Bitcoin vs. Regulated Payment Systems: What Gives?

Abstract

In a short period of time virtual currencies have gained significant traction and become an economic reality, with Bitcoin being the most dominant among over 500 virtual currencies. Bitcoin and other virtual currencies present a particularly difficult and unique jurisdictional challenge to existing regulatory enforcement because of their: ability to transcend national borders in the fraction of a second; and anonymity due to encryption. In January 2014 the Uniform Law Commission (ULC) created a Study Committee on Alternative and Mobile Payments (Study Committee). The focus of the Study Committee (now designated a Drafting Committee) is to devise an optimal licensing system for intermediaries that perform financial services for third parties relating to digital or virtual currencies. The Study Committee/Drafting Committee concluded that the New York regulatory framework for virtual currencies (New York “Bitlicense” Regulation) is “well drafted” and (with some changes) could serve as a beginning template for a uniform law. At this writing, a remaining significant issue is the extent to which the proposed uniform law should go beyond the licensing, compliance and enforcement issues common to the CSBS regulatory framework and the New York “BitLicense” Regulations, to cover substantive commercial transaction issues as in the UCC. Advances such as the blockchain technology underlying Bitcoin and many other virtual currencies may hold great promise for efficiencies in the transfer cost of money and data.This article addresses the legal and financial implications of virtual currencies, and is organized as follows. Part II. presents a brief history describing the evolution and function of money and currencies. Part III. describes the development of virtual currencies and Bitcoin in particular. Part IV. discusses traditional payment and regulatory systems. Part V. looks at criminal law issues relating to currencies. Part VI. considers the history of modern payment systems and regulation, currency stability issues, and the possible threat to financial order posed by virtual currencies. Part VII. Explores the future of regulation in this area of law. Implications for further research are then presented. The focus is the impact on payment systems of the rapidly developing use of virtual and cybercurrencies, especially bitcoins.