Vol32 Issue1 2013 Gruber

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TRUST, IDENTITY, AND DISCLOSURE: ARE BITCOIN

EXCHANGES THE NEXT VIRTUAL HAVENS FOR MONEY
LAUNDERING AND TAX EVASION?
Sarah Gruber*
I. INTRODUCTION
On September 2, 2012, less than ten weeks before the general

election of the forty-fifth president of the United States, an anonymous
person posted a message on Pastebin.com, claiming that Republican
presidential candidate Mitt Romneys pre-2010 1040 tax returns had
been taken from a Tennessee branch of accounting firm
PricewaterhouseCoopers.1 A follow-up post on September 4, 2012
threatened that all major news media outlets would be sent an encrypted
copy of the most recent tax returns and that [i]f the parties interested do
not want the encrypt[ion] key released to the public to unlock these
documents on September 28 of this year[,] then payment will be
necessary.2 The anonymous person offered a twist; the person would
* J.D. Candidate, 2014, Quinnipiac University School of Law. I, first, thank my brother,
Darren Gruber, for suggesting this Note topic and helping me with the technical aspect of this
Note. Second, I thank Kelly McKeon and my family for their patience and support. This Note
benefitted from the thoughtful commentary and edits of Melanie Abbott, David King, Neal
34375-qlr_32-1 Sheet No. 72 Side A

Feigenson, Mary Ferrari, Bob White, Jennifer Herbst, Sarah Meiklejohn, Arunan
Arulampalam, Damian Gunningsmith, Diane Cooper, William S. Fuchsman, and the hard-
working staff members and editorial board of the Quinnipiac Law Review. Finally, and
perhaps most importantly, I express my special thanks to Alexander Meiklejohn and Toni
Robinson, who provided me with invaluable assistance and thoughtful feedback.
1
Romney 1040 Collection, PASTEBIN (Sept. 2, 2012), http://pastebin.com/zdU1TK40.
2
Ken Whitehouse, Anonymous Group Allegedly Hacked Romney Tax Records Via
Franklin Firm, THE CITY PAPER (Sept. 4, 2012, 9:33 PM),
http://nashvillecitypaper.com/content/city-news/anonymous-group-allegedly-hacked-romney-
tax-records-franklin-firm (citing the second Pastebin.com post, which is now invalid).
Some of the hyperlinks in this Note have become invalid. Parallel citations to some
websites may be available on an internet archiving website. See Wayback Machine, INTERNET
ARCHIVE, http://archive.org/web/ (last visited Nov. 10, 2013). To find an archived website at
the Wayback Machine, enter the web address of the now invalid website into the search field.
Next, click on the date I indicated that the particular website was available on the Wayback
01/02/2014 11:18:02
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136 QUINNIPIAC LAW REVIEW [Vol. 32:1
allow interested parties . . . to compete to have the encryption key to

the tax returns either released publicly or destroyed:
The deal is quite simple. Convert $1,000,000 USD to Bitcoins (Google if [sic]
if you need a lesson on what Bitcoin is) using the various markets available out
in the world for buying. Transfer the Bitcoins gathered to the Bitcoin address
listed below. It does not matter if small amounts or one large amount is
transferred, as long as the final value of the Bitcoins is equal to $1,000,000
USD at the time when it is finished. The keys to unlock the data will be purged
and what ever [sic] is inside the documents will remain a secret forever.
Failure to do this before September 28 [and] the entire world will be allowed to
view the documents with a publicly released key to unlock everything. . . .
. . . For those that DO want the documents released will have an [sic] different
address to send to. If $1,000,000 USD is sent to this account below first[,] then
the encryption keys will be made available to the world right away. So this is
an equal opportunity for the documents to remain locked away forever or to be
exposed before the September 28 deadline.
Who-ever [sic] is the winner does not matter to us.3
The person posted two Bitcoin addresses4 to which Bitcoins could

be sent to either release the encryption key or destroy it.5
Days later, reports surfaced that the United States Secret Service
was investigating the extortion attempt against Romney.6 Both the
Democratic and the Republican parties in Williamson County,
Tennessee received packages with thumb drives and a letter containing
the anonymous persons message.7 Websites popped up that allowed
34375-qlr_32-1 Sheet No. 72 Side B

visitors, eager to see whether Democrats, Republicans, or even private
parties would cater to the extortionists demands, to monitor the virtual
balances of each of the listed Bitcoin addresses.8 On September 7, 2012,
Machine, located in the corresponding footnote.

3
Whitehouse, supra note 2.
4
See infra note 55. The Bitcoin addresses were listed as follows: Bitcoin Address to
Promote Full Release: 16NvEaWVRR6xg7YRoR18anw3k67AKJJ8PV and Bitcoin
Address to Stop Release: 17XfMaCiSKFqMfogXqXHyHttPfRjxJg6qV. Mitt Romney Tax
Update 9/9/12, PASTEBIN (Sept. 9, 2012), http://pastebin.com/XrV6fFzJ.
5
Whitehouse, supra note 2.
6
Elinor Mills & Greg Sandoval, Feds Probe Alleged Hacking Theft of Romneys Tax
Returns, CNET NEWS (Sept. 5, 2012, 2:00 PM), http://news.cnet.com/8301-1009_3-
57506843-83/feds-probe-alleged-hacking-theft-of-romneys-tax-returns/.
01/02/2014 11:18:02
7
Id.
8
See Abe Garver, BitInstant to Romney Camp: 'We'll Convert $1,000,000 USD to
34375-qlr_32-1 Sheet No. 73 Side A 01/02/2014 11:18:02
2013] BITCOIN EXCHANGES 137
BitInstant, LLC,9 a Bitcoin payment processor and exchange service,

publicly offered to waive its transaction fees for Mitt Romneys
representatives if they wished to pay the $1,000,000 blackmail amount
to destroy the encryption key.10 On September 9, 2012, the anonymous
person updated the public by announcing receipt of [q]uite a bit of
Bitcoins on either side. We have also decided that to speed the entire
process up for everyone, we are no longer asking for 1,000,000 bitcoins
[sic]. Whichever wallet gains 3500BTC will decide the fate of Romenys
[sic] tax records. . . . [T]ime is STILL running out[.]11
September 28, 2012 came and went with no public announcement
from the anonymous person as to the disposition of Mitt Romneys tax
returns.12 Neither Bitcoin address accrued much money at all,13 with one
news site estimating that the address designated for the release of the
returns received only three Bitcoins (approximately $39) and the address
designated for the withholding of the returns received 0.72 Bitcoins
(approximately $9).14 A blogger for the Southern California Public
Radio station suggested that the rumor of the stolen returns constituted
an attempt to manipulate the Bitcoin market and drive the price of
Bitcoin For Free, FORBES (Sept. 7, 2012, 2:32 AM), http://www.forbes.com/sites/

abegarver/2012/09/07/bitinstant-to-romney-camp-well-convert-1000000-usd-to-bitcoin-for-
free/ (listing two now invalid sites keeping count).
9
See BITINSTANT, www.bitinstant.com (on file with the author and available as of May
5, 2013 at the Wayback Machine, supra note 2).
10
See Garver, supra note 8. In its post, BitInstant made sure to promote the use of
Bitcoins as currency, taking a jab at conventional money: Romney the fiat Federal Reserve

Notes that youre used to are only losing value. If youd like to move more of your substantial
personal wealth into Bitcoin, wed be happy to advise. This will help protect you from the
ravages of inflation your administration . . . will undoubtedly perpetuate. Eric Voorhees, A
Friendly Offer for Mitt Romney, BITINSTANT (Sept. 6, 2012, 4:59 PM),
http://blog.bitinstant.com/blog/2012/9/6/a-friendly-offer-for-mitt-romney.html (on file with
the author and available as of Jan. 1, 2013 at the Wayback Machine, supra note 2).
11
Mitt Romney Tax Update 9/9/12, supra note 4. On September 9, 2012, the price per
Bitcoin closed at $11.02; the initial demand of $1,000,000 had decreased to $38,570. For a list
of average Bitcoin prices over time, see BITCOIN CHARTS, http://bitcoincharts.com/charts/
mtgoxUSD#rg360ztgTzm1g10zm2g25 (last visited Oct. 25, 2013) (change the time period to
All Data and click Load raw data).
12
Jay Hathaway, Blackmailers Make $50 on Romneys Tax Returns, THE DAILY DOT
(Sept. 28, 2012), http://www.dailydot.com/news/blackmailers-50-dollars-bitcoin-romney-
taxes/.
13
Bitcoin transactions are logged on a public ledger, explained more fully in Part II(A),
infra.
01/02/2014 11:18:02
14
Hathaway, supra note 12. The value of that amount of Bitcoins, today, vastly differs.
See BITCOIN CHARTS, supra note 11.
Bitcoins up, since it had been fairly low in the weeks before the rumor.15
An article from American Banker noted: This will be the first time that
many people have heard of Bitcoin. The legal questions are many, and
we look forward to analyzing the facts surrounding this story as they
unfold.16
On November 5, 2012, just one day after the presidential election,
news broke that by September 14, 2012, agents of the U.S. Secret
Service had already executed a search warrant on a suspect living in
Franklin, Tennessee.17 The agents seized every bit of computer
equipment, phone and tablet that could store electronic data.18 The
suspect, who had established a website to receive donations to replace
all the equipment and software programs needed to get [his] business
functioning 100% again,19 published a copy of the sealed search
warrant20 and a list of items seized.21 A grand jury indicted the suspect,
Michael Mancil Brown, charing him with six counts of wire fraud and
six counts of extortion.22 In the wake of the extortion attempt, the title of
one news article asked, What in the world wide web is a Bitcoin? A
group of hackers are asking Mitt Romney for $1M in Bitcoins. What are
they and why do they matter?23
Although the extortion attempt ultimately failed, what would have
happened if someone had sent $1 million in Bitcoins to the listed Bitcoin
15
Matthew DeBord, Does Mitt Romney Have a Bitcoin Problem?, SOUTHERN
CALIFORNIA PUBLIC RADIO (Sept. 10, 2012, 3:36 PM), http://www.scpr.org/blogs/
economy/2012/09/10/9897/does-mitt-romney-have-bitcoin-problem/.
16
Matthew Elias & James Woods, Romney Shakedown Attempt Shows Bitcoins
Laundering Potential, AMERICAN BANKER (Sept. 6, 2012, 10:27 AM),

http://www.americanbanker.com/bankthink/romney-shakedown-attempt-shows-laundering-
potential-of-bitcoin-1052402-1.html.
17
Jeremy Finley, Secret Service Investigates Franklin Man in Romney Tax Return Theft,
WSMV-TV NASHVILLE (Nov. 5, 2012, 2:40 PM), http://www.wsmv.com/story/
20006705/secret-service-investigate-franklin-man-in-romney-tax-return-theft.
18
Id.
19
Neil Munro, Suspected Romney Tax-Return Hacker Appeals for Legal Funds, THE
DAILY CALLER (Nov. 12, 2012, 2:25 PM), http://dailycaller.com/2012/11/12/suspected-
romney-tax-return-hacker-appeals-for-legal-funds/ (citing to the suspects donation website,
on file with the author).
20
Id.
21
Id.
22
Tennessee Man Accused of Extortion for Claim He Had Romney Tax Returns,
BLOOMBERG LAW, 8 WCR 479 (Issue No. 14, July 12, 2013) (hyperlinking to indictment for
violations of 18 U.S.C. 1343, 1952(a)(3)).
23
Stacey Leasca, What in the World Wide Web is a Bitcoin?, GLOBALPOST (Sept. 6,
01/02/2014 11:18:02
2012, 2:10 PM), http://www.globalpost.com/dispatch/news/regions/americas/120906/what-

the-world-wide-web-bitcoin.
address? How could law enforcement have found the alleged

extortionist? Law enforcement could have, in a way, traced the Bitcoins,
which would have been akin to following marked dollar bills in a sting
operation.24 A public ledger records all transactions from one Bitcoin
account to another.25 To avoid being traced through the public ledger,
however, the alleged extortionist could have used a mixing service to
obfuscate the source of the Bitcoins, almost like money laundering.26 His
real identity would not necessarily have been tied to the Bitcoin address
listed. Bitcoin accounts can be created offline, with few ties, if any, to a
persons computer.27 The alleged extortionist could have exchanged the
Bitcoins for cash, either online or through a Bitcoin ATM, in amounts
low enough not to trigger any requirement to verify his identity.28 He
could have used the Bitcoins as payments for goods and services.29 He
could have purchased physical manifestations of Bitcoins and handed
them to someone, in person, in exchange for cash.30 The alleged
extortionist could have obfuscated his IP address, such that ties to the
physical location of any computer he used would have been minimal.31
Or, he also could have exchanged the Bitcoins for cash on a regulated
exchange, having been required to verify his identity.32 The exchange
might have been suspicious of the exchange of Bitcoins for cashor it
might not. Methods exist that would have allowed the extortionist to
prevent others from knowing that these Bitcoins were ill-gotten.33 Is
Bitcoin a currency with which criminals can more easily perpetrate
crimes?
This Note discusses two potential threats associated with Bitcoins:
money laundering and tax evasion. This Note highlights the use and

potentially problematic implications of Bitcoins in commerce and
discusses their current regulation by the government, both within the
United States and internationally, to guard against these threats. Other
articles have set forth possible ways to regulate Bitcoins, concluding that
users that transfer Bitcoins directly to other users may fall outside the
24
See infra Part II(A).
25
See infra Part II(A).
26
See infra Part III(B).
27
28
29
30
31
01/02/2014 11:18:02
32
33
regulatory scope of existing United States law.34 This Note instead

addresses the regulation of Bitcoins where most people see them: at the
businesses and websites that facilitate the transfer of Bitcoins.35 Part II
describes Bitcoins and provides background information on the Bitcoin
technology: how Bitcoins are created, how they are used in commerce,
how their exchanges are vulnerable to cyber-attacks, and the value of
trust to their users.
Part III discusses the application of the Bank Secrecy Act
(BSA)36 to Bitcoin exchanges organized and operated within the
United States. Part III discusses how the BSA currently addresses the
threat of money laundering by Bitcoin users, concluding that well-
known exchanges that operate both within and outside the United States
generally self-regulatesome of them may even comply with the BSAs
requirementsin order to gain the trust of their users despite the cyber-
attacks on exchanges in the past; even so, the BSAs requirements do not
lead to detection of all criminal activity. Part III also addresses
technologies that enable users to obfuscate the source of their Bitcoins
and their IP addresses, and discusses the ways in which users can avoid
BSA-regulated entities altogether. Part III concludes that the weaknesses
inherent in the BSA scheme and the tools that subvert the BSAs
purpose allow the use of Bitcoins to further criminal activity. Finally,
Part IV describes the tax-reporting implications of foreign Bitcoin
exchanges, looking by analogy at attempts to gain information from
known tax havens.
This Note argues that, given the applicability of the BSA to Bitcoin
exchanges, the Bitcoin system poses serious questions relating to money

laundering and tax reporting, mostly with regard to the less trustworthy
exchanges known for their illegal activity. Some Bitcoin exchanges and
e-wallets may also have the potential to become the next tax havens with
which people illegally avoid their tax obligations. Many exchanges
voluntarily implement measures amounting to self-regulation in attempts
34
See, e.g., Nikolei M. Kaplanov, Comment, Nerdy Money: Bitcoin, the Private Digital
Currency, and the Case Against its Regulation, 25 LOY. CONSUMER L. REV. 111 (2012);
Reuben Grinberg, Bitcoin: An Innovative Alternative Digital Currency, 4 HASTINGS SCI. &
TECH. L.J. 159 (2012).
35
Kaplanov agrees that an institution or company that accepts bitcoins as deposits or
loans bitcoins commercially would certainly constitute banking activity under either state or
federal laws. The online service companies that provide online wallet services might fall
under different provisions as would the online bitcoin exchanges, especially for larger
01/02/2014 11:18:02
amounts and transactions. Kaplanov, supra note 34, at 153 n.266.

36
31 U.S.C. 53115326 (2006).
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scheme for a group of untraceable digital pseudonyms to pay each other

with money and to enforce contracts amongst themselves without
outside help[,]42 the paper proposed a protocol in which [a]nyone can
create money by broadcasting the solution to a previously unsolved
computational problem . . . . [from which] it must be easy to determine
how much computing effort it took to solve the problem and the solution
must otherwise have no value, either practical or intellectual.43 Wei Dai
also wrote that every participant maintains a (separate) database of how
much money belongs to each pseudonym so that, when money is
transferred, a message is broadcast to the database, which records debits
and credits of each pseudonym.44
In 2009, Satoshi Nakamoto, in his paper, Bitcoin: A Peer-to-Peer
Electronic Cash System,45 created a construct to implement Dais theory.
By allowing an electronic payment system based on cryptographic
proof instead of trust, [Bitcoins] allow[] any two willing parties to
transact directly with each other without the need for a trusted third
party such as a financial institution acting as an online payment
processor.46 Nakamoto highlighted the privacy of this new currency:
The traditional banking model achieves a level of privacy by limiting access to

information to the parties involved and the trusted third party. The necessity to
announce all transactions publicly precludes this method, but privacy can still
be maintained by breaking the flow of information in another place: by
keeping public keys anonymous. The public can see that someone is sending
an amount to someone else, but without information linking the transaction to
anyone. This is similar to the level of information released by stock exchanges,
where the time and size of individual trades, the tape, is made public, but

HACKTIVISTS AIM TO FREE THE WORLDS INFORMATION (2012). Interestingly, some
cypherpunks have filed lawsuits related to their efforts to promote cryptography and
anonymity. See, e.g., Bernstein v. U.S. Dept of Justice, 922 F. Supp. 1426 (N.D. Cal. 1996)
(holding unconstitutional the Arms Export Control Act to the extent that cryptographic
computer source code is speech protected by the First Amendment).
41
The cypherpunks mailing list had extensive discussions of the public policy issues
related to cryptography and on the politics and philosophy of concepts such as anonymity,
pseudonyms, reputation, and privacy. Cypherpunk, supra note 40.
42
WEI DAI, http://www.weidai.com/ (last modified Apr. 9, 2012). See b-money, WEI
DAI, http://www.weidai.com/bmoney.txt (last visited Oct. 27, 2013).
43
b-money, supra note 42.
44
Id.
45
Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, BITCOIN,
01/02/2014 11:18:02
http://bitcoin.org/bitcoin.pdf (last visited Oct. 27, 2013).

46
Id. at 1.
without telling who the parties were.47
Nakamoto also created Bitcoind,48 the original Bitcoin client,49 an

open-source50 program that implements the Bitcoin protocol.51 Bitcoin
clients operate on peer-to-peer networksthat is, each computer running
a Bitcoin client, or node, connects to all other nodes via an internet
connection.52
47
Id. at 6.
48
Satoshi Nakamoto, BITCOIN WIKI, https://en.bitcoin.it/wiki/Satoshi_Nakamoto (last
modified June 13, 2013, 8:12 PM).
49
A client is a computer program that requests a service from another program, usually a
server, which fulfills the request. See Client/Server, SEARCHNETWORKING,
http://searchnetworking.techtarget.com/definition/client-server (last visited Oct. 27, 2013). A
common example of a client is an internet browser program, a client program that requests
services (the sending of Web pages or files) from a Web server . . . in another computer
somewhere on the Internet. Id.
50
Bitcoind is open-source pursuant to the MIT licensethat is, the source code of the
program is available to be viewed or modified by anyone. See The MIT License (MIT), OPEN
SOURCE INITIATIVE, http://opensource.org/licenses/mit-license.php (last visited Oct. 27,
2013). See also The Open Source Definition, OPEN SOURCE INITIATIVE,
http://opensource.org/osd (last visited Oct. 27, 2013) (listing criteria for open-source
programs).
51
Bitcoind, BITCOIN WIKI, https://en.bitcoin.it/wiki/Bitcoind (last modified Mar. 21,
2013, 3:20 PM). Since Nakamotos original Bitcoin client, there have been countless new
programs developed, including Bitcoin-Qt, MultiBit, Armory, and Electrum. See Clients,
Bitcoin Wiki, http://en.bitcoin.it/wiki/Clients (last modified Oct. 21, 2013, 1:22 PM); Bitcoin
Client Software, BITCOIN, http://bitcoin.org/clients.html (last visited Oct. 27, 2013) (listing
advantages of using some clients over others). For a more complete listing of Bitcoin clients,
see also Software, BITCOIN WIKI, https://en.bitcoin.it/wiki/Software (last modified Oct. 26,
2013, 7:28 AM) (listing mobile apps, web interfaces for merchants, and developer resources).

