2016-2017 DEVELOPMENTS IN BANKING LAW 159

XIII. Bitcoin and Money Laundering

A. Introduction

Satoshi Nakamoto presented Bitcoin for the first time in 2009

in an essay titled “Bitcoin: A Peer-to-Peer Electronic Cash System,”
and it has since quickly risen to the most popular, decentralized virtual
currency in the world.1 Bitcoin is “a new payment system” of digital
money used on a “decentralized peer-to-peer payment network that is
powered by its users with no central authority or middlemen.”2
Bitcoin’s current total market cap as of November 30, 2016 is $11.85
billion and Bitcoin has attracted the attention of both small and large
businesses as well as individuals and consumers around the globe.3 As
Bitcoin continues to undergo rapid development and is projected to
make a big impact on society and the global economy, regulators, such
as the Internal Revenue Service (IRS) and the Commodity Futures
Trading Commission (CFTC), have started to pay attention to its
anonymous nature.4 For example, Bitcoin is a decentralized currency
that is very different than any traditional types of currency presently
regulated under both federal and state laws.5 While there are many
advantages of a decentralized payment system, recent years have
demonstrated that Bitcoin has played a part in illegal criminal
activities, such as money laundering.6 As recent case law shows,
deciding how to regulate Bitcoin within the greater regulatory scheme
                                                            
1
Kavid Singh, The New Wild West: Preventing Money Laundering in the
Bitcoin Network, 13 NW. J. TECH. & INTELL. PROP. 37, 37–38 (2015). See
generally Satoshi Nakamoto, A Peer-to-Peer Electronic Cash System,
BITCOIN PROJECT (2009), https://Bitcoin.org/Bitcoin.pdf [https://perma.cc/
4ALF-HTXY].
2
Frequently Asked Questions, BITCOIN PROJECT (2016),
https://Bitcoin.org/en/faq#what-is-Bitcoin [https://perma.cc/A9F4-FYYV].
3
Bitcoin Price Index Chart, COINDESK (Nov. 30, 2016), http://www.
coindesk.com/price/ [https://perma.cc/X3U3-SHXN].
4
Stan Higgins, US Central Bank Chair: Blockchain Could Have ‘Significant’
Impact, COINDESK (Sept. 28, 2016), http://www.coindesk.com/us-fed-yellen-
blockchain-impact/ [https://perma.cc/7AKD-4NW7].
5
See Jacob Bogage, Bitcoin’s Not Money, Judge Rules As She Tosses Money-
Laundering Charge, WASH. POST (July 26, 2016), https://www.
washingtonpost.com/news/morning-mix/wp/2016/07/26/Bitcoins-not-money-
judge-rules-as-she-tosses-money-laundering-charge/
[https://perma.cc/3XBW-V677].
6
Singh, supra note 1, at 37.

 
 
160 REVIEW OF BANKING & FINANCIAL LAW VOL. 36

of currency and anti-money laundering regulation is tough.7

Lawmakers must strike a balance between hindering criminal activity
and maintaining Bitcoin’s potential growth and increased
advancement.8
This article focuses on Bitcoin in the context of money
laundering over the past few years and discusses previous and future
regulatory action within the virtual currency arena. First, Section B
gives a brief history of Bitcoin and its development, and discusses the
advantages and disadvantages of a virtual payment system. Section C
demonstrates the mismatch of opinions throughout the legal system
about how to define Bitcoin when it is being used in criminal
activities, especially in money laundering. Section D explains previous
regulatory actions that have been taken in the past to try to clarify what
Bitcoin should be defined as. Finally, Section E looks to the future of
regulation of Bitcoin and other virtual currencies, including the
challenges that regulators and lawmakers will face as they decide the
best way to deal with Bitcoin on both a state and federal level.

B. Brief History of Bitcoin and Recent Developments

Bitcoin has quickly risen to the status of “the most popular,

decentralized form of virtual currency in the world.”9 The rise of
Bitcoin came along with the ongoing “trend of digitizing transfers of
money” for which many financial technology companies strive.10 The
biggest advantage of Bitcoin is the avoidance of the “double-
spending” problem, which is “the risk that a person could concurrently

                                                            
7
See generally United States v. Faiella, 39 F. Supp. 3d 544 (S.D.N.Y. 2014);
United States v. Ulbricht, 31 F. Supp. 3d 540 (S.D.N.Y. 2014); Jacob
Gershman, Federal Judge: Yes, Bitcoins Are Money, WALL ST. J.: LAW BLOG
(Sept. 20, 2016, 2:04 PM), http://blogs.wsj.com/law/2016/09/20/federal-
judge-yes-Bitcoins-are-money/ [https://perma.cc/G8KZ-AZKG]; Robert
Hackett, Bitcoin Is Not Money, Miami Judge Rules, FORTUNE (July 25, 2016),
http://fortune.com/2016/07/25/Bitcoin-money-laundering-miami-judge/
[https://perma.cc/75QG-TKWG].
8
JERRY BRITO & ANDREA CASTILLO, BITCOIN: A PRIMER FOR POLICYMAKERS
7 (2d ed. 2016).
9
Singh, supra note 1, at 37.
10
Glen Williams & David Gunn, What Big Banks Can Learn from Bitcoin’s
Technology, FORBES (Sept. 9, 2016), http://www.forbes.com/sites/
baininsights/2016/09/09/what-big-banks-can-learn-from-Bitcoins-
technology/print/ [https://perma.cc/EJA3-ST3L].

