bitcoin: an innovative alternative digital currency -ssrn-id1817857

8/6/2019 Bitcoin: An Innovative Alternative Digital Currency -SSRN-id1817857

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Bitcoin:AnInnovativeAlternativeDigitalCurrency

(PRELIMINARYDRAFT)

Apr.21,2011ReubenGrinberg1

IMPORTANT:Thisisafirstdraftthatismissingadiscussionofanumberofimportantlegalissues,particularlymoneylaunderingandwhatthee-goldsagameansforBitcoin,taxes,etc.Someorallofmyconclusionsmaychangeinlaterdrafts.IampostingthispubliclytogetearlyfeedbackfromtheBitcoincommunity.Pleasefeelfreetoemailmeyourcommentsatreuben.grinberg+bitcoin@gmail.com.Inthespiritofbitcoin,donationscanbesentto1Het2qD6Yab9vaLUs3JrM1aYMXNSJ42Rdc.

Introduction..............................................................................................................................3

I.BitcoinPrimer.......................................................................................................................5 II.BitcoinEcosystem..............................................................................................................8

III.ComparingBitcointoitsCompetition.....................................................................11 a.Facilitationofe-commerce.....................................................................................................12

1.Traditionalecommerce.........................................................................................................................12 2.Micropayments.........................................................................................................................................14 3.VirtualWorldandGame-RelatedCommerce..............................................................................14

b.Gold-BackedCurrencies..........................................................................................................16

IV.IsBitcoinSustainable?..................................................................................................18 a.IraqiSwissDinar........................................................................................................................18

b.Confidence....................................................................................................................................191.ImproperUseofDiscretionaryAuthority.....................................................................................19 2.SuperiorCompetingCurrency...........................................................................................................203.GovernmentCrackdown.......................................................................................................................21 4.DeflationarySpiral..................................................................................................................................21

c.PotentialTechnologyFailures...............................................................................................231.AnonymityFailure......... .......... ......... .......... ......... .......... .......... ......... .......... ......... .......... .......... ......... .......232.Theft..............................................................................................................................................................233.DenialofService.......................................................................................................................................24

V.Legal.....................................................................................................................................25 a.FederalGovernmentsMonopolyonIssuingCurrencies..............................................26

1.TheStampPaymentsActof1862.....................................................................................................27 2.ProhibitiononCoiningCurrentMoneyandtheLibertyDollarSaga................................31

b.SecuritiesRegulations..............................................................................................................351.NoteorStock.............................................................................................................................................36

1YaleLawSchool,J.D.expectedMay2011.IthankprofessorJonathanR.Maceyandmywifefortheirtimeandinsights.IalsothankAUSAJillWestmorelandRoseandBernardvonNotHaus,opposingpartiesintheLibertyDollarcaseswhotookthetimetoanswermyquestions.


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2.InvestmentContract...............................................................................................................................37 3.Commodity.................................................................................................................................................394.Currency......................................................................................................................................................40

Conclusion...............................................................................................................................43


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IntroductionBitcoinisadigital,decentralized,partiallyanonymouscurrency,notbackedbyanygovernmentorotherlegalentity,andnotredeemableforgoldorothercommodity.Itreliesonpeer-to-peernetworkingandcryptographytomaintainitsintegrity.2

Bitcoinhasmanypropertiesthatcouldmakeitanidealcurrencyformainstreamconsumersandmerchants.Comparedtomostcurrenciesoronlinepaymentservices,suchasPayPal,bitcoinsarehighlyliquid,havelowtransactioncosts,andcanbeusedtomakemicropayments.ThisnewcurrencycouldalsoholdthekeytoallowingorganizationssuchasWikileaks,hatedbygovernments,toreceivedonationsandconductbusinessanonymously.3Amazingly,asofMarch2011,abitcoin(currencytickerBTC)isworthaboutthesameasaU.S.Dollar(USD),thereareabout$5millionworthofbitcoinsinexistence,4thereareprobablysomewherebetween5,000to30,000Bitcoinusers,andabout$150,000worthofbitcoinsaretradedeveryday.5

2Seehttp://en.wikipedia.org/wiki/Bitcoin;SatoshiNakamoto,Bitcoin:APeer-to-PeerElectronicCashSystem(2009),http://www.bitcoin.org/sites/default/files/bitcoin.pdf;BitcoinFAQ,http://www.bitcoin.org/faq.3SeeKeirThomas,CouldtheWikileaksScandalLeadtoNewVirtualCurrency?,PCWorld:BusinessCenter(Dec.10,2010),http://www.pcworld.com/businesscenter/article/213230/could_the_wikileaks_scandal_lead_to_new_virtual_currency.html;RaineyReitman,ElectronicFrontier

Foundation,BitcoinaStepTowardCensorship-ResistantDigitalCurrency(Jan.20,2011),https://www.eff.org/deeplinks/2011/01/bitcoin-step-toward-censorship-resistant(Bitcoinisparticularlyinterestinginthewakeofrecenteventsthatdemonstratedhowfinancialinstitutionscanmakepoliticaldecisionsinwhomtheyservice,showcasedbythedecisionsofPayPal,Visa,MastercardandBankofAmericatocutoffservicestoWikileaks.).Infact,Anonymous,alooselyorganizedgroupofhacktiviststhathaveattackedWikileaksfoes,amongothers,TheWeek,Anonymous:Thesecretgroups5biggesthacks(Mar.7,2011),http://theweek.com/article/index/212846/anonymous-the-secret-groups-5-biggest-hacks,acceptdonationsinBitcoinsontheiranonymousnewssite,AnonNews.AnonNewsEverythingAnonymous,DonatingthroughBitcoin,

http://www.anonnews.org/bitcoin.html(lastvisitedMar.7,2011).4SeePageIndicatingUSD-BitcoinExchangeRateProvidedByMt.Gox,http://bitcoincharts.com/markets/mtgoxUSD.html.Mt.Goxis,accordingtotheBitcoinwiki,themostwidelyusedbitcoincurrencyexchangemarket.https://en.bitcoin.it/wiki/MtGox.5GavinAndresen,Video,MakingMoney:creatingadecentralizedelectroniccurrency,IgniteAmherst(2011),availableathttp://blip.tv/file/4771178[hereinafterAndresenVideo];seehttp://bitcoinwatch.com/(lastvisitedMar.28,


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AlthoughtheBitcoineconomyisflourishing,BitcoinusersareanxiousaboutBitcoinslegalstatus.6Somebelievethatgovernments,particularlytheU.S.government,arelikelytocrackdownonBitcoin.SomepointtoBitcoinsability,likealldigitalandanonymouscurrencies,tofacilitatemoneylaundering,taxevasion,

andtradeinillegaldrugsandchildpornography.7

Indeed,theU.S.governmentprosecutedandshutdownthecreatorsofe-gold,adigitalcurrencybackedbygold,understateandfederallawsforconspiracytocommitmoneylaundering,andalsoforprovidingservicestothoseinvolvedinchildexploitation,creditcardfraud,andwire(investment)fraud.8Alternatively,otherspointtogovernmentspurportedinterestsinprotectingtheireconomiesandmonopoliesonmintingnewmoney.9TheseindividualspointtothesuccessfulprosecutionandconvictionofthecreatoroftheLibertyDollar,apaperandcoin-basedcurrencybackedbygold,silver,andcopper.10PartIexplainshowBitcoinworksandPartIIdescribesitsnascentecosystemof

websitesandservices.PartIIIcomparesBitcointoitscompetition,includingpaymentprocessorslikePayPalanddigitalgoldcurrencies.PartIVexploreswhetherBitcoincanbeasustainablecurrencyandwhyindividualswouldtrusta

2011)(approximately120,000bitcoinstransactedinlast24hoursatanexchangerateofapproximately0.8USD/BTC).6See,e.g.,epii,Howlonguntilgovernmentsoutlawbitcoinusage?(Mar.29,2011),http://www.bitcoin.org/smf/index.php?topic=5110.msg74627#msg74627(IthinkthatillegalizationisBitcoin'smostlikelymodeoffailure.).7See,e.g.,id.(ConsideringhowquicklyserviceslikeSilkRoad[ananonymousmarketplaceforillegaldrugs]havesprungup,andthefactthatthedemographicof

peoplewhoseemmostinterestedinBitcoinatthispointtendstooverlapwiththedemographicoflikelytaxevaders,Iamafraidthatthisillegalizationmightjustbeamatteroftime.).8SeePeterC.Tucker,TheDigitalCurrencyDoppelganger:RegulatoryChallengeorHarbringeroftheNewEconomy?,17CARDOZOJ.INTL&COMP.L.589,590-92(2009)(citationsomitted).9See,e.g.,Glass,Re:Howlonguntilgovernmentsoutlawbitcoinusage?(Mar.29,2011),http://www.bitcoin.org/smf/index.php?topic=5110.msg74713#msg74713.10See,e.g.,id.;Dept.ofJustice,PressRelease,DefendantConvictedofMintingHisOwnCurrency(Mar.18,2011),availableathttp://charlotte.fbi.gov/dojpressrel/pressrel11/ce031811.htm([Thedefendant]

intendedfortheLibertyDollartobeusedascurrentmoneyinordertolimitrelianceon,andtocompetewith,UnitedStatescurrency.ItisaviolationoffederallawtocreateprivatecoinorcurrencysystemstocompetewiththeofficialcoinageandcurrencyoftheUnitedStates.Attemptstounderminethelegitimatecurrencyofthiscountryaresimplyauniqueformofdomesticterrorism,U.S.AttorneyTompkinssaidinannouncingtheverdict.Whiletheseformsofanti-governmentactivitiesdonotinvolveviolence,theyareeverybitasinsidiousandrepresentaclearandpresentdangertotheeconomicstabilityofthiscountry,sheadded.).


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currencynotsupportedbyanylegalinstitutionandnotredeemableforanycommodity.PartVwillexploreafewofthemanylegalramificationsofBitcoin,includingstatutessupposedlyaimedatenforcingthefederalgovernmentsmonopolyonissuingcurrencyandsecuritiesregulation.

I.BitcoinPrimerJulianAssangewasprobablynotsurprisedwhenPayPal,acorporationwithlargemarketsharesusceptibletogovernmentpressure,stoppedprocessingdonationstohiswhistleblowingorganization,Wikileaks,duetowhatPaypaldeemedillegalactivity.11Inthe1990s,Assangewasamemberofthecypherphunksmailinglist,agroupthatdiscussedachievingprivacyandlibertarianidealsbyusingcryptography.In1998,anothermemberofthecypherpunksproposedadigital,distributed,anonymouscurrencycalledb-moneythatwouldallowuntraceablepseudonymousentitiestocooperatewitheachothermoreefficiently,byproviding

themwithamediumofexchange12Abouttenyearslater,SatoshiNakamoto13figuredouthowtoimplementsuchacurrency,publishingadescriptionofhisinvention14andalsoreleasingsoftwaretomakeitwork.15Bitcoinisafiatcurrency,liketheU.S.Dollar,becauseitisnotredeemableforacertainamountofacommodity,suchasanounceofgold.UnliketheU.S.Dollar,BitcoinisnotbackedbytheU.S.Governmentoranylegalinstitutionforthatmatterandisadigitalratherthanpapercurrency,storableonelectronicmediaandtransferableovertheinternet.16IndividualswhowanttoownortransactinBitcoinscaneitherrunaprogramon

theirowncomputerthatimplementstheBitcoinprotocol(aBitcoinclient17),or

11PAYPAL,PaypalstatementregardingWikileaks(Dec.3,2010),https://www.thepaypalblog.com/2010/12/paypal-statement-regarding-wikileaks/12WeiDai,b-moneyatpara13(1998),http://weidai.com/bmoney.txt13Thenameisalmostcertainlyapseudonym.Seehttps://en.bitcoin.it/wiki/Satoshi_Nakamoto;AndresenVideo,supranote5.14Nakamoto,supranote2.15Seebitcoin,https://github.com/bitcoin/bitcoin(currentrepositoryfortheofficialBitcoinprogramcode).16SeeWilliamHett,DigitalCurrenciesandtheFinancingofTerrorism,XVRICH.J.L.&TECH.4,7(2008),http://law.richmond.edu/jolt/v15i2/article4.pdf(describinghowdigitalcurrenciesgenerallywork).17TheBitcoindeveloperspublishanofficialBitcoinclientforWindows,MacOSX,andLinux,withanugly,confusing,butusablegraphicaluserinterface.SeeBitcoin,http://www.bitcoin.org/(DownloadBitcoin0.3.20.2[:]Windows[;]Linux[;]MacOSX);https://en.bitcoin.it/wiki/Original_Bitcoin_client(screenshotofgraphicaluserinterface).However,becausetheBitcoincodeisopensourceandtheprotocol


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createanaccountonawebsitethatrunstheBitcoinclientforitsusers.TheBitcoinclientsavesanindividualsbitcoinsinafilecalledthewallet,whichtheusermustsecureandbackup.Theseprogramsconnecttooneanotherovertheinternetformingpeer-to-peernetworks,makingthesystemadistributedoneimpervioustocentralattack.

