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CRYPTOCURRENCY
OVERVIEW
1. Conventional Currency vs. Cryptocurrency
2. Regulation
3. Risks & Failures
4. Consumer Recourse
5. Questions
OVERVIEW
1.Conventional Currency vs.
Cryptocurrency
2. Regulation
3. Risks & Failures
4. Consumer Recourse
5. Questions
CONVENTIONAL CURRENCY VS.
CRYPTOCURRENCY
◦Background: Conventional Currency
◦System of money
◦Controlled by governing body
◦The US Dollar
◦Old: Gold standard
◦Each $ corresponded to a certain amount of gold. Finite.
◦$1 = 1.5g of gold
◦1971: Nixon cancels Dollar-Gold convertibility
◦Now: Fiat money
◦Dollar’s value not fixed to any physical unit. Infinite (potentially).
◦Value defined by policy  Federal Reserve decides money supply
CONVENTIONAL CURRENCY VS.
CRYPTOCURRENCY
Cryptocurrency
(exemplified by bitcoin)
◦System of digital money
◦Controlled by complex
math
◦Obtained by
◦Mining
◦Receipt of payment
◦Purchase
CONVENTIONAL CURRENCY VS.
CRYPTOCURRENCY
◦Similarity to Gold Standard USD
◦Finite amount
◦Similarities to Fiat Money USD
◦No intrinsic value (not redeemable for any mineral, etc.)
◦Purchasing power fluctuates
◦Unique Qualities
◦No physical form
◦Not “legal tender”
◦Supply not determined by central bank
◦Peer-to-Peer (no intermediaries)
◦Algorithm determines creation of new BTCs
CONVENTIONAL CURRENCY VS.
CRYPTOCURRENCY
Intro Video- https://www.youtube.com/watch?v=Gc2en3nHxA4
OVERVIEW
1. Conventional Currency vs. Cryptocurrency
2.Regulation
3. Risks & Failures
4. Consumer Recourse
5. Questions
REGULATION: PROPERTY OR
CURRENCY?
IRS
◦ Cryptocurrency is not “real” currency, but
◦ Cryptocurrency is property
◦ Taxable based on fair market value
◦ Capital gains/losses
Courts
◦ Bitcoin cases referred to it as “virtual currency”
◦ Seemingly treat it as variation on regular currency, rather than property
◦ E.g. “Bitcoin is a decentralized digital currency that may be used to purchase goods and services online….” Securities
and Exchange Commission vs. Shavers, E.D. Tex., No. 4:13-CV-416 (Sept. 18, 2014)
Are these conflicting classifications a problem?
◦ What cryptocurrency is classified as influences its regulation
◦ Example: Paying employee in bitcoin
REGULATION:
CRYPTOCURRENCY-SPECIFIC
No enacted cryptocurrency-specific laws
◦ Except for NY licensing law
Proposed Law
◦Cryptocurrency Protocol Protection and Moratorium Act (CryptPMA),
H.R. 5777
◦ Proposed December 2014
◦ “Died” in Congress
◦ Would have:
1. Prevented the government from creating “any statutory restrictions or regulations
specifically identifying and governing the creation, use, exploitation, possession or transfer
of any algorithmic protocols governing the operation of any [cryptocurrency]”
2. Declared cryptocurrency be treated as currency, not property
◦ Only tax when converted to an official government currency
REGULATION:
CRYPTOCURRENCY-SPECIFIC
New York State “BitLicense”
◦“No Person shall, without a license obtained from the
superintendent as provided in this Part, engage in any Virtual
Currency Business Activity.”
REGULATION:
CRYPTOCURRENCY-SPECIFIC
New York State “BitLicense”
◦The regulation defines “virtual currency” as follows:
◦"Virtual Currency means any type of digital unit that is used as a
medium of exchange or a form of digitally stored value. Virtual Currency
shall be broadly construed to include digital units of exchange that
◦(i) have a centralized repository or administrator;
◦(ii) are decentralized and have no centralized repository or administrator; or
◦(iii) may be created or obtained by computing or manufacturing effort."