 
2016-2017 DEVELOPMENTS IN BANKING LAW 161

send a single unit of currency to two different sources.”11 Many virtual

currencies face the “double-spending” problem because of the ease of
duplicating virtual currency already used in other transactions.12 This
can completely undermine the value of the underlying currency.13
Bitcoin has a public ledger that records every transaction and every
single Bitcoin used, thus making it impossible to double-spend the
same Bitcoin.14 Additionally, the Bitcoin network is a decentralized
network, in which no one individual has complete ownership or
control.15 As such, Bitcoin transactions do not require middlemen
services, such as PayPal, eliminating the otherwise time-consuming
and costly process going through a third party to complete a
transaction.16 In addition, Bitcoin has helped to improve access to
capital, lower transaction costs for small business, and provide avenues
for financial innovation.17 For example, international money transfers
usually have to go through a third party, which pockets some of this
money for itself, thus leaving the sender with less money than he or
she intended to send.18 Because there is no middleman, but instead a
public ledger, one can send money globally without having to incur
this additional fee of payment to the third party.19
However, these same qualities that make Bitcoin “an attractive
payment system” have also paved the way for illegal activities,
including money laundering.20 Bitcoin’s decentralized network means
that users are “pseudonymous”—while every single Bitcoin
                                                            
11
Erik Bonadonna, Bitcoin and the Double-Spending Problem, CORNELL U.:
NETWORKS II (Mar. 29, 2013), https://blogs.cornell.edu/
info4220/2013/03/29/Bitcoin-and-the-double-spending-problem/
[https://perma.cc/AF97-7NK9].
12
Id.
13
Singh, supra note 1, at 40.
14
BRITO & CASTILLO, supra note 8, at 7.
15
Frequently Asked Questions, supra note 2.
16
Williams & Gunn, supra note 10.
17
Singh, supra note 1, at 37.
18
Michael Beckerman, The Benefits of Allowing Bitcoin to Flourish, N.Y.
TIMES: DEALBOOK (Sept. 21, 2015), http://www.nytimes.com/
2015/09/22/business/dealbook/the-benefits-of-allowing-Bitcoin-to-
flourish.html [https://perma.cc/6NB8-5L5T] (explaining that international
money transfers “costs nearly 8 percent of the total amount sent to transfer
money around the world, largely because of a complex web of third-party
approvers”).
19
Id.
20
BRITO & CASTILLO, supra note 8, at 2.

 
 
162 REVIEW OF BANKING & FINANCIAL LAW VOL. 36

transaction is traceable on a public ledger, it is not tied to anyone’s

identity—thus making the Bitcoin system seriously attractive for
criminal activity.21 Users have found ways to gain access into Bitcoin
exchanges to steal “hundreds of millions of dollars’ worth of bitcoins”
from businesses as well as use the virtual currency for online illegal
drug markets.22 For example, in August 2016, hackers stole about $65
million in Bitcoins from a Bitcoin exchange called Bitfinex, which
ultimately sent the Bitcoin price down over 20 percent.23 Additionally,
the infamous Silk Road, which was shut down in 2014, was the
ultimate black market that traded Bitcoins in exchange for illegal
drugs, fake passports, driver’s licenses, and illegal services, such as
hiring a hit men and hackers.24 The severity of criminal activity
surrounding the use of this virtual currency has alerted regulators and
lawmakers to focus their efforts in formulating an effective solution.25
Such a solution would ideally eliminate Bitcoin’s disadvantages and its
susceptibility to criminal behavior and money laundering while
preserving its otherwise advantageous payment system.26

