JOSEPHINE JORGENSEN—2017 is a big year for Bitcoin: its value continues to rise and reach new records. Bitcoin reached a record high of more than $7,400 on November 3, bringing the market capitalization above $124 billion. Those that bought into Bitcoin early on have made an impressive return on their investment. An original investment of $10 would have a current value of about $1.2 million dollars.
Bitcoin is a virtual currency that can either be held as an investment or used to purchase goods. Bitcoin transactions are made with no middleman, no transaction fees, and no identification. Most merchants, however, do not accept Bitcoin as a form of payment because it is not considered to be legal tender. Unlike fiat currency, which is backed by a government, Bitcoin has no physical backing. Similar to stocks and bonds, the IRS views Bitcoin as property for tax purposes. Like a share of stock, the price of bitcoin is determined by open market bidding on exchanges, although bitcoin is more volatile and less liquid than most stock. That is, to the latter point, it is thought to be harder to sell Bitcoin and recoup cash than it would be to sell a share of stock in a recognized company.
Banks and regulators are still trying to understand how virtual currency fits into the world of traditional payment and banking services. The SEC recently provided guidance on how virtual currency fundraising can be considered securities. More regulatory oversight is likely to follow after the announcement of the first SEC-registered bitcoin exchange. But until more concrete regulations are set in place for Bitcoin, investment firms that are regulated by the SEC must adapt bitcoin to existing compliance rules and regulations. Bitcoin is viewed very differently among the large investment firms. For example, the CEO of JPMorgan called Bitcoin a fraud, while the head of Goldman Sachs is “thinking about Bitcoin.” CME Group, the world’s largest exchange, took a crucial step towards opening up Bitcoin to institutional investors when it announced plans to introduce Bitcoin futures by the end of the year.
As of now, Bitcoin transactions operate in a gray area when it comes to regulation, but the transactions are not unlawful. According to the U.S. Treasury, using Bitcoins to buy goods and services is not illegal, but mining Bitcoin to operate exchanges or trade them for traditional currency may constitute money transmitting.
Interestingly, the federal government has, for the most part, left Bitcoin regulation up to the states, despite the fact that the federal government usually exercises its constitutional preemptive power for financial regulation. Most state statutes, however, do not account for virtual currencies. This means that legislative action is required before money laundering and money transmission charges can be applied to Bitcoin sellers.
Ultimately, the legality of Bitcoin transactions depends on what the Bitcoins are used for. The anonymous and decentralized nature of Bitcoin transactions allows individuals to purchase illicit goods without a trace. But only a small percentage of the transactions are explicitly illegal. Most of the transactions are done on exchanges and involve people who speculate on the future price of Bitcoin, much like traders buy shares of stock with the hopes that the share price will rise and they will be able to turn a profit. Unfortunately, these virtual currency exchanges have their own set of legal issues due to poor security and lack of investor protection. Since 2011, more than 980,000 bitcoins have been stolen, which would be valued at approximately 4 billion dollars today. Most recently, hackers stole Bitcoins worth over $65 million after it attacked Bitfinex, a major virtual currency exchange.
Bitcoin is a relatively new concept and it will be interesting to watch its growth. As the excitement over Bitcoin continues to soar, the demand and price of Bitcoin will likely continue to rise and reach new records. But buyers beware—most people are buying Bitcoin, not as a store of value, but with an expectation that the price will rise and help them make more money. Consequently, many of the world’s leading investors warn that Bitcoin is a bubble that is sure to burst. Only time can tell the fate of Bitcoin. Even if a crash is inevitable, the technology behind Bitcoin has the potential to revolutionize the future of payment and banking.