A Florida circuit-court judge’s Monday ruling that bitcoin is not money is the latest addition to a confusing jumble of definitions and regulations that have attempted to classify and control digital currency.
“This Court is not an expert in economics, however, it is very clear, even to someone with limited knowledge in the area, that Bitcoin has a long way to go before it is the equivalent of money,” wrote Miami-Dade Circuit Judge Teresa Mary Pooler in a court opinion to a case that involved charges of money laundering.
Since Florida doesn’t have a law specific to digital, or virtual, currency, applying laws that regulate money-service businesses to bitcoin transactions “is like fitting a square peg in a round hole," Pooler wrote.
But jamming pegs into ill-suited holes is just what some law enforcement, tax and other regulators across the globe are trying to do as they struggle to apply traditional laws to technology innovations that defy them. Besides digital currencies, which are traded on exchanges run by the people who use them, these include autonomous cars and home- and car-sharing services like Airbnb and Uber.
“We’re reaching a point now where the pace of innovation is breakneck, and it is a big ask of our government officials to keep up with every evolution, every imagination,” Andrew M. Hinkes, an attorney with expertise in virtual currencies at the Berger Singerman law firm in Fort Lauderdale, tells The Christian Science Monitor.
The exchange of virtual “money” relies on a technology called “blockchain” that allows for anonymous and ephemeral transfer of value online. Opinions among regulators globally vary about what digital currencies such as bitcoin are and are not, and how to regulate them. Some countries, including China, Russia and Thailand, have gone so far as to impose bans on certain forms of trade of the encrypted currencies. They did so out of fear of its association with criminal activity, or in protection of their official currencies.
The United States is divided on the issue. In 2014, the Internal Revenue Service defined virtual currency as property, for federal tax purposes. The Securities and Exchange Commission, on the other hand, has deemed it as currency, and the Federal Trade Commission says it’s a commodity.
“Bitcoin is not a currency, it’s not a commodity, it’s a computer protocol,” Marco A. Santori, a partner specializing digital currency at Pillsbury Winthrop Shaw Pittman in New York City, tells the Monitor. “If the computer protocol is being used as money, it should be regulated as money. If it is being used a security, it should be regulated as security. If it is being used a commodity or derivative or a dessert topping, it should be regulated as such.”
Some states are also trying to figure out how to control the new technology, which is often associated with illicit activities because its self-regulating, not tied to any financial institutions, and offers anonymity to its users. Others are ignoring it, hoping that existing laws will suffice for now.
New York last year introduced digital currency regulations that relate to consumer protection, anti-money laundering compliance, and cyber-security guidelines. In an official 2014 guidance to consumers and investors, Texas deemed digital currencies to not be money under its state laws and said it would not regulate their transactions. North Carolina recently updated its laws to clarify rules for digital currencies, and California is working on its own legislation that could treat digital currency companies as banks.
The Florida circuit court's ruling could lead to changes of Florida law, which needs a “much-needed update,” Pooler wrote in her opinion.
The case at the center of Pooler's ruling involves Michell Espinoza, who was charged in 2014 with running an illegal money services business and with money laundering. He was arrested after selling bitcoins to an undercover police detective who told him he would be using them to buy stolen credit card numbers. Pooler dismissed the charges Monday.
In her opinion, she argues that while bitcoin may be similar to money, in that it can be exchanged for items of value (such as dollars) and is accepted by some merchants, it is not the same thing. Bitcoin is not backed by banks and is highly volatile in value. So unlike money, writes Pooler, it is not a good store of value or mark of tangible wealth. Plus, it wouldn’t be right to punish Mr. Espinoza, she concludes, for breaking state laws that even legal experts have difficulty applying to this new and complicated financial system.
Pooler's ruling could still be overturned by an appeals court, say lawyers, and it does not have binding authority on other courts. Still, the case is expected to set a precedent for similar cases nationwide. It will also make it harder for Florida to continue to regulate digital currency businesses under existing financial services laws, lawyers predict, now that a court has ruled that these businesses don't fit into existing regulations.