The Bitcoin “Cryptocurrency” has gained momentum in the market, and some businesses, including Overstock. com and TigerDirect.com, now accept bitcoins as payment. Many others are wondering if Bitcoin is a good fit for them—and they should factor regulatory uncertainty into their calculations.
In the U.S., certain companies exchanging bitcoins and real currency must register with the Financial Crimes Enforcement Network and are subject to Bank Secrecy Act regulation, says Jeremy Mandell, an associate in the Financial Services Practice Group at Morrison & Foerster. Such companies may also be subject to state licensing requirements, which can be burdensome for start-ups and smaller firms.
Other concerns include the potential for illicit use and fraud—Bitcoin has been the currency of choice for some online black markets. And there have been major incidents of theft: in December, some $5 million worth of bitcoins was drained from accounts on Sheep Marketplace, one of those black markets. When such problems occur, there’s little recourse for victims. “There are no consumer protections like those we see in more traditional payment mechanisms; there are limited dispute resolution rights, no deposit insurance for virtual currency holders, and account access can be restricted,” says Mandell. “But the market is evolving to address these consumer exposures.”
As virtual currencies become more widespread, regulators will continue to scrutinize them. The IRS ruled recently that bitcoins are property, and some states are also moving forward. The New York State Department of Financial Services announced that it will propose a virtual currency regulatory framework by late 2014. “Other states are taking about these issues too,” says Mandell, “so we are likely to see more regulation of virtual currency— sooner rather than later.”