52
Unlike the traditional client/server model, see Client/Server, supra note 49, clients
operating on a peer-to-peer network do not make requests of a central server. Instead, each
node connected to the internet has both server and client capabilities, making requests and
connecting to only each other and not a central server. See Margaret Rouse, Peer-to-Peer,
SEARCHNETWORKING, http://searchnetworking.techtarget.com/definition/peer-to-peer (last
updated Sept. 2005). Since there is no central server to which clients make requests, there is
no central network that is the place where Bitcoin users transact; instead, the users connect
directly to each other, both making and giving requests through their respective clients. See
Network, BITCOIN WIKI, https://en.bitcoin.it/wiki/Network (last modified Mar. 11, 2013,
10:31 PM). Nodes find each other, among other ways, by using a process in which each
computer both advertises its own location and searches for other nodes. Each node directly
connects to the other and passes along all of the addresses connected to it to everyone else.
Through this system, everyone has a reasonably clear picture of which [computers] are
connected to the network at the moment. Id. Bitcoind, created by Nakamoto, may also
discover other nodes by connecting to IRCInternet Relay Chat, a service designed for group
communicationusing addresses that are coded into the software itself, and checking for
01/02/2014 11:18:02
active nodes from addresses previously connected during a prior session. See Satoshi Client
Node Discovery, BITCOIN WIKI, https://en.bitcoin.it/wiki/Satoshi_Client_Node_Discovery
To understand how Bitcoins are created, one must first understand

the Bitcoin protocol, or the rules by which Bitcoins transfer from one
entity to another. During a transaction, one entity must
cryptographically53 sign[] [a Bitcoin] over from one entity to another,
essentially putting a lock and key on each [Bitcoin] . . . .54 In the public
key cryptography system, a user first obtains a unique address, which
consists of a series of letters and numbers.55 Each address is a unique
public key, with which a corresponding private key is associated.56 To
send Bitcoins to an address, the sender adds the receivers public key,
(last modified July 4, 2013, 12:03 AM). For more on peer-to-peer networks, see generally
PEER-TO-PEER: HARNESSING THE BENEFITS OF A DISRUPTIVE TECHNOLOGY (Andy Oram
ed., 2001).
53
See Cryptographic Services, MICROSOFT DEVELOPER NETWORK,
http://msdn.microsoft.com/en-us/library/92f9ye3s.aspx (last visited Oct. 27, 2013) (Public
networks such as the Internet do not provide a means of secure communication between
entities. Communication over such networks is susceptible to being read or even modified by
unauthorized third parties. Cryptography helps protect data from being viewed, provides ways
to detect whether data has been modified, and helps provide a secure means of communication
over otherwise nonsecure channels. For example, data can be encrypted by using a
cryptographic algorithm, transmitted in an encrypted state, and later decrypted by the intended
party. If a third party intercepts the encrypted data, it will be difficult to decipher.).
Cryptography is the conversion of data into a secret code for transmission over a
public network. Today, most cryptography is digital, and the original text (plaintext) is
turned into a coded equivalent called ciphertext via an encryption algorithm. The ciphertext
is decrypted at the receiving end and turned back into plaintext. Definition of: Cryptography,
PCMAG, http://www.pcmag.com/encyclopedia_term/0,2542,t=cryptography&i=40522,00.asp
(last visited Oct. 27, 2013). The Bitcoin protocol utilizes the public key cryptography system.
See Public-Key Cryptography, WIKIPEDIA, http://en.wikipedia.org/wiki/Public-
key_cryptography (last modified Nov. 11, 2013, 1:43 AM).

54
eMansipater, Comment to What is a Good Way to Concisely Describe Bitcoin?,
BITCOIN STACK EXCHANGE (Sept. 1, 2011, 4:01 PM),
http://bitcoin.stackexchange.com/questions/336/what-is-a-good-way-to-concisely-explain-
bitcoin.
55
Address, BITCOIN WIKI, https://en.bitcoin.it/wiki/Address (last modified Jan. 16, 2013,
11:13 PM). Addresses can be created online or offline. Id. [You] can have many different
Bitcoin addresses and, for increased privacy . . . it is recommended that you use a unique
address for each transaction. Id. A users activity using one address is not inherently tied to
his or her activity using another address.
56
Introduction, BITCOIN WIKI, https://en.bitcoin.it/wiki/Introduction (last modified Sept.
18, 2013, 9:45 PM). See Cryptographic Services, MICROSOFT DEVELOPER NETWORK,
http://msdn.microsoft.com/en-us/library/92f9ye3s.aspx#public_key (last visited Oct. 27,
2013) (Public-key encryption uses a private key that must be kept secret from unauthorized
users and a public key that can be made public to anyone. The public key and the private key
are mathematically linked; data that is encrypted with the public key can be decrypted only
with the private key, and data that is signed with the private key can be verified only with the
01/02/2014 11:18:02
public key. The public key can be made available to anyone; it is used for encrypting data to
be sent to the keeper of the private key.).
which is known to the public, to a transaction message specifying how

many Bitcoins are being transferred.57 The sender then authorizes the
release of his or her Bitcoins using his or her private key, not known to
the public, as a signature.58 The sender then broadcasts the transaction to
nodes hosting the Bitcoin client.59 Because the private key authorizes the
release of Bitcoins from an address, deleting the private key essentially
destroys the Bitcoins associated with the address, and stealing the
private key essentially steals the Bitcoins associated with the address.60
A public ledger records all Bitcoin transaction data.61 Bitcoins
public ledger has no central place where this ledger of transactions is
stored.62 Instead, peer-to-peer Bitcoin clients send the ledger to all
nodes connected to the client, updating the ledger constantly.63
Publishing the ledger does not involve collecting or divulging personal
information such as the real name or physical address of the user or
sender,64 and, to some, the resulting privacy of users is Bitcoins biggest
attraction.65
57
Introduction, supra note 56.
58
Id.
59
Id.
60
See Technical Background of Version 1 Bitcoin Addresses, BITCOIN WIKI,
https://en.bitcoin.it/wiki/Technical_background_of_version_1_Bitcoin_addresses (last
modified Mar. 14, 2013, 3:05 AM) (Bitcoin addresses (the public keys) and their associated
private keys are stored in the wallet data file. . . . If you lose your wallet entirely, all of your
coins are lost and can never be recovered.). It is computationally infeasible to regenerate a
lost private key; if one did try, however, it might take around 60 years to do. Chris Moore,
Comment to How Long Would it Take a Large Computer to Crack a Private Key?, BITCOIN
STACK EXCHANGE (Feb. 8, 2012, 12:32 AM), http://bitcoin.stackexchange.com/

questions/2847/how-long-would-it-take-a-large-computer-to-crack-a-private-key.
61
See How Bitcoin Works, BITCOIN WIKI, https://en.bitcoin.it/wiki/How_bitcoin_works
(last modified Mar. 8, 2013, 7:47 PM). The ledger is available to all users connected to other
Bitcoin nodes. Id.
62
Id.
63
Id. New transaction broadcasts do not necessarily need to reach all nodes. As long as
they reach many nodes, they will [be recorded in the ledger]. [Ledger] broadcasts are also
tolerant of dropped messages. Nakamoto, supra note 45, at 4.
64
Nakamoto, supra note 45, at 6 (The traditional banking model achieves a level of
privacy by limiting access to information to the parties involved and the trusted third party.
The necessity to announce all transactions publicly precludes this method, but privacy can still
be maintained by breaking the flow of information in another place: by keeping public keys
anonymous. The public can see that someone is sending an amount to someone else, but
without information linking the transaction to anyone.).
65
[I]f you pay with it, no one needs to know. Bitcoin balances can flow between
accounts without a bank, credit card company, or any other central authority knowing who is
01/02/2014 11:18:02
paying whom. Instead, Bitcoin . . . doesnt care who you are or what youre buying. Morgen
E. Peck, Bitcoin: The Cryptoanarchists Answer to Cash, IEEE SPECTRUM (May 30, 2012,
The public ledger is called a block chain.66 The block chain consists
of blocks, which are record[s] of some or all of the most recent Bitcoin
transactions that have not yet been recorded in any prior blocks.67 Each
block contains a reference to the block that came immediately before
it.68 [E]ach block in the chain confirms the integrity of the previous
one, all the way back to the first one[,]69 via a cryptographic proof.70
9:52 PM), http://spectrum.ieee.org/computing/software/bitcoin-the-cryptoanarchists-answer-

to-cash. One user on a Bitcoin forum posts a relevant limerick: I heard of a new way to trade
/ I stumbled across today / Bitcoin they say / Is a fantastic new way / To keep sniffing pigs at
bay. Puckie, Comment to Newbie Limericks, BITCOIN FORUM (Jan. 5, 2012, 9:24 AM),
https://bitcointalk.org/index.php?topic=56651.0.
The Bitcoin system, however, is not as private as many users may think. It may be
possible to conduct transactions i[n] such a way so as to obscure [ones] identity, but, in many
cases, users and their transactions can be identified. Martin Harrigan, Bitcoin is Not
Anonymous, AN ANALYSIS OF ANONYMITY IN THE BITCOIN SYSTEM (Sept. 30, 2011, 1:20
AM), http://anonymity-in-bitcoin.blogspot.com/2011/07/bitcoin-is-not-anonymous.html. A
careful study of Bitcoin transactions using only publicly available data and tools from
network analysis . . . show[s] that the actions of many users are far from anonymous. . . .
[S]everal centralized services, e.g. exchanges, mixers and wallet services, have access to even
more information should they wish to piece together users activity. Id. For the results of the
study, see generally FERGAL REID & MARTIN HARRIGAN, AN ANALYSIS OF ANONYMITY IN
THE BITCOIN SYSTEM (2012), available at http://arxiv.org/pdf/1107.4524v2.pdf.
Another study, in which researchers actively transacted with a variety of services in
order to identify their public addresses, posited that the centrality of these services makes it
difficult for even highly motivated individualse.g., thieves or others attracted to the
anonymity properties of Bitcointo stay completely anonymous, provided they are interested
in cashing out by converting to fiat money. SARAH MEIKLEJOHN ET AL., A FISTFUL OF
BITCOINS: CHARACTERIZING PAYMENTS AMONG MEN WITH NO NAMES (2013), available at
http://cseweb.ucsd.edu/~smeiklejohn/files/imc13.pdf.
66
See Blocks, BITCOIN WIKI, https://en.bitcoin.it/wiki/Block (last modified June 15,

2013, 3:06 PM); Block Chain, BITCOIN WIKI, https://en.bitcoin.it/wiki/Block_chain (last
modified Sept. 25, 2013, 5:33 PM).
67
Blocks, supra note 66.
68
Id.
69
How Bitcoin Works, supra note 61. [N]o party can overwrite previous records by just
forking the chain in large part because it is extremely difficult to generate a valid block. Id.
[H]owever, there can be forks. One-block forks are created from time to time when two
blocks are created just a few seconds apart. Block Chain, supra note 61. If that happens, the
correct block chain is chosen based on whichever of the two blocks ends up being included
in the next block . . . because that chain is longer. More serious forks have occurred when
software updates were published with backward-incompatible changes. Id. Blocks in
shorter chains (or invalid chains) are . . . called orphan blocks[,] and while they are stored,
they are not used for anything. Id. When a block becomes an orphan block, all of its valid
transactions are re-added to the pool of queued transactions and will be included in another
block. Id. See also Chain Reorganization, BITCOIN WIKI,
https://en.bitcoin.it/wiki/Chain_Reorganization (last modified Nov. 28, 2012, 10:51 PM)
01/02/2014 11:18:02
(The term blockchain reorganization is used to refer to the situation where a client
discovers a new difficultywise-longest [sic] well-formed blockchain which excludes one or
Even though no central authority distributes a correct copy of the

block chain, the block chain corrects itself when it passes from node to
node.71 The block chain also provides a method to confirm the integrity
of each transaction to prevent double spending.72 For example, once a
block attaches to the block chain, the transactions within that block have
been confirmed.73 Each block that attaches to the block containing a
transaction acts as another confirmation of that transaction.74 Merchants
and exchanges accepting Bitcoins can set their own threshold as to how
many confirmations are required until funds can be considered valid. . . .
Most exchanges and other merchants who bear the risk from double
spending require [six] or more blocks, or six confirmations.75
Blocks not only record the transactions involving the exchange of
Bitcoins; they also serve to create Bitcoins,76 creating an incentive for
nodes to support the network, as users work to create the very blocks
that comprise the transaction ledger.77 Each block poses a difficult-to-
solve mathematical (and cryptographic) problem, and a new block is
created when an answer is found to the previous blocks problem.78 The
problem79 is solved using a predictable amount of a computers
more blocks that the client previously thought were part of the difficultywise-longest [sic]
well-formed blockchain. These excluded blocks become orphans. Chain reorganization is a
client-local phenomenon; the entire bitcoin network doesnt reorganize simultaneously.).
70
See Hash, BITCOIN WIKI, https://en.bitcoin.it/wiki/Hash (last modified Jan. 16, 2013,
11:09 PM); SHA-2, BITCOIN WIKI, http://en.wikipedia.org/wiki/SHA-256 (last modified Oct.
21, 2013, 4:12 PM).
71
Nakamoto, supra note 45, at 4. (If a node does not receive a block, it will request it
when it receives the next block and realizes it missed one.).

72
Double-Spending, BITCOIN WIKI, https://en.bitcoin.it/wiki/Double-spending (last
modified Apr. 2, 2013, 6:23 PM) (Double spending is the result of successfully spending
some money more than once.). See Benjamin Wallace, The Rise and Fall of Bitcoin, WIRED,
Dec. 2011, at 100, available at http://www.wired.com/magazine/2011/11/mf_bitcoin/all/1.
(If a digital dollar is just information, free from the corporeal strictures of paper and metal,
whats to prevent people from copying and pasting it as easily as a chunk of text, spending it
as many times as they want?).
73
Confirmation, BITCOIN WIKI, https://en.bitcoin.it/wiki/Confirmation (last modified
Apr. 2, 2013, 6:21 PM).
74
Id.
75
Id.
76
How Bitcoin Works, supra note 61.
77
Nakamoto, supra note 45, at 4.
78
Blocks, supra note 66; Block Chain, supra note 66.
79
The Bitcoin protocol uses a hash algorithm, specifically the SHA-256 algorithm, to
solve the problem. Hash, supra note 70. See SHA-2, supra note 70 Cryptographic Hash
01/02/2014 11:18:02
Function, BITCOIN WIKI, http://en.wikipedia.org/wiki/Cryptographic_hash (last modified Oct.

25, 2013, 12:39 PM).
resources and is easily verified once established.80 The first node that
solves the most recent problem to create a block is rewarded for its
efforts with a bounty of some number of bitcoins, which is agreed-upon
by the network.81 The rules of the Bitcoin protocol are such that the
difficulty [of the cryptographic problem] is adjusted to keep block
production to approximately 1 block per 10 minutes.82
The activity of using ones computer to solve the cryptographic
problem by creating the next block for the block chain is called
[]miningusing processing power to try to produce a valid block,
and as a result min[ing] some Bitcoins.83 [T]he more miners [that]
engage in the mining activity, the more difficult it becomes for each
individual miner to produce a block.84 Mining serves two main
80
Hash, supra note 70; How Bitcoin Works, supra note 61.
81
How Bitcoin Works, supra note 61. What if two users create a block around the same
time? Both would be awarded Bitcoins, one reward of which would later become invalid.
Because the nodes transmit the block chain to each other, [o]ne-block forks are created from
time to time when two blocks are created just a few seconds apart. Block Chain, supra note
66. Because generating nodes build onto whichever one of the blocks they received first[,
w]hichever block ends up being included in the next block becomes part of the main chain
because that chain is longer. Id. If the block, for which a user was awarded Bitcoins, ends up
in the shorter chain, it becomes an orphan block, id., and the Bitcoins previously awarded to
that user cease[] to exist, DeathandTaxes, Comment to What Is the Block Maturation Time?,
STACK EXCHANGE (Nov. 14, 2011, 5:44 PM), http://bitcoin.stackexchange.com/
questions/1991/what-is-the-block-maturation-time. To avoid the risk that Bitcoins will be
spent and later cease to exist, placing considerable risk on the recipient of the coins, id., the
Bitcoin network enforces a 100-block maturation time for generations until the Bitcoins are
considered valid, Block Chain, supra note 66. Generated coins cant be spent until the
generation transaction has 101 confirmations. Transactions that try to spend generated coins

before this will be rejected. Theymos, Comment to What Is the Block Maturation Time?,
FAQ OVERFLOW (Aug. 11, 2013, 9:22 PM) http://www.faqoverflow.com/bitcoin/1991.html.
82
83
Id.
84
Id. See Mining, BITCOIN WIKI, https://en.bitcoin.it/wiki/Mining (last modified Oct. 29,
2013, 10:38 AM) ([The difficulty of mining a block] is recalculated every 2016 blocks to a
value such that the previous 2016 blocks would have been generated in exactly two weeks had
everyone been mining at this difficulty. . . . As more miners join, the rate of block creation
will go up. As the rate of block generation goes up, the difficulty rises to compensate which
will push the rate of block creation back down.); Target, BITCOIN WIKI,
https://en.bitcoin.it/wiki/Target (last modified Nov. 8, 2012, 4:30 AM) ([E]very Bitcoin
client compares the actual time it took to generate these blocks with the two week goal and
modifies the target by the percentage difference. This makes the proof-of-work problem more
or less difficult.). Because more people have begun mining, miners have paid a lot of money
to gain an edge in mining by buying expensive mining rigs with high speed encryption
processors. See, e.g., BitForce Single SC 50 GH/s, BUTTERFLYLABS,
01/02/2014 11:18:02
www.butterflylabs.com/landing/ (last visited Oct. 27, 2013) ($2,499). See also Pooled Mining,
BITCOIN WIKI, https://en.bitcoin.it/wiki/Pooled_mining (last updated Sept. 20, 2013, 5:59
purposes:
Besides being important for maintaining the transaction database, mining is

also the mechanism by which bitcoins get created and distributed among the
people in the bitcoin economy. The network rules are such that over the next
hundred years, give or take a few decades, a total of 21 million bitcoins will be
created.85
The Bitcoin protocol sets this hard limit of 21 million Bitcoins by

allowing the creation of blocks at an approximate rate of 6 blocks per
hour, with [t]he number of Bitcoins generated per block . . . set to
decrease geometrically, with a 50% reduction every [four] years.86 The
first of these halving days occurred on November 28, 2012,87 creating
a wave of excitement in the Bitcoin community.88 Instead of being
AM) (Pooled mining is a mining approach where multiple generating clients contribute to the
generation of a block, and then split the block reward according [to] the contributed
processing power.); DEEPBIT, https://deepbit.net/ (last visited Nov. 1, 2013) (charging a 3%
fee for its service but paying to the participant a portion of every solved block proportional to
your part in [the] pools hashing power).
85
86
Controlled Supply, BITCOIN WIKI, https://en.bitcoin.it/wiki/
Controlled_Currency_Supply (last modified Dec. 10, 2012, 2:16 AM). The 210,000 block
halving point roughly corresponds to every four years. Blocks, supra note 66. Interestingly,
given the increasingly powerful mining equipment, . . . . the average time between blocks has
fallen to approximately five minutes on average, half the time bitcoin was originally
programmed for. Jonathan Stacke, Bitcoin Block Time Halved to Five Minutes Amid
Exponential Network Growth, THE GENESIS BLOCK (Aug. 13, 2013),
http://thegenesisblock.com/bitcoin-block-time-halved-to-five-minutes-amid-exponential-
network-growth/. See also Jonathan Stacke, At This Rate, the Last New BTC Will Be Issued 15

to 55 Years Ahead of Schedule, THE GENESIS BLOCK (May 28, 2013),
http://thegenesisblock.com/at-this-rate-the-last-new-btc-will-be-issued-55-years-ahead-of-
schedule/.
87
Bitcoin Community Celebrates Halving Day, PRLOG (Nov. 28, 2012),
http://www.prlog.org/12032578-bitcoin-community-celebrates-halving-day.html.
88
See Kyt Dotson, Bitcoin Halving Day Draws Nigh, SILICON ANGLE (Nov. 27, 2012),
http://siliconangle.com/blog/2012/11/27/bitcoin-halving-day-draws-nigh/ (Prepare to fall to
your knees and shake your fist to the heavens, a terrible milestone is upon us, one that will
forever change the fabric of an entire community. Its not the Mayan doomsdayits Bitcoin
halving day.); Vitalik Buterin, Block Reward Halving: A Guide, BITCOIN MAGAZINE (Nov.
27, 2012), http://bitcoinmagazine.com/block-reward-halving-a-guide/ (Opinions range from
those who believe that Bitcoin will enter a period of extreme financial instability as it is
caught off guard by the sudden shock in supply to those who believe that the markets will
simply hum along as if nothing had happened at all.). The Bitcoin community wondered
what effect the halving event would have on the price of Bitcoins. One website speculated
whether the price of Bitcoins would increase (because the reward to mine is a delicate
01/02/2014 11:18:02
balance of difficulty [versus] electricity costs, and if the cost to generate Bitcoins increases,
the price will also increase) or decrease (because the cost outweighs the return and the
awarded 50 Bitcoins for every block created, miners were awarded only
25 Bitcoins upon successful creation of a block, even though the rate of
block creation remained constant.89 This [problem] was chosen because
it approximate[d] the rate at which commodities like gold are mined.90
The hard limit of 21 million Bitcoins attracts users who distrust
government regulation of money:91
In a centralized economy, currency is issued by a central bank at a rate that is

supposed to match the growth of the amount of goods that are exchanged so
that these goods can be traded with stable prices. The monetary base is
controlled by a central bank. . . .
In a fully decentralized monetary system, there is no central authority that

regulates the monetary base. Instead, currency is created by the nodes of a
peer-to-peer network. The Bitcoin generation algorithm defines, in advance,
how currency will be created and at what rate. Any currency that is generated
by a malicious user that does not follow the rules will be rejected by the
difficulty of mining and people will simply stop mining). Neil Fincham, Halving Day is
Almost Upon Us!, MINEFOREMAN (Nov. 23, 2012), http://mineforeman.com/
2012/11/23/halving-day-is-almost-upon-us/.
One website displays a Bitcoin Clock reflecting the time until the next halving day,
which is currently projected for September 25, 2016. See BITCOIN CLOCK,
http://bitcoinclock.com/ (last visited Nov. 9, 2013). The clocks projections constantly
fluctuate because of the constant influx of new miners. See supra note 86 and accompanying
text.
89
Bitcoin Community Celebrates Halving Day, supra note 87.
90
Controlled Supply, supra note 86. See Grinberg, supra note 34, at 174 n.68
([G]overnments can print money irresponsibly and cause hyperinflation. Zimbabwe, for

