
Why Bitcoin lives in a “legal gray area” - shawndumas
http://arstechnica.com/tech-policy/2012/08/why-bitcoin-lives-in-a-legal-gray-area/
======
ChuckMcM
Actually its not legal in the US, as part of the original Federation of states
and later under 31 U.S.C Sec 5103 the United States has held that it is not
legal to conduct business within the United States with any currency other
than US Dollars. When pressed, the rationale generally relies on protecting
consumers from fraud, and preventing money laundering and other financial
crimes. Back in the mid 70's, growing up in Las Vegas, I got to experience
this first hand when the Treasury Department swooped in and put a stop to
people using Casino chips [1] as a casual currency.

However, given the way that Bitcoin works, I really wonder if governments do
want to shut it down. This may be controversial but it seems with the
blockchains the psuedo anonymity of bit coin that the transaction history (if
its used primarily for crime) is creating something of a map of nodes as to
who the 'big' guys are and who the 'little' guys are. This isn't an 'id' based
strategy more along the lines of 'where has this bitcoin been' and then
tracing all of them to see how they flow. If all you do is download
transaction blocks once a day and note which coins have transacted, then
compare that with the coins you find in the wallet of the guy you just
arrested, it might leak more data than you would hope. Pure speculation
though, based on how current law enforcement identifies criminals by watching
bank balances change.

[1] They had great properties, you could take them into any casino and get
their face value in dollars.

~~~
cs702
ChuckMcM: what about using Bitcoin as a store of value or investment asset, in
the same way people use commodities like gold and silver?

Just as it's perfectly legal to have any portion of your wealth invested in
gold or silver, which you can freely buy and sell at any time, shouldn't it be
legal to have any portion of your wealth invested in bitcoins, which you
should be able to buy and sell at any time like any other commodity?

Edit: Note that the same argument can be made for bartering. According to the
IRS, in the US, it's perfectly legal to barter any product, commodity, or
service for another product, commodity, or service, so long as any taxes due
are paid as required by tax law.[1]

\--

[1]
[http://www.irs.gov/businesses/small/article/0,,id=188095,00....](http://www.irs.gov/businesses/small/article/0,,id=188095,00.html)

~~~
ChuckMcM
As a value store, sure. Just like baseball trading cards. Where it gets dicey
is where person A uses currency to get a proxy item (BitCoin, Casino Chip,
Baseball Trading Card) takes that proxy item to Person B and uses it to
purchase a good or service of some value, then Person B takes the proxy item
and uses it to purchase a good or service from Person C who then converts it
back to currency. In those situations the transaction between A and B has
become 'lost' (or laundered) because its not possible to connect the
transaction C made to the transaction A and B made beyond a reasonable doubt.
And that is the stuff that gets the enforcement types all agitated.

The IRS would like like to know if you bought some proxy thing, it appreciated
in value, and then you sold it for a gain (or loss). BitCoin exchanges should
send a 1099 of all transactions to the IRS (I don't know if they do that or
not).

~~~
narrator
Also a "Proxy Item" is always subject to capital gains tax and sales tax.
Otherwise it would be money. This is the only thing really preventing
competing currencies. In fact, Ron Paul has worked on getting this restriction
repealed in the case of gold and silver:
<http://www.lewrockwell.com/paul/paul434.html>

"The final step to ensuring competing currencies is to eliminate capital gains
and sales taxes on gold and silver coins. Under current federal law, coins are
considered collectibles, and are liable for capital gains taxes. Short-term
capital gains rates are at income tax levels, up to 35 percent, while long-
term capital gains taxes are assessed at the collectibles rate of 28 percent.
Furthermore, these taxes actually tax monetary debasement. As the dollar
weakens, the nominal dollar value of gold increases. The purchasing power of
gold may remain relatively constant, but as the nominal dollar value
increases, the federal government considers this an increase in wealth, and
taxes accordingly. Thus, the more the dollar is debased, the more capital
gains taxes must be paid on holdings of gold and other precious metals.

Just as pernicious are the sales and use taxes which are assessed on gold and
silver at the state level in many states. Imagine having to pay sales tax at
the bank every time you change a $10 bill for a roll of quarters to do
laundry. Inflation is a pernicious tax on the value of money, but even the
official numbers, which are massaged downwards, are only on the order of 4%
per year. Sales taxes in many states can take away 8% or more on every single
transaction in which consumers wish to convert their Federal Reserve Notes
into gold or silver."

------
donpdonp
I like a well written bitcoin story. As soon as this story opened with the red
herring of Silk Road, I sighed in disappointment.

To my knowledge, bitcoin is not recognised as a currency by my country (or any
other country), therefore it has no special properties. I'm an individual
citizen buying something for one value and selling it for another. This is
well established in civil law and tax taw.

When I see a story about bitcoin I read it once, then read it again
substituting the words pet rocks for the word bitcoin. I ask 'is there
anything specific to bitcoin about the concerns being raised?' and the answer
is almost always no.

If I buy some pet rocks at a garage sale in August and sell them at my garage
sale in September for more money, I record the profit or loss, report it on my
tax return and pay the appropriate income tax on it. This is not advice, but
its what I'm going with until I learn otherwise.

