Mo' Bitcoins, Mo' Problems: The Regulation of Bitcoins at the Federal and State Level


By: Chresanthe Staurulakis,

Halloween 2016 marks the eighth anniversary of the release of Bitcoin, a decentralized, convertible, digital form of cryptocurrency.[1] Bitcoin was introduced by an anonymous creator, working under the pseudonym Satoshi Nakamoto.[2] Today, bitcoins function as a type of virtual currency.[3] Bitcoins can be traded, held or used to make online purchases on websites that accept it as a proper form of payment.[4] The system works as a computer protocol that lets users send money directly to anybody in the world over the internet.[5] While the technologies underlying Bitcoin are extremely complex, the process of trading bitcoins is fairly simple.[6]

First, one must download the Bitcoin “wallet” application onto one’s computer or phone.[7] This digital “wallet” functions the same way as a normal wallet but, instead of holding dollars, it holds bitcoins. This “wallet” also serves as a virtual bank account that allows the user to send or receive bitcoins or pay for items using bitcoins.[8] Once you have downloaded the “wallet,” you will receive a private key and a public key.[9] These two keys are what allows users to transfer bitcoins while keeping their identities anonymous.[10] Your private key is what you sign any transaction with to prove that you are the owner of the bitcoin you want to spend.[11] It is the key that allows you to send bitcoins to other users.[12] Only the owner of the “wallet” should know their private key.[13] Conversely, your public key serves as the address that you can share with other users in order to receive bitcoins from them.[14] To send bitcoins, you would enter the recipient’s Bitcoin address into the “wallet” app, enter the number of bitcoins you wish to send, authorize the transaction with your private key and hit “send” button.[15] The transferred bitcoins will immediately appear in the recipient’s wallet no matter where they are in the world.[16]

The way in which bitcoins may be transferred instantaneously and anonymously is part of their appeal and is the result of a completely trustless, peer-to-peer system.[17] There is no middleman or centralized server that may delay the money transfer.[18] There is nothing akin to a bank or PayPal system working to handle the transaction or verify the parties participating in the transaction.[19] Therefore, users are not required to pay any sort of transaction fee.[20] However, despite these advantages, there is still a lot of uncertainty surrounding bitcoins. Bitcoins are difficult to account for, report and value.[21] Moreover, Bitcoin makes it easy to participate in illegal activities such as money laundering or purchasing and selling goods on the black market.[22] Therefore, since its inception, Bitcoin has been the target of much regulation at both the federal and state level.

Many U.S. federal agencies have yet to draft completely new regulations pertaining specifically to virtual currency, like Bitcoin.[23] Instead, federal agencies have decided to oversee virtual currencies through pre-existing regulations.[24] The federal agencies that have been at the forefront of regulating bitcoins include the Commodity Futures Trading Commission (CFTC), the Financial Crimes Enforcement Network (FinCEN), the Securities and Exchange Commission (SEC), and the Internal Revenue Service (IRS).[25] On September 17, 2015, the CFTC announced that it was going to treat bitcoins as “commodities” for regulatory purposes.[26] Businesses dealing with bitcoins would be required to register with the CFTC and be subject to its regulation.[27] FinCEN has chosen to treat and regulate companies working with bitcoins as “money service businesses” (MSB), specifically “money transmitters.”[28] In 2011, FinCEN expanded its definition of “money transmitters” to include businesses that, on behalf of a third party, mine virtual currencies, use virtual currency to purchase goods and services, convert virtual currency to other forms of currency, invest in virtual currency, or rent out systems and software for the purpose of mining virtual currency.[29] If one is simply a “user” who uses bitcoins to purchase goods and services for themselves, they are not considered a MSB.[30] In 2013, FinCEN issued a guide to further clarify what activities count as “virtual currency activities” and distinguish among “users,” “exchangers” and “administrators.”[31] If one is simply a “user” who uses bitcoins to purchase goods and services for themselves, they are not considered a MSB.[32] However, businesses that issue virtual currency or provide for the exchange of virtual currency for real currency or other forms of currency are considered MSB’s and will be forced to register with FinCEN and be subject to its regulations.[33] Failing to register with FinCEN is a federal crime.[34]

In addition, the SEC declared that it will reserve the right to police virtual currency companies and prosecute them if they are found to be involved in any fraudulent schemes.[35] The SEC exercised this right in September 2014 when the District Court for the Eastern District of Texas entered a judgment against Bitcoin Savings & Trust for conducting a Ponzi scheme soliciting investments in bitcoin-related investment opportunities.[36] Finally, the IRS stated that it will treat bitcoins as “property” and tax any transfers of bitcoins among users.[37]