                                                            
21
Id.; Singh, supra note 1, at 42.
22
Singh, supra note 1, at 37.
23
Jethro Mullen, Hackers Steal Bitcoins Worth Millions in Attack on
Exchange, CNN (Aug. 3, 2016), http://money.cnn.com/2016/08/03/
technology/Bitcoin-exchange-bitfinex-hacked/ [https://perma.cc/58CU-
X3WG].
24
Donna Leinwand Leger, How FBI Brought Down Cyber-Underworld Site
Silk Road, USA TODAY (May 15, 2014), http://www.usatoday.com/
story/news/nation/2013/10/21/fbi-cracks-silk-road/2984921/
[https://perma.cc/PHH2-LKSZ].
25
See generally U.S. COMMODITY FUTURES TRADING COMM’N, ORDER
INSTITUTING PROCEEDINGS PURSUANT TO SECTIONS 6(C) AND 6(D) OF THE
COMMODITY EXCHANGE ACT, MAKING FINDINGS AND IMPOSING REMEDIAL
SANCTIONS, NO. 15-29, Sept. 17, 2015, http://www.cftc.gov/idc/groups/
public/@lrenforcementactions/documents/legalpleading/enfcoinfliprorder091
72015.pdf [https://perma.cc/BQK6-RBR9]; I.R.S. Notice IR-2014-36 (Mar.
25, 2014) [https://perma.cc/D6NT-PAWT]; FIN. CRIMES ENF’T NETWORK,
U.S. DEP’T OF THE TREAS., FIN-2013-G001, APPLICATION OF FINCEN’S
REGULATIONS TO PERSONS ADMINISTERING, EXCHANGING, OR USING
VIRTUAL CURRENCIES (2013); Adam Hayes, Fla. Lawmaker Pushing to
Classify Bitcoin as Money, INVESTOPEDIA (Sept. 13, 2016),
http://www.investopedia.com/news/fla-lawmaker-pushing-classify-Bitcoin-
money/ [https://perma.cc/C2HC`-3DEQ].
26
See supra note 8 and accompanying text.

 
2016-2017 DEVELOPMENTS IN BANKING LAW 163

C. Bitcoin and Money Laundering

1. Money Laundering Defined

Money laundering is defined as “the process of creating the

appearance that large amounts of money obtained from serious crimes,
such as drug trafficking or terrorist activity, originated from a
legitimate source.”27 There are various precautions in place to avoid or
identify money laundering via both state and federal laws.28 Current
federal money laundering regulation is guided by 18 U.S.C. §§ 1956–
57, which makes it “illegal to conduct certain financial transactions
with proceeds generated through specified unlawful activities, such as
narcotics trafficking, Medicare fraud and embezzlement, among
others.”29 Financial transactions are defined as “a transaction which in
any way or degree affects interstate or foreign commerce . . . involving
the movement of funds by wire or other means or . . . involving one or
more monetary instruments.”30 Further, monetary instruments are
defined as “coin or currency of the United States or of any other
country.”31
Additionally, regulation is in place to monitor money
transmitters—businesses that transmit funds from one person to
another—who transmit currency in excess of $10,000, usually across
U.S. borders.32 Any money transmitter business or service must obtain
a license to operate and is subject to the Bank Secrecy Act (BSA),
which includes “an obligation to maintain an anti-money laundering
program, as well as registration, reporting and record-keeping
requirements.”33 Additionally, it is illegal to operate an unregulated

                                                            
27
Money Laundering, INVESTOPEDIA, http://www.investopedia.com/terms/
m/moneylaundering.asp?lgl=no-infinite [https://perma.cc/Z9KM-AUC7].
28
See Federal Statutes—Money Laundering, INTERNAL REVENUE SERV. (Feb.
5, 2016), https://www.irs.gov/uac/federal-statutes-money-laundering [https://
perma.cc/F3AW-S6H6].
29
Id.
30
18 U.S.C. § 1956(c)(4) (2012).
31
§ 1956(c)(5)
32
BRITO & CASTILLO, supra note 8, at 43.
33
Financial Recordkeeping and Reporting of Currency and Foreign
Transactions (Bank Secrecy) Act of 1970, 31 U.S.C. § 5311 (2012); FinCEN
Issues Guidance on Application of Money Transmission Definitions and
Exemption to Certain Business Models, SIDLEY AUSTIN (May 1, 2014),
http://www.sidley.com/news/fincen-issues-guidance-on-application-of-

 
 
164 REVIEW OF BANKING & FINANCIAL LAW VOL. 36

and unlicensed money-transmission business under the Patriot Act and

18 U.S.C. § 1960, which states that anyone who conducts an
unlicensed money transmitting business can be fined or subject to up
to five years in prison.34 Money transmitters are also subject to state
licensing regulations, which requires a money transmitting business or
service to register within the individual state as well.35 In addition,
money services businesses (MSB), which includes money transmitters,
are required to file Suspicious Activity Reports (SARs), which
requires an MSB to report a transaction “if the MSB knows, suspects
or has reason to suspect that the transaction…involved funds derived
from illegal activity … or is designed to evade the requirements of the
Bank Secrecy Act.”36 These money transmitter regulations provide
transparency of businesses transporting currency so as to create a
“significant impediment to the use of illicit profits by narcotics and
others engaged in illegal activities.”37

2. Previous Attempts to Categorize Bitcoin

Within the Money Laundering Scheme

The biggest problem facing regulators with virtual currencies,

such as Bitcoin, is whether virtual currencies fit within the definition
of words such as “currency” or “funds” that are found in federal and
state anti-money laundering statutes and the BSA. More specifically,
courts have struggled with whether Bitcoin are going to be defined as
currency for purposes of regulation and enforcement in criminal
actions.38
In several landmark cases over the last few years, federal
prosecutors were able to successfully send Bitcoin users to prison on,
among other charges, money-laundering offenses.39 Most notably, in
United States v. Ulbricht, Ross Ulbricht, the criminal operator of the