REGULATION:
CRYPTOCURRENCY-SPECIFIC
NY BitLicense
Virtual Currency Business Activity means the conduct of any one of the
following types of activities involving New York or a New York Resident:
(1)receiving Virtual Currency for Transmission or Transmitting Virtual Currency, except
where the transaction is undertaken for non-financial purposes and does not involve the
transfer of more than a nominal amount of Virtual Currency
(2)storing, holding, or maintaining custody or control of Virtual Currency on behalf of
others;
(3)buying and selling Virtual Currency as a customer business
(4)performing Exchange Services as a customer business
(5)controlling, administering, or issuing a Virtual Currency
REGULATION:
CRYPTOCURRENCY-SPECIFIC
NY BitLicense
oFingerprinting
oBackground checks
oCapital requirements
oCyber security requirement
oDisaster recovery plan
oAdvertising disclosure requirements
oConsumer protection
REGULATION: LAWS THAT
COULD APPLY TO
CRYPTOCURRENCY
1. Bank Secrecy Act
2. Securities Regulations
3. Stamp Payments Act
4. Electronic Funds Transfer Act
5. Uniform Commercial Code
REGULATION: UPCOMING
oUnited States
oUniform Law Commission to discuss draft model law specific to cryptocurrencies
oCalifornia
oA bill regulating cryptocurrencies made it through numerous rounds of voting but was
rendered inactive by veto
oMassachusetts
oNothing yet, but the Massachusetts Office of Consumer Affairs and Business
Regulation issued a consumer alert to inform consumers about the dangers of virtual
currencies
oVarious initiatives aiming at state cooperation
REGULATION: INTERNATIONAL
oUK
o Government says that it plans to regulate soon
oBangladesh
o Outlawed bitcoin
oJapan
o Considering regulation, such as a licensing scheme for
exchanges
oChina
o Prohibited financial institutions from handling
cryptocurrencies
oEuropean Central Bank
o Advised financial institutions to trade in cryptocurrencies
until they are regulated
oBrazil
o Does not regulate cryptocurrencies
OVERVIEW
1. Conventional Currency vs. Cryptocurrency
2. Regulation
3.Risks & Failures
4. Consumer Recourse
5. Questions
RISKS & FAILURES: POLICY
oMoney laundering
oMethods such as “tumbling” can obscure the source of the
cryptocurrencies.
oPurchase of illegal goods
oSites such as Silk Road offer many goods such as drugs and fake
IDs
oSilk Road gone, but many other DarkNet markets in its place
ohttps://dnstats.net/
oSupporting criminal activity
oCryptocurrencies can be used to anonymously purchase goods,
launder money from illegal activity, and purchase illegal services
RISKS & FAILURES: CONSUMER
•Hackers. Cryptocurrencies are targets for highly
sophisticated hackers, who have been able to breach
advanced security systems.
•Fewer protections. If you trust someone else to
hold your cryptocurrencies and something goes
wrong, that company may not offer you the kind of
help you expect from a bank or debit or credit card
provider.
•Cost. Cryptocurrencies can cost consumers much
more to use than credit cards or even regular cash,
often due to price volatility.
RISKS & FAILURES: CONSUMER
(cont’d)
•Scams. Fraudsters are taking
advantage of the hype surrounding
virtual currencies to cheat people
with fake opportunities.
•Lack of Transparency. The
anonymous nature of
cryptocurrencies make
transparency and accountability
difficult for consumers seeking to
ensure the safety of their
investments.
OVERVIEW
1. Conventional Currency vs. Cryptocurrency
2. Regulation
3. Risks & Failures
4.Consumer Recourse
5. Questions
CONSUMER RECOURSE
•Anonymity and lack of transparency make attribution difficult
•Victims of hackers or scammers have found trouble identifyIing legally
cognizable damages
•Little to no recourse under current regulations for average consumers
•Consumer Finance Protection Bureau has identified problems for
consumers
•Insurance for digital wallets
• Private – Lloyd’s of London began offering insurance for bitcoin wallet Elliptic
• Public – No protection currently, but perhaps a future model similar to FDIC
CONSUMER RECOURSE: ADVICE
•If you can't afford to lose the money you
have, you should not buy cryptocurrencies.
•Due diligence
• Weigh risks
• Understand how the currency works, how
much currency is currently valued, and
whether you can retrieve the value at any
time.
