Indeed, last week Democratic Senator from West Virginia, Joe Manchin III wrote a letter addressed to the heads of the Federal Reserve (Janet Yellen), the Treasury Department (Jacob Lew), the Office of the Comptroller of the Currency (Thomas Curry), the Federal Deposit Insurance Corporation (Martin Gruenberg), the Commodity Futures Trading Commission (Mark Wetjen), and the Securities and Exchange Commission (Mary Jo White) calling on regulators to cripple Bitcoin before “Americans will be left holding the bag on a valueless currency”. Mr. Manchin urged regulators to “take appropriate action to limit the abilities of this highly unstable currency. I urge the regulators to work together, act quickly, and prohibit this dangerous currency from harming hard-working Americans.”
Bitcoin is already banned totally or in part in Russia, China, Thailand, Indonesia, Vietnam and South Korea. The initial pronouncements from U.S. regulators regarding Bitcoin appeared benign and actually encouraging. At Senate hearings last November the Department of Justice said that Bitcoin could be “legal means of exchange” and Chairman of the Federal Reserve, Ben Bernanke noted that Bitcoin “holds long term promise.”
These statements don’t amount to legitimizing Bitcoin or giving it a pass, they mean Bitcoin can be controlled, co-opted, taxed and regulated. Bitcoiners have the misguided belief that Bitcoin is impervious to government control because it is “decentralized” and “peer to peer”. These Bitcoin prayer words give Bitcoiners a false sense of the crypto currency’s invincibility. Bitcoin regulation is coming.
Bitcoin is traded on exchanges, especially ones located in the United States ( e.g. Second Market?);
the bulk of Bitcoin changes hands from the large private individual holdings (the few original early Bitcoin adopters who own half the existing Bitcoin) to institutional investors and to the government through confiscation:
taxation and regulation of Bitcoin can easily be imposed.
Paradoxically, more regulation will also probably mean that Bitcoin will be subject to greater manipulation.
Which U.S. Agency(ies) Will Regulate Bitcoin?
Bitcoin Regulation by The Federal Reserve?
New Fed Chair Janet Yellen told Senator Manchin last week during her Senate testimony “I think it’s important to understand that this is a payment innovation that’s taking place entirely outside the banking industry. The Federal Reserve simply does not have the authority to supervise or regulate Bitcoin in any way.”
If Bitcoin survives and publically trading Bitcoin ETF’s start trading on U.S. exchanges, Bitcoin might eventually fall under the purview of the Fed. For now, however, the Fed will have to content itself with printing money in a vain attempt to stimulate the economy (by creating inflation) and create jobs under its dual mandate.
Bitcoin Regulation by The U.S. Treasury Department/ The United States Department of Justice?
These two departments do not take kindly to anything that might undermine or appear to undermine the hegemony of the U.S dollar. The Department of Justice is also concerned about Bitcoin’s “ability to facilitate the global movement of funds by a wide array of illicit actors and has established the Virtual Currency Emerging Threats Group (VCET). The supremacy of the dollar is what allows the United States to fund a massive welfare/warfare state. Threats to its dominance will be dealt with. A few examples:
The Treasury Department and the United States Department of Justice worked in conjunction to shut down E-gold in 2008. At the time of its closing E-gold, a service, that allowed users to deposit money into their accounts that would then be denominated into grams of gold from which they could make digital transfers to other E-gold account holders, had approximately five million users. Bitcoin is estimated to have under one million users.
The Treasury Department and DOJ used the money transmitter and money laundering laws to bring down E-gold. While the gold held by E-gold was confiscated, E-gold account holders were able to make claims to have the value of their E-gold holdings returned to them if they could show proof of the funds that purchased the gold.
Liberty Dollars were a private currency backed by precious metals in circulation from 1998 to 2009. Liberty dollars were issued in physical form and in certificates backed by gold or silver. The U.S. Mint issued a warning in 2006 that Liberty Dollars were not legal tender. A year later Federal agents raided the Liberty Dollar offices in Evansville Indiana and seized all the precious metals and froze Liberty Dollar’s bank account.
Liberty Dollar founder Bernard Von NotHaus was charged in 2009, not only with counterfeiting, but with domestic terrorism. In 2011, Mr. von NotHause was found guilty of making, possessing and selling his own coins.
The United States is seeking forfeiture of the approximately $7 million in Liberty Dollars seized.
Bitcoin Mint- Casascius Coins
Mike Caldwell of Utah produced physical Bitcoins that he called Casascius Coins. These coins were a way of storing Bitcoin addresses and private keys underneath a hologram embedded in the coins. Mr. Caldwell produced nearly 100,000 of these coins. In November of 2013, Mr. Caldwell received a letter from the Treasury Department’s Financial Crimes Enforcement Network (FINCEN) indicating that the Casacius Coin minting constituted money transmitting for which Mr. Caldwell did not have a license to engage. Upon receipt of the letter from FINCEN, Mr. Caldwell ceased production of the Casascius Coins. Rather than go through the arduous, expensive and uncertain process to comply with the money transmitting regulations, Mr. Caldwell decided to alter the tenor of the physical Bitcoins he produces. He reopened his business opting to mint unfunded coins only- ones with out the addresses and private keys.
Bitcoin Regulation by The Commodity Futures Trading Commission?
