that there are no tax rules specific to virtual currencies. Specifically calling out Second Life Linden dollars and Bitcoins, the GAO enumerates the varied uses of virtual currencies within and outside their virtual worlds and explains how use of virtual currency may give rise to taxable income.” Read on»

    Federal Election Commission Seeks Public Comment On The Use Of Bitcoins As Political Contributions (Perkins Coie):

    “A political action committee has sought an advisory opinion from the Federal Election Commission (FEC) as to whether bitcoins can be accepted as political contributions and, if so, how bitcoins should be characterized and valued by recipients. […] The FEC’s consideration of the request is significant because it will mark only the second time that a U.S. government agency has publicly considered the nature of bitcoins.” Read on»

    AML Enforcement And Virtual Currencies (Michael Volkov):

    “It is difficult for regulators and law enforcement to keep up with creative new ways in which criminals choose to store and trade money. This is especially true in the Internet-age where anonymity and ease of communications and transactions are available. Regulators are now wrestling with the intractable issue of virtual currencies. Everyone has been reading about Bitcoin as the new viper of virtual currency. But the Bitcoin phenomena is nothing really new; Amazon, Facebook, and Ebay have created their own virtual currencies, and more are likely to follow.” Read on»

    Virtual Currency: Government Scrutiny Continues To Grow (Perkins Coie):

    “Riding the coattails of an August 6, 2013 federal court ruling that alleged Ponzi-schemer Trendon Shavers’ Bitcoin-based investment scheme constituted an investment contract, and therefore a ‘security’ under the federal securities laws, various federal and state lawmakers have aligned their attention to issues affecting the virtual currency market. Indeed, it now appears that Congress is getting involved.” (Perkins Coie

    Senate Committee Expands Review Of Virtual Currency Policies (BuckleySandler LLP):

    “Citing a federal court’s recent holding that virtual currency Bitcoin is money or currency for the purpose of determining jurisdiction under the Securities Act of 1933, as well as other recent developments related to virtual currencies, the lawmakers seek information about (i) the agencies’ existing policies on virtual currencies, (ii) coordination among federal or state entities related to the treatment of virtual currencies, and (iii) “any plans” “strategies” or “ongoing initiatives” regarding virtual currencies.” Read on»

    Federal Court Finds That Issuer Shares Purchased with Bitcoin Are Securities (Morrison & Foerster LLP):

    “A federal district court has ruled that investors who pay for shares using Bitcoin have effectively invested money, at least for purposes of federal securities laws. The decision has implications for funds that seek to include Bitcoin among their investments or settle purchase orders for fund shares in Bitcoin.” Read on»

    New York Considering Virtual Currency Regulations; Issues Subpoenas To Bitcoin-Associated Companies (BuckleySandler LLP):

    “On August 12, New York Department of Financial Services (NY DFS) Superintendent Benjamin Lawsky issued a notice of inquiry about the ‘appropriate regulatory guidelines that [the NY DFS] should put in place for virtual currencies.’ The NY DFS notes the emergence of Bitcoin and other virtual currency as the catalyst for its inquiry and states that it already has ‘conducted significant preliminary work.’ That preliminary work includes 22 subpoenas the NY DFS reportedly issued last week to companies associated with Bitcoin.” Read on»

    State, Federal Authorities Increase Scrutiny Of Virtual Currencies, Emerging Payment Providers (BuckleySandler LLP):

    “This recent scrutiny of virtual currencies follows regulatory and enforcement actions taken earlier this year, including guidance issued by FinCEN and federal criminal charges against a digital currency issuer and money transfer system.” Read on»

    Federal Court Finds That Issuer Shares Purchased with Bitcoin Are Securities (Morrison & Foerster LLP):

    “A federal district court has ruled that investors who pay for shares using Bitcoin have effectively invested money, at least for purposes of federal securities laws. The decision has implications for funds that seek to include Bitcoin among their investments or settle purchase orders for fund shares in Bitcoin.” Read on»

    Goodbye Switzerland. Hello Bitcoins. (Morvillo Abramowitz Grand Iason & Anello P.C.):

    “… it is not surprising that the potential for bitcoins and other virtual currencies to replace offshore accounts as ‘[t]omorrow’s tax havens’ has been the subject of scholarly analysis and commentary. It remains to be seen how the IRS will attack the use of bitcoins and other virtual currencies to evade income tax obligations.” Read on»

    Bitcoin Scheme Worthy of Charles Ponzi (Pillsbury):

