Saturday, July 6, 2013


More and more people are becoming interested in using bitcoins for transactions (and, no, not just people trading in illegal goods). For those of you who are scratching your head right now, bitcoins are a form of digital currency.   Basically, you buy them online and then use them to conduct business. Bitcoin enthusiasts are very excited about them because you don’t need a bank or other money trader (and their fees) to exchange them. It’s part of the “cut-the-big-banks-out” revolution that is, understandably, very popular right now. Drug and arms dealers love them because they also don’t like using banks (with those sticky rules about having to use an ID to open an account) and some online black markets have switched over to using bitcoins exclusively.

Before I launch into whether you should accept them or not, I would like to back up and look at the larger issue here: What is money? It is a medium of exchange. At some point very early on humans figured out that we can’t rely on bartering alone because I might not have what you want at the very moment I need what you have. So, clever mammals that we are, we selected things that were durable, like gold or pretty shells, and used them as a way to preserve our wealth for a time when we needed to spend it.

(By the way, right now you feel like I did when I would ask my Dad how to spell a word like “hysterical" and have to sit through a ten minute lecture on the etymology before getting the answer, “well,” he’d say as he sat back and scratch his beard, “hysterical comes from Latin hysterics which means ‘of the womb,’ because it was originally considered to be a mental condition that only women suffer from, have you heard of a hysterectomy…” Like good old Dad, I will get to your answer, but you’re going to have to hear me out first.)

The method of using a medium of exchange (as opposed to the barter system) has a major drawback though: it only works if both parties to the exchange recognize the medium as valuable. Gold is a good choice for a medium because it has clear value: it is a useful metal, it is near impossible to fake, and, well, it’s pretty. Unfortunately, it is also heavy and rare enough that its value is too great for small every day exchanges. So (and I’m skipping over a ton of very interesting history here so don’t be afraid to do your own research) we come to the dollar.

When it was first introduced, a dollar (and in this article I’m referring to the U.S. dollar) was basically a certificate that you could exchange for a certain amount of real gold. This policy was eroded over time and eventually killed by Nixon in 1971. Today a dollar is valuable because the U.S. says it is valuable. And the U.S. government has a direct interest in the dollar being a medium of exchange because it prints them. Now listen up, because this is important: To the extent that the cost of printing a dollar is less than what the dollar will buy, the U.S. government has gained in any transaction done in dollars.  Well, actually the Federal Reserve gains because it just “buys” the dollars from the Treasury by increasing the liability assigned to the Treasury’s account  and turns around and uses them and enormous statutory authority to manipulate the amount of liquid capital in the U.S. economy.  However, I’m skipping over further discussion of the Federal Reserve System, and you should educate yourself on the matter, but for this post it is suffice to say that the U.S. government has a very strong interest in people using the dollar as their medium of exchange.

You can easily imagine, then, that the U.S. government uses the full extent of its authority to squash any other type of currency. Obviously, it can’t force the rest of the world to use the U.S. dollar (so many nations annoying insist on printing their own currency), but it sure as heck can control people and entities in its own country from undermining this wonderful source of wealth. Right?

Well, the government has been steadily losing ground for a while now. First, the laws had to be adjusted to allow middle men, called money transmitters, to be able to move money around using alternative currency (e.g. Western Union and PayPal using electronic currency; banks issuing checks, travelers checks, and credit cards) to free their customers from the risks of carrying or sending dollars— but the U.S., through the states, maintained control of these money transmitters through strict licensing laws.   Then, there were the little and not-so-little businesses that wanted to issue their own credits (like Starbucks cards) and the laws had to be adjusted to allow it.  It doesn’t make sense to force Starbucks to be licensed as a money transmitter, so they made an exception to the money transmitter licensing laws: businesses can issue credits, without a license, so long as those credits are valuable at only at the issuing business.   It’s a slippery slope though, isn’t it, because if I accept your $50 Starbucks card in exchange for my labor didn’t Starbucks just become a money transmitter? (Also, you do realize that when you buy a $50 Starbucks card you just made an interest free loan of $50 to Starbucks, right?  In addition to tying up your money to be spent only with them?).

So, in case you’re falling asleep here is your executive summary: in the U.S. legal tender was gold, then dollars, then licensed money transmitter documents like checks, credit cards and PayPal, but Starbucks cards don’t count even though people use them like money.

Amid this graying of the law, here comes bitcoins.  Are they money, a legitimate medium of exchange?  Well, like gold or shells, bitcoins are money so long as both people in the exchange agree they are valuable.  But, and this is where it gets very interesting, the number of people who believe in their value will be greatly diminished if they are illegal.

So, is it legal to use bitcoins?   California doesn’t think so.  Just this past May it sent out a number of cease and desist letters like this one claiming that anyone trading in bitcoins is violating money transmitter licensing laws. Many other states are fighting the good fight to protect the dollar as well. But the bitcoin enthusiasts are lawyering up and fighting back. The Bitcoin Foundation shot a letter to California basically saying that California doesn’t have authority to regulate bitcoins. Its reasoning is sound enough, but frankly, I found the letter to be a disappointment philosophically. Its very well researched argument rests on the details and definitions of laws that were written for the likes of travelers checks and Starbucks cards. This squeezing between the lines may work to keep bitcoins out of hot water in the immediate future, but eventually bitcoins must face the underlying issues I’ve been trying to raise in this post: until they give a really great argument as to why the government will benefit from bitcoins, bitcoins are going to be viewed as threat not only to the establishment of banks and other licensed money traders but to the financial holdings of federal government itself. And not just the U.S. government, every government in the world that prints its own currency.  (Personally, I think that this argument can be made because the gain a government receives from printing money is at least partially lost through inflation, but I’ll leave that for the economists.)