Newbitcoinsareissuedtocompetingminerswhousetheircomputerstogeneratesolutionstoproblemsthathelpensuretheintegrityandsecurityofthesystem.Asmoreorfewerminersjointhenetwork,theproblemdifficultyadjuststoensurethatbitcoinsarecreatedatapre-determinedrateandnotfasterorslower.Currently,about50bitcoinsareissuedevery10minutes,althoughtheratewillhalveto25bitcoinsinabouttwoyearsandwillhalveeveryfouryearsafterthat.18Atthoserates,10.5millionbitcoinswillbecreatedinthefirstfouryears,halfthatamountinthenextfouryears,andsoon,approachingbutneverreachingatotalsupplyof21millionbitcoins,asillustratedinFigure1.Bitcoinsaredivisibletoeightdecimalplacesandcaneasilybefurtherdividedwithminorsoftwarechanges,althoughthe

currentofficialBitcoinclientonlyallowstwodecimalplaces.

specificationispublic,othersareintheprocessofcreatingalternativeclients,suchasonewritteninJava,andanotherintendedformobilephonesandtabletsrunningtheAndroidoperatingsystem.Seehttps://en.bitcoin.it/wiki/Category:Clients;https://market.android.com/details?id=de.schildbach.wallet&feature=search_result18Ablockcontainsthesolutionthattheminingcomputersaretryingtosolve.Ablockiscreatedaboutonceeverytenminutes.AccordingtotheBitcoinFAQ,50bitcoinsareawardedforthefirst210,000blocksgenerated,andtheawardishalvedevery210,000blocksafterwards.Ittakesabout4yearstogenerate210,000blocks(10minutes/blockx210,000blocks/60/365).AsofMarch8,2011,approximately113,000blockshavebeengenerated(accordingtomyBitcoinclient),whichmeansthatinapproximatelytwoyearstheawardwillbehalvedto25bitcoins.


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Expected Total Bitcoins

0

5

10

15

20

25

2009 2013 2017 2022 2025 2029

Year

TaBtcn(mio

Figure1.ExpectedBitcoinsupplyovertime.10.5millionwillbecreatedinthefirstfouryears,halfthat

amountinthenextfouryears,andsoon.Thetotalsupplywillapproachbutneverreach21million.

Bitcoin,FAQ,HowarenewBitcoinscreated?,http://www.bitcoin.org/faq(lastvisitedMar.8,2011).

AsillustratedinFigure2,inMay2010,onebitcoincostslessthanhalfacent.InlateApril,2011,onebitcoinisapproximatelyatparitywiththeUSDollar19a2000%percentappreciationagainsttheDollarinlessthanayear.

19SeeMt.GoxchartsonBitcoinwatch,http://bitcoincharts.com/markets/mtgoxUSD.html(lastvisitedApr.15,2011).


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Figure2.Log-scaleofBitcoin/USDexchangerate.BitcoinCharts,

http://bitcoincharts.com/charts/bcmPPUSD#rg360zlztgMzm1g10zm2g25zx.NotethatBitcoinswerein

existencebeforeMay2010butthecurrencyexchangefromwhichthisdataistakenwasnotoperating

beforethen.Theten-foldjumpinvaluelikelyhappenedasaresultinaspikeindemandforthecurrency

afterBitcoinwaspublicizedonapopulartechnologywebsite,Slashdot.org.

Thesystemispartiallyanonymousinthatanyonecanseethetrailofalltransactionsfromallaccounts,20butnothinginthesystemtiesaccountstoindividuals,andindividualscancreateunlimitedaccountsinstantlyandforfree.21Individualscansendbitcoinsforfree,butmayaddanoptionaltransactionfeetoensurethe

transactionisquicklyprocessed.22Furthermore,Bitcointransactionsareirreversibleinthesamewaycashtransactionsareirreversible.Bycontrast,forexample,creditcardchargescanbechargedbacktoamerchant.

II.BitcoinEcosystemAgrowingecosystemsurroundsBitcoin,includingexchanges,transactionservicesproviders,marketinformationandchartproviders,escrowproviders,jointminingoperationsandsoon.Notablyabsentfromthisecosystem,sofar,arefutures

20See,e.g.,BlockExplorer,http://blockexplorer.com/(allowinguserstoseelatestBitcointransactions,searchfortransactionsoraccounts,andsoon).21BitcoinWiki,Introduction:Anonymity,https://en.bitcoin.it/wiki/Introduction#Anonymity(lastvisitedMar.14,2011).22Althoughtransactionfeesarenotgenerallyusedrightnow,manyBitcoinactivistsexpectthatasthevolumeoftransactionsincrease,individualswillmoreoftenattachtransactionfees.


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marketsandentitiesofferinglegitimateinvestmentreturns,suchasfractionalreservebanks,althoughsomeindividualshaveannouncedplanstobuildthese.23Individualsholdingthiscurrencyrepresentanumberofinterests,includingtechnologyearlyadopters,privacyandcryptographyenthusiasts,government-

mistrustinggoldbugs,andcriminals.24

Anumberofmerchantsacceptbitcoins,cateringtoindividualswiththeseinterests,includingwebhosts,onlinecasinos,illicitdrugmarketplaces,auctionsites,technologyconsultingfirms,andadultmediaandsextoymerchants.25Additionally,anumberofnon-profitorganizationsacceptdonationsinBitcoin,themostprominentofwhichistheElectronicFrontierFoundation.26Toaccommodategrowingdemandseveralexchangeshavebeencreated,offeringexchangesbetweenBitcoinandtraditionalcurrencies,includingtheU.S.Dollar,JapaneseYen,Euro,andotherdigitalcurrencies,includingLibertyReserve,Pecunix,andWebMoney.27Mt.Gox,whichseemstobethemostpopularexchange28with

$10,000intradingvolumeonaparticulardayinMarch2011,29hasaneasytouse23See,e.g.,Nefario,Investorsforbitcoinstockmarketandcreditratingagrency[sic],devstarted!(Feb.25,2011),http://www.bitcoin.org/smf/index.php?topic=3844.0(stockmarketandcreditratingagency);gigabytecoin,WhereToCreateYourOwnBankForLessThan$25K???(Mar.24,2011),http://www.bitcoin.org/smf/index.php?topic=4871.0(bank).24SeeBitcoinForum,Poll:WhyDoYouUseBitcoin?,http://www.bitcoin.org/smf/index.php?topic=4465.0(pollIconductedonthemainBitcoinforum);Tucker,supranote8,at601-08(describingusersgenerallyinterestedindigitalcurrencies).SomeindividualsarealsoinvestedinBitcoins

becausetheyapparentlybelieveBitcoinshavethepotentialtosignificantlyappreciateinvalue.Seechodpaba,WhatifoneBitcoinwasworththesameasoneshareBerkshireHathaway?(Mar.12,2011),http://www.bitcoin.org/smf/index.php?topic=4390.0.25SeeBitcoinWiki,Trade,https://en.bitcoin.it/wiki/Trade(lastvisitedMar.14,2011)(listingmerchantsthatacceptbitcoins).26SeeBitcoinWiki,Trade,Donation-acceptingorganizationsandprojects,https://en.bitcoin.it/wiki/Trade#Donation-accepting_organizations_and_projects(lastvisitedMar.14,2011);EFF,WaysYouCanHelpEFF,https://www.eff.org/helpout(lastvisitedMar.14,2011)(DonatetoEFFusingBitcoinP2PCryptocurrency!TransfermoneyfromyourBitcoinaccounttoours:

1MCwBbhNGp5hRm5rC1Aims2YFRe2SXPYKt).27SeeBitcoinWiki,Trade,Currencyexchange,https://en.bitcoin.it/wiki/Trade#Currency_exchange(lastvisitedMar.14,2011).28BitcoinWiki,MtGox,https://en.bitcoin.it/wiki/MtGox(lastvisitedMar.14,2011)([Mt.Goxist]hemostwidelyusedbitcoincurrencyexchangemarket.).29OntheBitcoinChartssite,tradingvolumeonMt.GoxonMarch6,2011wasUSD$10,000,morethantentimesgreaterthanthevolumeonanyoftheotherlistedexchanges.


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website.30Noneofthestandardexchangesallowfuturestrading,yet,althoughthereisalessformalover-the-counterexchangethatallowsindividualstolistbuyandsellordersinvolvingbitcoinsandanyservice,commodity,orcurrency.31CalloptionsarepossibleusingClearCoin,aBitcoinescrowservice,32andhavebeensoldontheover-the-counterexchange.33

Severalsitesprovidetransactionservices,allowingindividualstokeep,send,andreceivebitcoinswithouteverrunningtheBitcoinclientontheirowncomputers.Mt.Gox,forexample,allowssendingbitcoinsthroughemail,asdoesBitcoinMail.MyBitcoinandVejkaprovidewebsitesthatallowsindividualstocreateunlimitedBitcoinaddresses,sendbitcoinstoanyaddressforfree,andcheckbalances.MyBitcoinalsohastoolstohelpmerchantseasilyacceptpaymentinbitcoinsontheirwebsites.Althoughearlyon,individualscouldmineasignificantnumberofbitcoinsontheirowncomputers,theproblemdifficultyhasincreasedsomuchthatmostcomputers

nowwouldtake,onaverage,closetoormorethanayeartominejust50BTC.3430Seehttp://www.mtgox.com.Onecantransfermoneyintotheaccountbysendingcash,moneyorderorchecktoanindividual(twopercentcommission)orbyPaypal(sevenpercentcommission),eitherofwhichtakesseveralbusinessdays.OncethemoneyappearsintheMt.Goxaccount,thewebsiteallowspurchasingandsellingBitcoinsattheprevalentexchangerateoratsomeparticularprice,witha0.65%commission.ThewebsitealsoallowsinstantlysendingfundstoanotherindividualsMt.GoxaccountortoaBitcoinaccount.IwasabletopurchaseaboutUSD$9worthofBitcoinsonMt.Gox.Ifirstsent$10USDbyPaypaltoBitcoinMorpheus,asinstructedontheMt.Goxwebsite.Thatindividualtooka$1commissionandadded

USD$9tothemyaccountonMt.Gox.Ithenpurchasedabout$9worthofBitcoinsandthensentthemtomyBitcoinaccountnumber.31http://bitcoin-otc.com/(lastvisitedMar.7,2011).32http://wiki.bitcoin-otc.com/wiki/Option_orders#Call_Options_using_ClearCoin_Escrow33SeeBitcoinMoney,BitcoinoptionstradingontheBitcoinOTCmarketplace(Apr.13,2011),http://www.bitcoinmoney.com/post/4585101363/first-bitcoin-put-option-contract(ThefirsteverbitcoinPUToptioncontractwasjustrecentlytradedonthe#bitcoin-otcmarketplace.Abuyerpaidtoaseller1.50BTCasthepremiumforacontractthatgivesthebuyertheoptiontosellatalatertime100BTCattherateof$0.75/BTC.).34SeeRemove"generatebitcoins"fromstandardclient?(Mar.23,2011),http://www.bitcoin.org/smf/index.php?topic=4828.0(discussingthelowprobabilityofindividualsgeneratingbitcoinsasindividuals).AsignificantincreaseintheamountofcomputationalpowerparticipatinginminingintheBitcoinnetworkcausedtheBitcoinprotocoltoautomaticallyincreasethedifficultyofstrikingBitcoingold.Forexample,themyMacbookAir(afairlyslowmachine,runningona1.4GHzintelcoreduo)wouldtake,onaverage,approximately13years,tomineitsfirst50BTC.SeeBitcoinGenerationCalculator,


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Severalenterprisingindividualshavecreatedminingcollectivesthathaveenormouscomputationalpower,collectminingrewardsoften,anddistributetherewardsamongmembersofthecollectiveaccordingtotheamountofworktheycontributedtowardsfindingthereward(i.e.,theircomputationalpower).

Name DescriptionBitcoinCharts35 Providescurrencyexchangevalueandvolumecharts

foranumberofBitcoinexchanges.

BitcoinMonitor36 ShowsthemostrecentBitcointransactions,currencyexchanges,andBlocksolutions.

BitcoinBlockExplorer37 Allowsindividualstosearchbyaddressandseealltransactionsforthataddress.

BitcoinFaucet38 Aservicethatprovides0.05BTCforfree,byoneofthemaindevelopersbehindBitcoin,whowant[s]Bitcointobesuccessful,[and]createdthislittleservicetogive[newusers]afewcoinstostart

with.39BitcoinMail40 Asitethatallowsindividualstosendbitcoinsto

othersbyemail.ClearCoin41 Anelectronicservicethatholdsbitcoinsinescrow.

Feesare1%fortransactionsover100BTCandnothingotherwise.