                                                                                                                              
money-transmission-definitions-and-exemptions-to-certain-business-models-
05-01-2014 [https://perma.cc/7J79-7FDV].
34
18 U.S.C. § 1960 (2012); BRITO & CASTILLO, supra note 8, at 44.
35
See id. at 47.
36
Money Services Business (MSB) Suspicious Activity Reporting, FINCEN,
https://www.fincen.gov/money-services-business-msb-suspicious-activity-
reporting [https://perma.cc/VU6R-AH2K].
37
Federal Statutes—Money Laundering, supra note 28.
38
See generally United States v. Faiella, 39 F. Supp. 3d 544 (2014); United
States v. Ulbricht, 31 F. Supp. 3d 540 (2014).
39
See, e.g., Faiella, 39 F. Supp. 3d 544; Ulbricht, 31 F. Supp. 3d 540.

 
2016-2017 DEVELOPMENTS IN BANKING LAW 165

infamous online drug market, Silk Road, was federally prosecuted on

July 9, 2014 and sentenced to life in prison for money laundering, and
other charges.40 The Silk Road was designed as “an online marketplace
for illicit goods and services” where buyers would purchase illegal
drugs and malicious software in exchange for Bitcoins.41 U.S. District
Judge Katherine Forrest ruled that “funds,” as stated in 18 U.S.C. §
1956(c)(4), includes anything that “can be used to pay for things” and
since Bitcoins were traded for narcotics over Silk Road, “one can
money launder using Bitcoin.”42 As stated by Judge Forrest, “Congress
intended to prevent criminals from finding ways to wash the proceeds
of criminal activity” and thus “the money laundering statute is broad
enough to encompass use of Bitcoins in financial transactions.”43
Similarly, in United States v. Faiella in 2014, Robert Faiella, a
Bitcoin exchanger, and Charlie Shrem, CEO of a Bitcoin exchange,
were both convicted for conspiracy to launder money and operation of
an unlicensed money transmitter business by selling “over $1 million
in Bitcoins to users of ‘Silk Road.’”44 In this case, U.S. District Judge
Jed Rakoff stated that “bitcoin clearly qualifies as ‘money’ or ‘funds’”
after reading the dictionary definition of “money” as well as the text of
18 U.S.C. § 1960, the statute that prohibits unlicensed money
transmitting businesses.45 Further, the Financial Crimes Enforcement
Network issued a guidance in 2013 that clarified that “virtual currency
exchangers constitute ‘money transmitters’ under its regulation” and
thus because Faiella did not register its business, it was illegally
running the service.46 Both Ulbricht and Faiella appear to reflect an
ideology among judges that Bitcoin should count as currency for
money laundering purposes.47
Despite some clarity regarding where Bitcoin fits within the
federal money-laundering scheme being provided in 2014, the two
                                                            
40
See Ulbricht, 31 F. Supp. 3d at 546.
41
Id. at 547.
42
Id. at 570.
43
Id.
44
Press Release, U.S. Dept. of Justice, Manhattan U.S. Attorney Announces
Charges Against Bitcoin Exchangers, Including CEO of Bitcoin Exchange
Company, For Scheme to Sell and Launder Over $1 Million in Bitcoins
Related to Silk Road Drug Trafficking (Jan. 27, 2014), https://www.
justice.gov/usao-sdny/pr/manhattan-us-attorney-announces-charges-against-
bitcoin-exchangers-including-ceo [https://perma.cc/U9WW-AHT2].
45
Faiella, 39 F. Supp. 3d at 545.
46
Id. at 546.
47
See id. at 545.

 
 
166 REVIEW OF BANKING & FINANCIAL LAW VOL. 36

most recent prosecutions of Bitcoin users in 2016 have shown that it is

still within the judge’s discretion to include or not include Bitcoin in
the statutory scheme.48 In July 2016, in Florida v. Espinoza,49 Florida
circuit court Judge Teresa Pooler dismissed a money laundering case
on the basis that Bitcoin is not money as defined by both state and
federal regulations.50 Michell Espinoza was prosecuted for his
involvement in the sale of $1,500 worth of Bitcoins to undercover
police officers in Florida.51 Espinoza, via an online Bitcoin exchange,
was engaged in the business of selling Bitcoins in exchange for cash,
explaining to the undercover officers that he made a profit in these
transactions by purchasing Bitcoins for 10 percent under market value
and selling them for 5 percent over market value.52 Further, the
officers told Esponiza that they had intended to use the Bitcoins to buy
stolen credit card numbers and wanted to engage in a subsequent
transaction whereby the officers traded Espinoza a share of the stolen
credit card numbers for more Bitcoins, a transaction that would be
considered an “unlicensed transaction”, and thus illegal under
Florida’s “unauthorized money transmitter” law if Bitcoin counted as
“currency, monetary value, or payment instrument.”53 After agreeing
to this transaction, Espinoza was arrested at the meet-up and charged
with illegally engaging in a money transmitting business as well as
money laundering.54
In her opinion, Judge Pooler explained that while Bitcoin may
have some characteristics in common with what we commonly refer to
as money, the uniqueness of this virtual currency did not neatly fit into
the anti-money laundering statutes.55 Judge Pooler pointed to the idea
that Bitcoin cannot always be exchanged for items of value; the fact
that some, but not all, merchants accept Bitcoin as payment; and the
fact that the value of Bitcoin is not as stable as money.56 The Court