example, increased its money supply by about 10,000 times in 2008 and experienced a more
than 200 million percent inflation rate in 2008. (citation omitted)); Kaplanov, supra note 34,
at 161 n.326 ([T]rading bitcoins would be better than [trading] Zimbabwean dollars, which
have wildly fluctuated.).
91
Even the Commonwealth of Virginia demonstrated mistrust, introducing a bill in its
House of Delegates to establish a 10-member joint subcommittee . . . who would study the
feasibility of a metallic-based monetary unit in order to prepare Virginia for the impact of
a major financial meltdown, caused by hyperinflation, cyberattacks on banks and the Federal
Reserves increasing control over the nations money supply. Markus Schmidt, Virginia
Alternative Currency: Prince William County Republican Wants Cheap Doomsday Dollars
As Apocalypse Insurance, HUFFINGTON POST (Feb. 11, 2013, 9:37 AM),
http://www.huffingtonpost.com/2013/02/11/virginia-alternative-currency_n_2659937.html.
Americans have grown increasingly suspicious of the institutions entrusted with safeguarding
the economy. . . . Who knows what other threats may be lurking in the shadowy world of
cyberattacks, [Virginia Del. Robert G.] Marshall said. Ylan Q. Mui, Virginia Coin Moves
Closer to Reality, WASH. POST (Feb. 5, 2013), http://www.washingtonpost.com/
01/02/2014 11:18:02
business/economy/virginia-coin-moves-closer-to-reality/2013/02/05/9bcdd532-6fa4-11e2-
ac36-3d8d9dcaa2e2_story.html.
network and thus is worthless.92
Even those without fundamental distrust of banks but rather a

distrust of the government have joked about withdrawing money from
banks and buying gold.93
B. Bitcoins in Commerce
Bitcoins are becoming increasingly prevalent in todays economy,

as evidenced by the volume of sales by both online and brick-and-mortar
merchants in which the buyer paid in Bitcoins.94 Bitcoins are now
accepted in payment for gift cards,95 virtual debit cards,96 precious
metals,97 cash,98 3D paintings,99 anonymous offshore hosting services,100
92
Controlled Supply, supra note 86 (citation omitted).
93
After the re-election of President Obama in 2012, one wealthy citizen worried about
his money and threatened to turn his assets into gold before the election and bury it in
multiple places on his ranch. [His financial advisor] managed to talk him out of it, but after
the election the client was evidently too upset to talk about it. Tom Kludt, The 6 Most
Bizarre Freakouts Over Obamas Re-Election, YAHOO! NEWS (Nov. 14, 2012),
http://news.yahoo.com/6-most-bizarre-freakouts-over-obamas-election-172956141
politics.html. The price of gold has since plummeted, going from a high of $1,790 on October
4, 2012 to $1,203 on June 27, 2013, a 33% decline. Neil Irwin, Look Out Below! The Price of
Gold is Plummeting, WASH. POST (June 27, 2013, 3:42 PM),
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/06/27/look-out-below-the-price-
of-gold-is-plummeting/.
94
See Trade, BITCOIN WIKI, https://en.bitcoin.it/wiki/Trade (last modified Nov. 9, 2013,
1:00 AM) (listing online and brick-and-mortar businesses accepting Bitcoins). Note: it still
remains up to you to decide whether you trust the service provider or not. Id. Buyers who

paid for items in Bitcoins and have the items delivered to a physical address are likely no
longer anonymous.
95
See, e.g., GIFTFORCOINS.COM, http://giftsforcoins.com/store/ (last visited Nov. 9,
2013).
96
See, e.g., BTCINSTANT.COM, http://www.btcinstant.com/ (on file with the author and
available as of May 24, 2013 at the Wayback Machine, supra note 2) (Perfect for people who
have no credit card or bank account but want to spend their Bitcoins online!). A virtual
MasterCard can only be spent at the merchant you buy from[;] . . . think of it as a gift card
for the sites you want. Id. At btcinstant.com, [p]urchases of Child Porn, buying of illegal
weapons, or any transaction at our discretion that you normally wouldnt buy with a credit
card will be canceled [sic] and [the] bitcoins refunded minus our fees [sic]. We arent getting
our account canceled [sic] due to you[,] sorry! Buy your illegal items with bitcoins strickly
[sic]! Terms and Conditions, BTCINSTANT.COM, http://btcinstant.com/terms.html (last
visited Oct. 29, 2013). See also BITCC, https://bitcc.herokuapp.com/products (last visited
Nov. 9, 2013) (offering Visa debit cards issued . . . [with] no fraud or theft involved).
97
See, e.g., AMAGI METALS, http://www.amagimetals.com/ (last visited Nov. 9, 2013)
01/02/2014 11:18:02
(gold and silver).

98
See, e.g., TRADE YOUR BITCOIN, http://tradeyourbitcoin.com/ (last visited Oct. 29,
domain registration,101 flowers,102 gun parts,103 a Hackers Handbook,104

language learning services,105 gambling services,106 lottery tickets,107
books,108 outdoor survival gear,109 computers and laptops,110 t-shirts,111
luxury jewelry,112 cupcakes,113 Australian beef,114 beauty products,115
and even prescription drugs.116 Websites host maps on which real world
2013) (Find a local seller, negotiate via email, meet in public and trade!).
99
Matt Goerzen, TUMBLR, http://mattgoerzen.tumblr.com/ (last visited Oct. 29, 2013).
100
PRIVACY.LI, http://www.privacy.li/ (last visited Oct. 29, 2013) (With servers in many
diverse countries we can always host anonymously your controversial or privacy sensitive
material no questions asked.).
101
FRANKDOMAINS, http://www.frankdomains.com/ (last visited Oct. 29, 2013).
102
BITCOINFORFLOWERS, http://www.bitcoinforflowers.com/ (last visited Oct. 29, 2013).
103
BITCOINGUNPARTS.COM, http://www.bitcoingunparts.com/ (last visited Oct. 29,
2013).
104
HACKERS HANDBOOK, http://hackershandbook.org/ (last visited Oct. 29, 2013)
([S]tep-by-step tutorials on how to: . . . [g]ain access to e-mail accounts[;] [h]ack facebook
accounts[;] . . . . [h]ow to pirate software/movies/games/music.).
105
LANGUAGE101.COM, http://language101.com/bitcoin/ (last visited Oct. 29, 2013)
(offering tutoring in Spanish, French, German, Italian, Canadian French, and Russian).
106
See, e.g., BLOCKBET.NET, blockbet.net (last visited Oct. 29, 2013) (sports gambling);
BTCFORTUNE.COM, https://btcfortune.com (last visited Oct. 29, 2013) (lottery); THE LUCKY
COIN CASINO, https://www.luckycoin.in/ (last visited Oct. 29, 2013) (offering blackjack,
poker, and other gambling games, and using the Bitcoin payment system [i]n order to ensure
that your payment processor or government cannot block your bets from getting to this site (as
is common in the United States)); SATOSHIDICE, http://satoshidice.com/ (last visited Oct. 29,
2013) (random number generated dice game based in Ireland). See also Cyrus Farivar,
Bitcoin-Based Casino Rakes in More Than $500,000 Profit in Six Months, ARSTECHNICA
(Jan. 22, 2013, 7:20 PM), http://arstechnica.com/business/2013/01/bitcoin-based-casino-rakes-
in-over-500000-profit-in-six-months/ (reporting SatoshiDices recent announcement of

profits in the hundreds of thousands of dollars after only six months of being in business).
107
New Lottery System 100% Based on the Innovating Bitcoin Cryptocurrency
Technology Has Just Been Released, DIGITAL JOURNAL (Feb. 13, 2013),
http://www.digitaljournal.com/pr/1069450.
108
BITCOININ, http://www.bitcoinin.com/ (last visited Nov. 9, 2013) (located in
Minnesota).
109
MIDWEST CORD, http://www.midwestcord.com (last visited Oct. 29, 2013) (located in
Fargo, North Dakota).
110
BITCOINSTORE, http://www.bitcoinstore.com/ (last visited Oct. 29, 2013).
111
ICO6, https://www.ico6.com (last visited Oct. 30, 2013).
112
ALL THINGS LUXURY, http://www.allthingsluxury.biz/ (last visited Oct. 30, 2013).
113
CUPS AND CAKES BAKERY, http://cupsandcakesbakery.com/ (last visited Oct. 30,
2013) (located in San Francisco, California).
114
HONESTBEEF, www.honestbeef.com.au (last visited Oct. 30, 2013).
115
BEAUTIFUL ON RAW, http://www.beautifulonraw.com/beauty-store/ (last visited Oct.
30, 2013).
01/02/2014 11:18:02
116
THE SWISS PHARMACY, http://www.theswisspharmacy.com/ (last visited Nov. 9,
2013).
shops can be located that accept Bitcoins as payment.117 Even non-

merchant individuals posting personal comments in discussion forums
commonly post their Bitcoin addresses in the comments they make,
hoping that another user will find the individuals comments insightful
and wish to donate money to the author.118 One politician running for re-
election accepted Bitcoin donations on his campaign website.119
Many service providers accept Bitcoins in payment for services
such as legal services,120 web development,121 e-mail hosting,122 web
application security testing,123 academic assistance,124 auction
services,125 piano lessons via Skype,126 Kosher meal delivery,127 taxi
117
Real World Shops, BITCOIN WIKI, https://en.bitcoin.it/wiki/Real_world_shops (last
modified Sept. 30, 2013, 6:19 PM). Cf. Kashmir Hill, 21 Things I Learned about Bitcoin from
Living on it for a Week, FORBES (May 9, 2013, 1:54 PM).
118
See, e.g., norulezapply, Comment to BAMT - Easy Persistent USB Key Based Linux
for Dedicated Miners/Mining Farms, BITCOIN FORUM (Dec. 24, 2011, 5:30 PM),
https://bitcointalk.org/index.php?topic=28967.msg661219#msg661219 (If my post helped,
Ill happily accept a few bitmills! 15rGg6A1JFZV3b7TTbtpAaiYGdUD1e1oAm).
119
Donate Bitcoins to the Campaign, MARK WARDEN,
http://www.markwarden.com/page/bitcoin-donation (last visited Aug. 23, 2013) (We
welcome Bitcoin donations. We support currency freedom! However, in order to promote the
use of Bitcoins for these purposes, our campaign must comply with federal and state
election/campaign finance laws.). Mark Warden ultimately won re-election as State
Representative to the New Hampshire State House. See MARK WARDEN,
http://www.markwarden.com/ (last visited Oct. 30, 2013).
In November, 2013, the Federal Election Commission issued a draft advisory opinion
that would allow the Conservative Action Fund to accept Bitcoins as in-kind
contributions . . . sell its Bitcoins and deposit the proceeds in its campaign depositories before
using the funds. Conservative Action Fund, Draft AO 2013-15 (Fed. Election Commn Nov.

7, 2013), http://www.fec.gov/agenda/2013/mtgdoc_13-45.pdf.
120
LAW 4 SMALL BUSINESS, http://www.l4sb.com/ (last visited Nov. 9, 2013) (with
attorneys located in New Mexico and Illinois).
121
JUSTIN BULL, http://www.justinbull.ca/bitcoin.html (last visited Oct. 30, 2013)
(accepting payments and offering a 10% discount if paid in Bitcoins).
122
BITDOMAIN.BIZ, www3.bitmail.biz (last visited Oct. 30, 2013).
123
Hacking for Imaginary Money, BINARYSECURITY.WEBS.COM,
http://binarysecurity.webs.com/ (last visited Oct. 30, 2013).
124
Bitcoin Being Brought In!, ASSIGNMENTHOLE, http://www.assignmenthole.com/
general/bitcoin-being-brought-in/(last visited Nov. 9 2013) (Now you may order tutorials
here via your Bitcoin wallets.).
125
BITMIT, https://www.bitmit.net/en/soonending (last visited Oct. 30, 2013) (similar to
eBay).
126
JONKUBISMUSIC, http://www.jonkubis.com/ (last visited Oct. 30, 2013).
127
KOSHER DIET DELIVERY, kosherdietdelivery.com/bitcoin.php (last visited Oct. 30,
2013) (Because Bitcoin allows us to completely circumvent credit card transaction fees, etc.[,
01/02/2014 11:18:02
w]e are able to offer our most aggressive pricing to clients who wish to embrace this new
cryptocurrency and pay via BTC.).
services,128 or even a stay at a bed and breakfast.129 Many charitable

organizations accept Bitcoin donations.130 Even the financial services
industry now caters to the Bitcoin community, offering loan services,131
stock exchanges,132 commodity and futures exchanges,133 foreign
exchange trading,134 and escrow services135 in the medium of Bitcoins.
One article calls Bitcoin the Wild West of finance, with a proliferation
of websites offering loosely regulated replicas of the services familiar to
those in the financial industry.136 One firm based in Malta offers
interests in its hedge fund, though it excludes any entity from the United
States from participating because the U.S. jurisdiction is tricky.137
The famed Winklevoss twins have proposed an exchange-traded trust
128
DANIEL HARTS TAXI SERVICE, http://www.taxizen.co.uk/ (last visited Oct. 30, 2013)
(located in London, England).
129
B&B DEL CORSO, www.bnbnapoli.it (last visited Oct. 30, 2013) (located in Naples,
Italy).
130
Donation-Accepting Organizations and Projects, BITCOIN WIKI, https://en.bitcoin.it/
wiki/Donation-accepting_organizations_and_projects (last modified Oct. 28, 2013, 1:54 AM)
(listing various organizations that accept Bitcoins).
131
See, e.g., BTCJAM, https://btcjam.com/ (last visited Oct. 30, 2013) (YOU define the
repayment parameters[.] YOU define the rate you are willing to pay[.]). The terms of service
of btcjam.com state: This Agreement and all other aspects of your use of the Site shall be
governed by and construed in accordance with the laws of the State of Sao Paulo - Brazil
without regard to its conflict of law provisions. BTCJam Terms and Conditions of Use,
BTCJAM, https://btcjam.com/legal/tos (last visited Oct. 30, 2013).
132
See, e.g., MPEX, http://mpex.co/ (last visited Oct. 30, 2013) (allowing, among other
actions, buying, selling, exercising option contracts, putting up collateral, and trading on
margin).
133
See, e.g., Bitcoin Derivatives Market and Exchange, ICBIT, https://icbit.se/ (last
visited Oct. 30, 2013) (including futures contracts of currencies and commodities such as

crude oil and gold).
134
See, e.g., About FNIB, FIRST NATIONAL INNOVATION BROKERS,
https://www.firstnationalib.com/about.html (last visited Oct. 30, 2013) (incorporated in New
Zealand and providing 24-hour secure online forex trading); Why FNIB?, FIRST NATIONAL
INNOVATION BROKERS, https://www.firstnationalib.com/advantages.html (last visited Oct. 30,
2013) (providing trading of all the major currency pairs plus the Argentine Peso, Brazilian
Real, Indian Rupee, Russian Rouble, Turkish Lira and more).
135
See, e.g., BTCROW, http://btcrow.com/about_us.php (last visited Oct. 30, 2013) (We
aim to provide a bitcoin escrow service that protects both buyers and sellers, via an
independent, impartial dispute resolution service.).
136
Naomi OLeary, Bitcoin, the City Traders Anarchic New Toy, REUTERS (Apr. 1,
2012, 7:01 PM), http://www.reuters.com/article/2012/04/01/traders-bitcoin-
idUSL6E8ET5K620120401 (listing services including stock exchanges, where companies
can make initial public offerings and pay dividends, options trading, margin trading, short
selling, stop orders, and leveraged bets).
137
Jon Matonis, First Bitcoin Hedge Fund Launches from Malta, FORBES (Mar. 8, 2013,
01/02/2014 11:18:02
12:30 PM), http://www.forbes.com/sites/jonmatonis/2013/03/08/first-bitcoin-hedge-fund-

launches-from-malta/ (quoting a member of the fund).
fund that would trade baskets of Bitcoins.138 New uses for Bitcoins arise
quite frequently, as do new species of cybercurrencies that have tweaked
the Bitcoin protocol.139
One notorious online marketplace, called Silk Road, sold a slew of
illegal drugs, among other items.140 A study of the traffic on Silk Road
determined that the top seller was marijuana, followed by prescription
drugs, books, hash, cocaine, pills, LSD, and much more.141 Silk Road
138
See Nathaniel Popper & Peter Lattman, Winklevoss Twins Plan First Fund for
Bitcoins, N.Y. TIMES, July 1, 2013, at B1, available at http://dealbook.nytimes.com/
2013/07/01/first-name-in-the-first-fund-for-bitcoins-winklevoss/?_r=0. The Form S-1
Registration Statement filed with the Securities and Exchange Commission is available at
http://www.sec.gov/Archives/edgar/data/1579346/000119312513279830/d562329ds1.htm.
139
See Ian Steadman, Wary of Bitcoin? A Guide to Some Other Cryptocurrencies,
ARSTECHNICA (May 11, 2013, 9:51 AM), http://arstechnica.com/business/2013/05/wary-of-
bitcoin-a-guide-to-some-other-cryptocurrencies/2/. For example, Litecoin is a
cybercurrency that comes from its parent Bitcoin but differs in key respects. LITECOIN,
https://litecoin.org/ (last visited Oct. 30, 2013). It is easier to mine, creates blocks at a faster
rate (every two and a half minutes), and is scheduled to produce a total of 84 million currency
units (four times the amount of Bitcoins). See id.
Freicoin is a cybercurrency that is based on the Bitcoin protocol, but [u]nlike
Bitcoin, Freicoin has a demurrage fee that ensures its circulation. FREICOIN, http://freico.in/
(last visited Oct. 30, 2013). This demurrage fee causes Freicoin bearers to automatically
lose 5% of the value of their Freicoins per year, automatically paying that currency to the
community members who contribute work to secure the currency. See About, FREICOIN,
http://freico.in/about/ (last visited Oct. 30, 2013). Language on Freicoins official website
embodies the Occupy Wall Street spiritthe website hosts a picture of an Occupy Wall
Street demonstrationand shows great disdain for any economic system that makes some
rich at the expense of others, claiming that Freicoins demurrage fee address[es] the
grievances of the working class and re-align[s] financial interests of the wealthy elite with the

stability and well-being of the economy as a whole. Id. (An economy built on a demurrage
currency as the essential foundation will also not fall victim to the same usurious greed,
excess, and short-term thinking that led to the 2008 crisis and financial collapse. Freicoin will
continuously stimulate global growth through reinvestment, and dis-incentivize the type of
actions which led to and furthered the paralysis that caused the credit crunch. . . . Banks,
financiers, and large corporations can no longer hoard money waiting for higher interest rates
or a more favorable investment climate as the demurrage acts as a tax on stagnant money.).
140
See Adrian Chen, The Underground Website Where You Can Buy Any Drug
Imaginable, GAWKER (June 1, 2011, 4:20 PM), http://gawker.com/5805928/the-underground-
website-where-you-can-buy-any-drug-imaginable (Silk Road, a digital black market that sits
just below most internet users purview, does resemble something from a cyberpunk novel.
Through a combination of anonymity technology and a sophisticated user-feedback system,
Silk Road makes buying and selling illegal drugs as easy as buying used electronicsand
seemingly as safe. Its Amazonif Amazon sold mind-altering chemicals. (citation
omitted)).
141
Nicolas Christin, Traveling the Silk Road: A Measurement Analysis of a Large
01/02/2014 11:18:02
Anonymous Online Marketplace 9 (Carnegie Mellon INI/CyLab, Working Paper, Nov. 30,
2012), available at http://arxiv.org/pdf/1207.7139v2.pdf.
was accessible only if the user had obfuscated his or her internet
pathway by using Tor,142 software that prevents anyone from learning
your location or browsing habits.143 An extension of Silk Road called
The Armory sold guns to Bitcoin users.144 The Silk Road domain was
recently seized by the FBI145 and the alleged mastermind arrested.146
New online drug marketplaces have begun to surface, filling the void left
142
TOR PROJECT, https://www.torproject.org/ (last visited Oct. 30, 2013).
143
Id. See Tor: Overview, TOR PROJECT, https://www.torproject.org/
about/overview.html.en (last visited Oct. 30, 2013) (Tor is a network of virtual tunnels that
allows people and groups to improve their privacy and security on the Internet. . . . Tor helps
to reduce the risks of both simple and sophisticated traffic analysis by distributing your
transactions over several places on the Internet, so no single point can link you to your
destination. The idea is similar to using a twisty, hard-to-follow route in order to throw off
somebody who is tailing youand then periodically erasing your footprints. Instead of taking
a direct route from source to destination, data packets on the Tor network take a random
pathway through several relays that cover your tracks so no observer at any single point can
tell where the data came from or where its going.). Websites hosted by Tors web host,
Freedom Hosting, were recently the targets of a malicious software that took advantage of a
security vulnerability to send identifying information of visitors to an internet protocol address
in Reston, Virginia. Kevin Poulsen, Feds Are Suspects in New Malware That Attacks Tor
Anonymity, WIRED (Aug. 5, 2013, 3:57 AM), http://www.wired.com/
threatlevel/2013/08/freedom-hosting/ (suggesting the FBIs involvement).
The Tor network comports with the philosophy of cypherpunks. See GREENBERG,
supra note 40, at 79 (Users of a Mix Network give the slip to anyone who might be tracking
them the same way they would in the real world: by getting lost in the crowd. If someone is
being tailed, she might go into a movie theater, find a seat in the dark, and then reemerge in a
crowd of people. But a Mix Network gives the followed a much larger head start over the
follower: . . . it ushers a crowd of people into a theater, all of whom want to avoid being
followed, gives them a chance to remove their hats, wigs, sunglasses, and clothes and put on
new ones, and then releases them again. Then the crowd disperses to mix with other crowds of

disguised people who enter other theaters with other crowds, change their disguises, and
repeat the process until no stalker has any hope of keeping up with his target.).
144
See Justin Porter, Silk Roads The Armory Terminated, BITCOIN MAGAZINE (Aug.
6, 2012), http://bitcoinmagazine.com/1990/not-ready-silk-roads-the-armory-terminated/. The
Armory voluntarily closed in August of 2012, however, attributing its closure to low and
continuously declining number of transactions. Id.
145
Sealed Post-Complaint Protective Order Pursuant to 18 U.S.C. 983(j)(i) at 2, 4, U.S.
v. Ulbricht, No. 13-civ-6919(JPO) (S.D.N.Y. Oct. 1, 2013), available at
http://techliberation.com/wp-content/uploads/2013/10/SilkRoadProtectiveOrder.pdf
(describing Silk Road as designed to facilitate the illicit commerce hosted on the site by
providing anonymity to its users, by operating on . . . [the] Tor network[,] . . . a part of the
Internet designed to make it practically impossible to physically locate the computers hosting
or accessing websites on the network, and by requiring all transactions to be paid in
Bitcoins, an electronic currency designed to be as anonymous as cash).
146
Joseph Goldstein, Arrest in U.S. Shuts Down a Black Market for Narcotics, N.Y.
TIMES (Oct. 3, 2013), at A3, available at http://www.nytimes.com/
01/02/2014 11:18:02
2013/10/03/nyregion/operator-of-online-market-for-illegal-drugs-is-charged-fbi-
says.html?_r=2&.
by Silk Roads closure.147