•Take proper precautions
◦ Protect private key
◦ Don’t leave large amounts in virtual wallet
OVERVIEW
1. Conventional Currency vs. Cryptocurrency
2. Regulation
3. Risks & Failures
4. Consumer Recourse
5.Questions
OUR QUESTIONS
•Should cryptocurrencies be regulated separately?
•Should we try to fit cryptocurrencies into existing bodies of
law?
•Is it even possible to regulate cryptocurrencies, given their
anonymous nature?

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Cryptocurrency

  • 2. OVERVIEW 1. Conventional Currency vs. Cryptocurrency 2. Regulation 3. Risks & Failures 4. Consumer Recourse 5. Questions
  • 3. OVERVIEW 1.Conventional Currency vs. Cryptocurrency 2. Regulation 3. Risks & Failures 4. Consumer Recourse 5. Questions
  • 4. CONVENTIONAL CURRENCY VS. CRYPTOCURRENCY ◦Background: Conventional Currency ◦System of money ◦Controlled by governing body ◦The US Dollar ◦Old: Gold standard ◦Each $ corresponded to a certain amount of gold. Finite. ◦$1 = 1.5g of gold ◦1971: Nixon cancels Dollar-Gold convertibility ◦Now: Fiat money ◦Dollar’s value not fixed to any physical unit. Infinite (potentially). ◦Value defined by policy  Federal Reserve decides money supply
  • 5. CONVENTIONAL CURRENCY VS. CRYPTOCURRENCY Cryptocurrency (exemplified by bitcoin) ◦System of digital money ◦Controlled by complex math ◦Obtained by ◦Mining ◦Receipt of payment ◦Purchase
  • 6. CONVENTIONAL CURRENCY VS. CRYPTOCURRENCY ◦Similarity to Gold Standard USD ◦Finite amount ◦Similarities to Fiat Money USD ◦No intrinsic value (not redeemable for any mineral, etc.) ◦Purchasing power fluctuates ◦Unique Qualities ◦No physical form ◦Not “legal tender” ◦Supply not determined by central bank ◦Peer-to-Peer (no intermediaries) ◦Algorithm determines creation of new BTCs
  • 7. CONVENTIONAL CURRENCY VS. CRYPTOCURRENCY Intro Video- https://www.youtube.com/watch?v=Gc2en3nHxA4
  • 8. OVERVIEW 1. Conventional Currency vs. Cryptocurrency 2.Regulation 3. Risks & Failures 4. Consumer Recourse 5. Questions
  • 9. REGULATION: PROPERTY OR CURRENCY? IRS ◦ Cryptocurrency is not “real” currency, but ◦ Cryptocurrency is property ◦ Taxable based on fair market value ◦ Capital gains/losses Courts ◦ Bitcoin cases referred to it as “virtual currency” ◦ Seemingly treat it as variation on regular currency, rather than property ◦ E.g. “Bitcoin is a decentralized digital currency that may be used to purchase goods and services online….” Securities and Exchange Commission vs. Shavers, E.D. Tex., No. 4:13-CV-416 (Sept. 18, 2014) Are these conflicting classifications a problem? ◦ What cryptocurrency is classified as influences its regulation ◦ Example: Paying employee in bitcoin
  • 10. REGULATION: CRYPTOCURRENCY-SPECIFIC No enacted cryptocurrency-specific laws ◦ Except for NY licensing law Proposed Law ◦Cryptocurrency Protocol Protection and Moratorium Act (CryptPMA), H.R. 5777 ◦ Proposed December 2014 ◦ “Died” in Congress ◦ Would have: 1. Prevented the government from creating “any statutory restrictions or regulations specifically identifying and governing the creation, use, exploitation, possession or transfer of any algorithmic protocols governing the operation of any [cryptocurrency]” 2. Declared cryptocurrency be treated as currency, not property ◦ Only tax when converted to an official government currency
  • 11. REGULATION: CRYPTOCURRENCY-SPECIFIC New York State “BitLicense” ◦“No Person shall, without a license obtained from the superintendent as provided in this Part, engage in any Virtual Currency Business Activity.”
