Bitcoin: What It Is And How It's Regulated in the U.S.

, New York Law Journal

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Anthony S. Barkow and Nathaniel H. Benforado
Anthony S. Barkow and Nathaniel H. Benforado

On Jan. 1, 2013, the price of one Bitcoin hovered around $13. A year later, the trading price was around $800, with one prominent bank estimating a fair value as high as $1,300. Some view Bitcoin as a giant bubble fueled by foolish speculation. Others believe it represents a currency designed for the Internet age, offering greater efficiency and accessibility as compared to traditional banking services.

Regardless of who is ultimately right about the future of Bitcoin, "real" money—fiat currency—is being poured into the Bitcoin ecosystem, new startups are entering the field almost every day, and even mainstream entities are getting involved. And with Bitcoin no longer on the fringe, regulators have taken note.

This article provides background on the virtual currency and examines the current regulatory landscape in the United States.

How it Works

Bitcoin is a virtual currency. Unlike traditional currency backed by government guarantee, and even other virtual currencies, Bitcoin does not rely on a trusted central authority, such as a mint or bank, to guard against counterfeit or double-spending (where a payor uses the same funds to make two transactions). Instead, Bitcoin uses a decentralized network comprised of those who use the currency to verify and log every transaction.

Benefits and Risks

Advocates argue that Bitcoin improves upon traditional payment systems in many ways, including:

• Encouraging innovation and entrepreneurialism through its open and unrestricted system, similar to the widespread expansion of the Internet;

• Reducing transaction costs through its decentralized network, as compared to traditional payment systems that rely on a central authority;

• Decreasing transaction times—generally between 10 minutes and an hour per transaction—as compared to several days for many bank account transfers;

• Improving global access to financial services, both by serving underbanked groups and creating an easy mechanism for cross-border transactions; and

• Decreasing the threat of identity theft and minimizing the risk of counterfeiting.

On the other hand, many of Bitcoin's positive attributes also make it attractive to bad actors. These potential risks include:

• Providing an effective means to launder money or fund illicit activity through largely anonymous transactions;

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