Some Bitcoin users store their Bitcoins in some form of third-party
e-wallet,148 so as not to risk holding their own private keys and
potentially losing them. Some users buy physical manifestations of
Bitcoins as collectors items or to conduct transactions off the grid.149
Of the many e-wallet providers,150 most display disclaimers on their sites
advising of the risks of entrusting Bitcoins to a third party or statements
advertising their superior security features.151 One website claims to be
147
See Jill Heller, Silk Road Returns: How New Website Promises New and Improved
Underground Marketplace, INTERNATIONAL BUSINESS TIMES (Nov. 6, 2013, 2:16 PM),
http://www.ibtimes.com/silk-road-returns-how-new-website-promises-new-improved-
underground-marketplace-1458584 (Silk Road 2.0 will be reborn better, much[,] much more
secure as testament to the tenacity and determination of this wonderful community of
ours[.] . . . We will not be down trodden[;] we will rise again. (quoting a moderator of the
new website)).
148
See Beginners Guide to Mining Bitcoins, START BITCOIN, http://startbitcoin.com/ (last
visited Oct. 30, 2013).
149
See PHYSICAL BITCOINS BY CASASCIUS, https://www.casascius.com/ (last visited Oct.
30, 2013) (Casascius Bitcoins are physical coins you can hold - and each one is worth real
digital bitcoins. . . . Each piece has its own Bitcoin address and a redeemable private key on
the inside, underneath the hologram.); About, PRINTCOINS, http://printcoins.com/ (last visited
Oct. 30, 2013) ([PrintCoins] are printed on 24lb paper that is made from 100%
cotton . . . . that can be used like a blank check. You simply fund the bill with a specific
amount, and then write the amount on the bill. Perfect for . . . [o]ff [the] grid transactions[.]).
See also Robin Michael, Comment to Off the Grid, URBAN DICTIONARY (Jan. 7, 2008),
http://www.urbandictionary.com/define.php?term=off%20the%20grid (defining off the grid
as [o]ne who disdains all recordable common forms of commerce, such as eschewing any
form of credit extension, banking services or reportable payroll activities, using only cash so
as to avoid any traceable transactions, e.g., living completely underground).

150
A browser-based wallet is an online account with an external provider where bitcoins
can be stored. Browser-Based Wallet, BITCOIN WIKI, https://en.bitcoin.it/wiki/EWallet (last
modified Dec. 2, 2012, 11:15 PM). Hybrid e-wallets utilize browsers but the users private
keys are stored encrypted on the server offering some protection for security breaches. Id.
The safest type of e-wallet utilizes some sort of cold storage, which entails keeping a
reserve of Bitcoins offline. . . . To minimize the possibility that an intruder could steal the
entire reserve in a security breach, . . . . [t]he only amount kept on the server is the amount
needed to cover anticipated withdrawals. Cold Storage, BITCOIN WIKI,
https://en.bitcoin.it/wiki/Cold_storage (last visited May 26, 2013, 4:05 PM).
151
See, e.g., Choose Your Bitcoin Wallet, BITCOIN, http://bitcoin.org/en/choose-your-
wallet (last visited Oct. 30, 2013) (scroll over the eighth icon) (Web wallets host your
bitcoins. That means it is possible for them to lose your bitcoins following any incident on
their side. As of today, no web wallet service provide [sic] enough insurance to be used to
store value like a bank.); EASYWALLET.ORG, https://easywallet.org/w/
SxRWgpLim2R3A2v1Lv1rQQ (last visited Oct. 30, 2013) (Easywallet.org does not aspire to
be a Bitcoin bank and as such can only provide a medium level of security. Please do not store
01/02/2014 11:18:02
more than some spare change here.); Frequently Answered Questions, EASYCOIN.NET,
https://easycoin.net/info.php (last visited Oct. 30, 2013) (On Easycoin.net we . . . protect[]
The Worlds First Bitcoin Bank, noting that it makes discount

payments on a positive bitcoin balance at the end of each month.152
Nevertheless, the website posts a disclaimer that it is not a true bank
that accepts USD or any national currency, only bitcoins which by their
nature are not regulated, [and are] not FDIC insured or regulated by any
government entity.153 One website defining the term browser-based
wallet warns, in red text:
When storing your bitcoins with a browser-based wallet on a third-party

website, you are trusting that the operator will not abscond with your bitcoins,
and that operator maintains secure systems that protect against theft, internal or
external. It is recommended that you obtain the real-world identity of the
your bitcoin funds while all you have to do is keep your password and optionally [sic]
transaction PIN in a safe place. . . . [W]e store them on an impossible to hack offline wallet.);
STRONGCOIN, https://www.strongcoin.com/ (last visited Oct. 30, 2013) ([O]ur servers only
hold encrypted private keys and neither we nor anyone else can spend your Bitcoins.).
Blockchain.info disclaims: My wallet is a free online bitcoin wallet which you can use to
make worldwide payments for free. . . . We are not a bank, you retain complete ownership of
your Money. We cannot view your balance, see your transactions or make payments on your
behalf. My Wallet: Be Your Own Bank, BLOCKCHAIN.INFO, https://blockchain.info/wallet
(last visited Nov. 9, 2013). These front-page announcements contrast with sites that hide their
disclaimers in user agreements or terms of service.
Some e-wallet services offer interesting features. Blockchain.info, for example,
provides a mnemonic for users to write down in case the password to the account is lost;
losing ones access to a Bitcoin e-wallet password results in the loss of all the Bitcoins
associated with that address, similar to the loss of the private key. See supra note 60.
Blockchain.info warns: Please Write Down the Following: []happy flame completely zack
characterize primitive disperse quivering newport entreaties glitter infrared indira hee
infrastructures ignominy hoofs counselling[.] Without the mnemonic we cannot help recover

forgotten passwords and will result in LOSS of ALL of your bitcoins!. Id. (emphasis in
original) (on file with the author). Cf. Brainwallet, BITCOIN WIKI,
https://en.bitcoin.it/wiki/Brainwallet (last modified Aug. 4, 2012, 3:40 AM) (A brainwallet
refers to the concept of storing Bitcoins in ones own mind by memorization of a
passphrase.).
152
FLEXCOIN, http://www.flexcoin.com/ (last visited Oct. 30, 2013). The website does
not define discount payments. How Flexcoin Solves Bitcoins Problems, FLEXCOIN,
http://www.flexcoin.com/103.html (last visited Oct. 30, 2013) (All flexcoin account holders
are paid a discount on any fees already incurred (or any potential future fees) based on their
bitcoin balance. The discount payments are generated from minor fees that are collected when
flexcoins are transferred out of the flexcoin system to an external bitcoin address. A large
portion of these fees are distributed to flexcoin account holders as a discount against any fees
theyve already paid (or any potential future fees).). See Security Guidelines, FLEXCOIN,
http://www.flexcoin.com/214.html (last visited Oct. 30, 2013) (Though no one on earth can
guarantee 100% security, its our feeling that no expense should be spared when building the
infrastructure for dealing with moetary [sic] transactions. We live in the same world as you
01/02/2014 11:18:02
do. Weve seen the reports about . . . bitcoin security and the issues the currency has faced.).
153
FLEXCOIN, supra note 152.
website operator, ensure that sufficient recourse is available and avoid services
that do not use an offline wallet (cold storage) for bitcoins that are not needed
for daily transactions. Storing significant quantities of bitcoins on third party
websites is not recommended.154
C. Vulnerabilities In Using Bitcoins
While the use of Bitcoins has exploded in popularity during the past
few years,155 so, too, have accounts of Bitcoin security breaches. The
breaches give real meaning to the warnings posted on e-wallet websites
to not entrust ones Bitcoins to third parties.
On June 19, 2011, Mt. Gox, the largest Bitcoin exchange,
experienced a significant security breach.156 Mt. Gox reported in a
press release that [i]t appears that someone who performs audits on our
system . . . had [his or her] computer compromised. This allowed for
someone to pull our database.157 Within an hour of the hack,
reportedly 100,000 Bitcoins were sold at incredibly cheap rates on Mt.
Gox, plunging the market from around $17.50 USD per Bitcoin to just
$0.01 per Bitcoin. Meanwhile 400,000 other Bitcoins were reported
missing.158 Mt. Gox reported that [d]ue to the large impact this had on
the Bitcoin market, we will rollback every trade which happened since
the big sale, and ensure this account is secure before opening access
again.159 After the security breach, Mt. Gox required its users to reclaim
their compromised accounts by verifying their accounts and providing
154
Browser-Based Wallet, supra note 150.

155
Romain Dillet, Bitcoin Ticker Available on Bloomberg Terminal for Employees,
TECHCRUNCH (Aug. 9, 2013), http://techcrunch.com/2013/08/09/bitcoin-ticker-available-on-
bloomberg-terminal/ (stating that Bitcoin is now officially mainstream).
156
MtGox, BITCOIN WIKI, https://en.bitcoin.it/wiki/MtGox (last modified July 13, 2013,
12:01 AM).
157
Huge Bitcoin Sell Off Due to a Compromised Account Rollback, MT.GOX (June 25,
2011, 12:09 AM), https://support.mtgox.com/entries/20224998-huge-bitcoin-sell-off-due-to-a-
compromised-account-rollback.
158
Jason Mick, Inside the Mega-Hack of Bitcoin: the Full Story, DAILYTECH (June 19,
2011, 6:40 PM), http://www.dailytech.com/Inside+the+MegaHack+of+Bitcoin+the+Full
+Story/article21942.htm.
159
Huge Bitcoin Sell Off Due to a Compromised Account Rollback, supra note 157. To
a certain extent, Mt. Gox may have obtained the consent of all users of its exchange in
advance, even though [s]ellers and [b]uyers agree that as soon as their respective offers are
matched, such offers are binding and may not be withdrawn. Terms of Use, MT.GOX,
https://www.mtgox.com/terms_of_service (last updated Jan. 20, 2013) (If a Member
01/02/2014 11:18:02
contravenes these Terms, Mt. Gox reserves the right to suspend his/her Account and block all
monetary sums or Bitcoins contained therein.).
valid e-mail addresses.160 Within a month of the security breach, Mt.

Gox had lost 10 percent of its market share to a Chile-based upstart
named TradeHill.161
TradeHill, in turn, suffered its own difficulties. On February 13,
2012, TradeHill shut down its operations and began efforts to return its
clients funds, citing regulatory problems and the loss of $100,000 in a
dispute with one of its payment processors, even though it was the
second-largest Bitcoin exchange at the time it closed.162
On March 1, 2012 and May 11, 2012, Bitcoinica, an online service
that enabled leveraged speculation . . . against the Bitcoin to USD
(BTD/USD),163 suffered security breaches, enabling thousands of
Bitcoins to be stolen.164 After taking the site off-line, Bitcoinica offered
verified users the ability to withdraw only 50% of their funds stored on
the site.165 One forum post entitled Class action Litigation vs.
Bitcoinica Consultancy LTD & Intersango LTD, claimed to be the
official thread for the potential upcoming litigation proceedings against
the Bitcoinica Parties.166 The post asked: [i]f you have been adversely
affected by bitcoinica due to their [sic] potentially criminal negligence,
please post here and email me any information you can provide[;] I will
be going to see my lawyer about our case tomorrow.167 On August 6,
2012, four users affected by the Bitcoinica security breach filed suit
160
Huge Bitcoin Sell Off Due to a Compromised Account Rollback, supra note 157.
161
Wallace, supra note 72.
162
Timothy B. Lee, Major Bitcoin Exchange Shuts Down, Blaming Regulation and Loss
of Funds, ARSTECHNICA (Feb. 15, 2012, 10:15 AM), http://arstechnica.com/tech-

policy/2012/02/major-bitcoin-exchange-shuts-down-blaming-regulation-and-loss-of-funds/.
163
Bitcoinica, BITCOIN WIKI, https://en.bitcoin.it/wiki/Bitcoinica (last modified Aug. 13,
2013, 7:47 PM).
164
One report estimates that 43,554 Bitcoins were stolen in the March incident, and
18,547 Bitcoins were stolen in the May incident. Bitcoinica, Twice Hacked in 2012, is Being
Sued, INFOSECURITY (Aug. 15, 2012), http://www.infosecurity-magazine.com/view/
27618/bitcoinica-twice-hacked-in-2012-is-being-sued/.
165
Id.
166
BadBitcoin (James Sutton), Comment to Class Action Litigation vs. Bitcoinica
Consultancy LTD & Intersango LTD, BITCOIN FORUM (July 13, 2012, 3:11 PM),
https://bitcointalk.org/index.php?topic=93109.0. This was not the only forum thread looking
for potential class members. See, e.g., ||bit, Comment to LEGAL COURSE of ACTION
Discussion bASIC / BitcoinASIC, BITCOIN FORUM (Feb. 12, 2013, 9:38 AM),
https://bitcointalk.org/index.php?topic=143496.0 (ALL that have lost money and/or property
to bASIC/BitcoinASIC: I wanted to start this thread so that people can organize in one place
to respond effectively . . . . Id like to initiate suggested discussions towards a possible legal
01/02/2014 11:18:02
course of action, and perhaps actual legal action.).

167
BadBitcoin (James Sutton), supra note 166.
against Bitcoinica and other parties in the Superior Court of California

alleging causes of action sounding in breach of contract, open book
account, account stated, negligence, and conversion.168 The plaintiffs
alleged that the value of their claims amounted to approximately
$460,457.70.169 Although at least one of the defendants may live in
California,170 Bitcoinica LP is a New Zealand limited partnership that
was placed into liquidation proceedings in Auckland, New Zealand.171
Defendant Intersango Ltd. filed a motion to quash service of summons
for lack of personal jurisdiction, which was granted.172 Defendant
Strateman filed a motion to dismiss or stay on the grounds of forum non
conveniens, which was denied.173 Defendant Strateman has since filed an
Answer alleging 24 affirmative defenses.174
These are not the only examples of Bitcoin exchanges being
hacked.175 Bitcoin wallets have also been hacked.176 As a practical
168
Complaint at 1, Cartmell v. Bitcoinica LP, No. CGC-12-522983 (Cal. Super. Ct. Aug.
6, 2012), available at http://webaccess.sftc.org/scripts/magic94/
Mgrqispi94.dll?APPNAME=web&PRGNAME=casenumberprompt22 (enter 522983).
169
Id. at 4.
170
See Proof of Service of Summons, Cartmell, No. CGC-12-522983 (Cal. Super. Ct.
Nov. 15, 2012), available at http://webaccess.sftc.org/scripts/magic94/
171
Case Management Statement at 4, Cartmell, No. CGC-12-522983 (Cal. Super. Ct.
Dec. 14, 2012), available at http://webaccess.sftc.org/scripts/magic94/
Mgrqispi94.dll?APPNAME=web&PRGNAME=casenumberprompt22 (enter 522983). See
5 N.Z. Gazette 165, 170 (2013), available at https://www.dia.govt.nz/pubforms.nsf/
NZGZT/NZGazette5Jan13.pdf/$file/NZGazette5Jan13.pdf.
172
Order Granting Motion to Quash Service of Process for Lack of Personal Jurisdiction,
Cartmell, No. CGC-12-522983 (Cal. Super. Ct. Jan. 25, 2013), available at

http://webaccess.sftc.org/scripts/magic94/Mgrqispi94.dll?APPNAME=web&PRGNAME=cas
enumberprompt22 (enter 522983) (Plaintiff failed to produce facts showing Defendant
Intersango, Ltd has any California contacts relevant to this case.).
173
Order Denying Defendants Motion to Dismiss or Stay Action at 2, Cartmell, No.
CGC-12-522983 (Cal. Super. Ct. Jan. 25, 2013), available at http://webaccess.sftc.org/
scripts/magic94/Mgrqispi94.dll?APPNAME=web&PRGNAME=casenumberprompt22 (enter
522983) (Plaintiffs did not agree to adjudicate all disputes in New Zealand. The language
of the Terms and Conditions allegedly on the website, even if it is enforceable, states only that
you [meaning a customer] agree to submit to the personal and exclusive jurisdiction of the
court located within New Zealand to settle any dispute, not that customers could not file
actions against Bitcoinica outside New Zealand. . . . There has been no showing that access to
evidence requires moving the case to New Zealand. . . . California has a strong interest in
assuring a forum for California residents.).
174
Answer to Plaintiffs Amended Complaint, Cartmell, No. CGC-12-522983 (Cal.
Super. Ct. May 29, 2013), available at http://webaccess.sftc.org/scripts/magic94/
01/02/2014 11:18:02
175
See, e.g., Timothy B. Lee, Bitcoin Exchange Bitfloor Attempts Comeback After
$250,000 Heist, ARSTECHNICA (Sept. 27, 2012, 3:07 PM), http://arstechnica.com/tech-
matter, the Bitcoin ecosystem is far less trustworthy177 than the banks
that Bitcoin proponents expressly denounce as untrustworthy.178 Bitcoin
Magazine writes about the various levels of trust based on the type of
service provided:
The last problem is that of trust. As we know[,] . . . anonymous services whose

only function is storing money cannot be trusted simply because the profit that
they would earn from running away with everyones coins at any point is
sufficiently high compared to the profit that they expect to earn in the future by
acting honestly that it often is expedient for them to disappear. Deposit
accounts can still be trusted; if the provider[s] provide[] enough information
about who they are and where they can be found, the threat of law enforcement
will shift the calculus toward honesty, and even some anonymous services can
be trustworthy. In the case of Silk Road, for example, users only need to store
change in the service for a few days, and the owners have an effective source
policy/2012/09/bitcoin-exchange-bitfloor-attempts-comeback-after-250000-heist/.
176
See Vitalik Buterin, Critical Vulnerability Found in Android Wallets, BITCOIN
MAGAZINE (Aug. 11, 2013), http://bitcoinmagazine.com/critical-vulnerability-found-in-
android-wallets/ (discussing the critical security vulnerability found in all Bitcoin wallets on
Android devices that resulted in stolen Bitcoins). Ironically, the codification of all transactions
in the block chain allows theft victims to know where their Bitcoins have ended up, and how
many Bitcoins the thiefs address contains. See id. (noting that several Android wallets were
cleared out and the funds contained therein sent to
1HKywxiL4JziqXrzLKhmB6a74ma6kxbSDj, which had 55.8 Bitcoins as of the date of
Buterins article).
177
See Nakamoto, supra note 45, at 1 ([Bitcoins] allow[] any two willing parties to
transact directly with each other without the need for a trusted third party.). I use the terms
trustworthy and trusted mostly interchangeably in this Note, but the distinction merits
further comment. The former implies an objective standard of trustis the exchange

dependable, perhaps historically?while the latter implies a subjective standard of trustdo
others believe, rightly or wrongly, that an exchange is dependable? See Marc Waldman et al.,
Trust, in PEER-TO-PEER: HARNESSING THE BENEFITS OF A DISRUPTIVE TECHNOLOGY, supra
note 52, at 24270 (discussing trust principles, including the distinction between reputational
trust and actual trustworthiness, in peer-to-peer networks, online communities, and encryption
systems).
178
Discussing the hacking of Bitcoin wallets that operate on Android devices, one author
writes:
This event should also be a wake-up call to Bitcoin users to look at other potential
flaws in their wallet security. There have been many instances of Bitcoin users
having their wallets hacked through little fault of their own[;] . . . if you are holding
a large number of bitcoins, you would do well to store them in a wallet that you use
as little as possible. Keeping a separate spending and savings wallet should be the
norm; ideally, you should use some kind of mixer to send money between the two
to preserve privacy. . . . The lesson here is this: there is still a long way to go before
we iron out all of the security flaws that Bitcoin implementations might have. The
01/02/2014 11:18:02
traditional financial system has had forty years, and even they arent done.
Buterin, supra note 176.
of fees, the future expectation of which is sufficient to continually entice them

to conduct themselves honorably.179
Not only are the exchanges and e-wallet services vulnerable to

attack, as demonstrated by the Mt. Gox and Bitcoinica incidents, but
there are fundamental weaknesses inherent in the system of creation of
Bitcoins.180 The phrase 51% attack describes a situation in which, if
there is a fork in the block chain,181 an entity that controls more than
half of the networks processing power . . . can decide which block
ultimately gets accepted as true.182 With a 51% attack, the attacker
could double-spend,183 prevent transactions from gaining any
confirmations,184 and prevent miners from mining any valid blocks.185
A substantial fork in the block chain occurred on March 11,
2013.186 This incident will go down in history as one of the closest
moments that we have come to the underlying Bitcoin protocol actually
failing.187 Users of the most popular Bitcoin client, bitcoind, had been
using different versions of the client.188 The older version could not
accept a particular block containing over 5,000 transactions due to a
technical difficulty, causing clients using the old version to begin mining
a different block.189 Newer versions of the client, however, accepted the
179
Vitalik Buterin, Review: TORwallet, BITCOIN MAGAZINE (June 19, 2012),
http://bitcoinmagazine.com/review-torwallet/ (reviewing an e-wallet which was later revealed
to have been a scam). After the scam came to light, the writers of the article warned: Let this
be another reminder to all Bitcoin users: anonymously operated financial services are in
almost all cases not to be trusted. Id.
180
See David Perry, Bitcoin Attacks in Plain English, CODING IN MY SLEEP (Oct. 5,