~~~
omni
I'm sure supporters of Bitcoin would (at least in the US) like to argue for
Bitcoin being a currency in this case, as it would allow users to record
capital gains and losses rather than standard P/L like you'd get from selling
rocks. The tax benefits on capital gains are much greater.

edit: This statement is false. Thanks for the clarification, nullc.

~~~
nullc
Er. Something doesn't have to be a _currency_ to report capital gains on them!

[http://www.irs.gov/publications/p550/ch04.html#en_US_2011_pu...](http://www.irs.gov/publications/p550/ch04.html#en_US_2011_publink100010476)

"For the most part, everything you own and use for personal purposes,
pleasure, or investment is a capital asset. Some examples are: [...] Any
property you own is a capital asset, except the following noncapital assets."

------
pygy_
The main legal weakness of the network is the possibility to launder money
while mining. You exchange electricity for anonymous Bitcoins.

Freshly minted coins are obviously anonymous, and so are the ones awarded for
transaction fees (they come from whatever transaction your mining rig managed
to solve).

It is expected that mining fees will rise to match the cost of mining once the
free supply has dried up.

As long as you can find an electricity supplier that looks the other way,
mining can be used for laundering.

~~~
tobias3
Not only that you can use Bitcoin scramblers to launder your bitcoins.

Because nobody mentioned them yet: They forward money for a fee. With enough
users one can then not trace the transaction anymore.

And that makes Bitcoins a anonymous method to pay. Readily availble to launder
money. Governments will not look away if this becomes widespread.

------
tokenadult
The underlying publication

<http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2115203>

reported on in the Ars Technica article kindly submitted here is a student law
review article, specifically a "note," a classic form of first publication for
innovative legal reasoning on a novel issue. I can report, as a one-time law
student who was a member of my law school's law review, that every law
student's dream (if the law student has a scholarly bent) is to publish a law
review article that in turn is taken up by an appellate court and then cited
as the basis for the court's opinion. That happened to one of my classmates--
his comment on a case in the Minnesota Law Review was cited by the United
States Supreme Court in a decision that agreed with his reasoning.

So the author here interviewed by Ars Technica is young, early in his career,
and speculating on what COULD happen or opinionating about what OUGHT TO
happen. He hopes to persuade a court that his reasoning is correct. But the
article is not a sure-fire prediction of how any court or any law enforcement
agency will respond to Bitcoins. The Bitcoin experiment has some novel
features, and litigation related to it will probably produce new court case
holdings (at a minimum) and possibly new statutes as well. "The life of the
law has not been logic; it has been experience." Oliver Wendell Holmes, Jr.,
The Common Law (1881), page 1.

As I have written before, perhaps the greatest contribution the Bitcoin
experiment will make to humankind is to teach you and me and our neighbors
more about the realities of economics. Here we see that the Bitcoin experiment
will also teach us more about the reality of the law (in several different
countries of the world, and how law from one country can be applied to
transactions that involve another country.) Where there is legal uncertainty,
there is transaction risk, and persons using Bitcoins to engage in commercial
transactions will have to figure out how to price that risk.

