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What is Bitcoin?

A presentation on Bitcoin, the legal problems they pose, and possible solutions to curb their negative effects.

Peter Twomey

on 18 February 2013

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Transcript of What is Bitcoin?

If is regulated by the PATRIOT Act What is What is Bitcoin? Issues:
1. Are Bitcoins a currency or a commodity?
2. Who is legally liable for Bitcoins?
3. Can existing legislation be utilized to illegalize or regulate Bitcoins?
4. If not, how such new legislation deal with Bitcoins? Legal Tension Bitcoin is an Internet currency first established in 2009.
It is anonymous and completely decentralized.
Its existence relies upon peer-to-peer networking and a dedicated base of online ‘miners’. Anonymous Transactions between Bitcoin users are almost entirely anonymous.
There is no requirement for a Bitcoin user to enter their name, address, or any other details that might later be used to identify them.
A randomly generated code used to denote the identity of a user is all that remains to confirm that a transaction did indeed take place.
Users can use a different code for every transaction they wish to enter into. Decentralized Bitcoin is money without a governing body.
Unlike typical currencies like U.S dollars and the euro, Bitcoin lacks a centre of control, a group to be held liable for instances of criminal action. Risks Due to its inherent anonymity and decentralized nature, Bitcoins have been widely used to further some of the most deplorable illegal activities.
Bitcoins can easily be utilized for money laundering, the purchasing of illegal drugs, weapons and child pornography on the ‘Dark Internet’, and the funding of terrorist activity, both in the US and abroad.
Other than the pursuit of illegal acts, there is no significant benefit gained from the use of Bitcoins. Bitcoins; Currency or Commodity? ECB 2012 Report: Virtual Currency Schemes Current Understanding of Digital Currencies Similar to fiat money, doesn't have the intrinsic value necessary to be a commodity.
Value not set by a governing body, however.
Set amount of Bitcoins that can be created. (a)Non-Currency (a) Investment Contract (b) Note Securities Regulations -
Exchange Act 1934 S 3(a)(10):
(a) Investment Contract
(b) Note 1.“A contract, transaction or scheme whereby a person invests his money”
2.”in a common enterprise”
3.“led to expect profits”
4.“solely on the efforts of the promoter or a third party…” SEC v W.J. Howey Co. Reves v Ernst & Young “[a] note is presumed to be a ‘security’, and that presumption may be rebutted only by a showing that the note bears a strong resemblance… to one of the enumerated categories of instrument.” Family Resemblance Test 1. The motivations that would prompt a reasonable seller and buyer to enter into the transaction.
2. The "plan of distribution" of the instrument
3. The investing public's reasonable expectation that the note is a security
4 Whether some factor, such as the existence of another regulatory scheme, significantly reduces the risk of the instrument. If is regulated by Securities Regulation ? Concequences of Securities Regulations (b) Currency 1. USA PATRIOT Act '01
2. Money Transmitters Who is legally liable? 1. Exchanges
2. E-Wallet Services
3. 'Miners'
4. Users USA PATRIOT Act '01 Applies to 'Financial Institutions'
Broadly defined, includes 'Currency exchangers or parties involved in the transmission of funds' • Development of internal anti-money laundering procedures, policies, and controls designed to detect and prevent money laundering.
• Designation of an internal compliance officer.
• Institution of an ongoing employee training.
• Implementation of an independent audit function to test and review the company’s due diligence programs, the most important being the 'Know Your Customer' provision. Consequences for 'Financial Institutions' under The USA PATRIOT Act '01 - Section 311 Penalties Failure to comply with the anti-money laundering programs can subject a company to:
Fines of up to $25,000 per day civilly.
Fines of up to $250,000 per day for a willful criminal violation.
A fine of up to $500,000 for willful violations of the Act if the company fails to implement proper anti-money laundering programs and the company is involved in a pattern of illegal activity involving more than $100,000. 1. Brings the Bitcoin exchange under the purview of the SEC.
2. This means that sales of Bitcoins amount to public offerings, which have to accord with numerous formalities.
3. Huge legal and accounting costs associated with this.
4. SEC can fine for the Bitcoins already sold.
5. For a big enough claim can get Department of Justice involved, makes it a criminal action. •Collection and analysis of basic identity information, which involves name matching against lists of known parties.
•Monitoring of a customer's transactions.
•Also proscribes ‘Enhanced Due Diligence’.
•Forces financial institutions to "establish appropriate, specific, and, where necessary, enhanced, due diligence policies, procedures, and controls that are reasonably designed to detect and report instances of money laundering through those accounts." 31 U.S.C. 5318(i) 'Know Your Customer' If are NOT regulated by the PATRIOT Act Change the USA PATRIOT Act Amend the PATRIOT act to include Bitcoins within the definition of currency.
Once this occurs, Bitcoin exchanges will automatically come under the definition of 'financial institute', and the 'Know Your Customer' provisions will apply.
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