2012, 5:39 PM) http://codinginmysleep.com/bitcoin-attacks-in-plain-english/.
Decentralization engenders a whole new area of network-related failures: unreliability,
incorrect data synchronization, etc. Nelson Minar & Marc Hedlund, A Network of Peers:
Peer-to-Peer Models Through the History of the Internet, in PEER-TO-PEER: HARNESSING
THE BENEFITS OF A DISRUPTIVE TECHNOLOGY, supra note 52, at 17.
181
See supra note 61 and accompanying text.
182
Perry, supra note 180.
183
Double-Spending, supra note 72.
184
Weaknesses, BITCOIN WIKI, https://en.bitcoin.it/wiki/Weaknesses#
Attacker_has_a_lot_of_computing_power (last modified June 12, 2013, 9:23 PM).
185
Id.
186
See 11/12 March 2013 Chain Fork Information, BITCOIN, http://bitcoin.org/en/
alert/2013-03-11-chain-fork (last updated May 16, 2013, 1:37 AM); Vitalik Buterin, Bitcoin
Network Shaken by Blockchain Fork, BITCOIN MAGAZINE (Mar. 12, 2013),
http://bitcoinmagazine.com/bitcoin-network-shaken-by-blockchain-fork/.
187
01/02/2014 11:18:02
188
Id.
189
Id.
large block and began building other blocks on top of it, causing a
fork.190 Recognizing that a monetary system cannot function if there are
two different databases of how much money each person has, Bitcoin
developers agreed to accept the older clients version of the
blockchain191 and set to work on the next task: notifying major miners
and mining pool operators.192 Most large businesses, including
BitcoinStore, BitPay, SatoshiDice and MtGox, shut down deposits to
protect themselves from double spend attacks.193 A successful double-
spend attack occurred during the fork.194 Weeks after the fork, and after
a suspected cyberattack on Mt. Gox, the market price of Bitcoins
plummeted from $266 to $105 in a matter of hours.195
Why have these system failures and security breaches done nothing
to slow the growth of the Bitcoin ecosystem?196 One news source muses:
190
Id.
191
Buterin, supra note 186. This decision may have been based in part by the fact that
60% of users were using the older version of the client. See BIP 0500, BITCOIN WIKI,
https://en.bitcoin.it/wiki/BIP_50 (last modified Aug. 13, 2013). In order to restore a
canonical chain as soon as possible, the largest mining pools downgraded their Bitcoin
clients to the older versions so their pools would also reject the larger block. This placed
majority hashpower on the chain without the larger block. Id.
192
Buterin, supra note 186. In considering which version of the client to support, the
developers allegedly took into account the fact that if the newer versions blockchain were
chosen as the correct fork, thousands of users on [the older version] would be forced to
upgrade in order to use Bitcoin at all. Id. These businesses likely received notice from
alerts issued by the Bitcoin Developers. See Alerts Mailing List, BITCOIN WIKI,
https://en.bitcoin.it/wiki/Alerts_mailing_list (last modified Mar. 17, 2013, 10:09 AM); Alerts,
BITCOIN WIKI, https://en.bitcoin.it/wiki/Alerts (last modified Sept. 4, 2013, 4:40 AM)
(alerting users on the alert mailing list: URGENT: chain fork, stop mining on version 0.8).

Others may have received notice by accessing Bitcoins chat room on Internet Relay Chat and
reading the consensus of comments from other users. See Buterin, supra note 186.
193
194
BIP 0500, supra note 192 (However, it was done by someone experimenting to see if
it was possible and was not intended to be malicious.). The double-spender made a post in a
forum discussing how he or she completed the double-spend. See macbook-air, Comment to A
Successful DOUBLE SPEND US$10000 Against OKPAY This Morning, BITCOIN FORUM
(Mar. 12, 2013, 6:22 PM), https://bitcointalk.org/index.php?topic=152348.0. A representative
from OKPAY Inc. posted on the same forum: I suppose its always a [sic] tempting to try to
get away with something that [sic] not belongs [sic] to you. OKPAY, Comment to Successful
DOUBLE SPEND US$10000 Against OKPAY This Morning, BITCOIN FORUM (Mar. 13,
2013, 9:49 AM), https://bitcointalk.org/index.php?topic=152348.0.
195
See Matthew Boesler & Walter Hickey, How the Bitcoin Collapse Stacks Up Against
Historys Ugliest Market Crashes, BUS. INSIDER (Apr. 11, 2013, 3:22 PM),
http://www.businessinsider.com/bitcoin-crash-biggest-market-declines-2013-4; Kim-Mai
Cutler, Bitcoin Suffers a Correction Amid Apparent DDOS Attacks on Some Exchanges,
01/02/2014 11:18:02
TECHCRUNCH (Apr. 10, 2013), http://techcrunch.com/2013/04/10/bitcoin-crash/.

196
Cf. Hibah Yousuf, I Lost $50,000 in Bitcoin Crash, But Im Still a Believer, CNN
Ultimately, the massive breach may not be enough to kill the Bitcoin
movement. After all, many people are very dedicated and enthusiastic about
the concept of Bitcoins. That said, the recent volatility, combined with [Mt.
Goxs] breach raise serious doubts about Bitcoin managing to become
mainstream. The fact that [Mt. Gox,] the largest exchange[,] . . . would practice
such lax security practices such as failing to use the state of the art hashing
methods to protect its database seems disturbing.197
The Bitcoin movement seems to be in more trouble than many

users anticipated.198 Even if the security breaches have done nothing to
slow Bitcoins popularity, they at least justify an argument that the
underlying distrust of banks is unjustified.199
(Apr. 18, 2013, 6:43 AM), http://buzz.money.cnn.com/2013/04/18/bitcoin-investor/.

197
Mick, supra note 158. See James Surowiecki, Cryptocurrency: The Bitcoin, a Virtual
Medium of Exchange, Could Be a Real Alternative to Government-Issued MoneyBut Only if
it Survives Hoarding by Speculators, MIT TECH. REV. (Aug. 23, 2011),
http://www.technologyreview.com/review/425142/cryptocurrency/ ([T]he bitcoin boom of
the past year looks not so much like the birth of a new currency as like a classic bubble.).
198
See Wallace, supra note 72 ([O]nce [Bitcoins] started to become valuable, a PC felt
inadequate. Some users protected their bitcoins by creating multiple backups, encrypting and
storing them on thumb drives, on forensically scrubbed virgin computers without Internet
connections, in the cloud, and on printouts stored in safe-deposit boxes. But even some
sophisticated early adopters had trouble keeping their bitcoins safe. Stefan Thomas had three
copies of his wallet yet inadvertently managed to erase two of them and lose his password for
the third. In a stroke, he lost about 7,000 bitcoins, at the time worth about $140,000. I spent a
week trying to recover it, he says. It was pretty painful. Most people who have cash to
protect put it in a bank, an institution about which the more zealous bitcoiners were deeply
leery. Instead, for this new currency, a primitive and unregulated financial-services industry
began to develop. Fly-by-night online wallet services promised to safeguard clients digital
assets. Exchanges allowed anyone to trade bitcoins for dollars or other currencies. Bitcoin

itself might have been decentralized, but users were now blindly entrusting increasing
amounts of currency to third parties that even the most radical libertarian would be hard-
pressed to claim were more secure than federally insured institutions. Most were Internet
storefronts, run by who knows who from who knows where.).
The efforts of Bitcoin users to safeguard and maintain their funds appear far more
onerous than the efforts it would take to utilize existing United States banks; generally, bank
customers are not responsible for ensuring the security of their own deposits. There is
absolutely no consumer protection in any sector of the Bitcoin economy. Nathaniel Popper,
In the Murky World of Bitcoin, Fraud is Quicker than the Law, N.Y. TIMES, Dec. 6, 2013, at
A1, available at http://dealbook.nytimes.com/2013/12/05/in-the-murky-world-of-bitcoin-
fraud-is-quicker-than-the-law/?ref=todayspaper&_r=0 (quoting Sarah Meiklejohn).
199
david_shaw, Comment to Bitfloor Hacked, $250,000 Missing, HACKER NEWS (Sept. 4,
2012), http://news.ycombinator.com/item?id=4477376 (One of the benefits of using a major
bank (in the United States, for this example), is that your money is federally insured. Youll
always see little logos or blips of text advertising that the bank is a member, FDIC. People
take this for grantedafter all, if your bank is robbed, why should it be your loss? Its a little
01/02/2014 11:18:02
harder when the currency is anonymous and completely uninsured. Many bitcoin exchanges
will do their best to dip into their profits to reimburse users after they were hacked. I know
D. Bitcoins and the Law
The use of Bitcoins poses many novel questions of law in a variety

of legal areas.200 Courts will soon be faced with the need to apply the
law to businesses that use Bitcoins or provide services to Bitcoin
users.201 On March 5, 2012, the now defunct Bitcoin exchange TradeHill
filed suit against Dwolla, Inc., an online money transmitter service, for
violation of the Racketeer Influenced and Corrupt Organizations Act
(RICO)202 as well as various state law contract causes of action.203 The
court dismissed the case pursuant to an arbitration clause contained in
Dwollas Terms of Use.204
On May 2, 2013, CoinLab, a large U.S.-based exchange, sued Mt.
Gox in federal district court for an accounting, breach of contract, and
breach of the implied duty of good faith and fair dealing.205 CoinLab
seeks damages in excess of $75 million, despite the parties contract
providing for liquidated damages of only $50 million in the event of
breach of a particular provision.206 In its Answer and Counterclaim, Mt.
Gox alleged that its duty to CoinLab was legally excused because
CoinLab was not compliant with those laws applicable to the Services
that CoinLab was to provide under the Agreement.207
On July 3, 2013, a group of plaintiffs filed a class-action suit
against E-Sports Entertainment, LLC, an operator of a website that
provides computer software, for allegedly including malware that
surreptitiously utilized plaintiffs computers to mine Bitcoins in software
that several major exchanges have already dipped into their own coffers to reimburse their

users. However, they need to pay for this completely out-of-pocket, and even then theres
nothing that indicates that they have to do so.).
200
See, e.g., Kendal Dobra, An Executors Duty Toward Digital Assets, 59 PRAC. LAW.
21 (Oct. 2013) (discussing executors difficulties in ascertaining the digital financial accounts
of decedents).
201
This is not the first time the law has required tweaking in response to developments in
electronic payment systems. See, e.g., James Steven Rogers, The New Old Law of Electronic
Money, 58 SMU L. REV. 1253, 130711 (2005) (discussing the application of the Uniform
Commercial Code to E-Note systems).
202
18 U.S.C. 1962 (2006).
203
Amended Complaint at 1, Tradehill, Inc. v. Dwolla, Inc., No. 3:12-cv-01082, 2012
WL 1601094 (N.D. Cal. Mar. 5, 2012).
204
Order of Dismissal, Tradehill, 2012 WL 162268 (N.D. Cal. May 9, 2012).
205
Complaint at 810, CoinLab, Inc. v. Mt. Gox, No. 13-CV-00777 (W.D. Wash. May 2,
2013).
206
Id. at 2. See Exhibit A to id.
01/02/2014 11:18:02
207
Answer and Counterclaim 28, CoinLab, Inc., No. 13-CV-00777 (W.D. Wash. Sept.
10, 2013). Mt. Gox alleged 15 affirmative defenses and 12 counterclaims. Id.
provided by the operator.208 On July 8, 2013, a group of plaintiffs filed a

class-action suit against BitInstant, alleging violations of the Electronic
Funds Transfer Act,209 breach of contract, unjust enrichment, and
negligence in connection with allegedly deceptive practices.210
On October 29, 2013, plaintiff company Bitvestment Partners LLC
filed suit against CoinLab and its parents and subsidiaries for breach of a
Bitcoin mining output agreement in which CoinLab had agreed to
dedicate 100% of its mining output to the plaintiff until the plaintiff
received a specified amount of Bitcoins.211 The plaintiff alleged causes
of action for breach of contract, breach of the covenant of good faith and
fair dealing, unjust enrichment, an accounting, and tortious interference
with contractual relations.212 Unlike the plaintiff in the Bitcoinica suit,
the plaintiff in this suit asked for damages in an amount to be
determined at trial, but no less than 7984.006735 Bitcoins,213 likely
hopeful that the price of Bitcoins will increase by the time of trial. Just
days later, CLI Holdings, Inc., doing business as Alydian, Inc., the
mining division of CoinLab, Inc., filed for protection under Chapter 11
of the Bankruptcy Code, listing Bitvestment Partners, LLC, as a creditor,
estimated assets of up to $50,000, and estimated liabilities of up to $10
million.214 It is clear that Bitcoin-related disputes will become prevalent
208
Complaint 3335, Gallette v. E-Sports Entertainment, LLC, No. CGC-13-532593
(Cal. Super. Ct. July 3, 2013), available at http://webaccess.sftc.org/scripts/magic94/
Mgrqispi94.dll?APPNAME=web&PRGNAME=casenumberprompt22 (enter 532593). The
defendant filed a motion to compel arbitration. Motion to Compel Arbitration, Gallette, No.
CGC-13-532593 (Cal. Super. Ct. Sept. 4, 2013), available at
http://webaccess.sftc.org/scripts/magic94/Mgrqispi94.dll?APPNAME=web&PRGNAME=cas

enumberprompt22 (enter 532593). The defendant has since terminated the employment of
the employee responsible for the unauthorized Bitcoin mining code and has set up a claims
process for affected users to submit verified damages. See Robert McMillan, Rogue Employee
Fired for Turning Game Network into Bitcoin Mining Colony, WIRED (July 9, 2013, 6:30
AM), http://www.wired.com/wiredenterprise/2013/07/esea-2/.
209
15 U.S.C. 1693 (LEXIS 2013).
210
See Complaint 1013, Iacono v. Bitinstant, LLC, No. 13-CV-04674 (S.D.N.Y. July
8, 2013).
211
Complaint 4, Bitvestment Partners LLC v. CoinLab, Inc., No. 13-CV-07632
(S.D.N.Y. Oct. 29, 2013).
212
Id. 1.
213
Id. 70.
214
Chapter 11 Voluntary Petition, In re CLI Holdings, Inc., No. 13-BK-19746 (Bankr.
W.D. Wash. Nov. 1, 2013). See Robin Sidel, Race to Mine Bitcoin Gathers Steam: Rush to
Generate Valuable Virtual Currency Fuels Litigation, Regulatory Scrutiny and a Quest for
Speed, WALL ST. J. (Nov. 5, 2013, 6:59 PM), http://online.wsj.com/news/articles/
01/02/2014 11:18:02
SB10001424052702303661404579180261683703066 (Alydian felt that its duty was to

ensure that Alydians customers, creditors[,] and investors maximize their possible returns
in the courts as the Bitcoin economy develops.

In 2013, the Securities and Exchange Commission issued an
investor alert to warn individual investors about fraudulent investment
schemes that may involve Bitcoin and other virtual currencies.215 The
alert warns:
We are concerned that the rising use of virtual currencies in the global
marketplace may entice fraudsters to lure investors into Ponzi and other
schemes in which these currencies are used to facilitate fraudulent, or simply
fabricated, investments or transactions. . . . Fraudsters may also be attracted to
using virtual currencies to perpetrate their frauds because transactions in
virtual currencies supposedly have greater privacy benefits and less regulatory
oversight than transactions in conventional currencies.216
In May of 2012, an FBI report entitled Bitcoin Virtual Currency:

Unique Features Present Distinct Challenges for Deterring Illicit
Activity was leaked to the Internet.217 The report, marked
Unclassified yet For Official Use Only, revealed: Bitcoin, like . . .
other virtual currencies, provides opportunities for criminals to transfer,
launder, or steal funds. . . . The way [the peer-to-peer system] creates,
operates, and distributes Bitcoins makes it distinctively susceptible to
illicit money transfers, and manipulation through the use of malware and
botnets.218
Are the FBIs fears warranted? Nikolei Kaplanov answers that
since the bitcoin payment system is not really run by anyone or
anything[,] . . . [t]he idea of using bitcoins as some sort of offshore bank
account is, at best, a misnomer.219 Kaplanov concludes that bitcoin
users buying and selling goods in a cash-like transaction . . . fall outside

of the regulatory provisions under federal banking, money transmission,
through Chapter 11 bankruptcy protection, Peter Vessenes, CoinLabs chief executive,

said . . . . He said the [Bitvestment] lawsuit was baseless.).
215
OFFICE OF INVESTOR EDUC. & ADVOCACY, SEC. & EXCH. COMMN, SEC PUB. NO.
153, INVESTOR ALERT: PONZI SCHEMES USING VIRTUAL CURRENCIES 1 (2013), available at
http://www.sec.gov/investor/alerts/ia_virtualcurrencies.pdf.
216
Id.
217
Kim Zetter, FBI Fears Bitcoins Popularity with Criminals, WIRED (May 9, 2012,
10:51 PM), http://www.wired.com/threatlevel/2012/05/fbi-fears-bitcoin/.
218
FED. BUREAU OF INVESTIGATION, INTELLIGENCE ASSESSMENT, BITCOIN VIRTUAL
CURRENCY: UNIQUE FEATURES PRESENT DISTINCT CHALLENGES FOR DETERRING ILLICIT
01/02/2014 11:18:02
ACTIVITY (2012), available at http://cryptome.org/2012/05/fbi-bitcoin.pdf.

219
Kaplanov, supra note 34, at 130, 153.
and securities laws.220 Another author argues:
[T]here is a serious question of whether [the Bank Secrecy Act] and [the
Money Laundering Control Act] regimes impose legal risk for the Bitcoin
developers, exchanges, ewallet providers, individual miners, operators of
mining pools, mere Bitcoin users, and businesses that accept bitcoins. Future
work should analyze these regimes more closely to determine which, if any, of
these groups must register with FinCEN as money services businesses and be
subject to heavy regulatory burdens. Future work should also determine if any
of these groups are at danger of being considered money launderers since it is
generally known that Bitcoin is used to promote illegal activities, such as the
sale and purchase of illegal drugs.221
This Note answers Grinbergs questions about the application of the

Bank Secrecy Act (BSA) to Bitcoin exchanges and other providers of
services relating to Bitcoins.222 As discussed more fully below, and as
the FBI fears,223 given the applicability of the BSA to Bitcoin exchanges,
the Bitcoin system poses serious questions relating to money laundering
and tax reporting, but only with regard to the less trustworthy exchanges
known for their illegal activity; some Bitcoin exchanges may even have
the potential to become the next tax havens.
Part III of this Note shows that both domestic and foreign based
Bitcoin exchanges fall within the purview of the BSA. Many exchanges
voluntarily implement measures amounting to self-regulation in attempts
to appear more trustworthy to wary consumers or attempts to avoid
criminal or civil sanctions. This self-regulation is insufficient to achieve
these goals, given the mixing services and Tor network that enable
anonymity, as well as the fact that the BSAs requirements do not lead to

detection of all criminal activity. Exchanges that have no need to appear
trustworthy, moreover, still pose even greater risks of money laundering
and other illegal activity that the FBI envisioned.
220
Id. at 173.
221
Grinberg, supra note 34, at 206.
222
This Note will not, however, address the Money Laundering Control Act of 1986,
codified in part at 18 U.S.C. 1956 (2006), partially because the amendments of the BSA by
the USA Patriot Act largely strengthened United States money laundering regulations above
and beyond the scope of the Money Laundering Control Act. See Andres Rueda, International
Money Laundering Law Enforcement & the USA Patriot Act of 2001, 10 MSUDCL J. INTL
L. 141, 14952, 18991 (2001). For more information on the Money Laundering Control Act,
01/02/2014 11:18:02
see generally Anna Driggers, Money Laundering, 48 AM. CRIM. L. REV. 929 (2011).
223
See supra note 218 and accompanying text.
III. THE BANK SECRECY ACT
One of the outstanding issues surrounding Bitcoin markets is the

application of the Bank Secrecy Act (BSA)224 to Bitcoin exchanges
and e-wallets. Congress passed the BSA to minimize[] the risk that
commercial institutions might be used as money laundering vehicles.225
To accomplish this goal, the BSA grants the Secretary of the Treasury
the authority to develop and implement various record-keeping and
reporting requirements that financial institutions must follow,226 where
the records have a high degree of usefulness in criminal, tax, or
regulatory investigations or proceedings, or in the conduct of
intelligence or counterintelligence activities, including analysis, to
protect against international terrorism.227 The Financial Crimes
Enforcement Network (FinCEN), established as a bureau in the
Department of the Treasury,228 enforces various provisions of the
BSA.229
A. Reporting Requirements of the BSA
The most notable provision of the BSA requires reporting and

record-keeping by domestic financial institution[s]230 and foreign
financial agenc[ies]231 of all transactions totaling more than $10,000 in
224
31 U.S.C. 53115326 (LEXIS 2013).
225
Shawn Turner, U.S. Anti-Money Laundering Regulations: An Economic Approach to
Cyberlaundering, 54 CASE. W. RES. L. REV. 1389, 1402 (2004).
226
Id. See also 31 U.S.C. 5313(a) (2006).