AFTER EDIT: There is an interesting idea in another comment submitted before
mine.

 _I would really like to see a full-frontal assault by a first-world
government on Bitcoin, just to test how resilient it is to such an attack_

I hazard the guess that significant resources have already been devoted by the
National Security Agency in the United States and by comparable government
agencies in other countries to figure out multiple attacks surfaces in the
Bitcoin ecosystem. It may be that those attacks will not be publicized by any
government, but held in reserve for a time of need. Perhaps operatives of this
or that government can better conduct covert operations with the help of
Bitcoins, in one case, while perhaps they can disrupt the activities of a
hostile government by disrupting Bitcoins, in another case. I'm sure there are
plenty of interested onlookers analyzing the Bitcoin experiment.

------
omni
"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."

Is this even remotely true? I thought they were all basically trying to brute
force a valid hash, with no time-based guarantees at all.

~~~
donpdonp
Its true and actually the best concise summary of bitcoin mining I have read.
All miners are in a race to find the valid hash for the block they are working
on. The first miner to find the hash wins the block and gets 50 coins. The
system as a whole notes how long its taking miners to find the hash and
adjusts the difficulty of the winning hash based on this speed. So in actually
blocks are won in a little less or a little more than 10 minutes and the
system adjust to keep the time as close as possible to 10 minutes.

~~~
nullc
Er. Describing it as a race inspires some of the most common misconceptions
about mining. If it were a race and Alice ran 10x faster than Bob, Bob would
probably never win.

Bitcoin mining is stochastic, and for a given current difficult each
calculation performed by anyone has an equal very small probability of being a
solution. Like throwing dice and trying to get a 1. If Alice mines 10x faster
than Bob then Alice will find, on average, 10x more solutions.

------
augusto_hp
Bitcoin is not an official currency in any country, but as in any monetary
system it has value. It is real no matter how hard you deny.

The problem with Bitcoin is politics. Every country controls how much _new_
money comes into market, lowering the overall value of the currency. With
Bitcoin they just can't do that.

It is quite lame to argue that Bitcoin is used to support crimes and so on,
since its overall value is by far less than the amount needed to produce every
drug USA caught. Let's try not to mix things up. :)

Bitcoin is cool and IMHO, one of the very few viable solution to a unified
currency system.

------
michaelfeathers
The article seems to imply that BitCoin would be money under current law and
that it is subject to all sorts of transmitter and exchange limitations. That
makes me wonder.. why are miles and points programs exempt?

What they deal with seems to have all of the qualities of currency. Ditto:
Second Life's Lindens.

~~~
jrockway
_That makes me wonder.. why are miles and points programs exempt?_

Because the miles and points are non-transferable and not exchangeable for
cash.

~~~
michaelfeathers
How about Linden?

------
eduardordm
It is a crime to run your own currency in all countries members of the WTO
(for good reasons). You are not allowed to use bitcoins to buy or sell any
product in any of those countries.

Also, I'm not a believer in bytes carrying out value. You see, a dollar bill
is just a paper that represents a value that's not that paper. Having a serial
number of a bill "could" be the same as having a bill itself. That makes
bitcoins completely impossible to regulate, it will have life by itself. Lack
of regulation is not freedom, is stupidity.

Economies with distinct realities cannot share the same currency or indexed
currency. See Greece and Germany. Argentina and US.

Currencies will cease to exist. I'll not be alive to see that, but in the
future there will be only XP points (just like diablo!) and maybe commodities.
Currencies will slowly die out. You will be only capable of producing XP
points by working, products itself will never generate XP points.

Maybe I'm just childish, but that's how I see it right now. It's friday, have
a great day!!!

~~~
dredmorbius
Citation needed.

~~~
eduardordm
High school?!?! That's part of the Marrakesh Agreement!!! It makes clear that
trading of goods can only happen by using it's signatories official
currencies.