                                                            
48
See e.g., Faiella, 39 F. Supp. 3d 544; Ulbricht, 31 F. Supp. 3d 540.
49
No. F14-2923 (Fla. Cir. Ct., July 22, 2016).
50
See Hackett, supra note 7.
51
Hackett, supra note 7.
52
Espinoza, No. F14-2923 at 2.
53
Id.; John K. Londot, Bitcoin Trading Isn’t Money Laundering, But For How
Long?, LAW360 (Aug. 8, 2016, 3:27 PM), https://www.law360.
com/articles/825837/bitcoin-trading-isn-t-money-laundering-but-for-how-
long- [https://perma.cc/5W3V-K6LN].
54
Espinoza, No. F14-2923 at 3.
55
Londot, supra note 53.
56
Bogage, supra note 5.

 
2016-2017 DEVELOPMENTS IN BANKING LAW 167

held that, therefore, Bitcoin cannot be characterized as money.57

Further, using statutory interpretation to interpret terms such as
“money,” “currency,” and “payment instruments” in Florida’s
“unauthorized money transmitter” law and anti-money laundering
statute, Judge Pooler ruled that Espinoza’s actions did not violate
either of these laws and thus was not guilty of money laundering.58 In
Judge Pooler’s view, “it is very clear, even to someone with limited
knowledge in [economics], that bitcoin has a long way to go before it
is the equivalent of money.”59
However, only two months later, in September 2016, in
Manhattan, U.S. District Judge Alison Nathan ruled that Bitcoin is to
be treated as money for the purposes of hacking attacks made against
J.P. Morgan Chase & Co.60 In United States v. Murgio,61 Murgio and
others were charged with operating Coin.mx, an unlicensed money
transmitting business that exchanged Bitcoins for cash to victims of
hacking attacks.62 These victims had to pay a sum of money, typically
in Bitcoins, to the criminals who hacked them and thus the Bitcoins
exchanged through Coin.mx were used to pay the criminals.63 Similar
to Espinoza, the decision turned on the statutory interpretation by the
judge of a federal law that deems the operation of an unlicensed
money-transmitting business a crime.64 In her opinion, she discussed
the meaning of the word “fund,” explaining “bitcoins are funds within
the plain meaning of that term” because they can be “accepted as a
payment for goods and services or bought directly from an exchange

                                                            
57
See supra note 56 and accompanying text.
58
Londot, supra note 53.
59
Espinoza, No. F14-2923 at 6.
60
Euny Hong, Bitcoin Is Money, Rules Federal Judge in Landmark Case
(JPM), INVESTOPEDIA (Sept. 20, 2016), http://www.investopedia.
com/news/Bitcoin-money-rules-federal-judge-landmark-case-jpm/
[https://perma.cc/W6ES-ANXB]; Gershman, supra note 7.
61
No. 15-cr-769 (AJN), 2016 U.S. Dist. LEXIS 131745 (S.D.N.Y. Sept. 19,
2016).
62
Press Release, Fed. Bureau of Investigations, Manhattan U.S. Attorney
Announces Charges Against Two Florida Men for Operating an Underground
Bitcoin Exchange (July 21, 2015), https://www.fbi.gov/contact-us/field-
offices/newyork/news/press-releases/manhattan-u.s.-attorney-announces-
charges-against-two-florida-men-for-operating-an-underground-bitcoin-
exchange [https://perma.cc/Z6BW-KLKT].
63
Id.
64
Id.

 
 
168 REVIEW OF BANKING & FINANCIAL LAW VOL. 36

with a bank account.”65 These recent cases, coupled with prosecutions

from the past few years, demonstrate that the government is still very
unsure about whether Bitcoin should be afforded the same treatment as
traditional money and currency. Regulators continue to struggle on
how best to regulate Bitcoin in order to optimize the benefits of the
virtual currency while eliminating criminal activity.66

D. Regulation of Bitcoin

1. Recent Clarifications of Bitcoin Within

Money Laundering Regulation

Because Bitcoin is relatively new and users and regulators are

constantly uncovering new ways the technology can be used, the
government has struggled to find a way to fit Bitcoin into the statutory
definitions of currency and other financial instruments.67 In recent
years, several federal regulatory bodies, including the Financial
Crimes Enforcement Network (FinCEN) of the U.S. Department of the
Treasury, the IRS, and the CFTC have released statements regarding
the regulation of virtual currencies in response to the rise in criminal
activities surrounding Bitcoins.68
On March 18, 2013, FinCEN issued a guidance clarifying the
differences between currency and virtual currency.69 It also clarified
the differences between specific entities and persons involved in
virtual currency transactions who are subject to the regulations set
forth in the BSA in an effort to clarify which Bitcoin participants can
be defined as a money transmitter.70 The guidance defines virtual
currency as “a medium of exchange that operates like a currency in
some environments, but does not have all the attributes of real
currency.”71 Many, such as Judge Rakoff in United States v. Faiella,