227
31 U.S.C. 5311 (2006).
228
31 U.S.C. 310(a) (LEXIS 2013).
229
See 31 U.S.C. 5331(a) (LEXIS 2013) (flush language). Accord 31 C.F.R. 1010.810
(2013) (delegating authority for the imposition of civil penalties to the Director of FinCEN
and authority for investigating criminal violations to the Commissioner of Customs and
Border Protection and the Commissioner of Internal Revenue). See Enforcement Actions,
FINCEN, http://www.fincen.gov/news_room/ea/ (last visited Nov. 1, 2013) (setting forth a list
of enforcement actions imposing civil penalties against money services businesses, depository
institutions, etc.). FinCEN regularly polices filings made from BSA requirements. See
generally FIN. CRIMES ENFORCEMENT NETWORK, U.S. DEPT OF THE TREASURY, ISSUE 18,
THE SAR ACTIVITY REVIEW BY THE NUMBERS (2013), available at
http://www.fincen.gov/news_room/rp/files/btn18/sar_by_numb_18.pdf (setting forth statistics
of filings made pursuant to the BSA for 2012).
230
31 U.S.C. 5313(a) (2006). See 31 C.F.R. 1010.100(t) (2013) (any person doing
business [in the United States], whether or not on a regular basis or as an organized business
concern, in . . . (3) a money services business defined in paragraph (ff) of this section).
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231
31 U.S.C. 5314(a) (2006). See 31 C.F.R. 1010.100(v) (2013) (A person acting
outside of the United States . . . as a financial institution . . . or acting in a similar way related
one transaction (or two or more related transactions).232 The Secretary of

the Treasury may require any financial institution . . . to report any
suspicious transaction relevant to a possible violation of law or
regulation.233
The rationale for reporting-based systems is to create a paper
trail leading from the laundered funds to the illegal activity from which
they were originally derived.234 The question of whether a person is a
money transmitter is a matter of facts and circumstances.235 Money
transmitting businesses must acquire an appropriate money transmitting
license in the state in which they operate and comply with the reporting
requirements of section 5330.236 Conducting, controlling, managing,
supervising, directing, or owning all or part of an unlicensed money
transmitting business may result in fines or imprisonment for up to five
years, or both, whether or not the defendant knew that the operation
was required to be licensed or that the operation was so punishable.237
Money services businesses included within the definition of
financial institutions that are subject to the reporting requirements
include a person wherever located doing business, whether or not on a
regular basis or as an organized or licensed business concern, wholly or
in substantial part within the United States, acting as a dealer in foreign
exchange, a check casher, a provider of prepaid access, or a money
to money, credit, securities, gold, or a transaction in money, credit, securities, or gold.).

232
31 U.S.C. 5331(a)(1)(B) (LEXIS 2013). Accord 31 C.F.R. 1010.330(a) (2013).
Such a report, to be filed with FinCEN, must include, inter alia, identification information of
the person from whom the currency was received. 31 U.S.C. 5331(b)(2) (LEXIS 2013). The
BSA further requires recordkeeping and reporting of taxpayer identification information by

currency dealers or exchangers in connection with an exchange of currency in excess of
$1,000, such as the name and address of the customer. 31 C.F.R. 1022.410 (2013).
Users violate the BSA if they for the purpose of evading the transactions in currency
reporting requirements . . . (c) Structure (as that term is defined in 1010.100(xx)) or assist in
structuring, or attempt to structure or assist in structuring, any transaction with one or more
domestic financial institutions. 31 C.F.R. 1010.314 (2013) (emphasis added). Structuring
transactions is also commonly known as smurfing. Turner, supra note 225, at 1403 n.85.
233
31 U.S.C. 5318(g) (LEXIS 2013) (often termed a Suspicious Activity Report).
234
Rueda, supra note 222, at 146 (citing Money Laundering and the Drug Trade:
Hearings Before the Subcomm. on the Crime of House Comm. on the Judiciary, 105th Cong.,
at sec. III. 1 (1997) (testimony of Michael F. Zeldin, Principal, Price Waterhouse)).
235
31 C.F.R. 1010.100(ff)(5)(B)(ii) (2013).
236
18 U.S.C. 1960 (2006). Section 1960 also prohibits the transportation or
transmission of funds that are known to the money transmitting business to have been derived
from a criminal offense or are intended to be used to promote or support unlawful activity. Id.
237
18 U.S.C. 1960 (2006) (applicable to unlicensed money transmitting businesses
01/02/2014 11:18:02
operating in a state where failure to obtain a license is punishable as a misdemeanor or felony

under state law).
transmitter.238 A money transmitter is a person who provides money

transmission services, such as the acceptance of currency, funds, or
other value that substitutes for currency from . . . one person and the
transmission of [the same] . . . to another location or person by any
means.239 FinCEN recently revised the definition of a money
transmitting business to include a persons activities, rather than
formal business status.240 Entities that fall within further classifications
such as [d]ealer[s] in foreign exchange241 must also keep records of
each exchange of currency involving transactions in excess of $1,000 in
one day.242
Money transmitting business[es]243 like Paypal244 are required to
file reports under section 5313.245 Even money services businesses
operated outside of the United States fall within the reach of the BSA:
[F]oreign-located [money services businesses] will have the same reporting

and recordkeeping and other requirements as [those] with a physical presence
in the United States, . . . [and] will be subject to the same civil and criminal
238
31 C.F.R. 1010.100(ff)(1)(8) (2013).
239
31 C.F.R. 1010.100(ff)(5)(i) (2013) (emphasis added). The term money
transmitter shall not include a person that only: . . . (B) Acts as a payment processor to
facilitate the purchase of, or payment of a bill for, a good or service through a clearance and
settlement system by agreement with the creditor or seller . . . [or] (E) provides prepaid
access. 31 C.F.R. 1010.100(ff)(5)(ii) (2013) (emphasis added).
240
Bank Secrecy Act Regulations; Definitions and Other Regulations Relating to Money
Services Businesses, 76 Fed. Reg. 43585 (July 21, 2011) (codified at 31 C.F.R. pt. 1010,
1021, 1022). As such, individuals may be money transmitting businesses under the BSA.
241
31 C.F.R. 1010.100(ff)(1) (2013) (A person that accepts the currency, or other

monetary instruments, funds or other instruments denominated in the currency, of one or more
countries in exchange for the currency, or other monetary instruments, funds, or other
instruments denominated in the currency, of one or more other countries in an amount greater
than $1,000 for any other person on any day in one or more transactions, whether or not for
same-day delivery.).
242
31 C.F.R. 1022.410(b)(3) (2013).
243
31 U.S.C. 5330(d)(1) (2006) (including a business that provides . . . currency
exchange, or money transmitting or remittance services . . . or any other person who engages
as a business in the transmission of funds, including any person who engages as a business in
an informal money transfer system or any network of people who engage as a business in
facilitating the transfer of money domestically or internationally outside of the conventional
financial institutions system). A money transmitting service includes accepting currency
or funds . . . or the value of the currency or funds, by any means through . . . an electronic
funds transfer network. 31 U.S.C. 5330(d)(2) (2006).
244
See PayPal State Licenses, PAYPAL, https://www.paypal-
media.com/state_licenses.cfm (last visited Nov. 1, 2013) (indicating that Paypal is licensed in
01/02/2014 11:18:02
48 states as a money transmitting service).

245
31 U.S.C. 5330(d)(1)(B) (2006).
penalties as [those] with a physical presence in the United States, with respect
to their failure to comply with regulatory requirements.246
The definition of a money transmitting business encompasses

informal money transfer system[s] such as underground financial
systems.247
B. Digital Currencies, the BSA, and the Risk of Money Laundering
The regulatory definition of money transmission services

includes the phrase or other value that substitutes for currency to state
that businesses that accept stored value or currency equivalents as a
funding source and transmit that value are providing money transmission
services.248 Businesses utilizing digital currencies must be licensed
and registered as money transmitting businesses.249
In United States v. E-Gold, Ltd.,250 the defendant digital currency
issuer was indicted for violating 18 U.S.C. 1960 by failing to comply
with the registration and reporting requirements of the BSA as a money
transmitting business.251 The digital currency at issue was E-Gold,
bought with traditional currency (i.e. USD) which an account holder
could use to buy a good or pay for a service, or to transfer funds to
someone else.252 The district court disagreed with the defendants
argument that an entity is a money transmitting business under the
246

Services Businesses, 76 Fed. Reg. at 43589. For a thoughtful discussion of the legality of
extraterritorial jurisdiction, see generally Jeffrey A. Meyer, Dual Illegality and Geoambiguous
Law: A New Rule for Extraterritorial Application of U.S. Law, 95 MINN. L. REV. 110 (2010).
247
STEVEN MARK LEVY, FEDERAL MONEY LAUNDERING REGULATION: BANKING,
CORPORATE AND SECURITIES COMPLIANCE 12.04[4] (2012) (i.e. the hawala system). For a
description of the hawala system, see generally JEFFREY TORP, GUIDE TO ANTI-MONEY
LAUNDERING & BSA COMPLIANCE 8, app. 8.7 (2013).
248
Services Businesses, 76 Fed. Reg. at 43592.
249
LEVY, supra note 247, at 12.04[3]. Although the BSA uses the term money
transmitting business[,] . . . FinCEN has adopted the term money services business in order
to avoid confusion with the statutes use of the terms money transmitting business and
money transmitting service, the latter of which refers to a type of money transmitting
business. 1 JOHN K. VILLA, BANKING CRIMES: FRAUD, MONEY LAUNDERING AND
EMBEZZLEMENT 6:42 (2011 & Supp. 2012).
250
550 F. Supp. 2d 82 (D.D.C. 2008).
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251
Id. at 84.
252
Id. at 85.
BSA only if it engages in the physical transfer of currency.253 The court

explained:
[A] money transmitting service includes not only a transmission of actual

currency, but also a transmission of the value of that currency through some
other medium of exchange. Nowhere does this definition purport to suggest
that a money transmitting service includes only transmissions of actual cash
or currency. According to the plain language of the statute, therefore,
Defendants e-Gold and GS & R, who according to the Indictment allegedly
engage in the transmission of funds, must be registered, individually or jointly,
with the Department of Treasury (Treasury) under Section 5330.254
In 2013, a grand jury indicted Liberty Reserve, S.A. and seven

individuals for conspiracy to commit money laundering, conspiracy to
operate an unlicensed money transmitting business, and operation of an
unlicensed money transmitting business in connection with a virtual
currency scheme.255 According to the unsealed indictment, the Liberty
Reserve was born out of the defendants unsuccessful experience
running a third-party exchange service for . . . . E-Gold; some of the
defendants had even been convicted in the E-Gold suit.256 [F]illing the
void left by E-Gold and becoming the predominant digital form of
money laundering used by cyber-criminals worldwide,257 the Liberty
Reserve offered a digital currency that could be accessed by users
without requir[ing them] to validate their identity information, such as
by providing official identification documents or a credit card. Accounts
could therefore be opened easily using fictitious or anonymous

253
Id. at 83.
254
E-Gold, Ltd., 550 F. Supp. 2d at 94. E-Gold differed from Bitcoins, however, in the
fact that there was a central authority issuing the digital currency to buyers. Id. at 85. Bitcoins
do not have a central issuer; instead, they are created based on accepted rules on a peer-to-
peer basis. See Nakamoto, supra note 45. The difference between a central issuer versus a
peer-to-peer distribution protocol may change the analysis to a court analyzing Bitcoins.
Nevertheless, other digital currency scheme operators have been indicted for failure to
register under the BSA. See Peter C. Tucker, The Digital Currency Doppelganger: Regulatory
Challenge or Harbinger of the New Economy?, 17 CARDOZO J. INTL & COMP. L. 589, 613
(2009) (noting indictments of various digital currency operators such as E-Gold, Crowne
Gold, E-Bullion, The Bullion Exchange, and Gold-Age).
255
See Indictment, United States v. Liberty Reserve S.A., No. 13-CR-368(DLC)
(S.D.N.Y. 2013) (alleging violations of 18 U.S.C. 1956, 371 and 1960). The U.S. Attorney
also filed an action seeking the forfeiture of domain names associated with the Liberty
Reserve digital currency. Complaint, United States v. WM-Center.com, No. 13-CV-03565
(S.D.N.Y. May 28, 2013).
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256
Indictment, Liberty Reserve S.A., No. 13-CF-368(DLC), 11-12.
257
Id. 13.
identities.258 The indictment alleged that the Liberty Reserve enabled

laundering of $6 billion through millions of transactions and through
countries such as Costa Rica, Cyprus, and Russia.259
Given the broad scope of the BSA, Bitcoin exchanges from which
users can buy or exchange Bitcoins with currency fall clearly within the
purview of the act as money services businesses. The arguments for
and against regulating Bitcoin exchanges operated in the United States
are similar to the arguments for and against regulating PayPal.260
To classify Bitcoin exchanges as falling within the BSA as money
services businesses furthers the legislative intent of the BSA to
minimize[] the risk that commercial institutions might be used as
money laundering vehicles.261 The European Central Bank issued a
report in October 2012 on Virtual Currency Schemes, in which it
noted that Bitcoins can be used by criminals, fraudsters and money
launderers to perform their illegal activities.262 Bitcoins are currently
not regulated and are not closely supervised or overseen by any public
authority, even though participation in these schemes exposes users to
credit, liquidity, operational[,] and legal risks . . . .263
258
Id. 14.
259
Id. 28.
260
See Ronald J. Mann, Regulating Internet Payment Intermediaries, 82 TEX. L. REV.
681, 71213 (2004) (Selecting a regulatory approach for the P2P intermediaries is difficult
for a variety of reasons. First, because of the persistent allegations of misconduct by
PayPal[,] . . . it seems unacceptable to have PayPal completely unregulated. At the same time,
the competitive landscape shows a tension between PayPalnow owned by eBayand
smaller competitors primarily controlled by banks. In that setting, it seems particularly

inappropriate to use the gatekeeper strategy to subject PayPals operations to the control of the
banking industry. For the same reason, it seems absurd to say that P2P services must be
provided by a bank. . . . [A]ny such outcome would unnecessarily destroy some significant
opportunity for innovation in the provision of payment services. (citations omitted)).
261
Turner, supra note 225, at 1402.
262
Virtual Currency Schemes, EUROPEAN CENT. BANK, Oct. 2012, at 45, available at
http://www.ecb.int/pub/pdf/other/virtualcurrencyschemes201210en.pdf.
263
Id. at 47. One author notes that Bitcoins enable political dissidents a new way to
collect donations and criminals a new way to launder their moneywhile causing headaches
for traditional financial gatekeepers. Peck, supra note 65. Bitcoins have enabled the transfer
of funds to Wikileaks, the target of a bankers blockade by Visa, Mastercard, and Paypal
that effectively blocked its access to funds by blockading all donations through their payment
systems. See James Ball, The Bankers Blockade of WikiLeaks Must End, THE GUARDIAN
(Oct. 24, 2011, 11:30 AM), http://www.guardian.co.uk/commentisfree/2011/oct/24/bankers-
wikileaks-free-speech. Wikileaks sympathizers have managed to circumvent the industry-
wide blockade of donations to Wikileaks by using Bitcoins. See Jon Matonis, WikiLeaks
01/02/2014 11:18:02
Bypasses Financial Blockade With Bitcoin, FORBES (Aug. 20, 2012, 9:47 AM),
http://www.forbes.com/sites/jonmatonis/2012/08/20/wikileaks-bypasses-financial-blockade-
Bitcoin markets enable[] the easy laundering of funds264[t]he

act of transferring illegally obtained money through legitimate people or
accounts so that its original source cannot be traced.265 This is
especially true given the variety of mixing services the Bitcoin
community has developed that can be used to mix ones funds with
others, with the intention of confusing the trail [of Bitcoins] back to the
funds original source. . . . Mixing helps protect privacy, but can also be
used for money laundering.266
One service, bitcoinfog.com, provides such a mixing service that
prevents third parties from tracking Bitcoin transactions originating from
a particular address;267 if properly done[,] . . . you can eliminate any
with-bitcoin/; wikileaks, TWITTER (Feb. 26, 2013, 3:44 PM),

https://twitter.com/wikileaks/status/306550274854625281 (announcing that, as of February
26, 2013, WikiLeaks ha[d] received over $80k in bitcoins thanks to bitcoiners (fraction of
budget, but rapidly increasing)).
Fugitive Edward Snowden, accused of leaking information about the National Security
Administrations spying activities, now accepts Bitcoin donations to his defense fund. See
Crypto-Currency for NSA Leaker: Snowden Fund Accepts Bitcoin, PRISON PLANET (Aug. 13,
2013, 4:39 AM), http://www.prisonplanet.com/crypto-currency-for-nsa-leaker-snowden-fund-
accepts-bitcoin.html; wikileaks, TWITTER (Aug. 12, 2013, 1:48 AM),
https://twitter.com/wikileaks/status/366843577466241026 (Official #Snowden defence [sic]
fund now accepts Bitcoin: wikileaks.org/freesnowden help protect Snowden!).
264
Elias & Woods, supra note 16. See also Virtual Currency Schemes, supra note 262, at
6 (The [Bitcoin] scheme has been surrounded by some controversy, not least because of its
potential to become an alternative currency for drug dealing and money laundering as a result
of its high degree of anonymity.).
265
BLACKS LAW DICTIONARY 1097 (9th ed. 2009).
266
Mixing Service, BITCOIN WIKI, https://en.bitcoin.it/wiki/Mixing_service#cite_note-0

(last modified Jan. 1, 2013, 8:03 AM) (In traditional financial systems, the equivalent would
be moving funds through banks located in countries with strict bank-secrecy laws.). One user
posted: If Im a money launderer, Ive definitely got my eyes on Bitcoin right now . . . .
ElFuegoDiablo, Comment to Alexis C. Madrigal, How to Launder Billions and Billions of
Digital Dollars: Less Like the Gangsterism of Old. More Like a Lawless PayPal, THE
ATLANTIC (Nov. 4, 2013, 12:12 PM), http://www.theatlantic.com/technology/archive/
2013/11/how-to-launder-billions-and-billions-of-digital-dollars/281091/.
Of course, entrusting ones Bitcoins to an unknown third-party mixing service comes
with its own risks: Mixing services may themselves be operating with anonymity. As such, if
the mixing output fails to be delivered or access to funds is denied[,] there is no recourse. Use
at your own discretion. Id. One such mixing e-wallet, TORwallet, offered an e-wallet that
would mix a depositors Bitcoins in a large pool and send the Bitcoins back freshly
laundered. Buterin, supra note 179. TORwallet later failed to honor withdrawal requests
and presumably the operator absconded with all the funds deposited with its service. Id.
Researchers identifying Bitcoin addresses by interacting with them sent some Bitcoins to
various mixing services; One of these, BitMix, simply stole our money . . . . MEIKLEJOHN,
01/02/2014 11:18:02
supra note 65.