  • 12. REGULATION: CRYPTOCURRENCY-SPECIFIC New York State “BitLicense” ◦The regulation defines “virtual currency” as follows: ◦"Virtual Currency means any type of digital unit that is used as a medium of exchange or a form of digitally stored value. Virtual Currency shall be broadly construed to include digital units of exchange that ◦(i) have a centralized repository or administrator; ◦(ii) are decentralized and have no centralized repository or administrator; or ◦(iii) may be created or obtained by computing or manufacturing effort."
  • 13. REGULATION: CRYPTOCURRENCY-SPECIFIC NY BitLicense Virtual Currency Business Activity means the conduct of any one of the following types of activities involving New York or a New York Resident: (1)receiving Virtual Currency for Transmission or Transmitting Virtual Currency, except where the transaction is undertaken for non-financial purposes and does not involve the transfer of more than a nominal amount of Virtual Currency (2)storing, holding, or maintaining custody or control of Virtual Currency on behalf of others; (3)buying and selling Virtual Currency as a customer business (4)performing Exchange Services as a customer business (5)controlling, administering, or issuing a Virtual Currency
  • 14. REGULATION: CRYPTOCURRENCY-SPECIFIC NY BitLicense oFingerprinting oBackground checks oCapital requirements oCyber security requirement oDisaster recovery plan oAdvertising disclosure requirements oConsumer protection
  • 15. REGULATION: LAWS THAT COULD APPLY TO CRYPTOCURRENCY 1. Bank Secrecy Act 2. Securities Regulations 3. Stamp Payments Act 4. Electronic Funds Transfer Act 5. Uniform Commercial Code
  • 16. REGULATION: UPCOMING oUnited States oUniform Law Commission to discuss draft model law specific to cryptocurrencies oCalifornia oA bill regulating cryptocurrencies made it through numerous rounds of voting but was rendered inactive by veto oMassachusetts oNothing yet, but the Massachusetts Office of Consumer Affairs and Business Regulation issued a consumer alert to inform consumers about the dangers of virtual currencies oVarious initiatives aiming at state cooperation
  • 17. REGULATION: INTERNATIONAL oUK o Government says that it plans to regulate soon oBangladesh o Outlawed bitcoin oJapan o Considering regulation, such as a licensing scheme for exchanges oChina o Prohibited financial institutions from handling cryptocurrencies oEuropean Central Bank o Advised financial institutions to trade in cryptocurrencies until they are regulated oBrazil o Does not regulate cryptocurrencies
  • 18. OVERVIEW 1. Conventional Currency vs. Cryptocurrency 2. Regulation 3.Risks & Failures 4. Consumer Recourse 5. Questions
  • 19. RISKS & FAILURES: POLICY oMoney laundering oMethods such as “tumbling” can obscure the source of the cryptocurrencies. oPurchase of illegal goods oSites such as Silk Road offer many goods such as drugs and fake IDs oSilk Road gone, but many other DarkNet markets in its place ohttps://dnstats.net/ oSupporting criminal activity oCryptocurrencies can be used to anonymously purchase goods, launder money from illegal activity, and purchase illegal services
  • 20. RISKS & FAILURES: CONSUMER •Hackers. Cryptocurrencies are targets for highly sophisticated hackers, who have been able to breach advanced security systems. •Fewer protections. If you trust someone else to hold your cryptocurrencies and something goes wrong, that company may not offer you the kind of help you expect from a bank or debit or credit card provider. •Cost. Cryptocurrencies can cost consumers much more to use than credit cards or even regular cash, often due to price volatility.
  • 21. RISKS & FAILURES: CONSUMER (cont’d) •Scams. Fraudsters are taking advantage of the hype surrounding virtual currencies to cheat people with fake opportunities. •Lack of Transparency. The anonymous nature of cryptocurrencies make transparency and accountability difficult for consumers seeking to ensure the safety of their investments.
