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Our faculty are renowned for their innovative and dynamic teaching, and they are widely published in leading law reviews, books, and textbooks. Get involved today, and stay connected for life. Virtual currency has become increasingly prevalent as a method of payment, and of the numerous virtual currencies, Bitcoin has gained the greatest global popularity.
Governmental entities have made uncoordinated efforts to provide guidance on the treatment of bitcoins, and the courts have been largely silent on this classification issue.
As of Octoberno bankruptcy court has affirmatively ruled on how to treat bitcoins under the Code. A uniform classification system must be implemented to prevent bankruptcy courts from reverse-engineering classifications based upon the particular facts of any given case. In response to buy bitcoincryptocurrencies 81 13 illegal activities facilitated by bitcoin buy bitcoincryptocurrencies 81 13, states are beginning to propose Bitcoin regulations.
These Bitcoin regulations generally require individuals and businesses that use bitcoins in business processes to obtain licenses. However, the regulations make an exception for individuals and businesses that only use bitcoins to buy and sell goods and services; such use does not require a license. This Comment proposes that licensed bitcoins should have the classification of currency under the Code, while non-licensed bitcoins should have the less-protected classification of commodity.
Under a license-based classification system, bitcoins would only receive heightened protections afforded to currencies under the Code if a debtor has satisfied the regulatory requirements for obtaining a license. The American economy has been, and will always be, in a continuous state of evolution.
This natural progression includes where we draw the line between commodities and currencies, and what we will allow to constitute currency. Then, in the s, President Richard Nixon abandoned any buy bitcoincryptocurrencies 81 13 of the gold standard when he declared that the United States would no longer exchange dollars and gold at a fixed value.
These developments were highly controversial but were necessary due to societal and economic changes. Today, technology allows for individuals to exchange currency buy bitcoincryptocurrencies 81 13 and more efficiently with virtual currencies like Bitcoin.
The bankruptcy system must address the virtual currency phenomenon that Bitcoin presents to keep up with present societal changes. The birth of Bitcoin has provoked many questions and controversies.
Among these issues is whether to classify bitcoins as currencies or commodities. News Release IR Mar. Risks to Consumers Posed by Virtual Currencieshttp: Meanwhile, courts have largely been silent on the issue. The few courts that have had to classify Bitcoin have made highly fact-specific determinations without any broader policy considerations. The court, however, arguably had a prevailing interest in categorizing bitcoin as money in order to take a stand against bitcoin operators and make known that they cannot blatantly skirt regulatory safeguards.
A consistent approach is necessary to prevent further confusion. An affirmative classification system would prevent patchwork solutions and would give debtors, creditors, and the court system guidance on how to treat bitcoin in bankruptcy. Doherty, supra note 4, at 38—39 stating that China, Japan, and Finland have each officially classified bitcoin as a commodity. A practical solution to the categorization of Bitcoin in the bankruptcy context is to create a license-based classification system.
Under such a system, a license would be required if bitcoins are intertwined with business processes. On the other hand, a license would not be required if bitcoins are merely used to buy and sell goods or services.
CommodityInvestopediahttp: Common commodities include gold, oil, coal, and precious stones like diamonds. For example, if a business specializes in exchanging bitcoins for U. The bitcoins would then receive all of the protections afforded to currencies under the Code. However, if an individual debtor only uses bitcoins to buy goods from online retailers, then those bitcoins would not need to be licensed. While the effects of this classification system would be extensive, this Comment will focus on the effects of this suggested treatment of bitcoins in the context of bankruptcy.
First, this Comment will explore what bitcoins are and the present status of the currency versus commodity debate. Second, this Comment will examine the current legal treatment of bitcoins and Bitcoin-specific issues in bankruptcy. Bitcoin is decentralized because it is not monitored, controlled, or administered by any legal or buy bitcoincryptocurrencies 81 13 entity. Although each bitcoin has no inherent value, each is unique and held by a single entity at a time.
Bureau, supra note 5. However, unlike a banking password, if a user were to lose his or her private key, those bitcoins would be forever inaccessible because there is no way to track or recover a lost key. When mining, users provide computing power to process bitcoin transactions. Mining consists of running a continuous series of computations that add transactions to the blockchain.
In addition to mining, the other main categories of participants in the Bitcoin industry are Bitcoin exchanges and merchants who accept bitcoins as payment. Buy bitcoincryptocurrencies 81 13, once mined, can be exchanged for government-issued currencies on online exchanges, used to purchase goods and services from merchants who accept bitcoins as payment, or transferred from one user to another.
Also, numerous other Bitcoin-centric entrepreneurial endeavors have emerged, including an investment company that manages a bitcoin mutual fund and game developers who use bitcoins in online social games. This aspect of Bitcoin, however, also attracts those who desire buy bitcoincryptocurrencies 81 13 for nefarious purposes. Criminals have used bitcoins to transact illegal goods and services globally.