267
BITCOIN FOG, http://bitcoinfog.com/ (last visited Nov. 1, 2013).
chance of finding your payments and mak[e] it impossible to prove any

connection between a deposit and a withdraw[al] inside our service.268
One quantitative analysis of Bitcoin transactions, compiled from data
found in the public ledger, notes the many strange looking changes and
fork-merge structures, in which a large balance is either transferred
within a few hours through hundreds of temporary intermediate
accounts, or split into many small amounts which are sent to different
accounts only in order to be recombined shortly afterwards.269 Popular
website Blockchain.info270 analyzes the amount of tainted, or known
stolen, Bitcoins an identified address contains.271
The leaked FBI report aptly notes that Bitcoin service providers that
qualify as money transmitters would be subject to the BSA and
FinCENs authority.272 The problem identified by the FBI is that [a]s a
decentralized digital currency system, Bitcoin lacks a centralized entity
and is incapable of . . . monitoring and reporting suspicious activity,
running an anti-money laundering compliance program, or accepting and
processing legal requests like subpoenas.273 Upon its closure, TradeHill
268
Id. To eliminate the threat of theft by unknown third-party mixing services, some
developers established CoinJoin, a sort of conversation thread whereby a group of users
come together and mix bitcoin inputs together. It brings to the table the idea of trustless
mixing . . . . Daniel Cawrey, Why Bitcoin Is as Anonymous as You Want it to Be, COINDESK
(Sept. 24, 2013, 7:18 PM), http://www.coindesk.com/bitcoin-is-as-anonymous-as-you-want-
it-to-be/.
269
DORIT RON & ADI SHAMIR, QUANTITATIVE ANALYSIS OF THE FULL BITCOIN
TRANSACTION GRAPH 2 (2012), available at http://eprint.iacr.org/2012/584.pdf.
270
Blockchain.info provides analytics to the Bitcoin community, including a real-time
ticker of all Bitcoin transactions, most popular addresses that have received the most

payments, orphaned blocks, unconfirmed transactions waiting to be included in a block,
largest transactions, double spends, Bitcoin nodes list, and blocks and transactions that have
been rejected by nodes. BLOCKCHAIN.INFO, https://blockchain.info/ (last visited Nov. 1,
2013).
271
maplesyrupghost, Comment to New Feature from Blockchain.info: Taint Analysis,
BITCOINTRADING (Jun. 24, 2012, 10:40 PM), http://www.bitcointrading.com/forum/talk-
bitcoin/new-feature-from-blockchain-info-taint-analysis/ (Basically when someone steals a
large amount of bitcoins, the community dubs these coins as tainted, and as he hands them out
on the internet and spends them, those wallets now have tainted coins in them, although they
are still good bitcoins and the protocol will always accept them[. B]ut some websites like
apparently Mt. Gox blocked the coins that were stolen from them.). See, e.g., Taint Analysis
1dice6GV5Rz2iaifPvX7RMjfhaNPC8SXH, BLOCKCHAIN.INFO, https://blockchain.info/taint/
1dice6GV5Rz2iaifPvX7RMjfhaNPC8SXH (last visited Nov. 1, 2013) (showing the amount of
taint of Bitcoin address 1dice6GV5Rz2iaifPvX7RMjfhaNPC8SXH and explaining that
[t]he more taint the stronger the link that remains to the stolen Bitcoins).
272
FED. BUREAU OF INVESTIGATION, supra note 218.
01/02/2014 11:18:02
273
Id. (citation omitted). As one author puts it, peer-to-peer may be . . . harder to litigate
against. Dan Bricklin, The Cornucopia of the Commons, in PEER-TO-PEER: HARNESSING
cited regulatory problems . . . as [a] major factor[] in the decision [to

cease operations.]274
TradeHills regulatory problems came to light on March 18,
2013, when FinCEN released Guidance on the Application of
FinCENs Regulations to Persons Administering, Exchanging, or Using
Virtual Currencies.275 FinCEN issu[ed] this interpretive guidance to
clarify the applicability of the regulations implementing the [BSA] to
persons creating, obtaining, distributing, exchanging, accepting, or
transmitting virtual currencies.276 The Guidance states that a user who
obtains convertible virtual currency and uses it to purchase real or virtual
goods or services is not [a money services business] under FinCENs
regulations.277 This kind of user is a miner or person who uses Bitcoins
to purchase items.
The Guidance continues:
An administrator or exchanger that (1) accepts and transmits a convertible

virtual currency or (2) buys or sells convertible virtual currency for any reason
is a money transmitter under FinCENs regulations[.] . . . The definition of a
money transmitter does not differentiate between real currencies and
convertible virtual currencies.278
The Guidance specifies that the BSA regulations include brokers and
dealers of e-currencies and e-precious metals; centralized convertible
virtual currencies; and de-centralized virtual currencies.279
Addressing the categorizations in turn, first, brokers and dealers
involved in electronic trading in e-currencies or e-precious metals
should comply with the BSA regulations as set forth by FinCEN in its

Guidance on the Application of the Definition of Money Transmitter to
THE POWER OF DISRUPTIVE TECHNOLOGIES, supra note 52, at 59.

274
Lee, supra note 162.
275
FIN. CRIMES ENFORCEMENT NETWORK, U.S. DEPT OF THE TREASURY, FIN-2013-
G001, GUIDANCE: APPLICATION OF FINCENS REGULATIONS TO PERSONS ADMINISTERING,
EXCHANGING, OR USING VIRTUAL CURRENCIES (2013), available at http://www.fincen.gov/
statutes_regs/guidance/pdf/FIN-2013-G001.pdf [hereinafter GUIDANCE].
276
Id.
277
Id. (emphasis in original).
278
Id. (An exchanger is a person engaged as a business in the exchange of virtual
currency for real currency, funds, or other virtual currency. An administrator is a person
engaged as a business in issuing (putting into circulation) a virtual currency, and who has the
01/02/2014 11:18:02
authority to redeem (to withdraw from circulation) such virtual currency.).

279
GUIDANCE, supra note 275.
Brokers and Dealers in Currency and Other Commodities.280 The recent

Guidance states that if [a] broker or dealer transfers funds between a
customer and a third party that is not part of the [virtual] currency[,] . . .
such transmission of funds is no longer a fundamental element of the
actual transaction necessary to execute the contract for the purchase or
sale of the currency and constitutes money transmission.281 This
scenario likely describes entities such as Mt. Gox that facilitate deals
between buyers and sellers of currencies.
Second, an administrator of a centralized repository that involves
convertible virtual currency will be a money transmitter to the extent
that it allows transfers of value between persons or from one location to
another.282 The Guidance further states that any exchanger that uses its
access to the convertible virtual currency services provided by the
administrator to accept and transmit the convertible virtual currency on
behalf of others, including transfers intended to pay a third party for
virtual goods and services, is also a money transmitter.283 This scenario
likely describes e-wallets. Third, a person that creates units of
convertible virtual currency and sells those units to another person for
real currency or its equivalent is engaged in transmission to another
location and is a money transmitter.284 This scenario likely describes
any user that mines Bitcoins and exchanges them for other currencies.
The Guidance has limited binding precedent and is, at most,
persuasive. In general, the Administrative Procedure Act (APA)
280
Id. (citing FIN. CRIMES ENFORCEMENT NETWORK, U.S. DEPT OF THE TREASURY,
FIN-2008-G008, GUIDANCE: APPLICATION OF THE DEFINITION OF MONEY TRANSMITTER TO

BROKERS AND DEALERS IN CURRENCY AND OTHER COMMODITIES (2008), available at
http://www.fincen.gov/statutes_regs/guidance/pdf/fin-2008-g008.pdf).
281
GUIDANCE, supra note 275 (Examples include, in part, (1) the transfer of funds
between a customer and a third party by permitting a third party to fund a customers account;
(2) the transfer of value from a customers currency or commodity position to the account of
another customer; or (3) the closing out of a customers currency or commodity position, with
a transfer of proceeds to a third party. Since the definition of a money transmitter does not
differentiate between real currencies and convertible virtual currencies, the same rules apply
to brokers and dealers of e-currency and e-precious metals.).
282
Id.
283
Id. The Guidance anticipatorily sets forth objections to its rules. See id. (It might be
argued that the exchanger is entitled to the exemption from the definition of money
transmitter for persons involved in the sale of goods or the provision of services. Under such
an argument, one might assert that the exchanger is merely providing the service of
connecting the user to the administrator and that the transmission of value is integral to this
service. However, this exemption does not apply when the only services being provided are
01/02/2014 11:18:02
money transmission services.).

284
requires notice and comment before an agency, in this case, FinCEN,

may promulgate substantive rules.285 Substantive rules implement
agency policy by providing a tangible framework for interested
parties.286 Although all agency rules complete the details of statutes,
substantive rules go one step further by creating new law . . . [and]
set[ting] out rights and obligations.287
The APA does not require notice and comment for interpretive
rules, unless a separate statute so requires.288 Interpretive rules merely
advise[] the public of a statutes meaning or the manner in which it is to
be applied.289 A substantive rules binding future effect on a persons
rights and obligations contrasts noticeably with an interpretive rules
mere expression of an agencys views concerning the meaning of
applicable statutes and regulations.290
The Guidance issued by FinCEN constitutes, at most, persuasive
authority. FinCEN classifies this Guidance as interpretive and notes
that it explains only how FinCEN characterizes certain activities
involving virtual currencies.291 FinCEN states that it issu[ed] this
guidance under its authority to administer the Bank Secrecy Act,292
citing Treasury Order 180-01.293 FinCEN notes, on its website, that this
285
See Exceptions to Notice and Comment Requirements, 3-15 Admin. Law 15.05
(2013) (citing 5 U.S.C. 553(b)).
286
Exceptions to Notice and Comment Requirements, supra note 285 (An obvious
example of a substantive agency framework would be vehicle emission standards as
promulgated by the EPA under authority of the Clean Air Act, 42 U.S.C. 7521(a)(3)(A)
and 7525(g)(1).(citations omitted)). See Syncor Intl Corp. v. Shalala, 127 F.3d 90, 95 (D.C.
Cir. 1997) (A substantive rule has characteristics of both the policy statement and the

interpretative rule; it is certainly in part an exercise of policy, and it is a rule. But the crucial
distinction between it and the other two techniques is that a substantive rule modifies or adds
to a legal norm based on the agencys own authority. That authority flows from a
congressional delegation to promulgate substantive rules, to engage in supplementary
lawmaking. And, it is because the agency is engaged in lawmaking that the APA requires it to
comply with notice and comment.).
287
Exceptions to Notice and Comment Requirements, supra note 285 (citations omitted).
288
5 U.S.C. 553(b) (2012) (hanging paragraph).
289
Exceptions to Notice and Comment Requirements, supra note 285 (citation omitted).
290
Id. (citations omitted).
291
292
Id.
293
Id. Treasury Order 180-01 states, in relevant part:
[T]he Director of FinCEN is authorized to issue regulations and perform other
actions for the purposes of carrying out the functions, powers, and duties
delegated to the Director . . . . [including the authority to] take all necessary and
01/02/2014 11:18:02
appropriate actions to implement and administer the . . . [BSA] . . . including, but

not limited to, the promulgation and amendment of regulations and the
type of Guidance shall have persuasive precedential effect and, to that

extent, may be relied upon by those financial institutions subject to the
specific provision of 31 CFR Chapter X being interpreted until such
interpretation is superseded, revoked, or amended.294
Arguably, this Guidance could be construed as either substantive or
interpretive. If interpretive, a court need not agree with it, as the
Supreme Court has discussed:
The fair measure of deference to an agency administering its own statute has
been understood to vary with circumstances, and courts have looked to the
degree of the agencys care, its consistency, formality, and relative expertness,
and to the persuasiveness of the agencys position, . . . produc[ing] a spectrum
of judicial responses, from great respect at one end . . . to near indifference at
the other.295
It appears that law enforcement already follows FinCENs

Guidance as authoritative. On May 14, 2013, the Department of
Homeland Security seized a bank account owned by a company
transacting with Dwolla and Mt. Gox.296 The Department claimed that it
had probable cause to believe that the contents of the account were
involved in transactions and attempted transactions in violation of 18
U.S.C. section 1960.297 The supporting affidavit specifically alleged
that the company was engaged in a money transmitting business but
[was] not registered as required with FinCEN.298
Law enforcement entities from both California and New York have
begun inquiring into whether Bitcoin-related businesses have registered

assessment of penalties . . . .
Treas. Order 180-01 (March 24, 2003), available at http://www.treasury.gov/about/role-of-
treasury/orders-directives/Pages/to180-01.aspx.
294
FIN. CRIMES ENFORCEMENT NETWORK, U.S. DEPT OF THE TREASURY, REGULATORY
RELEASES (2002), available at http://www.fincen.gov/news_room/rp/rulings/pdf/
regrelease.pdf. FinCENs declaration of the nature of the Guidance is not controlling. See
Exceptions to Notice and Comment Requirements, supra note 285 (In addition to the
nondeterminative labels attached by the agency, several other factors help to differentiate
substantive and interpretative rules. A rule is usually substantive where a real controversy
exists over the policy it embodies. On the other hand, a rule is generally interpretative if it
does not contain proscriptions or penalties. In general, the agencys past treatment of a rule
will often indicate its nature.).
295
United States v. Mead Corp., 533 U.S. 218, 228 (2001) (citations omitted).
296
Affidavit in Support of Seizure Warrant, In re The Contents of one Dwolla account,
No. 13-MJ-01162 (D. Md. May 14, 2013).
01/02/2014 11:18:02
297
Id. at 1.
298
Id. at 3 (emphasis added).
as money services businesses, federally and locally.299 An executive of

Coinsetter notes that these inquiries are an opportunity for [Bitcoin-
related] companies to open up a much needed dialogue with regulators
and show them that they are working to legitimize Bitcoin.300 In August
2013, Congress began an inquiry into the Bitcoin system after the Senate
Homeland Security and Government Affairs Committee sent letters to
several agencies requesting that they disclose their virtual currency
policies, how they developed them, how agencies are coordinating and
finally what they plan to do going forward.301
C. Current Compliance with the BSA by Bitcoin Websites
Many trustworthy Bitcoin exchanges302 operating or organized

primarily in the United States have voluntarily undertaken to comply
with the BSA reporting requirements. This was true even before FinCEN
issued its Guidance; perhaps the exchanges agreed that they fell within
the scope of the BSA, anticipated further regulation by the federal
authorities, or even contemplated the criminal sanctions of 18 U.S.C.
1960 for failure to comply with the BSAs reporting requirements, as
299
See Jon Matonis, Bitcoin Foundation Receives Cease and Desist Order from
California, FORBES (June 23, 12, 11:11 AM), http://www.forbes.com/sites/
jonmatonis/2013/06/23/bitcoin-foundation-receives-cease-and-desist-order-from-california/
(embedding a cease and desist letter from the California Department of Financial Institutions
to the Bitcoin Foundation with a warning to CEASE AND DESIST FROM CONDUCTING
THE BUSINESS OF MONEY TRANSMISSION IN THIS STATE and citing the BSA and
Californias version of the statute). The New York State Department of Financial Services has

issued subpoenas to roughly two dozen companies associated with Bitcoin as part of a wide-
ranging inquiry into the business practices[,] . . . including antimoney-laundering programs,
consumer-protection measures and investment strategies. Robin Sidel, New York Opens
Probe of Bitcoin: Banking Regulator Sends Subpoenas to Dozens of Companies With Ties to
the Virtual Currency, WALL ST. J., Aug. 12, 2013, at C3, available at
http://online.wsj.com/article/SB10001424127887323585604579006880143449754.html. See
Benjamin M. Lawsky, Notice of Inquiry on Virtual Currencies, N.Y. STATE DEPT OF FIN.
SERV., August 12, 2013, available at http://dfs.ny.gov/about/press2013/memo1308121.pdf
(discussing New Yorks goals of bring[ing] virtual currencies out of the darkness and into the
light of day through enhanced transparency).
300
Jonathan Millet, Coinbase Inc, BitInstant and Coinsetter Receive Subpoenas from The
Department of Financial Services, FOREXMINUTE (Aug. 12, 2013, 10:00 AM),
http://www.forexminute.com/bitcoin/coinbase-inc-bitinstant-and-coinsetter-receive-
subpoenas-from-the-department-of-financial-services-9685.
301
Zachary Warmbrodt, Congress Starts Looking Into Bitcoin, POLITICO (Aug. 13, 2013,
12:00 AM), http://www.politico.com/story/2013/08/congress-starts-looking-into-bitcoin-
01/02/2014 11:18:02
95464.html.
302
For a discussion of the importance of trust, see Part II(C), supra.
the E-Gold and Liberty Reserve administrators did. BitInstant, a

company that provided, among other services, Bitcoin debit cards,303
noted in its Statement of BitInstant on Preventing Money Laundering
and Illegal Activity through its Services and in the Bitcoin Network:
Out of an abundance of caution, BitInstant has registered itself . . . with the US

Department of the Treasury Financial Crimes Enforcement Network
(FinCEN) under registration number 31000005031107. Notwithstanding
such registration, BitInstant believes it offers payment processing services and
does not believe itself to be a money services business (MSB) under the
Bank Secrecy Act or state banking laws applicable to BitInstant.304
Some big-name exchanges in foreign jurisdictions also voluntarily

undertake to comply with existing regulations.305 Some exchanges,
303
Brian Patrick Eha, Get Ready for a Bitcoin Debit Card, CNNMONEY (Aug. 22, 2012,
4:36 PM), http://money.cnn.com/2012/08/22/technology/startups/bitcoin-debit-
card/index.html.
304
Anti-Money Laundering Policy Statement & Program Procedures for BitInstant, LLC,
BITINSTANT, at 2, available at https://www.bitinstant.com/static/aml.pdf. BitInstant requires:
In order for you to make a Transaction payment, we need from you your: (i) first
name; (ii) last name; (iii) mobile telephone number, together with an SMS
confirmation of the same; and (iv) the last four digits of your social security
number. If you wish to make a Transaction that is in excess of $1,000.00 or
Transactions that, in a single day, exceed $1,000.00 in the aggregate, then we will
also need from you: (v) a copy of governmentissued photo ID; and (iv) a copy of a
utility bill. The purpose for collecting this information is to maintain BitInstant
compliance with applicable laws that require BitInstant to verify that its Services
are not being used for illegal purposes to, for example, facilitate in money
laundering or the funding of terrorism.

Terms of Service, BITINSTANT, https://www.bitinstant.com/tos (on file with the author and
available as of May 31, 2013 at the Wayback Machine, supra note 2). It would appear that the
$1,000 limit may refer to the threshold amount of a currency exchanger. See 31 C.F.R.
1022.410 (2013). BitInstant also filed Suspicious Activity Reports to FinCEN. Anti-Money
Laundering Policy Statement & Program Procedures for BitInstant, LLC, supra, at 17. There
can be no doubt that the abundance of caution BitInstant has demonstrated by registering as
a money transmitting business refers to the possibility of the criminal sanctions as set forth
in 18 U.S.C. 1960 (2006). As of November 10, 2013, BitInstant is no longer offering
exchange services. See BITINSTANT, supra note 9.
But see Payment Policies, AMAGI METALS, http://www.amagimetals.com/payment
(last visited Nov. 1, 2013). Amagi Metals, a company based in Colorado that sells precious
metals, has transaction limits for all payment types, including PayPal, except for those
transactions in which metals are purchased with Bitcoins. Id.
305
See Bailey Reutzel, French Companys Move Gives Regulators a Window on Bitcoin,
PAYMENTSSOURCE (Dec. 11, 2012, 4:00 AM), http://www.paymentssource.com/news/french-
companys-move-gives-regulators-a-window-on-bitcoin-3012598-1.html (Bitcoin-Central, a
01/02/2014 11:18:02
French digital currency exchange that handles the largely unregulated Bitcoin currency, now
operates under French regulation after parent-company Paymium partnered with payment
despite registering as money services businesses with FinCEN,306 have

closed down for one reason or another. BitFloor, having rebounded in
the market after a major theft307 to become the fourth largest Bitcoin
exchange in the world, closed down in April 2013, noting that due to
circumstances outside of our control . . . our US bank account is
scheduled to be closed.308 Some banks have refused to do business with
Bitcoin-related businesses, distrustful of money services businesses in a
services provider Aqoba. . . . [Paymium] claims it operates the first Bitcoin exchange
conforming to European regulations. Aqoba handles payments for merchants through a
relationship with the French bank Credit Mutuel Arka. The bank . . . will now carry the
burden of capital requirements and provide a guarantee for deposits in fiat currency, says
Pierre Noizat, co-founder of Paymium.). The regulations notably include Know Your
Customer rules on any transaction over 250 euro. Id.
Exchange giant Mt. Gox also imposes a transaction limit, though the regulatory
influence on this decision is not explicitly stated. AML Account Statuses, MT.GOX (May 31,
2013, 5:13 PM), https://www.mtgox.com/ (click FAQ, then AML Account Statuses)
(ATTENTION: In order to deposit or withdraw[,] your account will have to be verified by
our AML team. Verified accounts have the following withdrawal limits: . . . Daily withdrawal
limit (24hrs): 10,000 USD[;] . . . Documents required for verification: A valid copy of a
government issued photo ID and Proof of residence (less than 6 months old) this can be a
utility or phone bill. (emphasis in original)). It appears that Mt. Gox is complying with the
recording requirements of 31 C.F.R. 1022.410 (2013) as a currency exchanger.
Note that Mt. Gox changed this policy after the governments seizure of Dwollas
bank account on May 14, 2013, with which Mt. Gox frequently transacted. Prior to the
seizure, Mt. Gox had a seemingly compliant policy on transaction limits. See AML Account
Statuses, MT.GOX (Feb. 1, 2012, 12:01 PM), https://www.mtgox.com/ (on file with the author
and available as of May 1, 2013 at the Wayback Machine, supra note 2 (click FAQ, then
AML Account Statuses)) (No verification needed[:] . . . Daily withdrawal limit (24hrs):

1,000 USD[.] Verified Status[:] . . . Daily withdrawal limit (24hrs): 10,000 USD[.]); 31
C.F.R. 1022.410(b)(3) (2013) (requiring verification of dealers in foreign exchange for
transactions in excess of $1,000); 31 C.F.R. 1010.330(a) (2013) (requiring verification for
transactions in excess of $10,000).
Nevertheless, in response to requests to convert one currency in a users e-wallet into
another currency in another wallet, Mt. Gox responds: No, it is not possible to convert EUR
to USD directly from one wallet to another as Mt. Gox is not a currency exchange. Multi-
Currency Trading, MT.GOX (Dec. 28, 2011, 11:37 AM), https://support.mtgox.com/
entries/20800336-Multi-Currency-Trading.
306
For a current list of businesses registered as money services businesses, see MSB
Registrant Search Web Page, FINCEN, http://www.fincen.gov/financial_institutions/
msb/msbstateselector.html, and click the hyperlink associated with View/Download all
currently registered MSBs in Excel. The list, as of August 15, 2013, includes CoinLab, Mt.
Gox, Exchange Bitcoins, Inc., Bitfloor, BitInstant, Bit-Pay, BitBox, BitQuick, and more than
a bit more businesses that may exchange Bitcoins.
307
See Lee, supra note 175; Bitfloor Hacked, supra note 199.
01/02/2014 11:18:02
308
Vitalik Buterin, BitFloor Shuts Down, BITCOIN MAGAZINE (Apr. 19, 2013),
http://bitcoinmagazine.com/bitfloor-shuts-down/.
new digital currency.309

