Why Bitcoin lives in a “legal gray area” [Tim. B. Lee]
August 30, 2012 Leave a comment
When news of Silk Road, the secretive online marketplace that allows drugs to be purchased withbitcoins, broke last year, Sen. Charles Schumer (D-NY) was not pleased. He denounced the currency as a “an online form of money laundering.” Despite the Senator’s bluster, though, the Bitcoin network continues to operate a year later with no apparent legal impediments.
That’s in part because nothing like Bitcoin existed when current laws were written. A wide variety of laws regulates banks, money transmitters, currencies, and securities—but none of these categories are a good fit for bitcoins. In a paper published earlier this year, Temple University law student Nikolei Kaplanov explored the legal status of the cryptocurrency. “Bitcoins and their users fall within a gray area under federal and state law due to their unique nature,” Kaplanov wrote. We spoke to him to find out more.
There are several different roles in the Bitcoin economy: ordinary users, miners, and exchanges. Kaplanov argues that ordinary users have little to worry about, legally. Obviously, using bitcoins doesn’t immunize users from generally applicable laws; buying cocaine is illegal regardless of the method of payment. But, he said, “so long as you’re purchasing legal things and you’re conducting yourself in a manner where you’re making regular exchanges in person or through a company online, there are no legal hurdles whatsoever.”
Miners are a second category of Bitcoin users. Miners participate in Bitcoin’s distributed transaction-clearing process, competing for the free bitcoins that are awarded at random to one miner every 10 minutes.
Theoretically, miners could be subject to laws governing money-transmitters, since they’re effectively facilitating the transfer of funds from one Bitcoin user to another. But Kaplanov argues that it wouldn’t make sense to interpret the law in this fashion.
“If you’re going to be a money transmitter, you have to turn over information to Treasury or to State to prevent fraud and abuse,” he said. The problem is that miners don’t have any of the information, such as names and Social Security numbers, that the authorities want. The only information miners have is the pseudonymous Bitcoin addresses associated with each transaction—and that information is already available to the general public. The “blockchain,” the shared record of all completed Bitcoin transactions, is available for anyone to download and inspect, so it would be pointless to force miners to disclose information that the government can get directly from the Bitcoin network.