If Bitcoin is deemed to be a commodity, the Commodity Futures Trading Commission (CFTC) would regulate its trading. Former CFTC commissioner Bart Chilton has argued that that if Bitcoin is a commodity used as a derivative held for use in the future, then the CFTC could regulate it. Commissioner Chilton noted that the facts and circumstances would impact the determination of whether Bitcoin is a commodity.
Bitcoin Regulation by The Securities and Exchange Commission?
If Bitcoin is found to be a security the Securities Exchange Commission (SEC) would claim regulatory jurisdiction.
SEC Chair Mary Jo White wrote in a letter to the Committee on Homeland Security and Governmental Affairs dated August 30th, 2013:
“Whether a virtual currency is a security under the federal securities laws, and therefore subject to our regulation, is dependent on the particular facts and circumstances at issue. Regardless of whether an underlying virtual currency is itself a security, interests issued by entities owning virtual currencies or providing returns based on assets such as virtual currencies likely would be securities and therefore subject to our regulation.”
What is a Security?
Section 3(a) 10 of the Securities Exchange Act of 1934 provides a definition:
The term “security” means any note, stock, treasury stock, security future, security-based swap, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a “security”; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.”
It’s clear that a Bitcoin ETF would be subject to SEC regulation, but what about the mere existence of and trading of Bitcoin among private parties? Commentators have speculated that Bitcoins themselves may be deemed to be securities by the SEC. The issuance of anonymously created crypto currencies that don’t appear to fit neatly within the definition of a security seems to be a clever way of avoiding SEC scrutiny.
“When I use a word it means just what I choose it to mean – neither more nor less.” Humpty Dumpty in Alice’s Adventures in Wonderland
If the SEC wants to regulate Bitcoin, the definition of security can be amended to add “any unregistered private currency” Alternatively, the SEC could use the language in the definition of security “any instrument commonly known as a ‘security'” to determine that Bitcoins are securities by arguing that Bitcoins are commonly known as securities. Far fetched? We have seen when government wants a certain result they are amenable to using semantics to achieve the desired results.
A recent Federal case has determined that Bitcoin is a form of currency and can be subject to the securities laws.
If Bitcoins are deemed to be securities under the SEC definition the consequences could be dramatic. Securities, under the Securities Exchange Act of 1933, are required to be registered. The selling of unregistered securities with out a recognized exemption is subject to SEC enforcement action.
Registering securities requires the filing of a registration statement that includes, among other things, the name of the issuer, list of controlling security holders and risk factors associated with the purchase of such securities. No such Bitcoin filing has been made with the SEC. Bitcoin was invented by an anonymous person named Satoshi Nakamoto who authored a white paper on Bitcoin in November 2008. This paper explains how the Bitcoin protocol works but neither contains the essential investor information (the identity of the issuer, controlling security holders or risk factors) required by the SEC nor has been filed with the SEC.
If the SEC takes the position that Bitcoins are unregistered securities (there is no indication that they have formulated such a position), any one who ever sold or sells “unregistered” Bitcoin could be deemed to be in violation of the securities laws. The SEC could pursue known sales of Bitcoin as violations of the U.S. securities laws, or the SEC could create special rules that deal specifically with the regulation of crypto currencies.
While not labelling Bitcoin or any other crypto currency “Ponzi schemes”, the SEC has issued a warning on the use of crypto currencies in Ponzi schemes.
Bitcoin and the IRS
Will Bitcoin be taxed as a currency, a commodity or a security?
The IRS has yet to issue guidance on the taxation of Bitcoin proceeds. It is unclear how the IRS will chose to tax gains on Bitcoin. Rather than characterizing Bitcoin as a currency, commodity or security, they may perhaps create special taxation treatment for crypto currencies.
The IRS could ask Overstock and other online retailers that “accept” Bitcoin for a list of customers who made purchases with Bitcoin so that they can then contact those individuals to find out what their cost bases were in the Bitcoins they used to buy merchandise from online retailers. The Bitcoiners would owe tax on the gain between the price they bought the Bitcoins they used to buy merchandise and the price they sold their Bitcoins to make purchases.
What Will Kill Bitcoin First – Regulation or the Free Market?
Choose your Delusion
Bitcoiners like to cite the decentralized nature of Bitcoin as a feature that will keep it safe from government regulation. Government, however, can regulate the entry and exit points of Bitcoin exchanges, tax, seize, disrupt, break the Bitcoin encryption or even ban Bitcoin with relative ease – that is if the free market doesn’t kill if off first.
Today’s Innovation is Tomorrow’s Pong, Pointcast or Netscape
Bitcoiners like to refer to Bitcoin as Gold 2.0. Bitcoin detracters call it gold without the gold. Bitcoin is like digital alchemy – trying to create something from nothing. Bitcoin could also be viewed as gold on acid doing an imaginary rope a dope with no punch.
If the government allows (with regulation) crypto currencies to exist (there are over 100 crypto currencies in existence with a total market cap including Bitcoin of $11 billion, with Bitcoin constituting about $8 billion) the market will create competing DYI currencies or “bit programmed currencies” as USA Watchdog’s Greg Hunter calls them. Many of these currencies will be superior to Bitcoin (especially those backed by valuable commodities) or have the backing of large companies (Apple?) or have political support (bank issued crypto currencies) and may act to marginalize Bitcoin.
The Impact of Regulation on Bitcoin
It’s not all bad. If Bitcoin survives its own inherent defects and the coming competitive and regulatory assaults, we may soon see Bitcoin Subsidies, Bitcoin Tax Credits and even Bitcoin Bailouts.
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