AmorecomprehensivelistofBitcoinexchangesandmerchantswhoacceptBitcoinisavailableontheBitcoinwiki.42

III.ComparingBitcointoitsCompetitionBitcoincompeteswithatleasttwoclassesofproducts:(1)productsthatfacilitateinternet-basedcommerce,and(2)gold-backedcurrencies.Asdescribedbelow,Bitcoinisunlikelytomakesignificantheadwayinthetraditionalecommercemarket

http://www.alloscomp.com/bitcoin/calculator.php(enteringahashrateof800khps,theapproximatespeedofmycomputeraccordingtotheBitcoinclient,and76,000,theapproximatedifficultyfactoronMarch14,2011).35http://bitcoincharts.com/36http://www.bitcoinmonitor.com/37http://blockexplorer.com/38https://freebitcoins.appspot.com/39GavinAndresen,FreeBitcoins,WhatstheCatch,http://freebitcoins.appspot.com/(lastvisitedMarch6,2011).40http://www.bitcoinmail.com/41http://www.clearcoin.com42https://en.bitcoin.it/wiki/Trade


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becauseconsumersgenerallydonotcareaboutthekindofanonymitythatBitcoinprovides,prefertocomparepricesofmostgoodsandservicesinacurrencytheyarefamiliarwith,andwantfraudprotection(whichBitcoincurrentlylacks).However,Bitcoinmaybeespeciallycompetitiveinthemicropaymentandvirtualworldmarkets,whereconsumerscarelessaboutpricinginafamiliarcurrency.Bitcoinis

likelytobeattractivetothosewholikegold-backedcurrenciesbecauseitsvaluedependsontheavailabilityofalimited(albeitvirtual)resourceratherthandiscretionaryactionsbycentralbankers.

a.Facilitationofe-commerce

1.Traditionalecommerce

Thegrowthoftheinternetcreateddemandforelectronicpaymentsystems.43PayPalhascometodominatethisspace,allowinguserstofundaccountsbycreditcardorbanktransfers.44Companiesthattookthealternativeapproachofcreating

digitalcurrencieswhichwereconvertibletoandfromexistingcurrencies,suchasDigiCash,GoldMoney,Pecunix,andWeb-Money,45havenotbeenassuccessful46duetoacombinationoflackofcompetitiveadvantages,managerialincompetence,anddubiouslegality.ThefailureofDigiCashisinstructive.47Usersturnedouttohavenoqualmsaboutenteringcreditcardinformationonline48(oneofDigiCashssupposedadvantages)

43Tucker,supranote8,at601;CarlKaminski,OnlinePeer-to-PeerPayments:PayPalPrimesthePump,WillBanksFollow?,7N.C.BANKINGINST.375,375(2003)44Tucker,supranote8,at601-602;Kaminsky,supranote43,at378-379.PayPalhandlespaymentsformorethan100,000websitesin18currencies,andhasmorethan100millionuseraccounts.Id.Competitorsabound,suchasGoogleCheckout,AmazonPayments,Dwolla.Seehttp://news.cnet.com/8301-19882_3-20025966-250.html.45Tucker,supranote8,at601-602.46SeeSarahJ.Hughesetal.,DevelopmentsintheLawConcerningStored-ValueCardsandOtherElectronicPaymentsProducts,63BUS.LAW.237,257&n.157(2007)(notingbankruptcyofDigiCash,oneofthelargestdigitalcurrencyproviders).47DigiCashwasoneoftheearliestdigitalcurrencies,begunintheearly1990s,andwasinitiallyrunbyDavidChaum,whohadobtainednumerousdigitalcurrency

patentsinthe80srelatedtoensuringanonymityusingcryptography.DigiCashshistory,upuntilitsbankruptcyin1998,isoneofpoormanagement,missedopportunities,andfaileddeals.HowDigiCashBlewEverything,translatedbyDutchnativesandeditedbyIanGriggfromoriginalarticleHoeDigiCashallesverknalde,NEXT!,availableathttp://cryptome.org/jya/digicrash.htm(lastvisitedApr27.1999).See,e.g.,http://www.bitcoin.org/smf/index.php?topic=3755.0(comparingDigiCashtoBitcoin).48Tucker,supranote8,at593-4.


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anddidnotcareaboutDigiCashsstronganonymityguarantees49(asisespeciallyevidenttoday50).Similarly,fundamentalfeaturesofotherdigitalcurrenciesalsoturnedouttobeliabilitiesratherthanassets.GoldMoneyandPecunix,forexample,aredenominatedingoldratherthantheU.S.Dollar,andmostconsumerswouldprobablynotbeinterestedinshoppingandbrowsingitemswithpricesinan

unfamiliarcurrency.51

Similarly,Bitcoinisunlikelytobeparticularlycompetitiveinthetraditionalecommercemarket.Mostconsumersdonotcareaboutanonymityorcentralization.TheydonotwanttoshoprealgoodsinpriceslistedinBitcoininsteadofdollars.TheyareunafraidofinflationofthemoneysupplybytheFederalReserve.Furthermore,Bitcoinhasnobuiltinanti-fraudcapabilities,whereascompanieslikePayPalhaveinvestedmillionsofdollarsinprotectingcustomersagainstfraud.52ItistruethatoneofBitcoins(andotherdigitalcurrencies)largestbenefitsisthelowtransactioncosts.However,ascreditcardsbecomelessubiquitousonline,there

49StevenLevy,E-money(ThatsWhatIWant),Wired,2.12(Dec.1994),availableathttp://www.wired.com/wired/archive/2.12/emoney.html(DavidChaumhasdevotedhislife,oratleasthislife'swork,tocreatingcryptographictechnologythatliberatesindividualsfromthespookyshadowsofthosewhogatherdigitalprofiles.[H]eadvocate[es]aformof[digitalcurrency]thatfitsneatlyintoaprivacyparadigm,wherebythedetailsofpeople'slivesareshieldedfromthepryingeyesofthestate,thecorporation,andvariousunsavoryelements.).50Individualsgiveenormousamountsofdatatofinancialcompanies,suchascreditcardcompanies,andsocialnewswebsites,suchasfacebook.Thesecompanies,inturn,whetherwithusersconsentorsimplywithoutuserscomplaints,sellorgivethisinformationtoothers.See,e.g.,JoshConstine,TheFacebookCreditsGetBalanceAPIHelpsDevelopersDynamicallyPriceVirtualGoods(Mar.4,2011),http://www.insidefacebook.com/2011/03/04/facebook-credits-getbalance-api/(notingthatfacebookallowscompaniesthatdevelopapplicationsusingfacebookcreditstoseethecreditsbalanceofitsusers,whichwouldallowanapplicationtoidentifyhighrollerswithalargebalanceofCreditsanddynamicallypricevirtualgoodstoincreasepurchaseprobabilityorprofitmargin,improvingmonetization.);Offermatic,http://www.offermatic.com(websitethatgivesindividualsdealsin

returnforsharingcreditcardpurchasehistory).51See,e.g.,SirFibble,BitCoinFee-FreePaypalAlternative?(Mar.21,2011)http://forums.whirlpool.net.au/forum-replies.cfm?t=1663664([I]nternetcurrenc[ies]haveneverworkedandneverwill.Paypal,Paymateetcworkbecausetheytradeinmoneynotfictionalwidgets.).52AlthoughBitcoiniscryptographicallysecure,fraudisoftenaresultofhumanratherthantechnicalfailure.Scammerscanuseelectroniccurrenciesthatdonotallowchargebackstopreventvictimsfromgettingtheirmoneyback.


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isnoreasontothinkthatthecurrentpaymentprocessingmarketleaderswillnotcompetitivelyreducetheirtransactioncosts.53

2.Micropayments

Anotherkindofecommerceinvolvesverysmallpayments,calledmicropayments,fordigitalgoods.Becausetransactioncoststhroughexistingpaymentprocessorsaresolarge,makingpaymentsof,say,10centsor30centsovertheinternetisgenerallyimpractical.Paymentsassmallas99centswereonceconsideredmicropaymentsbutcompanieslikeApplehavehandled99centpaymentswithoutahitchusingcreditcards.Servicesinvolvingsmallerpaymentsaregenerallynon-existent.Ascreditcardsbecomealesscommonwaytofundonlinepaymentaccounts,transactioncostsarelikelytofall,perhapsmakingmicropaymentsfromPayPalandsimilarprocessorsfeasible.Bitcoincouldbecompetitiveinthisspacebecauseofthelowtransactioncosts.Furthermore,thedenominationinnon-U.S.dollarsisprobablylessimportantinthismarket.YouTipItisamicrodonation

servicethatallowsindividualstotipwebsitesorbusinessesusingbitcoins.54

However,acompetitorthatreliesontraditionalfiatcurrenciesandPayPal,calledFlattr,exists;55YouTipItandsimilarBitcoinservicesmaynotsucceedunlesstheycanoffersomethingthattraditionalservicescannot.

3.VirtualWorldandGame-RelatedCommerce

Asidefromtraditionalecommerceandmicropayments,individualsalsoengageincommerceinvirtualworldsoringames,suchasbuyingorsellingdigitalclothinginSecondLifeorbuyingcropsinFarmville.56Wherealternativedigitalcurrenciesfailedtogainafoot-holdinreal-worldecommerce,theyflourishedinvirtual

ecommerce.Forexample,inthevirtualworldSecondLife,nearlyallcommerceistransactedinLindenDollars,withaboutUSD$1.5millionworthoftransactionsdailyin2007,57andaboutUSD$30millionworthofLindenDollarsinexistenceattheendof2010.58FacebookhasrecentlyintroducedFacebookCredits,requiringthiscurrencytobeusedforgamesthatrunonFacebook,suchasFarmville,andtaking30%ofallpurchasesmadewithFacebookcredits.

53SeeBillZielke,WhyCreditCardsAreNottheFutureofOnlinePayment(Mar.2,2011)http://mashable.com/2011/03/02/credit-card-decline/([S]eniordirectorofMerchantServicesatPayPalnotesthatuseofcreditcardsonlinehasdeclinedandwillcontinuetodeclinebecauseoftheinconvenienceofusingcreditcards

onlineandalsobecauseofhightransactionfees).54Seehttp://www.youtipit.org.55Seehttp://flattr.com/56Wikipedia,FarmVille:Gameplay,http://en.wikipedia.org/wiki/FarmVille(lastvisitedMar.15,2011).57http://lindenlab.com/pressroom/general/factsheets/economics58http://community.secondlife.com/t5/Featured-News/The-Second-Life-Economy-in-Q4-2010/ba-p/674618


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AsFacebookshugecutindicates,virtualworldandgame-relatedcurrencieshavethepotentialtobebigmoneymakersfortheissuersofthecurrency.Ontheotherhand,developingasecurevirtualcurrency,protectedfromthepossibilityoffraud,andtheaccompanyingnecessaryexchangesrequiresasignificantinvestmentof

technicalandlegalexperience,andalsotime.Game-relatedvirtualcurrenciespresentanumberofotherproblemstoo,relatingtocentralizedanddiscretionarycontrol.Thecentralgameauthoritycandecidetoissuealotofnewcurrency,eithertoitselfortousers.Suchanincreasemaybeworrisomeifitdecreasesthevalueofthecurrencyandifcertainuserskeepanon-trivialshareoftheirwealthinthevirtualcurrency,asisprobablythecaseinSecondLife.Similarly,ifhackersorthegovernmenttargettheissuerscurrencysystem,holdersofthecurrencymaybesurprisedtofindtheirin-gamewealthsuddenlyinaccessible.BecauseBitcoincouldalleviateoreliminateanumberoftheseproblems,ithasthepotentialtobecomeadefactostandardforcertainvirtualandgame-related

currencies.DeveloperswhowanttofocusonprovidinganenjoyablevirtualorgameexperiencecoulduseBitcoininsteadofreinventingthewheel.AtleastonedeveloperhasalreadymadeBitcointheingamecurrencyforhisvirtualworld.59ThemanyavailableimplementationsofBitcoinwouldallowthedeveloperstoeasilyintegrateBitcoinfunctionalityintotheuserinterfaceofthevirtualworldorgame.Similarly,becausethecompanywouldnotbethecurrencyissuer,individualswouldnothavetoworryaboutthecompanyinflatingthecurrency,failing,andsoon.Usersmightalsohavemoretrustinthesystemknowingthatevenifthecompanysupportingthegameorvirtualworldfailsorisputunderlegalpressure,thecurrencywillsurvive.

Foracertainsubsetofgamesorvirtualworlds,however,Bitcoinwouldbeinappropriate.InWorldofWarcraft(WoW),forexample,playerscanearnWoWGoldbyaccomplishingvariousin-gametasks.Blizzard,themakerofWoW,nodoubtintendedforaplayersin-gamewealthtorepresentskillandtimeinvestedinthegameratherthanout-of-gamewealth.Inthisgame,asinothers,thecreatorsandplayersmayagreethatindividualspoorintherealworldcanescaperealityandberichin-game.60Thus,theEndUserLicenseAgreementgenerallyprohibitstheout-of-gamesaleofWoWGold.(Althoughthisprohibitionisgenerallyunsuccessful,withsignificantWoWGoldtradedoutsidethegame).Forthesekindsofgames,Bitcoinwouldbeinappropriatesinceitiseasilyconvertibleintoothercurrenciesinexchanges.

