Bitcoin: A Primer

Cryptocurrency Update

Date: February 25, 2014

Many of you may have heard of Bitcoins and are wondering exactly what they are and whether it is possible – or legal – to accept them as payment for goods and services. The short answer is Bitcoins are legal, may be used as payment for goods and services, and in fact possess many attractive features that may reduce, if not eliminate, data security issues associated with the use of debit and credit cards.

From relative obscurity in 2009, Bitcoins and other cryptocurrencies are becoming better understood and more widely accepted in today’s economy and in society at large. Bitcoins have been used as payment for real estate transactions, have served as the premise for episodes of popular television shows such as “Person of Interest,” and are accepted as a legitimate form of payment by as many as 10,000 companies, including mainstays of commerce such as Howard Johnson, Domino’s Pizza, Overstock.com, Las Vegas casinos and the NBA’s Sacramento Kings. These examples, along with recent legal and regulatory developments, including a finding by one federal district court that Bitcoins “can be used as money” because they possess attributes of a “currency or form of money,”1 suggest increasing acceptance in mainstream commerce.

Hailed as a currency that cannot be manipulated by any government, bank, organization or individual, Bitcoin is a mathematically based digital currency. Unlike the U.S. dollar or other traditional governmental currencies, Bitcoin is not issued by any body politic or central bank, is not represented by a physical object, like a coin or bill, and has no intrinsic value other than an expectation that a seller will accept it from a buyer as payment for goods and services. Important to the mainstream use of Bitcoins is that a market exists for their exchange into U.S. dollars and other traditional currencies, which helps lessen valuation issues, although valuations have tended to be volatile in the past. However, the existence of several exchange markets does allow treasury departments to hedge Bitcoins in ways not dissimilar to the way traditional currencies are hedged.

Financial regulators like the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN), the Internal Revenue Service and the New York Department of Financial Services are beginning to respond to Bitcoin’s growth and its impact on the economy. FinCEN has issued guidance indicating that persons who exchange or administer the transmission, purchase or sale of virtual currency are likely subject to Bank Secrecy Act requirements. In addition, the IRS is evaluating the tax implications of Bitcoin sale and use, and state regulatory agencies like the New York Department of Financial Services have begun to consider whether special purpose “Bitlicenses” are necessary or appropriate.

Bitcoin is an anonymous currency. So are dollar bills. Bitcoin’s use of encrypted computer code makes it extremely difficult to trace. In that sense, Bitcoins are the cyber equivalent to hard cash. This anonymity gives Bitcoin use many potential benefits for mainstream businesses. Businesses accustomed to accepting cash (dollar bills) as payment for goods and services when transactions are conducted in person may welcome the use of Bitcoins, an Internet equivalent of cash. The nature of a Bitcoin transaction is inherently secure and necessarily not susceptible to transactional fraud. Bitcoin protocols provide its users and the merchants accepting it a strong protection against identity theft and fraudulent chargebacks, which are inherent in Internet debit and credit card transactions. In the wake of recent large-scale data breaches and identity theft involving retail and online businesses whose business models include large volumes of debit and credit card sales, Bitcoin’s enhanced security is especially appealing.

As the use of Bitcoins proliferates, counsel and business leaders should consider establishing procedures, protocols and systems to prepare their companies for acceptance of Bitcoins as payment for products and services. Thompson Hine’s Cryptocurrency group is available to provide more information to any business considering accepting Bitcoins.

FOR MORE INFORMATION

For more information, please contact:

James P. Jalil
212.908.3976
James.Jalil@ThompsonHine.com

Norman A. Bloch
212.908.3942
Norman.Bloch@ThompsonHine.com

Thomas F. Zych
216.566.5605
Tom.Zych@ThompsonHine.com

or any member of our Cryptocurrency group.

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1 SEC v. Shavers,No. 4:13-CV-00416, 2013 U.S. Dist. LEXIS 110018 (E.D. Tex. Aug. 6, 2013).