                                                            
65
Hong, supra note 60.
66
See generally Faiella, 39 F. Supp. 3d 544; Ulbricht, 31 F. Supp. 3d 540;
Gershman, supra note 7; Londot, supra note 53.
67
BRITO & CASTILLO, supra note 8, at 41.
68
See id. at 2.
69
See generally FIN. CRIMES ENF’T NETWORK, U.S. DEP’T OF THE TREAS.,
FIN-2013-G001, APPLICATION OF FINCEN’S REGULATIONS TO PERSONS
ADMINISTERING, EXCHANGING, OR USING VIRTUAL CURRENCIES (2013).
70
Id.
71
See id.

 
2016-2017 DEVELOPMENTS IN BANKING LAW 169

have read this to say that Bitcoin should be treated as currency.72

Others, such as Judge Pooler in Florida v. Espinoza, disagree,
demonstrating that despite this classification, discrepancies in its
interpretation still exist.73
On March 25, 2014, the IRS sent out a notice which defined
Bitcoin as a “convertible virtual currency” that “functions as a medium
of exchange” and “operates like ‘real’ currency” but “does not have
legal tender status in any jurisdiction.”74 Thus, Bitcoin and other
virtual currencies are treated as property for federal tax purposes rather
than being treated as actual currency.75 This means that, unlike
currency, any gain made from selling Bitcoins is taxable income that
must be reported on an income tax return.76 However, the IRS is
currently realizing that this notice has had less impact than expected,
as it is currently investigating Bitcoin users who have seemingly used
Bitcoin to make money while evading taxes.77 More specifically, the
IRS sent a request to Coinbase, “the largest Bitcoin exchange in the
United States,” on November 17, 2016 requesting the “records of all
customers who bought virtual currency from the company from 2013
to 2015” in order to demand back taxes, likely from the largest
customers on the exchange.78 The IRS has discovered that the
“likelihood of underreporting is significant” because Bitcoin
transactions do not go through a third-party, which means there is no
real way to report the transactions and thus makes it easier for
someone to evade taxes.79 This recent discovery by the IRS will most
                                                            
72
See supra note 60 and accompanying text.
73
See supra note 50 and accompanying text.
74
I.R.S. Notice IR-2014-36 (Mar. 25, 2014) [https://perma.cc/D6NT-PAWT].
75
Id.
76
Rebecca Campbell, IRS at a Standstill With Bitcoin; Users and Tax
Professionals Remain in the Dark, CRYPTOCOINS NEWS (Oct. 8, 2016),
https://www.cryptocoinsnews.com/irs-standstill-bitcoin-users-tax-
professionals-remain-dark/ [https://perma.cc/7GHU-UT62].
77
Nathaniel Popper, Bitcoin Users Who Evade Taxes Are Sought by the I.R.S.,
N.Y. TIMES: DEALBOOK (Nov. 18, 2016), http://www.nytimes.com/
2016/11/19/business/dealbook/irs-is-seeking-tax-evaders-who-use-bitcoin.
html?_r=0 [https://perma.cc/D3WZ-92Z6].
78
Id.
79
Kelly Phillips Erb, IRS Wants Court Authority to Identify Bitcoin Users &
Transactions at Coinbase, FORBES (Nov. 21, 2016), http://www.
forbes.com/sites/kellyphillipserb/2016/11/21/irs-wants-court-authority-to-
identify-bitcoin-users-transactions-at-coinbase/2/#767c4f834183
[https://perma.cc/2ZLA-GZKL].

 
 
170 REVIEW OF BANKING & FINANCIAL LAW VOL. 36

likely urge the IRS to further define Bitcoin and other virtual
currencies so as to close the gap of illegal activities.80
In September 2015, the CFTC issued an order finding that
Bitcoin and other similar virtual currencies are to be defined as
commodities.81 The implications of this order means that the CFTC
now has jurisdiction to provide oversight and subject Bitcoin trading
of futures and options contracts to CFTC regulations.82 This order was
filed simultaneous to the CFTC settling charges against Coinflip, Inc.,
83
a Bitcoin options trading platform that was illegally connecting
Bitcoin option contract buyers and sellers.84 Coinflip, Inc. consented to
the order and is now regulated by the CFTC and will have to remain in
compliance with the Commodity Exchange Act (CEA) and CFTC
regulations in order to remain as a legal commodity options facility.85
More recently, CME Group, the largest futures exchange operator in
the world, “launched a pair of indexes designed to track” the price of
Bitcoin in the hopes of boosting the virtual currency’s visibility in the
market.86 Currently, trading Bitcoin is less accessible because there are
dozens of Bitcoin exchanges, a trader has to set up an account on each
individual exchange, and many are hesitant to trade Bitcoin because of
its past involvement in illegal activities.87 However, if CME’s index
                                                            