And what if bitcoins are a threat?  Can the governments that print currency (and not all of them do) join together and stop bitcoins when every citizen and every business realizes that they no longer have to pay fees to licensed money transmitters to use the value they accumulated through labor to purchase goods and services they need?  The Bible is very clear that Jesus himself turned over the tables of the money changers.

So, if you haven’t guessed already, I can’t advise you as to whether or not to accept bitcoins. I can say that people are using them, the government has good reasons to hate that, there is a decent argument that they are legal (at least until the laws are updated), and I, for one, am pulling up my chair in anticipation of watching a great battle.

(psst…For more info on how to use bitcoins see here.  For a more technical discussion of how they work see here.)

I just ran across this interesting bit of information on wikipedia while researching ponzu schemes.

"In August, 2012, the operator of Bitcoin Savings and Trust (BST),[95] Pirateat40,[96][97] disappeared from the public scene.[98] He left with 500,000 BTC he earned by running BST as a Ponzi scheme. The fact that BST was run using Bitcoin, makes this a unique instance of a Ponzi scheme. It allowed Pirateat40 to stay completely anonymous, making it possible for him to just disappear with the money from his investors. Although some called it a Pyramid scheme,[99] BST is generally considered a Ponzi scheme. At the time he disappeared, somewhere around August 31,[100] the 500,000 BTC were valued at around 5,000,000 USD. However, since Bitcoin prices increased significantly since the time it happened, they could now be worth more than 55 million USD.

If you’re looking for legal advice contact Roxanne at www.roxanneolson.com


  1. Nice post.. I want to mention that businesses can easily accept bitcoin as payment without actually having to hold any of them. BitPay allows merchants to have bitcoin immediately converted into dollars and put into your bank account after payment. You still have all the benefits, customer privacy, much lower transaction fees, and no charge backs..

    I like that you mentioned barter and I want to mention new tech (legality is unclear) called ripple, which allows for 'indirect trading' within a user created network of trust, allowing anyone in your network to issue credit that can be used with other people in the network. This is also a distributed system (like bitcoin) that is censorship resistant.

    I also want to note a technicality I noticed in this article, that the government doesn't print money, it is the private Federal Reserve that does. I think lots of government people dislike the power of the federal reserve as much as anyone else. Great post! Thanks!

  2. Thanks! I didn’t know about ripple, but I will check it out. And thanks for letting me know that I didn’t get away with avoiding some discussion of the Federal Reserve. Ugg. Technically, the U.S. Treasury Department’s Bureau of Engraving and Printing prints the physical dollars, but the Federal Reserve takes control of those dollars (through adjustments to the Treasury’s balance sheet) and uses them (along with its prodigious statutory power) to create or evaporate liquid capital in our economy. So, you’re correct that I placed too much blame on the government and I will adjust my post. Thanks so much for helping me!

  3. Ripple is a scam.. check out the details at ripplescam.org.

    BitPay rocks for processing bitcoin payment, but there are several services that can do this for you: mtgox.com, coinbase.com, bips.me

    Good luck on your bitcoin adventure!

    1. There is a lot of controversy over the new and distributed implementation of ripple pay at http://ripple.com because of the 'ripple coins' which are pre-minted. There has been an active community using HTTPS://ripplepay.com and https://villages.cc for about 3 years. Same idea, centralized servers. These tools have been very useful for me and many others, allowing us to issue our own credit backed currency.

  4. The article main argument about Bitcoin is wrong:

    >So, are bitcoins legal currency?   California doesn’t think so.  Just this past May it sent out a number of cease and desist letters like this one claiming that anyone trading in bitcoins is violating money trader licensing laws.

    The government of California has not questioned at any point that Bitcoin is legal. On the contrary, they have implicitely admited it is legal. What the Cal gov has discuted is that you need a license to act as money transmitter if you are in the business of trading bitcoins. But it has never disputed the legality of Bitcoin, in fact it has admited it is, because you dont demand a license on something that is ilegal.


    >The Bitcoin Foundation shot a letter to California basically saying that California doesn’t have authority to regulate bitcoins. Its reasoning is sound enough, but frankly, I found the letter to be a disappointment philosophically. Its very well researched argument rests on the details and definitions of laws that were written for the likes of travelers checks and Starbucks cards. This squeezing between the lines may work to keep bitcoins out of hot water in the immediate future...

    Thats not what happened and the problem comes again from not understanding what the cal gov was demanding. As I already said, the legality of Bitcoin was never questioned, a license was demanded. So the response from the Bitcoin foundation says two things:

    1. They are no money transmitter so they dont need the license to operate.

    2. Even if they were a Bitcoin transmitter, they would still dont need the license because Bitcoin does not fit the definition of the license.

    So the response from the Bitcoin fundation is completely appropiate and not squeezing because, again, the legality of Bitcoin was never questioned.

  5. I don’t think there is any implicit recognition by California that bitcoins are legal tender. If I sell Roxanne bucks and California says I’m acting as an unlicensed money transmitter the implication is that the whole operation, Roxanne bucks and all, is illegal. Even big advocates of bitcoins, the Winklevoss twins, admitted this risk in their recent SEC filing. Bitcoin Foundation would like California to treat bitcoins as a foreign currency. However, whether or not bitcoins are legal to use somewhere in the world is completely irrelevant to my reader who lives in California. The question I’m trying to answer is whether they are legal to use here.


Related Posts Plugin for WordPress, Blogger...