There has been less uniformity among states when it comes to regulating bitcoins. At the state level, a money transmitter is either a company that accepts value from one person and gives it to another or accepts value from one person and gives it back to that same person at a later date and time.[38] Unlike at the federal level, state money transmitters must be licensed.[39] However, businesses working with virtual currency may have difficulty determining whether they qualify as money transmitters within their state since each state has its own definition of “money” and “transmission.”[40]

In July 2014, New York was the first state to propose and implement a regulatory system governing bitcoins, called BitLicense.[41] Under BitLicense, “virtual currency” is considered “money” and companies dealing with bitcoins are considered money transmitters.[42] The five activities that BitLicense considers to be “virtual currency business activities” include transmitting virtual currency for third parties, maintaining control over virtual currency for others, buying or selling virtual currency as a customer business, exchanging or converting virtual currency and controlling, administering or issuing virtual currency.[43] Any business that participates in any of these activities must go through an extensive application process to obtain a license.[44] Once the business has obtained a license, it must abide by the compliance requirements set forth by BitLicense and be audited annually.[45] Other states have followed in New York’s footsteps. In June 2015, California passed a bill providing for similar licensing and regulation requirements as New York’s BitLicense.[46] Washington has ruled that virtual currency is considered in the definition of “money transmission.”[47] However, Kansas, Texas and Florida have all ruled that virtual currency is not “money” and is not included under its money transmission laws.[48] Finally, states like New Jersey, Connecticut, Pennsylvania, North Carolina, Utah, and New Hampshire have all taken efforts to follow in New York and California’s footsteps but the proposals have yet to been made official.[49]

It is clear that regulating Bitcoin remains unchartered territory for most. While it may have numerous advantages, businesses and everyday users should continue to exercise caution when using Bitcoin. While it is not illegal, the use of bitcoins is being monitored closely by federal agencies and states, as they continue to grapple with this new technology and determine how it should be regulated.


[1]. See Beyond Bitcoin: Blockchain – The Essential Building Block in Designing the Future, Reed Smith LLP 1 (2016), [hereinafter Beyond Bitcoin].

[2]. See Tal Yellin & Dominic Aratari, What is Bitcoin?, CNN Money (last visited Oct. 26, 2016),

[3]. See Beyond Bitcoin, supra note 1, at 7.

[4]. See Marco Santori, Bitcoin, Digital Currency and the Law, LawLine 1, 11 (2013),

[5]. See id. at 4.

[6]. See Beyond Bitcoin, supra note 1, at 2.

[7]. See Santori, supra note 4, at 6.

[8]. See Yellin & Aratari, supra note 2.

[9]. See Beyond Bitcoin, supra note 1, at 2.

[10]. See Yellin & Aratari, supra note 2.

[11]. See id.

[12]. See id.

[13]. See id.

[14]. See id.

[15]. See Santori, supra note 4, at 7.

[16]. See id.

[17], See Beyond Bitcoin, supra note 1, at 1.

[18]. See Santori, supra note 4, at 6.

[19]. See Beyond Bitcoin, supra note 1, at 2.

[20]. See id.

[21]. See Santori, supra note 4, at 18.

[22]. See Don He Et Al., Virtual Currencies and Beyond: Initial Considerations, IMF 1, 27 (2016),

[23]. See Beyond Bitcoin, supra note 1, at 9.

[24]. See id.

[25]. See id.

[26]. See Bitcoin Theft Highlights Cryptocurrency Regulatory Uncertainty, Allen & Overy (Aug. 11, 2016), [hereinafter Bitcoin Theft].

[27]. See id.

[28]. See Santori, supra note 4, at 21.

[29]. See Beyond Bitcoin, supra note 1, at 10.

[30]. See id.

[31]. See id.

[32]. See id.

[33]. See id.

[34]. See id.

[35]. See Don He Et Al., supra note 22, at 29.

[36]. See Beyond Bitcoin, supra note 1, at 11.

[37]. See Don He Et Al., supra note 22, at 24.

[38]. See Santori, supra note 4, at 28.

[39]. See id. at 29.

[40]. See id.

[41]. See Beyond Bitcoin, supra note 1, at 7.

[42]. See id.

[43]. See id.

[44]. See id.

[45]. See id.

[46].See Beyond Bitcoin, supra note 1, at 7.

[47]. See id.

[48]. See Stan Higgins, Federal Judge Rules Bitcoin is Money in US Trial, Coin Desk (Sept. 20, 2016),

[49]. See Beyond Bitcoin, supra note 1, at 7.

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