    On July 23, 2013 the Securities and Exchange Commission announced it was bringing charges in a Texas federal court against Trendon Shavers for allegedly using a Bitcoin Ponzi scheme to defraud investors between September 2011 and September 2012. […] The SEC is accusing Mr. Shavers, using the online handle ‘pirateat40,’ of advertising the Bitcoin Savings and Trust and accepting 700,467 Bitcoins, worth approximately $4,592,806, as investments while promising a 7% weekly return.” Read on»

    Court Maintains Bitcoin-Related Investment Scheme Is A Security Under The Federal Securities Laws (Perkins Coie):

    “Despite the apparent inconsistency with FinCEN’s Guidance, it is important not to make too much of the court’s factual finding that Bitcoin constitutes ‘currency or a form of money.’ The court did not invoke the [Bank Secrecy Act (BSA)] definition of currency, and appears instead to be applying the term ‘currency’ and ‘money’ broadly and in a different context. Unless and until a court rules on the specific question of whether Bitcoin constitutes ‘currency’ as defined under the BSA, this decision has limited value.” Read on»

    Bitcoin As A Medium Of Exchange (Pepper Hamilton LLP):

    “It seems highly unlikely that bitcoin would ever develop as a mass retail substitute to the existing (evolving) third-party payment systems. Nonetheless, in marketplaces experiencing a loss of confidence in the local currency or for reasons of convenience, bitcoin may emerge as a viable, ongoing niche player to provide medium of exchange functions.” Read on»

    Liberty Reserve indictment rocks digital currency world (Snell & Wilmer L.L.P.):

    “The indictment sealed on 20 May by a Grand Jury in the Southern District of New York, charging defendants operating international online digital currency and money transfer service Liberty Reserve with conspiracy to commit money laundering and operate an unlicensed money transmitting business, has raised questions about the future of digital currencies like Bitcoin.” Read on»

    Bitcoin Under SEC Scrutiny: First Civil Prosecution Brought Against Alleged Virtual Currency Ponzi Scheme Company (Perkins Coie):

    “Although the decentralized nature of Bitcoin initially seemed to be one of its greatest sources of allure, it now also constitutes one of its greatest risks. This case makes clear that, although Bitcoin is not necessarily described in established securities statutes, the SEC and its regulatory counterparts have every intention of closely scrutinizing transactions involving virtual currencies to adequately monitor and protect the investing public.” Read on»

    Bitcoin Receives Cease and Desist Order Evidencing Increased Regulatory Scrutiny of Virtual Currency (Morrison & Foerster LLP):

    “On May 30, 2013, the California Department of Financial Institutions (‘CADFI’) issued a cease and desist letter to Bitcoin Foundation, a not-for-profit organization established to standardize, protect, and promote the use and adoption of Bitcoin. CADFI stated in its letter that Bitcoin Foundation ‘may be engaged in the business of money transmission without having obtained the license or proper authorization required by’ California’s Money Transmission Act. CADFI’s issuance of the letter, the Financial Crimes Enforcement Network’s recent guidance regarding virtual currencies, and the subsequent asset seizures of prominent Bitcoin exchanges all reflect increased scrutiny of the use of virtual currencies.” Read on»

    The Rise Of Bitcoin (Pepper Hamilton LLP):

    Virtual currencies can “constitute a challenge for public authorities, as these schemes can be used by criminals, fraudsters and money launderers to perform their illegal activities.” On a different note, virtual currency may have a reputational impact – “they are about money and about payments and therefore, for the general public, they clearly fall under the responsibility of central banks, even though this might not be the case from a statutory and legal point-of-view.” Read on»

    Online Currency Exchange Alleged to Have Laundered Billions for Criminal Enterprises Around the World (Ropes & Gray LLP):

    “The Liberty Reserve indictment comes on the heels of several highly publicized money laundering and fraud indictments brought against prominent financial institutions in recent years. Such investigations are indicative of increasing global enforcement of existing anti-money laundering laws against high profile targets and that the DOJ is actively engaged in these investigations.” Read on»

    What Are the Feds Looking At? Bitcoin Industry, Stay Awake (Jeff Ifrah):

    “Although there is no immediate reason to believe that a properly registered bitcoin exchange violates state or federal law, those companies operating virtual currency or bitcoin exchanges should be aware that law enforcement is following this trend and capable of quickly reacting to perceived violations of the law.” Read on»


    Read more on Virtual Currencies at JD Supra Law News»

    Photo credit: Zach Copley/The Guardian


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