59nextnonce,Bitcoinstolemyweekend!,http://www.bitcoin.org/smf/index.php?topic=4494.msg65921#msg65921(March15,2011)(describingintegrationofBitcoinintoabrowser-basedMMOathttp://minethings.com).60Seehttp://www.bitcoin.org/smf/index.php?topic=3798.0.


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b.Gold-BackedCurrencies

Certainindividuals,calledgoldbugsandpermabearsareinterestedinalternativecurrenciesbecauseoftheirpoliticalbeliefsandinvestmentpredictions.Theseindividualsbelievethatcentralbankinginstitutionsthathavetheauthorityto

printmoremoney,liketheFederalReserve,corrupttheeconomyandthereforetheydonottrustgovernment-backedfiatcurrencies(thoseunredeemableforcommodities).61Thus,theseindividualsprefertoholdtheirwealthandmakeexchangesincurrenciesbackedbycommoditiesusuallygold.Ananalysisofthisperspectiveisbeyondthescopeofthispaper,62butacomparisonofBitcointoothergoldbugcurrenciesisinstructive.Currenciesprovideindividualswithtangiblemedium[s]ofexchangethatsellerswillacceptfortheirgoodsorservices.63Historically,manycurrencieswerespecie,meaningtheywereinherentlyvaluable,suchasgoldorsilvercoins.Toalleviatetheproblemsofcarryingaroundheavycoins,somegovernments,banks,or

privatecompaniescreatedpapermoneyredeemableforacertainamountofgoldoranothercommodity.(Sometimes,thesebackingentitieskeptlessofthecommodity,suchasgold,intheirreservesthanwouldbenecessaryifeveryonedecidedtoredeemtheirnotes).Inothercases,somegovernmentscreatedpapercurrenciesthatwerenotredeemableforanycommodity(orsimplyeliminatedtheabilitytoredeemthecurrencyforthecommodityinwhichitwaspreviouslyredeemable64).Thesefiatcurrencieshadvaluesimplybecausetheirbackinggovernmentsidentifiedthecurrencyaslegaltenderacceptableforpayinglegaldebts,includingtaxes.65

61See,e.g.,nextnonce,BitcoinForum,Bitcoinstolemyweekend!,http://www.bitcoin.org/smf/index.php?topic=4494.msg65921#msg65921(Mar.15,2011)(I'mahugefanofalternativecurrencies,especiallyconsideringthegrossmismanagementoftheUSDandotherfiatcurrencies.).62Theparadigmaticargumentisperhaps:RonPaul,EndtheFed(2009).Ingeneral,mostmainstreameconomistsbelievethatcentralbanksplayanimportantandpositiveroleineconomies,andthatpeggingcurrenciestogoldorothercommoditiescancauseunnecessaryeconomicharms.SeeEichengreen,Barry(1992)GoldenFetters:TheGoldStandardandtheGreatDepression,1919-1939,Preface;SpeechbyBenBernanketotheConferencetoHonorMiltonFriedmanat

UniversityofChicago,November82002,availableathttp://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/default.htm.63SeeCarnell,Macey,Miller,TheLawandBankingofFinancialInstitutions(4thed.2009).64http://en.wikipedia.org/wiki/Nixon_Shock65SeeJuliaAlpertGladstone,ExploringtheRoleofDigitalCurrencyintheRetailPaymentsSystem,31NEWENG.L.REV.1993,1196(1997).


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Thesegovernmentscan(andusuallydo)printmorecurrencyovertime,increasingthesupplyofthecurrencyrelativetodemand,whichreducesthevalueofthecurrencyandcorrespondinglyincreasespricesinaprocessknownasinflation.66Morerecently,severalprivatecompanieshavecreateddigitalcurrenciessometofacilitateecommerce,asdiscussedabove,butotherstoserveneedsofgovernment-

distrustinggold-bugs.67

Bitcoinissimilartothedozensofgold-backeddigitalcurrenciesthatalreadyexist,suchaseGoldorGoldGrams,becauseitisliquid,digital,easyforend-userstoexchangewithoneanother,generallyanonymous,andpopularamonggovernment-distrustinggoldbugs.However,Bitcoinisdifferentinseveralkeyways:(1)thereisnocentralauthoritythatcanissuenewcurrencyordefraudholdersofthecurrency(e.g.,byholdingfractionalreserveswhilepromisingtoholdfullreserves),(2)itisfiatmoneyratherthancommoditymoney,and(3)itmaybepracticallydifficulttoregulatebecausethereisnocentrallycontrollingauthority.

66Controloverthemoneysupplyisanimportantleverofmonetarypolicyforgovernments,whichcanbeusedtoprotectagainstrecessionsordepressions.Ontheotherhand,governmentscanprintmoneyirresponsiblyandcausehyperinflation.Zimbabwe,forexample,increaseditsmoneysupplybyabout10,000

timesin2008andexperiencedamorethan200millionpercentinflationratein2008.http://en.wikipedia.org/wiki/Zimbabwean_dollar#Hyperinflation.Oncurrencyexchangemarkets,thevalueofacurrencyagainstothercurrenciesisstronglyinfluencedbypredictionsregardinginflationandwhetheragovernmentwillbeabletomeetitsdebts(asagovernmentsstrugglestopayitsdebts,itwillbemorelikelytoprintmoremoney,causinginflation).67Thesedigitalcurrencieshavegenerallyfailedtobecomemarketleadersinecommerce,asdiscussedabove.SeegenerallyTucker,supranote8.


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Form Value Backing

U.S.Dollarand

othermodern

currencies

Paper Fiat U.S.Government

LibertyDollar(no

longercirculating) Paper Gold

Private

corporation

PhoenixDollar(no

longercirculating)68

Coin SilverPrivatecorporation

DigitalGold

CurrenciesDigital Gold

Privatecorporation

Bitcoin Digital Fiat Nolegalentity

IV.IsBitcoinSustainable?

Thevastmajorityofcurrenciesarebackedbygovernments(orotherlegalentities),commodities,orboth.SowhowouldtrustBitcoin,acurrencybackedbyneither?ButindividualsapparentlydotrustBitcoin,buyingbitcoinsataratesufficienttokeepBitcoinsalmostatparitywiththedollar.Thispartexamineswhetherthistrustismisplaced.

a.IraqiSwissDinar

Atleastonecurrency,theIraqiSwissDinar,wasbackedbyneithergovernmentnorcommodityyetheldastablevalueandnevercollapsedoveratenyearperiod.This

fiatcurrency,printedwithSwitzerland-manufacturedplates,wasbackedbytheIraqigovernmentbeforethe1990GulfWar.BecauseofsanctionsimposedonIraqduringthewarthatpreventedimportingmorenotes,SaddamHusseinsgovernmentdisendorsedtheoldcurrencyandcreatednewSaddamdinars.TheSwissDinarscontinuedtocirculateinnorthernKurdishregionsofIraq,maintainingastabletradingvalue.Bycontrast,SaddamHusseinprintedanenormousamountofnewcurrency(asdidcounterfeitersbecauseoftheprimitivetechnologyusedtoprintthenotes),causinghyperinflationintheSaddamDinars.Afterthe2003U.S.invasionofIraq,theU.S.centralprovisionalauthorityallowedindividualstotradeinSwissDinarsfornewSadamDinarsatanexchangerateof1SwissDinarto150SadamDinars.69

68http://vertoro.com/phoenix.htm;http://goldprice.org/buy-silver/2006/09/phoenix-dollar.html.69SeeCentralBankofIraq,HistoryoftheCBI,1990-2003and2003Today,http://www.cbi.iq/index.php?pid=History(lastvisitedMar.15,2011);MervynKing,Theinstitutionsofmonetarypolicy,7-11(2004),availableathttp://www.bis.org/review/r040202b.pdf?frames=0;http://en.wikipedia.org/wiki/Swiss_dinar.


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TheIraqiSwissDinarshowsthatacurrencylikeBitcoin,withoutcommodityorinstitutionalbacking,maybesustainable.Nevertheless,Bitcoinmayfailforavarietyofreasons,anditbehoovesBitcoinusersandinvestorstounderstandtherisks.

b.ConfidenceLikealmostanythinginwhichindividualscaninvesttheirmoney,Bitcoinisprobablysusceptibletoirrationalbubblesandalsoirrationalorrationallossofconfidence,whichwouldcollapsedemandrelativetosupply.Asexplainedinmoredepthbelow,confidencemightcollapseinBitcoinbecauseofunexpectedchangesintheinflationrateimposedbythesoftwaredevelopersorothers,agovernmentcrackdown,thecreationofsuperiorcompetingalternativecurrencies,oradeflationaryspiral.(Confidencemightalsocollapsebecauseoftechnicalproblems:iftheanonymityofthesystemiscompromised,ifmoneyislostorstolen,orifhackersorgovernmentsareabletopreventanynewtransactionsfromsettling).

1.ImproperUseofDiscretionaryAuthority

SomeputconfidenceinBitcoinbecausetheybelievethatBitcoinhasnocentralinstitutionwithdiscretionaryauthoritytoincreasethemoneysupplymorequicklythantheinflationratebuiltintothesoftware.However,eitherthedevelopers70ora

70AlthoughthedetailsoftheBitcoinProtocol,includingtheinflationrate,weresetbyBitcoinscreator,SatoshiNakamoto,in2009,afive-memberdevelopmentteamcontinuetoworkonthesoftware.Theyfixbugs,makechanges,andissuenew

releasesonthemainBitcoinwebsite.See,e.g.,http://www.bitcoin.org/smf/index.php?topic=3832.msg54809#msg54809(describinganinstanceinwhichthedevelopmentteamsuccessfullyrespondedtoasecurityflawthatallowedanindividualtoawardhimself184billionbitcoinsbyfixingtheflawandeliminatingtheoffendingtransaction).ThisdevelopmentteamconstitutesthedefactocentralbankofBitcoin.Iftheyweretodecidethattheinflationrateneededtobechangedandupdatedthesoftware,mostuserswouldprobablyusethenewversionofthesoftwarebecauseoftheirtrustinthedevelopmentteam.Seehttp://www.bitcoin.org/smf/index.php?topic=3832.msg54809#msg54809(describinginstanceinwhichmajorityofBitcoinclientsswitchedtoanewversion

ofthesoftware).ThisdevelopmentteammaydecidetochangecoreassumptionsoftheBitcoincommunityeitherbecauseithonestlyandcorrectlybelievesdoingsoisinthebestinterestoftheBitcoincommunityorbecausethedevelopmentteamhasbeenco-optedbyaparticularinterestgroup.http://www.quora.com/How-can-Bitcoin-be-hacked/answer/Sebastiano-Scr%C3%B2fina(Giventheprojectisopen-source,whatwouldpreventcentralbanks,governments,keynesians,andotherBTCcompetitors/enemiestoinfiltratethecommunityofdevelopersinordertopushtheirownagendas?Oneofthepossibleinfiltrationattackscouldbetopushfor


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convincingcoalition(i.e.,agroupthatreleasesacompatibleversionofBitcoinwithdifferentinflationsettingsandconvincesamajorityofuserstoswitch)71couldprobablyexercisediscretionaryauthoritytochangetheinflationrate.Suchanexerciseofdiscretion,evenifdonewithgoodintentionsandsupportedbyamajorityofBitcoinusers,mayneverthelesscausemanyindividualstolose

confidenceinBitcoinandsellofftheirholdings,startingapanic.Alternatively,iftheinflationrateisincreasedsomuchthatBitcoinundergoeshyperinflation,Bitcoinsvaluewouldprobablydropprecipitously.