  • 22. OVERVIEW 1. Conventional Currency vs. Cryptocurrency 2. Regulation 3. Risks & Failures 4.Consumer Recourse 5. Questions
  • 23. CONSUMER RECOURSE •Anonymity and lack of transparency make attribution difficult •Victims of hackers or scammers have found trouble identifyIing legally cognizable damages •Little to no recourse under current regulations for average consumers •Consumer Finance Protection Bureau has identified problems for consumers •Insurance for digital wallets • Private – Lloyd’s of London began offering insurance for bitcoin wallet Elliptic • Public – No protection currently, but perhaps a future model similar to FDIC
  • 24. CONSUMER RECOURSE: ADVICE •If you can't afford to lose the money you have, you should not buy cryptocurrencies. •Due diligence • Weigh risks • Understand how the currency works, how much currency is currently valued, and whether you can retrieve the value at any time. •Take proper precautions ◦ Protect private key ◦ Don’t leave large amounts in virtual wallet
  • 25. OVERVIEW 1. Conventional Currency vs. Cryptocurrency 2. Regulation 3. Risks & Failures 4. Consumer Recourse 5.Questions
  • 26. OUR QUESTIONS •Should cryptocurrencies be regulated separately? •Should we try to fit cryptocurrencies into existing bodies of law? •Is it even possible to regulate cryptocurrencies, given their anonymous nature?

Editor's Notes

  1. Oct. 2008 – “Satoshi Nakamoto” publishes whitepaper outlining a p2p electronic currency system. Satoshi may have been one person or a group of people. Why? Maybe in response to global financial crisis. January 2009 post in bitcoin database acknowledged brink of second bailout for banks May 2010 – First pizza order paid for with Bitcoin July 2011 – First mainstream exposure of bitcoin’s vulnerability. Risk of hacking and theft. Oct 2013 – Silk Road, the major Darknet Market, shut down by FBI
  2. IRS source: https://www.irs.gov/pub/irs-drop/n-14-21.pdf, p.2 When paying an employee in conventional currency only the employee has income. If Bitcoin had been treated as a currency by the IRS, then this would also be true for paying employees in Bitcoin. However, the IRS has ruled that Bitcoin should be treated as property. For this reason, paying an employee in Bitcoin is treated as a barter transaction. This means that both the employer and the employee have income each time an employee is paid. Further, this requires an employer to keep track of its basis (i.e. its buying price) for the Bitcoin and also track the reasonable value of the market price of Bitcoin on pay day. if the Bitcoin's value on payday is greater than the employers' basis in the Bitcoin, the employer will have income.
  3. The New York State Department of Financial Services (“NYDFS”) released its revised proposed BitLicense regulations on February 4, 2015. Changes from NYDFS’ initial proposed regulations are listed below. Among the more significant changes are: (a) helpful modifications of the definitions of “Virtual Currency” and “Virtual Currency Business” and (b) the addition of provisions giving the Superintendent broad discretion to issue a “conditional license” for a business not meeting all the criteria for a full license. 1. Definition of “Virtual Currency” Deleted “or that is incorporated into payment system technology” Added exclusion for digital units used within online gaming platforms that can be redeemed for real-world goods, services, discounts of purchases, but cannot be converted into or redeemed for Fiat Currency or Virtual Currency Added exclusion for digital units used as part of a closed loop payment card 2. Definition of “Virtual Currency Business” Added exclusion for transmitting or receiving Virtual Currency for non-financial purposes not involving more than a nominal amount of Virtual Added exclusion that development and dissemination of software in and of itself does not constitute Virtual Currency Business 3. §200.3 License Added exclusion merchants and consumers utilizing Virtual Currency solely for investment purposes
  4. The definition excludes closed currencies (gaming), rewards programs, and prepaid cards
  5. The development and dissemination of software in and of itself does not constitute Virtual Currency Business Activity. Does NOT include
  6. Seems to give the superintendent a lot of discretion Cyber security intelligence personnel, how will all this be litigated, if it is? Disaster recovery – doesn’t seem to have been that successful with banks Advertising – not allowed to make false, misleading, deceptive statements Consumer protection – read from sheet
  7. Uniform Law – reciprocity of licensing California – just one senator got it shelved. Initially very popular. Bitcoin Foundation lobbied heavily against it as “stifling innovation
  8. UK – regulation needed to get banks to work with bitcoin companies who can’t get funding Japan – arrest of Mt. Gox founder and CEO, money-laundering concerns. Initially didn’t want to regulate – wanted Japan to be a super cryptocurrency-friendly country OVERALL – countries held back from regulating but seem to be moving closer to regulation as concerns grow