Academic journal article American University Business Law Review

It’s Not Just about the Money: A Comparative Analysis of the Regulatory Status of Bitcoin under Various Domestic Securities Laws

Academic journal article American University Business Law Review

It’s Not Just about the Money: A Comparative Analysis of the Regulatory Status of Bitcoin under Various Domestic Securities Laws

Article excerpt


The Internet revolutionized the world like nothing before. It allowed for various forms of communication and connectivity, yet produced a number of social, legal, and economic challenges. Evidently, scholars began to theorize that the Internet would lead to the development of new forms of digital currency.1 And, they were right.

This Note focuses on the regulatory status of a digital "currency" called Bitcoin.2 Specifically, it explores whether Bitcoin may be regulated as a "security" under various domestic securities laws. Part II summarizes the unique characteristics of Bitcoin and its current regulatory classification. Part III analyzes the securities laws of the United States, the United Kingdom ("U.K."), Brazil, and Japan- four regional leaders in financial regulation. Part III also applies these laws to Bitcoin, arguing that Bitcoin does not fit squarely within the securities definitions of any country. Lastly, Part IV suggests a possible solution to regulating Bitcoin in the United States under a "quasi-security" framework. It recommends that the Securities and Exchange Commission ("SEC") define Bitcoin as a "quasisecurity" and pass regulations aimed solely at Bitcoin regulation, rather than trying to incorporate it into existing legislation. By promulgating new rules, the SEC can effectively spearhead the effort towards global Bitcoin regulation.

I.Bitcoin's Unique Characteristics and Current Regulatory Classification

This Section explains what Bitcoin is and how it works. It discusses the unique characteristics of Bitcoin, and gives a brief overview of its varying legal status around the world.

A.Entering the Bitcoin Market

Bitcoin is the first digital currency that allows two parties to directly exchange single monetary units without going through a central payment system.3 The Bitcoin system is regulated entirely by computer software.4 It awards bitcoins to users through a "mining" program that solves various mathematical proofs and takes increasing amounts of computational power.5 Once users take time to download this program and use their computers to generate solutions, new bitcoins are issued.6 However, as the number of users in the system increases, the mathematical proofs become more difficult, which eventually slows down the production of bitcoins over time.7 Today, due to Bitcoin's popularity, few users acquire bitcoins through the mining process; rather, they acquire bitcoins in exchange for goods and services,8 or they purchase them directly through online exchanges.9

B.Bitcoin Transfers

Once a user enters the Bitcoin market, he or she may choose to engage in Bitcoin transfers. Transfers occur through a network operated by thousands of computers, similar to a music-sharing system like iTunes or Spotify.10 Bitcoins are sent from one computer to another through individual messages." Each message has a personal identifier called an "address,"12 and each address has an associated pair of public and private keys, consisting of a string of numbers and letters.13 When an individual transfers bitcoins to a recipient, the recipient sends his or her address to the transferor.14 The transferor then adds the address and the amount of bitcoins to the transfer message.15 Finally, the transferor signs the message with his or her private key, and announces the public key to the recipient for signature verification.16

In addition, the Bitcoin system provides a built-in mechanism to prevent individuals from copying and pasting the same digital addresses over and over again-a process that is often referred to as "double spending."17 The traditional answer to the double-spending problem was a central clearinghouse, such as a bank, to keep a database of all transfers made in an account. However, Bitcoin found a way to alter this approach.18 After a transfer is completed, the system automatically broadcasts the time of the transfer and adds it to the Bitcoin "block chain. …

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