2.SuperiorCompetingCurrency

ThecreationofasuperiorcompetingcurrencycouldleadtoacrisisofconfidenceleadingtoacollapseofBitcoinsvalue72orcouldjustleadtoapermanentreductionofBitcoinsvalue.73

mintingmorethan21MBTCandstopthedeflationaryprocessbuilt-ininthe

conceptofBTC:lotsofeconomicalandpoliticalargumentscouldbeusedtosupportthisideainaveryrationalfashion.Manyotherinfiltrationattacksarepossibleandjustuptoyourimagination.).71AcoalitionmaytakecontroloftheBitcoinnetworkbyconvincingamajorityofBitcoinuserstouseadifferentversionofthesoftware.http://www.bitcoin.org/smf/index.php?topic=4740.0.OneBitcoinuserhastermedthisvulnerabilitymobrule.temp1029,Re:CounterfeitingandLossPrevention(Feb24,2011),http://www.bitcoin.org/smf/index.php?topic=3832.msg54605#msg54605.Suchacoalitionmightsucceedforanynumberofreasons.Forexample,itmayarguethatBitcoinisundergoingadeflationaryspiralandneedsahigherinflationratetobe

sustainable.See,e.g,http://www.bitcoin.org/smf/index.php?topic=4940.0(askingwhetheramajoritywouldsupportmakingtheinflationrateconstantratherthanbeinghalvedeveryfouryears).Oritmayappealtoprejudice(Amajorityofbitcoinsareowedbymembersofadisfavoredethnicgroup.Wemustinflatethecurrencytoeliminatetheireconomicpower!)orpopulism(Amajorityofbitcoindebtisowedtoevilcorporations.Wemustinflatethecurrencytotransferwealthtocreditorsfromdebtors!).72Assomeindividualssellbitcoinstobuythenewcurrencyotherindividuals,inapanic,couldstarttoselltheirbitcoinsatfire-saleprices,afraidofbeingthelastonestoownbitcoins.Insomeways,suchalarge-scaledefectionwouldresemblethedefectionsfromoldertonewertechnologieswherethetechnologieshavenetwork

effects.Forexample,Friendsterisasocialnetworkingsitecreatedin2002,beforeFacebook.Friendsterinitiallyhadthelargestmarketsharebuthadanumberoftechnicalproblems,suchasitsslowwebsite.Veryquickly,FacebookovertookFriendsterintheU.S.market,asparticipantsabandonedtheirFriendsteraccountsindroves.73Apanicwoulddestroythevalueofbitcoinsiftheyonlyderivedtheirvaluefromthefactthatmanymerchantsandserviceproviderswerewillingtoacceptbitcoinsfortheirgoodsandservices.C.f.BitcoinFAQ,WheredoesthevalueofBitcoinstem


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3.GovernmentCrackdown

AlthoughBitcoinmaybedifficulttoshutdownbecauseofitsdecentralizednature,agovernmentcrackdownonBitcoinmayneverthelesscauseacrisisofconfidenceespeciallyifmanyBitcoinusersdonotwanttoownacurrencythatisassociated

withcriminality.74

4.DeflationarySpiral

BitcoinmightundergoadeflationaryspiralthatcausescertainindividualsorindustriestoabandonBitcoin,75possiblycausingapanicorjustapermanent

from?WhatbacksupBitcoin,http://www.bitcoin.org/faq#Where_does_the_value_of_Bitcoin_stem_from_What_backs_up_Bitcoin(lastvisitedMar.26,2011)(Bitcoinshavevalueiftheyareaccepted

aspaymentbymany....Inasense,youcouldsaythatBitcoinisbackedupbythepricetagsofmerchantsapricetagisapromisetoexchangegoodsforaspecifiedamountofcurrency.).Yetthereisanotherwaytovaluethem:asacurrencywhosesupplygrowsmuchlessslowly(overthelongterm)thanalmostanyothercurrencyinexistence.Recognizingthisvalue,investorsmaypurchasebitcoinsasothersdumptheminapanicstabilizingBitcoinsvalueandensuringitscontinuedexistence.74In2006,theU.S.MintwarnedconsumersthatuseofLibertyDollars,analternativemetal-backedcurrencyprivatelyissuedintheU.S.,isillegal.U.S.Mint,PressRelease,LibertyDollarsNotLegalTender,UnitedStatesMintWarnsConsumers:JusticeDeterminesUseofLibertyDollarMedallionsasMoneyisaCrime

(Sept.14,2006),http://www.usmint.gov/pressroom/index.cfm?flash=yes&action=press_release&id=710[hereinafterU.S.Mint,LibertyDollarConsumerWarning].LibertyDollarscreatorcomplainedthattheU.S.Mintswarninghadasubstantialchillingeffectandeliminateddemandforthecurrency,causingeconomicdamagetoLibertyDollarowners.Complaint,Nothaus,2007WL4579959(2007)para15.75Moderneconomists,followingmodernmonetarytheory,believethatdeflationthedecreaseinpricesovertimecanhavedeleteriouseffectsonaneconomy.Deflationcanleadtoadeflationaryspiral:pricesfall,causinglowerproduction,leadingtolowerwages,leadingtolowerdemand,andfurtherdecreasesinprices.ManyeconomistsbelievethatadeflationaryspiralcausedtheGreatDepressionand

othermajorrecessions.Tocounteractdeflationandkeepinflationmanageable,theU.S.centralbank,knownastheFederalReserve(colloquiallyknownastheFed),managesboththesupplyanddemandformoney.Generally,asthesupplyofmoneydecreasesanddemandincreases,moneybecomesmorevaluableandgoodscostlessinthatmoney.Themostwell-knowntactictheFedusesistosetthediscountwindowinterestratetherateatwhichotherbankscanborrowfromit.Ahigherratediscouragesborrowing(loweringdemandformoney)andalowerrateencouragesborrowing(increasingdemandformoney).


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depressioninBitcoinsvalue.Sincetheupperlimitofbitcoinsisfixedat21million,bitcoinswillbecomemorevaluableovertimeasthesupplyofgovernment-backedfiatcurrenciescontinuetoincrease.76Aspricesdenominatedinbitcoinsfall,producersmayrespondbyloweringproduction,leadingtolowerwages,lowerdemand,andfurtherdecreasesinprices.77Theendresultofsuchaspiralis

underemployedhumancapitalandothermeansofproductionanddestructionofwealth.Thus,industriesusingBitcoin78thatfallintosuchaspiralmaydecidetoabandonBitcoin.EventhepossibilityofsuchaspiralmaylimitBitcoinsreach.79

76UnliketheDollar,Bitcoinhasnocentralbankthatcanpulltheleversofmonetarypolicy.WhiletheFedwillindefinitelyincreasethesupplyoftheDollartotargetalow,stableinflationrate,thesupplyofBitcoinsisfixed:Therewillneverbemorethan21millionBitcoinsinexistence.Thus,asthesupplyofothercurrenciesincreasesfasterthanthesupplyofBitcoinsincreases,Bitcoinsarelikelytocontinuallyappreciateinvalueovertime.(ThisisnottosaythatBitcoinsareagoodinvestment:Bitcoinsappreciationmaybemuchlowerthaninvestmentreturnsthan

eventhemostrisklessinvestmentstreasurybills.Furthermore,althoughthesupplyofBitcoinswillneverincreasebeyond21million,demandcouldalwaysfallovertime.)Thus,thepriceofgoodsinBitcoinswilldecreaseovertime,indicatingthatBitcoinisadeflationarycurrencyandmaybesusceptibletoadeflationaryspiral.77Aconcernthatoftengoeshandinhandwithdeflationthescarcityofsmall-valuecurrencyisnotaproblemforBitcoin.Bitcoinsareinfinitelydivisible,eliminatingconcernsaboutthefeasibilityofsub-bitpennytransactions.NewcomerstotheBitcoincommunityhaveworriedthatthefixednumberofbitcoinswillinhibitBitcoinsreachbecause[theres]notalotofbitcoinstogoround.Dai,http://www.bitcoin.org/smf/index.php?topic=4740.msg69876#msg69876.

Althoughitwouldbedifficulttohavetransactionsinamountslessthanonecent,transactionsof,say,0.0004bitcoinswouldbesimpleforprogramstohandlebecausebitcoinsareinfinitelydivisible.See,e.g.,http://www.bitcoin.org/smf/index.php?topic=4724.msg69762#msg69762(comparingthefeasibilityoftransactionsin$0.00000001totransactionsof.000000001BTC).Bitcoinusersmightcreatenewnamesforcertainsmallamountsofbitcoinstofacilitatecommunication.0.0004bitcoinsmightbereferredtoas,say,fourmillibitcoins,forexample.See,e.g.,http://www.bitcoin.org/smf/index.php?topic=4234.msg61491#msg61491(suggestingusingmBTC,uBTCandnBTCforsmallamountsofbitcoins).78SeeGavinAndreson,Re:Laborcostsandpricesinaneconomyusingbitcoin

exclusively(Mar.21,2011),http://www.bitcoin.org/smf/index.php?topic=4724.msg69032#msg69032(Ithinkthereisastrongpossibilitybitcoinswillendupbeingusedforsomethingnoneofusisthinkingabout.Maybebigmultinationalcorporationswillusethemtopaytheirinternationalsupplychainsinindustriesthatareusedtoconstantdeflation.).79epii,http://www.bitcoin.org/smf/index.php?topic=4940.msg72218#msg72218(TheeconomicfutureofBitcoinisstillunclear,innosmallpartbecauseitistreadingneweconomicground.ThoughI'mnotpessimisticpersonally,mostpeople


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c.PotentialTechnologyFailures

Besidesthefailurescenariosjustmentioned,technologyfailurescouldpreventindividualsfromtransactinginbitcoinsorcauseacrisisofconfidence,80asthefollowingthreeexamplesillustrate.

1.AnonymityFailure

AllBitcointransactionsarepublic,butareconsideredanonymousbecausenothingtiesindividualsororganizationstotheaccountsthatareidentifiedinthetransactions.However,individualssometimespostaccountnumbersonlineinwaysthatcanbeconnectedtotheironlineidentities.81Itmightbepossible,usingstatisticaltechniquesandsomeidentifiedaccounts,toundotheanonymityofthesystem.82SuchunexpectedandsuddenexposurewouldobviouslybedeleterioustoBitcoinsvalue.83

2.Theft

willstickwithsystemsliketheonestheyknowuntiltheyunderstandenoughsuchthatmakingthechangeissomethingtheycandowithconfidence.).80Seehttps://en.bitcoin.it/wiki/Weaknesses(listinganumberofpotentialtechnologicalvulnerabilities).81ManyparticipantsintheBitcoinForumspostaBitcoinaccountnumberthatcan

beusedtoprovideatipforagoodqualitypost.See,e.g.,http://www.bitcoin.org/smf/index.php?topic=241.msg2044#msg2044(Wanttothankmeforthispost?Donatehere!Flipyourcoinsoverto:13Cq8AmdrqewatRxEyU2xNuMvegbaLCvEe).82Seehttps://en.bitcoin.it/wiki/Anonymity;seealsohttp://www.bitcoin.org/smf/index.php?topic=241.083AnonymityisanimportantfeaturetomanycurrentBitcoinusers.See,e.g.,http://www.bitcoin.org/smf/index.php?topic=241.msg8874#msg8874(Forme,anonymityistheonlyfeatureIneed);http://www.bitcoin.org/smf/index.php?topic=4465.0;all(severalcommentsindicatingthatindividualsuseBitcoinbecauseoftheanonymityitprovides,among

otherfeatures).Similarly,mainstreamconsumersgenerallypreferthattheirtransactionsremainbetweenthem,theirfinancialintermediaries(e.g.,creditcardcompanies),andmerchants.See,e.g.,Facebook,Beacon,andPrivacy(Nov.26,2007),http://www.ryananderson.ca/2007/11/26/facebook-beacon-and-privacy/(recountingstoryoffacebookuserwhoboughtanengagementringfromoverstock.comandwashorrifiedtofindthatthesurprisewasruinedwhenthepurchasewasposted,withouthisconsent,inhisnewsfeedforhisgirlfriendandfriendstosee).