80
Campbell, supra note 76.
81
Luke Kawa, Bitcoin Is Officially a Commodity, According to U.S.
Regulator, BLOOMBERG (Sept. 17, 2015), http://www.bloomberg.com/
news/articles/2015-09-17/Bitcoin-is-officially-a-commodity-according-to-u-s-
regulator [https://perma.cc/TZL5-EQ8Y].
82
See id.
83
See generally U.S. COMMODITY FUTURES TRADING COMM’N, ORDER
INSTITUTING PROCEEDINGS PURSUANT TO SECTIONS 6(C) AND 6(D) OF THE
COMMODITY EXCHANGE ACT, MAKING FINDINGS AND IMPOSING REMEDIAL
SANCTIONS, NO. 15-29, Sept. 17, 2015, http://www.cftc.gov/idc/
groups/public/@lrenforcementactions/documents/legalpleading/enfcoinflipror
der09172015.pdf [https://perma.cc/BQK6-RBR9].
84
Press Release, U.S. Commodity Futures Trading Comm’n Release, CFTC
Orders Bitcoin Options Trading Platform Operator and its CEO to Cease
Illegally Offering Bitcoin Options and to Cease Operating a Facility for
Trading or Processing of Swaps without Registering (Sept. 17, 2015),
http://www.cftc.gov/PressRoom/PressReleases/pr7231-15
[https://perma.cc/XE3Q-XM62].
85
Kawa, supra note 81.
86
Alexander Osipovich, Bitcoin Futures Might Be Coming Soon, WALL ST. J.
(Nov. 14, 2016), http://www.wsj.com/articles/bitcoin-futures-might-be-
coming-soon-1479143252 [https://perma.cc/8G9C-LVGT].
87
Id.

 
2016-2017 DEVELOPMENTS IN BANKING LAW 171

leads to greater transparency of the virtual currency, it is possible that

this could lead to “futures contracts that would make it easier for both
professional and individual investors to trade bitcoin.”88 This in turn
could possibly lead to Bitcoin gaining more credibility as a viable
virtual currency and open the door for many other avenues of positive
influence.89

2. The Future of Bitcoin

As with all new technology, Bitcoin has attempted to grow

since its inception in 2009 to become a mainstream crypto-currency
that goes beyond the sphere of what paper currency offers the world.
The biggest issue facing Bitcoin currently is that “the same attributes .
. . that attract lawful users, such as the capacity for anonymity as well
as their speed and global reach, attract criminal actors engaged in illicit
financing.” 90 It might be necessary now for regulators to focus heavily
on the proper classification of the virtual currency within the anti-
money laundering scheme in order to combat illicit activities
associated with Bitcoin. Such clarity could benefit the world, as
Bitcoin has the potential to improve human welfare if the criminal
consequences could be properly minimized by appropriate
regulation.91
One possible answer would be to regulate Bitcoin out of
existence or outlaw it completely, as other countries such as Russia
and China have sought to do.92 Proponents of this solution are more
concerned about the anonymity of the decentralized network enabling
criminals to easily launder money rather than the many advantages of
Bitcoin.93 However, many legislators are quick to point out that paper
money, like Bitcoin, also can be used in illegal transactions, yet
regulating paper bills out of existence has yet to be suggested.94
Further, because of the decentralized virtual network that Bitcoin
operates over, it is likely impossible to completely shut down the

                                                            
88
Id.
89
Id.
90
FIN. CRIMES ENF’T NETWORK, U.S. DEP’T OF THE TREAS., SAR STATS
TECHNICAL BULLETIN (July 2014).
91
BRITO & CASTILLO, supra note 8, at 67.
92
Londot, supra note 53.
93
Hackett, supra note 7.
94
BRITO & CASTILLO, supra note 8, at 67.

 
 
172 REVIEW OF BANKING & FINANCIAL LAW VOL. 36

network even if it becomes outlawed.95 This has the potential to

completely hinder the advantages of Bitcoin by virtually banning any
legal uses of Bitcoin while encouraging illegal activities to continue
over a network that will continue to run unregulated.96
A more balanced approach would be to focus on where
illegality within the Bitcoin market lies and try to specifically regulate
those instances. The issue lies, as seen in cases such as Ulbricht,
Faiella, and Espinoza, with Bitcoin companies that exchange this
cryptocurrency for real currency.97 Thus, regulation should target
institutions that allow these types of transactions by subjecting them to
money transmitter regulations.98 If Bitcoin exchanges are identified as
money transmitters, they will be required to file SARs, which would
“allow government agencies to ascertain the identity of any individual
who converts Bitcoins into at least $10,000.”99 Therefore, a reduction
in potential criminal activity would likely occur because criminals
could no longer stay anonymous in the Bitcoin framework.100 This
progress is already reflected in the ability of the New York State
Police to trace “bank deposits back to a number of drug deals
conducted in Bitcoin on an online drug market” after receiving
information via SARs.101 Because this would only target Bitcoin
institutions who deal in real and virtual currency transactions, other
exchanges that simply exchange Bitcoin for goods will remain
relatively untouched and can continue to thrive as a quick and cheap
method of exchange.102
This might be a better solution than attempting to regulate the
Bitcoin economy as a whole. Certain state regulations have seen the
backlash from Bitcoin startups when regulation appears too
overinclusive. The New York Department of Financial Services
(NYDFS) developed new money-transmitter regulations in a
                                                            
