legal and regulatory issues with bitcoin

1. Bitcoin
Regulatory Considerations
2014 Ohio State Entrepreneurial Business Law Journal
Symposium - February 21, 2014
Jim Gatto
Pillsbury Winthrop Shaw Pittman LLP
Leader – Social Media & Games Team
Leader – Open Source Team
Tel: 703.770.7972
Email: james.gatto@pillsburylaw.com

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3. What is Bitcoin?
 Decentralized, virtual currency protocol
 Pseudononymous
 Peer-to-peer
 Generally irreversible
 Not legal tender in US (but not necessarily illegal)
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4. How Does Bitcoin Work?
Acquisition
Mine
Purchase via exchange
Accept for goods/services
Storage
Wallet
Web-based
Transactions
Public ledger of transactions
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5. Categories of Entities
 Users - a person that obtains virtual currency to purchase
goods or services (on their own behalf)
 Exchangers - a person engaged as a business in the exchange
of virtual currency for real currency, funds, or other virtual
currency
 Administrators - a person engaged as a business in issuing
(putting into circulation) a virtual currency, and who has the
authority to redeem (to withdraw from circulation) such virtual
currency
 Retailers/others
 Banks/Financial Institutions/Payment Processors?
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6. Enforcement Actions
 Mt. Gox
 Silk Road
 BitInstant
 Miami – money laundering case
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7. Does Bitcoin Need Regulation?
Guns don’t kill people…people do!
Bitcoins don’t buy drugs … people do!
Regulation not so much about use…. but
 consumer protection
 anti-money laundering
 anti-tax evasion
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8. Existing Regulatory Framework
Federal
• Federal Anti-money Laundering/Bank Secrecy Act
• MSB
• record keeping/transaction reporting
• SARs
• KYC
• Securities Laws
• CFTC
• IRS
• DHS
State
International
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9. Federal Regulatory Activity
November 2013 Congressional Hearings
 "there are many legitimate uses. These virtual currencies are not in
and of themselves illegal"
 "Innovation is a very important part of our economy," …premature
regulation could stifle Bitcoin innovation
 Law enforcement has tools to get the bad guys
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10. State Regulatory Issues
Silicon Valley v. Wall Street?
Tech v. Finance?
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11. NY Hearings
 Jan 28-29, 2014 - Public hearings held to consider whether to
regulate virtual currency (including Bitcoin)
The question is what type of licensing, examination, and collateral requirements for the
virtual currency industry will provide appropriate guardrails to protect consumers and
our national security without stifling beneficial innovation.
 BitLicense?
 Strong Set of Consumer Disclosures Rules
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12. California Pending Bill
SECTION 1. Section 107 of the Corporations Code is
amended to read:
A person shall not issue or put in circulation, as money, anything
but the lawful money of the United States. Nothing in this section
shall prohibit the issuance and use of alternative currency that is
redeemable for lawful money of the United States or that has
value based on the value of lawful money of the United States but
a person shall not be required to accept alternative currency.
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13. International
 Germany - Bitcoin should be considered as “private money”
 EU – warning re fraud, tax evasion, crimes
 UK – not treated as money …but subject to VAT
 Belgium – no regs
 France – no action
 Finland – issued regulatory guide and capital gains tax
 Sweden – bitcoin a means of payment; registration for exchanges
 Slovenia – pro bitcoin; not currency or financial instrument; taxable
 China – prohibitions on financial institutions/payment processors
 Singapore - pro bitcoin; taxable
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14. Russia on Virtual Currency
NYET!

The Central Bank of Russia released a notice clarifying the treatment of
virtual currency, including Bitcoin, within the financial industry

Declared that Article 27 of the Law on Central Bank of Russia prohibits
production of alternative monetary products.

Warned the public and financial industry that virtual currency is not regulated,
and due to its anonymous nature, may be used to launder money and finance
terrorism. Virtual currency also carries a high risk of loss of value.

The notice advised that any legal institution that or professional who
provides services to exchange virtual currency to national or foreign
currency, including to goods or services, will be treated as if they are
potentially involved in suspicious activities, money laundering, or
terrorism financing.
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15. Other Regulatory Issues
 FinCEN
 March 18, 2013 Guidance
 administrative rulings
 to the extent a user creates or “mines” a convertible virtual currency solely for


a user’s own purposes, the user is not a money transmitter under the BSA.
a company purchasing and selling convertible virtual currency as an
investment exclusively for the company’s benefit is not a money transmitter
producing and distributing software that facilitates the sale of virtual currency ,
in and of itself, does not trigger MSB under BSA
 SEC
 Investor alert on fraudulent investment schemes
 Investment funds – Winkelvoss Bitcoin Trust registration statement
 IRS – May 2013 GAO request for guidance
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16. More information?
for Bitcoin Legal Resource Guide
email me at
james.gatto@pillsburylaw.com
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