Bitcoin is susceptible to drastic price fluctuations because no governmental entity issues or insures it, and its value is dependent on public trust and perception. Inthe price of bitcoins saw a sixty-one percent buy bitcoincryptocurrencies 81 13 in a single day, and inthere was a single-day price drop of eighty percent.
These websites are just as vulnerable to hackers as any other website. For example, in FebruaryMt. Bureau, supra note 5; Doherty, supra note 4, at 38— See Beth Winegarner, Mt.
Unlike when funds are moved buy bitcoincryptocurrencies 81 13 a secured wire transfer, which passes through the Federal Buy bitcoincryptocurrencies 81 13 Bank, bitcoins buy bitcoincryptocurrencies 81 13 from peer-to-peer34 See U. None of these bitcoins have yet been recovered by Mt.
Gox or its customers. Despite the volatility and instability of bitcoin, and the fact that it does not have legal tender status in any jurisdiction, 37 Consumer Fin. Integrating Bitcoin as a payment option for customers is a complex endeavor because many of the operational and legal requirements surrounding Bitcoin, including tax-accounting and regulatory compliance, are in a state of flux.
Middlebrook, Bitcoin for Merchants: Consumers also have significant access to bitcoins for use in the non-virtual marketplace through public places offering bitcoin ATMs.
These ATMs allow users to exchange cash for bitcoins at public kiosks. Because the kiosks are more buy bitcoincryptocurrencies 81 13 to public computers than ATMs, these kiosks lack the typical safeguards of a classic ATM. The Code holds a broad range of assets susceptible to inclusion in the bankruptcy estate. Trouble Ahead for Investors and Bankruptcy Professionals? News Release, supra note 5 classifying virtual currency as property for federal tax purposes.
But see Butner v. United States, U. Thus, bankruptcy courts need to decide what to do with bitcoins. If bitcoins were classified as currency, bitcoin transactions would receive greater protections, including certain immunities from both the automatic stay buy bitcoincryptocurrencies 81 13 being deemed a constructive fraudulent transfer.
On the other hand, if bitcoins buy bitcoincryptocurrencies 81 13 classified as a commodity, the Code would not automatically afford such protections, 50 See Doherty, supra note 4, at 38 citing Lightfoot v. The analysis below provides an overview of the currency or commodity debate. See generally About InvestopediaInvestopediahttp: Like currency, bitcoin is accepted by major retailers as payment, is circulated through the international economy, and can be exchanged for U.
Furthermore, bitcoins have no intrinsic value, which has raised skepticism from esteemed investors such as Warren Buffet. Marc AndreessenForbes Mar. However, government-issued paper currency arguably has no intrinsic value either. Although each bitcoin mined is unique, it buy bitcoincryptocurrencies 81 13 a uniform value, and traders do not favor one bitcoin over another.
Thus, like a commodity, bitcoins are generally interchangeable and uniform across producers. There is a finite amount because developers plan to only produce twenty-one million bitcoins, which will be buy bitcoincryptocurrencies 81 13 in smaller and smaller quantities until This limitation provides great incentive for miners to promptly invest substantial capital in their buy bitcoincryptocurrencies 81 13 so they have the computing power necessary to secure the finite number of bitcoins and beat out other rigs with lesser computing power.
Adding to buy bitcoincryptocurrencies 81 13 controversy of how to treat bitcoins, different legal entities have classified bitcoins differently. For example, after a Texas district court tried to classify bitcoins inthe Texas Department of Banking issued contradictory guidance. Early attempts to classify bitcoins focused more on how Bitcoin users and bitcoin transactions should be classified, rather than bitcoins themselves.
In the bankruptcy context, debtors and creditors have struggled to determine how to classify bitcoins in contractual arrangements. In return, the miner contracted to repay the loan with the first 7, bitcoins produced, secured by an interest in the mining equipment. The bitcoin miner was unable to pay back the ORRI and filed for bankruptcy under chapter In the bankruptcy petition, the debtor buy bitcoincryptocurrencies 81 13 that the financial return for mining was trending downwards so as to urge the court to reject its ORRI contract with the creditor, freeing CLI Holdings to sell its mining rigs unencumbered to generate funds to pay off buy bitcoincryptocurrencies 81 13.
However, the court upheld the contract and treated bitcoins as any commodity subject to an ORRI. The parties in CLI Holdings ultimately settled their dispute outside the courtroom. Doherty, supra note 4, at In Shaversthe SEC sought jurisdiction to punish the perpetrator of a bitcoin-for-bitcoin Ponzi scheme.
Once the court buy bitcoincryptocurrencies 81 13 bitcoins as currency, the bitcoin investments could be considered securities under federal securities laws, and thus, the court concluded that bitcoins were subject to SEC regulation, and Shavers was subject to SEC penalties.
The fact that bitcoins are not universally accepted did not weigh heavily on the decision.