------
bluedanieru
I would really like to see a full-frontal assault by a first-world government
on Bitcoin, just to test how resilient it is to such an attack, and also so
that the lessons learned from it can be applied in improving both the
technology and its utilization. I wonder to what extent the very prospect of
failure discourages that.

Same goes with Tor. Both of these technologies are things that most
governments would very much like to see rubbed out before they gain widespread
adoption (and, you know, fuck them for that). It's a shame, because even the
Internet could probably do with a little bit of regulation, and the monetary
system certainly needs it, and yet both of these technologies are in part a
reaction to the complete failure of most governments to have any sort of
competence with either. In fact in many cases it's just outright malicious.
Now in Japan they will begin jailing people for something as harmless as
viewing a copyrighted work on fucking _Youtube_. Time to get a Tor router.

~~~
nullc
It's not resilient to such a thing. If you think _anything_ widely used can
be, you are woefully underestimating the power of a modern major state.

This isn't a question about technology; as much as the geeks love to obsess
over it. Technology is just one part. Non-technology attacks are simply much
more powerful. E.g. "Anyone caught using Bitcoin will be executed on the spot
by large caliber fire from attack helicopters flying far enough away that you
can't see or hear them targeting you", and suddenly Bitcoin is only some
obscure and irrelevant thing— even outlaws have no use for outlaw 'money'.
There is no question of _ability_ to suppress it, only a question of
sufficient motivation.

And motivation is where it comes up short. Bitcoin is just another thing
people can barter. Not different from beanie babies or lumps of coal, and it
shouldn't be legally or politically different. This whole weird concept of
something being unlawful until proven otherwise must be some kind of crazy
fallout from the drug and copyright wars, and I fear that thinking will
greatly harm society in the long run.

If Bitcoin turns out to be an efficient 'money' then sane and efficient
governments should support it: because a more efficient money will make
everyone more prosperous. Some people love to feel all counter-culture and
subversive with their hobbies, but as disruptive a technology Bitcoin is it's
just not politically disruptive. Most of the few establishment risks that go
along with Bitcoin apply doubly to cash, the others apply to other valuable
commodities that goverments can't just create out of thin air. The motivation
to attack just isn't there.

~~~
kmm
> Non-technology attacks are simply much more powerful. E.g. "Anyone caught
> using Bitcoin will be executed on the spot by large caliber fire from attack
> helicopters flying far enough away that you can't see or hear them targeting
> you", and suddenly Bitcoin is only some obscure and irrelevant thing

That's still a technology problem. Make the use of it undetectable. A
sufficiently technology savvy Bitcoiner would just wrap his stuff with some
encryption and with minimal hassle, you would need to be much faster and
harsher to stop them.

Besides, if we're assuming civilian execution without trial, then we're not
talking about the modern major states. Not a single of the major states could
even remotely do such a thing without consequences. The harshest punishments
for comparable offences would be for the distribution and possession of child
pornography and that is not stopping the offenders, on the contrary.

~~~
nullc
The widespread use of a money like thing _can't_ be undetectable by its very
nature. If you have to keep it between trusted parties it's not money, it's
hawala. :)

------
cyarvin
It's not a question of law but simply one of power. The USG is sovereign and
not subject to any controlling legal authority. And its power, especially in
financial matters, is global.

Therefore it can be analyzed as if it were a criminal actor. Does the USG have
motive, propensity and opportunity to murder Bitcoin? Sadly, the answers are
yes, yes and yes.

Motive and propensity - obvious. Opportunity - USG can't shut down Bitcoin
trading, but it can smash the BTC price by destroying the exchangers. If it
misses one, everyone who owns BTC and sees it as an investment will rush for
that exit. Once it is closed, the price is zero by definition.

In retrospect, BTC will look like a very foolish bubble. In fact it is
perfectly sound from an economic perspective, but not from a political
perspective - it assumes a basically fair, just and sensible global legal
order. Or at least a multipolar one. Closing our eyes and believing these
illusions exist is not an effective way to make them exist.

BTC is flourishing. It continues to flourish because DOJ hasn't finished its
paperwork yet. If you have some - sell it while you can. A big lump of gold
feels nice in the hand.