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Likecash,bitcoinscanbelostorstolen.84Keepingbitcoinsononescomputercanbeasdangerousaskeepinglargesumsofcashinonesphysicalwallet,andeachusershouldtakecaretobackupandsecurehisBitcoinwallet.85Alarge-scaletheftofbitcoinsfrommanyuserscouldcreateaconfidencecrisis.86SuchtheftcouldoccurbyavirusortrojanhorsethatinstallsitselfonaBitcoinuserscomputerandsends

thewalletfiletothecriminalwhowrotethesoftware.87

3.DenialofService

AlthoughBitcoinisdecentralizedandgenerallyhasnosinglepointoffailure,itisneverthelesssusceptibletoaformofdenialofserviceattack.88IndividualswithamajorityofthecomputationalpowerintheBitcoinminingnetworkcaneffectivelyprecludeanytransactionfrombeingprocessed.Suchasustainedattackmightsignificantlydepresstheexchangerateandleadtoacollapseofconfidence.Obtainingthenecessarycomputationalpoweriseasy,ifexpensive.89Althoughsome

84Bitcoinsaregenerallystoredinawallet.Individualsmaystorethewalletontheirowncomputersorwithanewalletservice.85See,e.g.,http://www.bitcoin.org/faq#How_do_I_backup_my_wallet.86ButseeHeatherC.Alston,Comment,WillThatBeCash,Credit,orE-Money,1N.C.BANKINGINST.225,253(1997)([C]ustomerswanttoknowwhatwillbedoneintheeventthattheirharddrivecrasheswithstorede-money).Althoughfewindividualsbackedupin1997,sincethen,regularlybackinguphasbecomecustomaryformainstreamcomputerusers.87Bitcointrojanhorsesalreadyexist.SeeBlueMatt,ThecaseoftheRussianScammer,http://www.bitcoin.org/smf/index.php?topic=3628.msg51389#msg51389;seealso

http://www.bitcoin.org/smf/index.php?topic=3596.20.Ascammercreatedaprogramthatpurportedtobackupauserswalletfilebutinsteademailedthefiletothecreatorofthesoftwareanddeletedthewalletfromtheuserscomputer.Id.Usingthisprogram,thescammerwasabletostealmorethan150bitcoinsfromanumberofusers.Id.BecausetheBitcoinwalletisnotencrypted,suchtheftisfairlysimple.Seebrucewagner,AutomaticEncrrytionandPasswordProtectionofwallet.datFile?,https://www.bitcoin.org/smf/index.php?topic=1852.msg22948#msg22948.TheseproblemscanbemitigatedtosomeextentbymakingtheBitcoinsoftwaresecure.However,usinganonlinewalletservicethatsecures,backups,andguaranteesusersbitcoinsmaybeamoresecureoption(oncereliableandlegallyreachable

servicesexist,seehttp://www.bitcoin.org/smf/index.php?topic=3597.0(someindividualsquestioningthereliabilityofsomepopularewalletproviders)).88See,e.g.,http://www.quora.com/How-can-Bitcoin-be-hacked/answer/Sebastiano-Scr%C3%B2fina.89Gainingcontrolofthenetworkinordertopreventtransactionsfromsettlingwouldcost,inMarch2011,ontheorderofamilliondollars,excludingelectricitycosts.ThecurrenttotalpowerintheBitcoinminingnetworkisapproximately500Giga-hashespersecond.AspecializedprocessorcalledaGPUthatcancalculateat


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questionwhyanyonewoulddosuchathing,90severalpartiesmighthavesufficientinterest:governmentswhowanttoshutBitcoindown,91individualswithfutureliabilitiesinbitcoins,92orhackerswhowanttoblackmailabusinessthatreliesonbitcoins.

Insum,astheIraqiSwissDinarillustrates,Bitcoinslackofcommodityorgovernmentbacking,alone,donotdoomBitcointofailure.However,potentialusersshouldbeawarethatitisstillayounganddevelopingcurrency,andcouldpotentiallyfailinmanyways.

V.LegalAlthoughBitcoinmaybemoreresistanttogovernmentattackbecauseofitsdecentralizednature,manyBitcoinusers,includingbothconsumersandbusinesses,areanxiousaboutitslegalstatus.Thatitmayexistinalegalgreyareamay

significantlyhamperdemandforbitcoins.ThisPartexaminesjustafewofthemany

approximately600Mega-hashespersecondcanbepurchasedforapproximately$600.Thus,thecurrentnetworkhasapowerofabout1000ofthesespecializedGPUs.Anindividualcouldthusspendaround$600,000(pluscostsforsupportinginfrastructure)togainamajorityofprocessingpoweronthenetwork.Seehttp://www.bitcoin.org/smf/index.php?topic=5048.0.

Incrediblecomputationalpowercanbepurchasedfromcloudcomputingprovidersovertheinternet,seehttp://en.wikipedia.org/wiki/Amazon_Elastic_Compute_Cloud,hackerscontroland

sellcontroltohugenetworksofcomputerscalledbotnets,seehttp://en.wikipedia.org/wiki/Botnet,andgovernmentagenciessuchastheCIAandNSAlikelyhavesignificantcomputationalpowerattheirdisposal.90Oneusernotesthatevenifanindividualdominatesthenetworkthatentitywillneverearnmorethanfiftybitcoinseverytenminutes.http://www.reddit.com/r/Bitcoin/comments/gam37/what_stops_people_with_capable_of_massive_amounts/c1m73fv.However,thisamountstosubstantialgrossrevenuesofapproximatelyUSD$2.4millionperyear.(Bitcoinonlyawards50bitcoinsevery10minutes;0.9USD/bitcoin*50bitcoins/10minutesx60minutes/hourx24hours/dayx365days/year=USD$2.4million).Althoughcreatinganetworkofcomputerspowerfulenoughtogainthemajorityofthenetworkwould

costontheorderof$1million,seenote_supra,electricityandotherinfrastructurecostswouldeatintothisprofitsignificantly.91GovernmentsmayhaveaninterestinshuttingBitcoindownbecauseitisanonymousandmaythereforefacilitateillegaldrugandchildpornographyexchangesinadditiontomoneylaundering.92Individualswhohavefutureliabilitiesinbitcoins,suchasaborrowerorafuturescontractparty,havesignificantincentivetoreducetheirfutureliabilitiesbygenerallywreakinghavocinthesystemtocollapsethevalueofthecurrency.


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relevantlegalissues.IconcludethatwhilestatutesostensiblydesignedtoenforcethefederalgovernmentsmonopolyonissuingcurrencydonotapplytoBitcoin,otherstatutes,suchasthefederalsecuritiesacts,probablydo.

a.FederalGovernmentsMonopolyonIssuingCurrencies

Commentatorsoftenwritethatthefederalgovernmenthasanexclusiverighttoissuecurrency93becauseoftheConstitutionsassignmentofcontrolovercurrencytoCongresstotheexclusionofstates94andtheFederalReservescontroloverthemoneysupply.Tothosetakingthefederalgovernmentsmonopolyatfacevalue,therecentconvictionofacreatorofaprivatecurrencycalledtheLibertyDollarcomesasnosurprise.TheDepartmentofJustice,inapressreleasenotingtheconviction,statedItisaviolationoffederallawtocreateprivatecoinorcurrencysystemstocompetewiththeofficialcoinageandcurrencyoftheUnitedStates.95However,organizationshavebeenissuingacertaintypeofprivatecurrency

communitycurrenciesmeanttocirculateonlywithinaparticularcommunityintheU.S.fordecades.Governmentofficialshaveknownaboutthesecurrenciesandhavecommentedthattheyseemtoposenothreat.96Thus,thegovernmentssupposedmonopolyismorelimitedthanitmayseematfirst.

93See,e.g.,BrianW.Smith&RamseyJ.Wilson,HowBesttoGuidetheEvolutionof

ElectronicCurrencyLaw,46AM.U.L.REV.1105,1111(1996-1997).94TheConstitutiongivesCongressthepowertoTocoinMoneyandregulatetheValuethereof,Const.ArtI8,andprohibitsstatesfromcoin[ing]money.ConstArtI10.95DeptofJustice,PressRelease,DefendantConvictedofMintingHisOwnCurrency96BarbaraA.Good,FederalReserveBankofCleveland,PrivateMoney:EverythingOldisNewAgain(1998),availableathttp://www.clevelandfed.org/research/commentary/1998/0401.pdf(discussingIthacaHoursandotherlocal,privatecurrenciesandalsonotingthatPrivatemoneyisnotprohibitedifitcomplieswithcertaingovernmentregulations);Smith&Wilson,supranote93,at1115n.55(See,e.g.,GreenspanIsLow-KeyAboutE-Cash

ImpactonPaymentSystem,15BANKINGPOLYREP.,Mar.4-18,1996,at26,27("'Inmyjudgment,someoftherecentspeculationaboutriskstomonetarypolicy...hasbeenabitalarmist.'(quotingFRBChairmanAlanGreenspan));EdwardW.Kelley,Jr.,Member,BoardofGovernorsoftheFederalReserveSystem,RemarksattheDigitalCommerceConference4(May6,1996).Mr.Kelleypointsoutthat,evenifeverypersonintheUnitedStatesheld$150inelectroniccurrency,thetotalvaluewouldamounttolessthan$50billion,whichisinsignificantrelativetothecurrentM1monetaryaggregateof$1trillion.Seeid.).


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TheConstitutionhasnothingtosayaboutprivatepartiescreatingmoney.97Instead,twosetsoffederalstatutesaffectprivatepartiesabilitiestocreatecurrencies:TheStampPaymentsActof1862andfederalcounterfeitingstatutes.

1.TheStampPaymentsActof1862

Inthe19thcentury,companiesissuedprivatecurrenciesinsmalldenominationsinresponsetoshortageofsmallU.S.coins.98(Individualswerehoardingsmall-valueofficialU.S.coinsbecausethemetalinthemwasworthmorethantheirfacevalues,duetoinflation).Economistsandpoliticiansarguedthatprivatecurrenciesinsmalldenominationswereendangeringtheeconomyandcontributingtoinflation.Aboutadozenstatesattemptedtoeliminatethesecurrenciesbyprohibitingprivateissueofnotesandtokensinvalueslessthan$5.Congresseventuallyadoptedthesubstanceofthesestatelawsassection2oftheStampPaymentsAct,andinsection1,allowedU.S.postagestampstobeusedforgovernmentdebtslessthan$5.

Section2oftheStampPaymentsActof1862states:Whoevermakes,issues,circulates,orpaysoutanynote,check,memorandum,token,orotherobligationforalesssumthan$1,intendedtocirculateasmoneyortobereceivedorusedinlieuoflawfulmoneyoftheUnitedStates,shallbefinedunderthistitleorimprisonednotmorethansixmonths,orboth.99

JudicialinterpretationsindicatethatthepossibilityofwidespreadcirculationandthereforecompetitionwithofficialcurrencyisthetouchstoneoftheAct.Morespecifically,theActisunlikelytoapplytoanythingthat(1)circulatesinalimited

area,100(2)isredeemableonlyingoods,(3)doesnotresembleofficialU.S.currencyandisotherwiseunlikelytocompetewithsmall-denominationsofU.S.currency,101

97LEWISD.SOLOMON,RETHINKINGOURCENTRALIZEDMONETARYSYSTEM:THECASEFORASYSTEMOFLOCALCURRENCIES95-96(1996).98ThomasP.Vartanian,et.al,EchoesofthePastWithImplicationsfortheFuture:TheStampPaymentsActof1862andElectronicCommerce,BNAsBankingReport(Sept.23,1996).9918U.S.C.336.100SeeUnitedStatesv.VanAuken,96U.S366,368(U.S.1878)(citedbyVartanian,supranote98)(reasoningthatCongressdidnotmeantoprohibitthingsthatwould

circulateonlyinalimitedareabecausesuchthingswereunlikeandwouldnotcompetewithofficialcirculatingsmallchange).101Vartanian,supranote98(citingVanAuken;UnitedStatesv.MonongahelaBridgeCo.,26F.Cas.1292(W.D.Pa.1863)(No.15796);UnitedStatesv.Roussopulous,95F.977(D.Minn.1899)).AllofthesecasesfindthatthecurrenciesinquestiondidnotviolatetheAct,inpart,becausetheydonotphysicallyresembleofficialcurrency.However,thesecasesprimarilyrestedonthefactthatthesecurrencieswereunlikelytocirculatewidelyorasmoneybecausetheywereredeemableingoodsat


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or(4)isacommercialcheck(suchasacustomermightmakeouttoastoretobuysomethingworthlessthan$1).102Althoughthemotivationsbehindthislawhavelongsincepassed,ithasremainedonthebooks,andhasbeenstylisticallyamendedanumberoftimeswithout

considerationofitspresentdayapplication.103

Anumberofexistingcommunitycurrencies,suchasIthacaDollars,Berkshares,andLETS,haveavoidedanylegalattackundertheActbycreatingonlynotesinvaluesgreaterthan$1.104(ThesecurrenciesmayalsofalloutsidetheActsreachbecausetheyareintended,bydesign,tocirculateonlylocally,andalsobecausetheirscripisoftendenominatedinhoursratherdollars105).AlthoughthecaseagainstLibertyDollarsmighthavebeenstraightforwardundertheAct,LibertyDollarcoinsandpapercurrencywerenevercreatedindenominationssmallerthan$1.106Virtualworldcurrencies,suchasLindenDollarsorWorldofWarcraftGold,likelydo

notfallwithintheActsreachbecausethesecurrenciesarenotintendedtocirculateasmoneyortobereceivedorusedinlieuoflawfulmoneyoftheUnitedStates.Thesecurrenciescangenerallyonlybeusedtopurchasevirtualgoodsinaparticularvirtualenvironment,and,likecurrenciesredeemableonlyingoodsorthatonlycirculateinalimitedarea,areunlikelytocompetewithofficialcoinage.107

particularstores.ThuslackofresemblancetoU.S.currency,alone,maynotbeenoughtomaketheActinapplicableifthatthingisneverthelesslikelytocirculatewidely.102SeeU.S.v.Stettinius.103Vartanian,supranote98.104See,e.g.,EllenGraham,Communitygroupsprintlocal(andlegal)currencies,WallStreetJournalatB1(Jun.27,1996);PaulGlover,CreatingCommunityEconomicswithLocalCurrency,http://www.ithacahours.com/intro.html(lastvisitedApr.2,2011)(notingthatIthacaHoursarelegal,amongotherreasons,becausedenominationsareatleast$1.00value);Good,supranote96(notingthatcommunitycurrenciesarelegalif,interalia,theyareissuedindenominationsvaluedataminimumof$1).105See,e.g.,TheIthacaHOURFamily,http://www.ithacahours.com/currency.html(lastvisitedApr2,2011)(indicatingdenominationsofOneHOUR,HalfHOUR,QuarerHOUR,EighthHOUR,andTwoHours).106SeeSusanHeadley,WhatareNORFEDLibertyDollarCoins?:U.S.MintWarnsAboutNORFEDLibertyDollarU.S.CoinLookalikes!,http://coins.about.com/od/coinbuyingadvice/qt/libertydollars.htm(lastvisitedApr.2,2011)(notingdenominationsofLibertyDollarsthatareall$1orgreater).Additionally,punishmentundertheStampsPaymentActislimitedtosixmonthimprisonmentmuchlessthanunderthestatutesvonNothauswasultimatelyconvictedunder.107SeeUnitedStatesv.VanAuken,96U.S366,368(U.S.1878)