95
Londot, supra note 53.
96
BRITO & CASTILLO, supra note 8, at 68.
97
See generally Faiella, 39 F. Supp. 3d 544; Ulbricht, 31 F. Supp. 3d 540;
Espinoza, No. F14-2923.
98
Singh, supra note 1, at 49.
99
Money Services Business (MSB) Suspicious Activity Reporting, supra note
36 and accompanying text; Singh, supra note 1, at 49.
100
Id.
101
Michael del Castillo, New York Police Win FinCEN Award for Bitcoin
Investigation, COINDESK (May 13, 2016), http://www.coindesk.com/new-
york-police-win-fincen-award-bitcoin-investigation/ [https://perma.cc/J2XZ-
KQKZ].
102
Id.

 
2016-2017 DEVELOPMENTS IN BANKING LAW 173

framework called ‘BitLicense,’ effective August 8, 2015, which

explicitly regulated virtual currencies like Bitcoin.103 However, rather
than the influx of applications for a BitLicense that regulators hoped
for, it appeared that many Bitcoin startups decided to stop servicing
the New York area.104 Along with an application cost of $5,000, the
BitLicense also required extensive paperwork that required the help of
lawyers to understand, thus adding to the cost.105 The biggest critics of
this regulation stated that “Bitcoin was intended to give people true
control and access to their money,” but restrictions such as BitLicense
try to centralize an otherwise decentralized network.106
Nonetheless, with the potential influence from the CME index,
one might predict that Bitcoin will become a more generally accepted
form of virtual currency in the future. In addition to CME, Cameron
and Tyler Winklevoss have recently chosen State Street Corp. “to help
them launch a new exchange-traded fund” (ETF) based on Bitcoin.107
If the SEC approves the ETF, this could be another step in the
transparency and acceptance of Bitcoin technology.108 As more
products emerge backed by Bitcoin technology, the more widely
accepted the use of this virtual currency will become. In addition,
stabilizing the more erratic nature of the market price of Bitcoin would
likely lead to even more acceptance among investors and potential
extend beyond the financial world.109

E. Conclusion

Bitcoins’ revolutionary technology certainly brings a new

level of innovation to business, payment systems, and communication
across the world. However, just as many technological developments
                                                            
103
Karen Freifeld, NY Regulator Issues First License for Bitcoin Company,
REUTERS (Sept. 22, 2015), http://www.reuters.com/article/us-Bitcoin-
regulations-idUSKCN0RM1TP20150922 [https://perma.cc/SH4N-CQQ9].
104
See Daniel Roberts, Behind the “Exodus” of Bitcoin Startups From New
York, FORTUNE (Aug. 14, 2015), http://fortune.com/2015/08/14/bitcoin-
startups-leave-new-york-bitlicense/ [https://perma.cc/T3K5-9S2F].
105
Id.
106
Id.
107
Paul Vigna, Winklevoss Brothers Choose State Street to Help Launch
Bitcoin ETF, WALL ST. J (Oct. 18, 2016), http://www.wsj.com/
articles/winklevoss-brothers-choose-state-street-to-help-launch-bitcoin-etf-
1476825213 [https://perma.cc/CK49-LUWT].
108
Id.
109
See id.

 
 
174 REVIEW OF BANKING & FINANCIAL LAW VOL. 36

from the past, the advantages of a virtual currency payment system

also faces the threat from criminal activities occurring over a
pseudonymous network where there is virtually no current regulation
to cover illegal transactions. Legislative changes are certainly
forthcoming, as states and federal regulators have already taken steps
to define Bitcoin in the regulatory scheme. The biggest challenge will
be to regulate Bitcoin without hindering the potential for growth.
While there is almost always certainly a chance that Bitcoin, like any
new technological venture, could fail or be pushed out of existence by
a newer, more innovative technology, policymakers must be careful
not to hinder a technology that could change the way our global
economy functions. Based on the most recent innovation of CME
announcing two Bitcoin indexes, pushing this virtual currency out of
existence seems unlikely. Instead, CME has hopefully started a radical
change in bringing more transparency to Bitcoin so that regulators and
potential users better understand and appreciate this technology.

Lauren Troeller110

                                                            
110
Student, Boston University School of Law (J.D. 2018).