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Digitalcurrenciescannotplayitsafethewaycommunitycurrencieshave;thereisnoquestionthattransactionsinsub-dollar(andevensub-cent)valuesoccur.108Unlikescripredeemableforgoods,virtualworldcurrencies,orcommunitycurrencies,Bitcoinismeanttocirculatebroadly,iscertainlyintendedtocirculateasmoney(amongthosewhoacceptBitcoinandproselytizeitsacceptanceby

variousmerchantsandindividuals),andcompetes,incertainways,withU.S.currency.Thus,underoneviewofthecaselaw,BitcoinisprohibitedbytheStampPaymentsAct.However,Bitcoinsupportershaveanumberofpurposiveandtextualargumentsontheirsideandwouldlikelyprevail.BanningBitcoinwoulddolittletopromotetheintentionofCongresspreventingcompetitionwithofficialsmall-valuecurrency(evenifthemotivationbehindthatintentionwerestillrelevanttoday,whichitisnot).Bitcoinismainlyusedovertheinternetandcompeteswithcreditcards,PayPal,andchecksratherthanU.S.coins.EvenifBitcoiniseventuallyusedinin-real-lifetransactions,109onemayargueeitherthatCongresscouldnothave

conceivedofdigitalcurrenciesatthetimethestatutewaswritten(andthereforedidnotintendtoprohibitthem)orthatCongresssfailuretoaddelectroniccashorcoinstothetextwhenitwasamendedin1994indicatesthatCongressdidnotintendfortheacttoapplytodigitalcurrencies.110Anumberoftextualinterpretationswouldsupportthesepurposivearguments.Althoughdigitalcurrenciesareoftendescribedasdigitaltokens,anote,check,memorandum,token,orotherobligationinthestatuteareallphysicalmanifestationsofcurrency,andthereforedonotextendtodigitalcurrencies.111Evenifdigitaltokensarefoundtofallwithinthislist,onecouldarguethatbitcoinsarenotobligationsandthereforefalloutsidethelist.112Furthermore,justastheSupremeCourtfoundthatscrip

108Vartanian,supranote98.109Forexample,Bitcoincouldeventuallybeusedtopurchaseitemsataphysicalstoreorvendingmachineorforindividualswhoarestandingrightnexttooneanothertoexchangemoneyusingtheirsmartphones.110Vartanian,supranote98.Ofcourse,onecouldalsoarguethatCongresssrepassageoftheAct,whenitknewofthepossibilityofdigitalcurrencies,indicatesthatCongresshadnointenttopreventtheActfromapplyingtodigitalcurrencies.111Id.Althoughthephraseotherobligationmaybegeneralenoughtorefertosomethingthatisnotphysical,theprincipleofejusdemgenerisindicatesthatitshouldbeinterpretedasonlyreferringtophysicallymanifestedthings.Inanycase,aBitcoin,unlikeacheckornote,isnotanobligation.112EachoftheitemsinthelistofthingsproscribedbytheActisanobligation,asconfirmedbythelastphrase,orotherobligation.MostofthecasesbroughtundertheActdealtwithobligations,suchasapaperticketthatobligatedtheissuertoprovidepassageacrossabridgeorscripthatobligatedtheissuertoprovide50centsinmerchandise.Abitcoin,however,isnotanobligationithasvalueonlybecauseotherindividualsarewillingtoascribeitvalueandnotbecauseanyentityhaspromisedtoprovidesomethinginreturnforabitcoin.Thus,abitcoinmaynotbeatokenwithinthestatutesmeaningbecauseitisnotanobligation.C.f.Kerry


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redeemableingoodsisnotforalesssumthan$1,113acourtmayfindthatabitcoin,whichisnotredeemableforanyparticularthingandisnotpeggedtothedollar,isnotforalesssumthan$1.114AndonemayarguethatalthoughBitcoinusersintendforBitcointocirculateasmoney,theydonotdosowithinthemeaningoftheActbecausethewordcirculateinthephrasecirculateasmoneyrefersto

physicalcirculationorbecausemoneyreferstophysicalmanifestationsofmoney.115ButBitcoinusershaveotherreasonstofearlittlefromtheStampPaymentsAct.Itisa150year-oldstatutethathasobviouslyoutliveditsusefulness.Courtsbeganlimitingitsapplicationalmostimmediatelyafteritwaspassed.116Federalcourtshavewarnedthatearlymoney-relatedlawsshouldbecautiouslyappliedtonewtechnologies,especiallywherethestatuteprovidescriminalpenalties.117Although

LynnMacintosh,TheNewMoney,14BERKELEYTECH.L.J.659,672n.78(1999)(Anargumentcanbemadethatobligationwasneverintendedtoincludeelectronic

money.).113UnitedStatesv.VanAuken,96U.S366(U.S.1878).114SeeVartanian,supranote98.115SuchanargumentwasmadebyaformerGeneralCounselfortheOfficeoftheComptrolleroftheCurrencyandalsoMasterCard.SeeSmith&Wilson,supranote93,at1110(TheSPAmaybeinapplicabletoallformsofelectroniccurrency,becausesuchcurrencieslackthephysicalcharacteristicsofU.S.currency.InstrumentsthatdonothavethephysicalcharacteristicsofU.S.coinsorpapercurrencycannotbeintendedtocirculateasmoney.).Butseeid.(Iffacedwithanether-basedpaymentsystem,however,acourtmaydismisstherelevanceofdistinctionsbasedonphysicalattributesandinsteadmayfocusonsimilarities

arisingfromnon-physicalproperties,suchastherightsandobligationsoftheholders.).116TheinitialActwaspassedinresponsetoprivateissuerscreatingsmall-denominationtokensorscrip,oftenredeemableonlyinmerchandisefromtheissuer.Thus,thecourtsfindinginVanAukenthatscripredeemableonlyforgoodswasnotprohibitedbytheActisquestionable.Furthermore,althoughonemayarguethatasingleissuersscripcirculatinginalimitedareamaynotcompetewithofficialU.S.currency,thereisnoquestionthatmanysuchprivatecurrenciescirculatingwould,takentogether,challengethemonopolyofofficialstampsandcoins.Thus,thecourtlimitedtheActbyinterpretingitmorenarrowlythanthetextandintentionsofCongresswouldindicateitshouldhavebeen.117UnitedStatesv.Gellman,44F.Supp.360,365-66(D.Minn.1942)(Thedifficultyisthatthisindictmentseekstochargethedefendantswithanoffenseunderstatuteswhichwereenactedoveronehundredyearsagowhenvendingmachinesprobablydidnotexist.Theywereneverframedtoembracetheuseofmetaltokensasasubstitutionformoneyinthelimitedsensereferredto.WhiletheCourtisnotunmindfulthatthereshouldbesomecurbonthefraudthatisbeingperpetratedbytheuseoftheseslugsortokens,reliefmustbesoughtfromCongressandnotfromthecourts.Acriminalstatutemustbestrictlyconstrued,andtoapplythese


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manyacademicworkshavenotedthattheStampPaymentsActmaybeaproblemfordigitalcurrencies,118therehasapparentlybeennopublishedcourtopinioninterpretingtheActsince1899.119AndthecomparativelylenientpunishmentsavailableforviolationsoftheAct(fineandmaximumsixmonthimprisonment)andavailabilityofmorefittingstatutesunderwhichtoattackBitcoin,asdescribedinfra,

arelikelytodissuadeprosecutorsfromtryingtobreathnewlifeintotheStampsPaymentAct.120

2.ProhibitiononCoiningCurrentMoneyandtheLibertyDollarSaga

BernardvonNotHausstartedprintinganddistributingmetallicandpapercurrencycalledLibertyDollarsin1998.121Thecurrencywasbackedbygold,silver,orotherpreciousmetals,andwasintendedtobeinflation-proof,unliketheU.S.dollar.122TheU.S.MintwarnedconsumersabouttheLibertyDollarin2006,123NotHaussofficeswereraidedbytheFBIandSecretServicein2007,124andNotHauswasindictedin2009125andconvictedinMarch2011.126Inpressreleasesrelatedtotheindictment

statutestothefactualsituationdisclosedbythisevidencewouldbeentirelyunwarranted.);Vartanian,supranote98([T]hecourtemphasizedtheissuesraisedbychargingdefendantswithanoffenseunderastatutethathadbeenenactedmorethan100yearsagowhencoin-operatedmachinesdidnotexist,andsuggestedthatproperreliefshouldbesoughtfromCongress.)(citingGellman).118See,e.g.,Vartanian,supranote98;Smith&Wilson,supranote92;Macintosh,supranote112,at671-72.119SeeRoussopulous.AsearchthroughgooglescholarandWestlawhasfoundnocaseinterpretingSection2oftheStampPaymentsActsinceRoussopulous.120Nevertheless,theAct,havingoutliveditsusefulnessandperhapsimpedingthedevelopmentofdigitalcurrencies,shouldberepealed.SeeMacintosh,supranote112,at671-73.121Indictment,UnitedStatesv.NotHaus,5:09CR27,atpara1,13-15,19(May19,2009).122Id.para14,15,19.123U.S.Mint,PressRelease,LibertyDollarsNotLegalTender,UnitedStatesMintWarnsConsumers:JusticeDeterminesUseofLibertyDollarMedallionsasMoneyisaCrime(Sept.14,2006),http://www.usmint.gov/pressroom/index.cfm?flash=yes&action=press_release&id=710[hereinafterU.S.Mint,LibertyDollarConsumerWarning].124http://replay.waybackmachine.org/20080117060339/http://www.rabidquill.com/2007/11/15/frontal-assault-on-freedom-fbi-raids-liberty-dollar/;http://www.courierpress.com/news/2007/nov/15/liberty-dollar-office-raided/125UnitedStatesAttorneysOffice,WesternDistrictofNorthCarolina,PressRelease,FourDefendantsIndictedinUnlawfulCoinOperation(Jun.3,2009),http://charlotte.fbi.gov/dojpressrel/pressrel09/ce060309.htm[hereinafterDOJ,LibertyDollarIndictmentRelease].


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andconviction,theDepartmentofJusticemadeseveralstatementsthatseemedextremelyhostiletoprivatecurrencies,goingasfarasreferringtoNotHausasadomesticterrorist.127NotHaushimselfbelievesthathisindictmentandconvictionwerepolitical,128ostensiblybecausethefederalgovernmentishostiletoprivatecurrencies.

Asathresholdmatter,thestatutesunderwhichNotHauswasconvicted,18U.S.C.485and486,areinapplicabletoBitcoinbecausetheyonlydealwithmetalcoinsorcoinsorbarsthatresembleofficialU.S.orforeigncurrency.129Nevertheless,somehavemusedthattheattackonLibertyDollarindicatethatBitcoinwillbenext.SuchfearsaremagnifiedbythepoliticaloverlapbetweenNotHausandLibertyDollarusers,ontheonehand,andsomeBitcoinusersontheother:gold-bugswhobelievethattheFederalReservedoesharmtotheeconomyandthattheexistenceofaninflationresistantcurrencywouldbenefittheeconomy.130However,theLibertyDollargovernmentactionisbestunderstoodasanattackon

counterfeitingandfraudratherthanasthefirstsalvoinawaragainstprivate126UnitedStatesAttorneysOffice,WesternDistrictofNorthCarolina,PressRelease,DefendantConvictedofMintingHisOwnCurrency(Mar.18,2011),http://charlotte.fbi.gov/dojpressrel/pressrel11/ce031811.htm.[hereinafterDOJ,LibertyDollarConvictionRelease].127Innotingtheindictment,aDOJpressreleasequotedanFBIspecialagentassaying,PeopleunderstandthatthereisonlyonelegalcurrencyintheUnitedStates.WhengroupstrytoreplacetheU.S.dollarwithcoinsandbillsthatdontholdthesamevalue,itaffectstheeconomy.DOJ,LibertyDollarIndictmentRelease.Thepressreleasenotingtheconvictionstated,Alongwiththepowertocoinmoney,

Congresshastheconcurrentpowertorestrainthecirculationofmoneywhichisnotissuedunderitsownauthorityinordertoprotectandpreservetheconstitutionalcurrencyforthebenefitofallcitizensofthenation.Itisaviolationoffederallawforindividuals,suchasvonNotHaus,ororganizations,suchasNORFED,tocreateprivatecoinorcurrencysystemstocompetewiththeofficialcoinageandcurrencyoftheUnitedStates.DOJ,LibertyDollarConvictionRelease.Furthermore,thereleasequotedaU.S.AttorneyassayingAttemptstounderminethelegitimatecurrencyofthiscountryaresimplyauniqueformofdomesticterrorism.Id.128NotHaustoldmethathisconvictionwaspolitical.TelephoneInterviewwithBernardvonNotHaus(Apr.12,2011)[hereinafterNotHausInterview].WhenIaskedhimwhyhebelievedso,hetoldmeitsafact,notabelief.Id.129Section485istitledCoinsorbarsandisclearlylimitedtocoinsorbarsthatarecounterfeitandresembleofficialU.S.orforeigncurrency.Section486,titledUtteringcoinsofgold,silverorothermetal,onlydealswithcoinsofmetal.ABitcoinisadigitaltokenratherthanacoinorabaranddoesnotresembleanyofficialcurrency.130Reachedafterhisconviction,NotHaustoldmethatthatU.S.Dollarsarefiatpiecesofshit.NothausInterview,supra.Healsosaid,Isuggestyougethiptothemonetarysystem.Wakeupandsmellthestench.Id.


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currencies,131asconfirmedbyAssistantU.S.Attorney(AUSA)JillWestmorelandRose,whosuccessfullyprosecutedNotHaus.132Ina2006U.S.Mintpressrelease,133the2009indictment,and2011trial,thegovernmentfocusedonthesimilarityofLibertyDollarstoofficialU.S.currencyandpotentialtoconfuseconsumers.134These

131C.f.SethLipsky,WhenPrivateMoneyBecomesaFelonyOffense:Thepopularrevoltagainstadecliningdollarleadstoacuriousconviction,Op-Ed,WSJ(Mar.31,2011),availableathttp://online.wsj.com/article/SB10001424052748704425804576220383673608952.html?mod=googlenews_wsj(notingtheapparentmismatchbetweentheoriesofcounterfeitusedinthetrial,ontheonehand,andlanguageintheconvictionpressreleaseindicatingthatprivatecurrenciesareillegal).132TelephoneInterviewwithJillWestmorelandRose,AssistantU.S.Attorney,WesternDistrictofNorthCarolina(Apr.7,2011).Ms.Rosesaidthatthecaseisnotaboutprivatevoluntarybarterorcurrencysystems.Thisisacaseaboutfraudand

counterfeiting.IpresentedMs.Rosewithahypotheticalofanalternativecoin-basedcurrencysystem,notpricedindollars,thatpresentednoriskoffraudorcounterfeitingbutwasintendedtobecirculatedandgenerallyaccepted.Rosesaidthatalthoughonecouldmakeanargumentthatsuchacurrencywouldbeprohibitedby18U.S.C.486becauseitwasintendedforuseascurrentmoney,prosecutionsbasedonsuchatheorywouldbeveryunlikelyunlesstherearevictimswhomakeconsumercomplaints.133In2006,theU.S.MintpublishedapressreleasenotifyingconsumersthatLibertyDollarsarenotgenuineUnitedStatesMintbullioncoins,notlegaltender,andareneitherbackedby,noraffiliatedwith,theUnitedStatesGovernment.U.S.Mint,LibertyDollarConsumerWarning,supra.Thereleasewarnedconsumersthat

LibertyDollarmedallionsmightbeconfusedwithofficialU.S.currencybecausetheyhadsimilarwordingandimages.Id.ItalsowarnedthatAccordingtotheNORFEDwebsite,LibertymerchantsareencouragedtoacceptNORFEDLibertyDollarmedallionsandofferthemaschangeinsalestransactionsofmerchandiseorservices.Id.134UNITEDSTATESRESPONSEINOPPOSITIONTODEFENDANTSMOTIONSUNDERRULES29,33AND34OFTHEFED.R.CRIM.PROC.,U.S.v.NotHaus,5:09CR27-V,at4-5(Apr.7,2011)(ThegovernmentpresentedsubstantialevidenceattrialoneachelementofthechargesforwhichDefendantwasconvicted.Ultimately,theevidencepresentedattrialshowedthatDefendant(1)designedandcreatedcounterfeitcoins(LibertyDollars)thatresembledgenuinecoinsofthe

UnitedStates;(2)instructedindividualsonmethodstoinjecttheLibertyDollarcoinsintotheflowofcurrentmoneybymisleadingpeopletobelievethatthecoinsweregenuineU.S.coins;and(3)defraudedpeoplebymintingtheLibertyDollarcoinswithadollarvaluethatwasinexcessofthetrueinherentvalueofthesilvercontainedinthecoins.Defendantengagesinawhollyirrelevantdiscussionofprivatecurrencybartersystemsandcontendsthatthegovernmentsoughttopaintapicturethatprivatecurrencysystemswereillegal....Defendantwasnotoperatingaprivatecurrencybartersystem,rather,hewascounterfeitingUnitedStatescoins


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materialsnotedthatNotHaustriedtospendLibertyDollarsintoregularcirculation,encouragedotherLibertyDollaruserstodothesame,andencouragedbusinessestogiveLibertyDollarsaschangetounsuspectingcustomers.135NotHausandhisorganizationprofitedfromtheirfraudbecausethefacevalueofLibertyDollarmetalcurrencieswassethigherthanthevalueoftheirmetalcontent.136NotHaus

contestedthesecharacterizationsandarguedthatheonlyencouragedindividualstoenterintoknowingandvoluntaryexchanges.137However,ajurydisagreed,findinghimtohaveviolatedallthreecounterfeitingcountsoftheindictment.138Fromthisperspective,theU.S.AttorneyscharacterizationofNotHausasadomesticterrorist139ismoreunderstandable.HeattemptedtocreateapaperandmetalcurrencydenominatedindollarsthatdirectlycompetedwithU.S.greenbacks

andusingdeceptivemeanstoinjectthemintotheflowofcurrentmoneytodefraudthepublic.)(citationsomitted).135AdamJeffersonKirby,TheStrangeCaseofTheLibertyDollar,SilverMonthly,

http://www.silvermonthly.com/1459/the-strange-case-of-the-liberty-dollar/,(lastvisitedApr.4,2011)(ItwascommonpracticeforVonNothausandhisassociatestopresentLibertyDollarstomerchantsunfamiliarwithhisproductwithoutofferingtheexplanationthattheywerenotU.S.legaltendercurrency,butrather,avoluntarybartercurrency,onewhichcouldnotberedeemedatfacevalueforFederalReserveNotesinanyU.S.commercialbank.AvideoexpospostedoriginallyontheLibertyDollarwebsitefeaturesVonNothauspersonallybuyingsandwicheswitha$10LibertyDollarcoin,declaringittobeanewtendollarsilverpieceashehandedittothebewilderedvendor.).136Oneoftheprosecutors,JillWestmorelandRose,toldmeIfyouregivingsomeonea$10coinandtellthemthatitslegal,butitonlyhas$4worthofsilver,

youredefraudingpeople.Interview,supra.(Theseprofitsthoseaccruingtoacurrencyissuerbecauseexcessoffacevalueofcurrencyoverthecostofitscreationarecalledseniorageandareoftenreservedtogovernments).KerryLynnMacintosh,HowtoEncourageGlobalElectronicCommerce:TheCaseforPrivateCurrenciesOntheInternet,11HARV.J.L.&TECH.733,747n.50(1998).137Forexample,inacasethatvonNotHausfiledagainsttheU.S.Mint(thatwaslaterdismissed),hearguedthatneitherhenorindividualsintheLibertyDollarorganizationhaverepresentedtheLibertyDollaraslegaltenderorcurrentmoney.LibertyDollarhasencouragedpersonswhoutilizethebartercurrencytoofferittomerchantsasbarterpaymentforgoodsandservicesbutnotaslegaltenderorcurrentmoney.NotHausv.Paulson,Complaint,No.3:07-CV-038RLY-

WGH,2007WL4579959atpara14(S.D.Ind.Mar.20,2007).WhenIspoketohimafterhisconviction,hearguedthatthegovernmenthadnotproventhecounterfeitingchargesagainsthimandaskedwhythegovernmentdidnotproducewitnesseswhohadbeendefraudedormislead.NotHausinterview,supra.Hesaidthathewasconvictedbecausetheprosecution,whichhedescribedaslyingpiecesofshit,hadlied.Id.138U.S.v.vonNotHaus,VerdictForm,5:09CR27-V(W.D.N.C.Mar.18,2011).139DOJ,LibertyDollarConvictionRelease,supra.


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inrepresentingofficialgovernment-backedmoney.Heislikeacounterfeiterwhoprintsgreenbackstopawnoffonunsuspectingindividualsandcustomers.Althoughsomebelievethatmetal-backedLibertyDollarsareworthmorethangreenbacks,thatisnoreasonforunsuspectingindividualstobeinvoluntarilystuckwithLibertyDollarsinsteadofgreenbacks.140

b.SecuritiesRegulations

Federallawsubjectssecuritiestoapanoplyofregulations,makingthedeterminationofwhetherbitcoinsaresecuritiesextremelyimportant.141SecurityisdefinedbroadlyintheSecuritiesActof19332(a)(1)asincludinganynote,stock,,transferableshare,[or]investmentcontract,andaboutthirtyotherthings.Othersecuritieslaws,suchassection3(a)(10)oftheSecuritiesandExchangeActof1934,containsubstantiallyidenticallanguage.Theselawsalsocontainlistsofexemptedsecurities,whichareexemptfromregistrationand

disclosurelawsbutarestillsubjecttoantifraudandcivilsuitprovisions.Atleastonecommentatorhasconcludedthatdigitalcurrenciesareunlikelytoberegulatedassecurities.142Bitcoinsupportersmaysimilarlyargue,aselaboratedbelow,thatbitcoinsdonotlooklikesecuritiesorinvestments,especiallybecausethereisnomoney-makingenterprisethatisattemptingtoraisemoney,andthatbitcoinsareinsteadlikecommoditiesorcurrencies,whicharegenerallynot

140SeeKirby,supra(Todirectlycompeteforconsumermarketsharewithadistinctivegoodorserviceisonething.Tounderminethelegitimatemarketshareofafirmbyemittingfalseorerroneousversionsofthatfirmsdistinctiveproducts

constitutesthecrimeofcounterfeiting.HowevercompellingVonNothausphilosophicalandconstitutionalargumentsmaybe,thisunfortunate,deceptivepracticedoesnotlendcredibilitytothelegitimatecriticismoftheU.S.governmentsfiscalpolicyofinflation,nortothelegitimatepracticeofenteringintoprivatevoluntarybarterusinggoldandsilverasamediumofexchange.AlthoughitcanbearguedpersuasivelythattheLibertyDollarsarenottechnicallycounterfeit,theengagementinthepracticeofinfiltratingthecurrencymarketinsuchawayseemstobetantamounttoakindofeconomicinsurrection,invitingthereprisalofgovernmentforce.Furthermore,ifVonNothauswantedhiscompetitiveproducttobeabletovieformarketshareofexchangemedia,thecoinsshouldnothavebeenmadetosocloselyresembleU.S.legaltendercoins.).Furthermore,individuals

printingcurrencythatpurportstobedollarstheoreticallyinterferewiththeFederalReservescontrolovermonetarypolicy(althoughtheamountincirculationapproximately$20millioninthecaseofLibertyDollars--issosmallthattherecouldbenopracticaleffect).Smith&Wilson,supranote93,at1115&n.55.141C.f.SOLOMON,supranote97,at109-10(1996)(notingtheimportanceofdeterminingwhetherprivate,localcurrenciesaresecuritiesunderthefederalsecuritieslaws).142Macintosh,supranote136,at746n.49.


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regulatedunderthefederalsecuritieslaws.However,asdescribedbelow,althoughbitcoinsdohavemanyfeaturesofcommoditiesorcurrencies,theyalsoresemblesecurities,andmayspecificallybeconsideredinvestmentcontracts.

1.NoteorStock

Abitcoinisnotstockwithinthemeaningofthesestatutesbecauseitlacksimportantcharacteristicsofstock,suchasconferringtherighttoreceivedividendscontingentuponanapportionmentofprofitsandvotingrightsinproportiontothenumberofsharesowned.143Similarly,abitcoinisnotanotewithinthemeaningofthestatutesbecauseitlackstheessentialcharacteristicsofanote:144aninstrumentthatindicatesapromisebythemakertopayasumofmoneytoanotherparty.145Althoughsomedigitalcurrencytokensmayrepresentpromisest

bitcoin: an innovative alternative digital currency -ssrn-id1817857

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