One blogger, posting a Bitcoin Primer for Legislators, notes that
regulation occurs, but not because of laws currently in place: Bitcoin is
already well regulated. Not by the whims of the likes of you
[legislators], central banks, or payment processors, but by math and
consensus of all equal participants in the globally accessible system. If
anyone doesnt play by the programmed rules, they are trivially [sic]
spot[t]ed and easily ignored.310 This behavior of ignoring untrustworthy
entities likely references the relational sanctions that can be compelling
to participants in a close-knit economy,311 such as boycotting
offenders.312
Exchanges that self-regulate may fear the close-knit community
backlash that Bitcoin users have demonstrated in the past. For example,
upon Mt. Goxs security breach and rumors of other security
weaknesses, dozens of irate Bitcoin users pledged to stop using the
exchange, arguing that the sites administrators lacked the technical
sophistication to build a secure and reliable currency exchange.313
309
See Bailey Reutzel & Marc Hochstein, Fickleness of Banking Relationships Vexes
Bitcoin Startups, PAYMENTSSOURCE (May 20, 2013, 5:55 AM),
http://www.paymentssource.com/news/fickleness-of-banking-relationships-vexes-bitcoin-
startups-3014169-1.html. The article notes that [t]he question is whether the bank feels
comfortable with your regulatory compliance. Id. (citation omitted). Banks looking to start
relationships with Bitcoin businesses want to see top tier venture capitalist backers and
nationally recognized lawyers. Id.
310
Bitcoin Primer for Legislators, COINBITS (Oct. 25, 2012),
http://coinbits.com/2012/10/25/bitcoin-primer-for-legislators/. One note explains that

regulation of [peer-to-peer] networks by [computer] codethe implementation and
enforcement of rules of behavior through the instructions embedded in the software and
hardware that define a networks architecturemay be more desirable and effective than
regulation by law, even though it is not without cost. John Alan Farmer, Note, The Specter of
Crypto-Anarchy: Regulating Anonymity-Protecting Peer-to-Peer Networks, 72 FORDHAM L.
REV. 725, 728 (2003).
311
See generally John McMillan & Christopher Woodruff, Private Order Under
Dysfunctional Public Order, 98 MICH. L. REV. 2421, 2423 (2000) (In the right
circumstances, then, private order can be achieved spontaneously.). McMillan & Woodruff
argue that [i]n large, anonymous communities, however, where people can enter and leave
and where alternative trading partners are readily accessible, spontaneous private order may
not be feasible. Anonymity strips reputational constraints of their power; more is needed than
social norms or self-enforcing dealings. Id. Relational contracting may still develop
spontaneously, however, if community ties are strong enough. Id. at 2432.
312
Id. at 2457.
313
Timothy B. Lee, Bitcoin Prices Plummet on Hacked Exchange, ARSTECHNICA (Jun.
01/02/2014 11:18:02
19, 2011, 5:34 PM), http://arstechnica.com/tech-policy/2011/06/bitcoin-price-plummets-on-

compromised-exchange/.
Users commonly write posts expressing fear, uncertainty, and doubt

(FUD)314 posts in Bitcoin forums, calling into question the
trustworthiness of exchanges. In one forum, a user began a FUD thread
about MPEx, an exchange website: It is my duty to post here. This
exchange is run by a dubious Romanian character, who is a content
stealer, spammer, [and] wannabe porn website owner.315 When
Bitcoinica was robbed, a prominent Bitcoin developer posted in a forum:
Im starting to regret becoming embroiled with such a shoddy and
badly secured site as Bitcoinica.316 Even Bitcoin Magazine passed
judgment on the founder of new Bitcoin exchange, BitFinex, after
Bitcoinicas collapse.317 These kinds of relational sanctions alone might
314
FUD: Fear, Uncertainty and Doubt, KENROCKWELL, http://www.kenrockwell.com/
business/fud.htm (last visited Sept. 2, 2013) (suggest[ing] something bad about a
competitor[s] product as part of a FUD campaign to delay potential customers from buying
the competitors product until theirs hits the market).
315
ciuciu, Comment to Heres Where I Spew My Accusations Against MPOE. All Are
Welcome., BITCOIN FORUM (Aug. 21, 2012, 9:30 PM), https://bitcointalk.org/
index.php?topic=102333.0. Defending his position later in the thread, ciuciu writes:
Another fact[:] compulsive liar and failed businessman. Id. Other users appeared to take
these allegations seriously, looking for contrary positions and creating an almost informal
judicial determination of MPExs trustworthiness. See, e.g., nimda, Comment to Re: Heres
Where I Spew my Accusations Against MPOE. All Are Welcome. Post By Ciuciu, BITCOIN
FORUM (Aug. 21, 2012, 10:39 PM), https://bitcointalk.org/index.php?topic=102333.0 (Thank
you for your information ciuciu; . . . Now that we have a good argument on this side, Im
waiting to hear some arguments from the pro-MPEX side.).
316
genjix, Comment to Bitcoinica MtGox Account Compromised, BITCOIN FORUM (July
13, 2012, 9:00 AM), https://bitcointalk.org/index.php?topic=93074.0.
317
See Vitalik Buterin, Bitfinex: Bitcoinica Rises From The Grave, BITCOIN MAGAZINE
(Nov. 22, 2012), http://bitcoinmagazine.com/bitfinex-bitcoinica-rises-from-the-grave/ ([He]

strongly support[ed] the . . . Bitcoin Ponzi scheme operator Pirateat40 in August, stating [that]
now that Pirateat40 closed down his operatations [sic] thanks to all the fud that was going on
and growing on the forum, I expect everyone that spreads this fud, accused[,] and insulted
Pirate . . . to apologize.).
For more information on the Pirateat40 Ponzi scheme, see Nathaniel Mott, Bitcoin:
How a Virtual Currency Became Real with a $5.6M Fraud, PANDODAILY (Aug 31. 2012),
http://pandodaily.com/2012/08/31/bitcoin-how-a-virtual-currency-became-real-with-a-5-6m-
fraud/ ([Pireateat40] disappeared with $5.6 million of these nave investors Bitcoins. . . .
Because Bitcoin is an open currency and there is no central agency monitoring its usage,
there is no official way to track down [Pirateat40] and demand the money back. Some of his
victims have turned to Internet sleuthing to determine who he might be. But really, who are
they going to call?). The Securities and Exchange Commission has since charged Trendon T.
Shavers with running the Bitcoin Savings and Trust Ponzi scheme. See Complaint, Sec. &
Exch. Commn v. Trendon T. Shavers & Bitcoin Sav. & Trust, No. 4:13-cv-00416 (E.D. Tex.
July 23, 2013) ([Bitcoin Savings and Trust] was a sham and a Ponzi scheme, and Shavers
misappropriated BTCST investors BTC, among other things, for his personal use.). The
01/02/2014 11:18:02
Complaint alleges violations of various provisions of the Securities Act, including violations
of 15 U.S.C. 77e(a), 77e(c), 77q(a), 78j(b) and 17 C.F.R. 240.10b-5. Id.
not be enough to encourage Bitcoin exchanges to stay in line.318

In at least one case, however, the relational sanctions spawned a
cooperative effort to facilitate the return of funds from Bitfloor, which
shut down after its bank closed its account, despite having registered as a
money services business.319 After Bitfloors closure, one frustrated user
waiting for Bitfloor to return his or her funds began a concerted effort
with other frustrated users to put pressure on the administrators of
Bitfloor.320 The user, AudenX, helped coordinate with Bitfloors legal
counsel, other banks, and other affected users to facilitate the refund of
deposits on the website, sending e-mail updates each week with progress
reports to interested parties.321
While Bitcoins undoubtedly may be used for legitimate
318
See Secure Trading, BITCOIN WIKI, https://en.bitcoin.it/wiki/Secure_Trading (last
modified Oct. 24, 2012, 4:54 PM) (At this time, there is little in the way of law
enforcement. . . . Bitcoin users are[,] for the most part, on their own. . . . In lieu of legal action
and lack of community trust outside the Bitcoin system itself, ones reputation has become the
focus for building trust relationships with others in the community. Traders will take very
little risk with new users who have not proven themselves . . . .). One suggested method for
verifying the trustworthiness of a user is to [s]earch the Bitcoin Forum for the username of
the person that you are trading with. Check if the user has provided constructive and useful
advice to other parties. And, most importantly, check for any claims that the user has
scammed. Id.
319
See MSB Registrant, supra note 306.
320
AudenX, Update for Bifloor Users Awaiting Refunds, TUMBLR (May 6, 2013),
http://audenx.tumblr.com/post/49875576808/update-for-bitfloor-users-awaiting-usd-refunds
(A lawyer I spoke to, who is among the affected Bitfloor users, said it is reasonable for us to
consider [Bitfloors legal counsels] statement to be credible, . . . . [but will still] double-check

his credibility . . . . A lawsuit would only be productive if Bitfloor cannot otherwise be
compelled to honor its obligations to us. . . . [M]y opinion is that our best bet is to extend our
patience a bit longer but remain vigilant.).
321
All of the e-mail posts have been compiled in the users Tumblr account. See AudenX,
TUMBLR, http://audenx.tumblr.com/ (last visited Nov. 1, 2013). The refunds all required
identity document reviews. See AudenX, 25-July-2013 Bitfloor Update, TUMBLR (July 25,
2013), http://audenx.tumblr.com/post/56433460142/25-july-2013-bitfloor-update.
AudenXs actions in facilitating the refund of deposits to numerous users, while
laudable, may very well created a fiduciary or confidential relationship. See 37 AM. JUR. 2D
FRAUD & DECEIT 37 (2013) (A fiduciary relationship is one founded on trust or confidence
reposed by one person in the integrity and fidelity of another and which also necessarily
involves an undertaking in which a duty is created in one person to act primarily for anothers
benefit in matters connected with such undertaking. A confidential relationship exists between
two persons if one has gained the confidence of the other and purports to act or advise with
the others interest in mind. The party in whom the trust and confidence are reposed, in a
confidential relationship, must act with scrupulous fairness and good faith in his or her
01/02/2014 11:18:02
dealings with the other and refrain from using his or her position to the others detriment and
his or her own advantage. (citations omitted)).
transactions,322 one cannot ignore the threat of illegitimate transactions

contemplated by the FBI in its report. MPEx, an exchange where stocks,
bonds, options, and other securities can be traded,323 taunts:
In case the domain is confiscated or otherwise lost MPEx will move to a

different domain, in a different jurisdiction. Should the same happen again,
MPEx would move to what will at the time be a solid alternative for a free
Internet, be it the TOR network, namecoin or some equivalent DNS or any
comparable solution. No government will ever be able to stop the Internet, in
general. Were prepared to show this in the particular.
Should the systems be confiscated or otherwise lost[,] the service will failover
to different systems, possibly on bulletproof hosting if need be. If sufficient
pressure is put on this side MPEx will be recoded as a p2p system.324
Not only do some of these sites blatantly advertise their disregard

for governmental authority, some seem not to care about whether their
clients funds are stolen: [b]y definition the rightful owner of any coins
is he who can send them. If you take issue with that, please stick to
fiat. You are not ready for Bitcoin yet.325 In situations like these, where
some exchanges do not intend to comply with any laws or even protect
their customers against attacks, further regulation might protect innocent
consumers against security attacks as well as protect against illicit use of
the Bitcoin system contemplated by the FBI.326
322
See, e.g., OLeary, supra note 136 (Bitcoin is finding a niche among ordinary people
for everyday, legitimate transactions. One British businessman in China said he regularly used
it to deal with businesses in Asia, Europe[,] and the Americas because of local restrictions on

sending currency to foreign companies.).
323
MPEx, BITCOIN WIKI, https://en.bitcoin.it/wiki/MPEx (last modified Dec. 23, 2012,
11:22 AM).
324
MPEX, http://mpex.co/faq.html (last updated Feb. 6, 2013). Others, likely fearing
relational sanctions, try their hardest to placate users. See, e.g., Adrianne Jeffries, Bitcoin
Exchange TradeHill Suspends Trading, BETABEAT (Feb. 13, 2012, 5:57 PM),
http://betabeat.com/2012/02/bitcoin-exchange-tradehill-suspends-trading/ (Everyone at
TradeHill has been working without pay for several months after one of our payment
processors removed over $100,000 dollars from our account without notice. We decided to
cover this loss for now instead of passing it on to our customers. . . .).
325
MPEX, supra note 324 (answering the questions What will you do about stolen
coins? How will you help the rightful owner?).
326
Would increasing regulation pose too much of an obstacle to law-abiding activity? See
generally William E. Kovacic, Law, Economics, and the Reinvention of Public
Administration: Using Relational Agreements to Reduce the Cost of Procurement Regulation
and Other Forms of Government Intervention in the Economy, 50 ADMIN. L. REV. 141, 144
01/02/2014 11:18:02
49 (1998). Perhaps the goal of protecting consumers from these online businesses has not yet
reached the critical mass necessary to become a prescient goal of the regulating government.
As United States regulations become more stringent and

prosecutions more prevalent for digital currency providers and
exchangers, it is inevitable that these entities will move, in whole or in
part, to locations abroad with less regulation.327 In fact, some websites
that deal in Bitcoins have made it abundantly clear that they try to stay
outside the reach of the law.328 Bitcoinfog.com, the mixing service that
makes money laundering more than a mere possibility, explains:
For security purposes, [our] service operates through the Tor network only.
You can be sure your data is processed securely and only by our server if you
use our .onion address. On the other hand, this also makes us feel more secure,
knowing that we will never be found and dealt with by proper authorities.
(Even if Tor network would be compromised, we have taken all the necessary
precautions to still stay hidden.) This is better for you as well; while a clearnet
service may swear on not cooperating with authorities in case they show up at
their homes, we can say with high certainty that not only will we not cooperate
with any authorities, the authorities will not actually be able to show up at our
doorstep, because finding a tor doorstep has proven difficult.329
See Joseph P. Tomain & Sidney A. Shapiro, Analyzing Government Regulation, 49 ADMIN. L.
REV. 377, 38285, 40203 (1997) (discussing the purpose of government regulation and the
attempts by scholars to represent the real reasons for regulation). How or when will the critical
mass be reached? []Maybe virtual currencies will be so convenient that they will pose a
threat because of their ease of use. Virtual currencies could have a negative impact on the
reputation of central banks if their use grows considerably . . . . Max Raskin, Bitcoins
Gains May Fuel Central Bank Concerns: Chart of the Day, BLOOMBERG (Jan. 27, 2013, 7:00
PM), http://www.bloomberg.com/news/2013-01-28/bitcoin-s-gains-may-fuel-central-bank-
concerns-chart-of-the-day.html (citing Virtual Currency Schemes, supra note 262).

Regardless of why the government has not more explicitly regulated Bitcoins, one
think-tank argues that [o]ne potentially effective alternative to externally imposed regulation
[of digital currencies and online payment systems] that is likely to gain support from the
financial community is collaborative self-regulation with input from the government. John
Villasenor, Cody Monk, & Christopher Bronk, Shadowy Figures: Tracking Illicit Financial
Transactions in the Murky World of Digital Currencies, Peer-to-Peer Networks, and Mobile
Device Payments, CTR. TECH. INNOVATION BROOKINGS 15 (2011), available at
http://www.bakerinstitute.org/publications/ITP-pub-FinancialTransactions-082911.pdf.
327
William Hett, Digital Currencies and the Financing of Terrorism, 15 RICH. J.L. &
TECH. 1, 32 (2008) (citation omitted).
328
Websites like these come as no surprise. See generally Cole Stryker, Navigating The
Deep, Dark Web, TECHDIRT (Oct. 30, 2012, 2:56 PM), http://www.techdirt.com/
articles/20121030/01363220883/navigating-deep-dark-web.shtml ([T]here are parts of the
deep Web, accessible only with the use of certain anonymizing software, where baddies
sometimes hang out. The deep Web is rife with readily available child pornography, terrorist
rhetoric, drug and sex tradeall manner of taboo and hateful communication.).
01/02/2014 11:18:02
329
BITCOIN FOG, supra note 267. See supra notes 14243 and accompanying text. The
clearnet is the unhidden internet, that is, a regular website that has not been obfuscated by the
Libertariannews.org, upon news of Tradehills closure, boasted that

people [can] purchase Bitcoins without any US Dollar exchange in
operation at all. People could simply buy them on message boards using
money packs, paypal, cash, etc. . . . . There are dozens of ways to get
Bitcoins that dont involve going through a major exchange.330 The
same recourse exists for traditional cash money launderers.331 In that
respect, the BSAs reporting requirements do little to stifle the ability to
launder money by using Bitcoins.
Exchanges that are already complying with the BSA have nothing
to fear if a court confirms the BSAs applicability to Bitcoin exchanges.
Mt. Gox, the worlds leading Bitcoin exchange that may already comply
with various provisions of the BSA,332 announced its partnership with
Silicon Valley startup CoinLab to handle Mt. Goxs American
Tor service. See TorJump, INSHAME (July 7, 2011), http://www.inshame.com/

2011/07/torjump.
After the Silk Road takedown, Tor posted an update to assuage users worried that they
might no longer be anonymous:
[W]eve been watching carefully to try to learn if there are any flaws with Tor that
we need to correct. So far, nothing about this case makes us think that there are new
ways to compromise Tor . . . . The FBI says that their suspect made mistakes in
operational security, and was found through actual detective work. Remember: Tor
does not anonymize individuals when they use their legal name on a public forum,
use a VPN with logs that are subject to a subpoena, or provide personal information
to other services.
Arma, Tor and the Silk Road Takedown, TORPROJECT (Oct. 2, 2013),
https://blog.torproject.org/blog/tor-and-silk-road-takedown.
330
michaelsuede, Major Banks and Credit Cards Freaking Out Over Bitcoin Shut

Down TradeHill Exchange, LIBERTARIAN NEWS (Feb. 13, 2012),
http://www.libertariannews.org/2012/02/13/major-banks-and-credit-cards-freaking-out-over-
bitcoin-shut-down-tradehill-exchange/. In a flourish of melodrama, the post continues: While
it is unfortunate that TradeHill was looted by fascist thugs and forced to shut down by
criminal banking enterprises, at least we can say that they are clearly scared of what Bitcoin
represents. Id.
331
See Mariano-Florentino Cullar, The Tenuous Relationship Between the Fight Against
Money Laundering and the Disruption of Criminal Finance, 93 J. CRIM. L. & CRIMINOLOGY
311, 44041 (2003) (So if the fight against money laundering has blind spots, what exactly
are they? The answer is that . . . the system produces perhaps too much of a certain kind of
enforcementagainst people already detected of committing predicate crimes and against
some people who leave a paper trail when handling criminally-derived physical
currency . . . .). Resorting to message boards to send Bitcoins instead of sending them
through well-known exchanges is similar to the more sophisticated techniques used by third-
party launderers, who are repeat players in the nebulous underground world of criminal
financing, [and] are more likely to evade detection, id. at 441, by not laundering funds
01/02/2014 11:18:02
through regulated, well-known financial institutions.

332
See supra note 305.
operations to make it as easy as possible for American consumers to

exchange their dollars for Bitcoins.333 On announcing this partnership,
arstechnica.com noted:
Perhaps the most important thing about the CoinLab announcement, though, is
the added credibility CoinLabs US location will give it with US consumers.
By moving its American operations to the United States, Mt. Gox is sending a
signal that it believes it is complying with US law. And placing the exchanges
funds within US jurisdiction will make it harder for the firm to disappear with
customers cash.334
One author suggests, however, that the reporting requirements of

the BSA may not be effective to actually prevent or prosecute money
laundering perpetrated with Bitcoins:
At a fundamental level, can the [Suspicious Activity Report (SAR)]

framework be effective when only the general risks associated with a product
or service are understood? Simply put, red flags applicable to BTCs are not yet
known (or sufficiently well understood) so as to allow for effective suspicion-
based reporting, even if such obligations are imposed on BTC exchange
providers. To wit, how would one know what a suspicious BTC transfer would
look like?
....
Nonetheless, it is clear that there are difficulties in imposing a SAR
framework on a product that is not understood and for which no base line has
emerged due to the novelty of that payment technology. The reliance by the
SAR framework on atypical customer behavior or product use is of little use in
the face of a genuinely novel payment technology.335
According to that author, even if a person did not use the various

333
Timothy B. Lee, In Bid for Credibility, Largest Bitcoin Exchange Moves to Silicon
Valley, ARSTECHNICA (Feb. 27, 2013, 5:20 PM), http://arstechnica.com/tech-
policy/2013/02/in-bid-for-credibility-largest-bitcoin-exchange-moves-to-silicon-valley/.
334
Id. One forum user discussing the news of the partnership predicted: Future news
article: US Government seizes $100 million from CoinLabs bank account. Morblias,
Comment to US and Canadian Users No Longer Allowed to Use MtGox Directly?, BITCOIN
FORUM (Feb. 27, 2013, 10:22 PM), https://bitcointalk.org/index.php?topic=147439.0. Another
user warned: [I] wonder how many people will be filing amended tax returns as a result [of
this business deal]. Koin, Comment to Re: US and Canadian Users No Longer Allowed to
Use MtGox Directly?, BITCOIN FORUM (Feb. 27, 2013, 10:55 PM),
https://bitcointalk.org/index.php?topic=147439.0. The deal between Mt. Gox and CoinLab
ended in a lawsuit. See Complaint, CoinLab, Inc. v. Mt. Gox, No. 13-CV-00777 (W.D. Wash.
May 2, 2013).
335
Robert Stokes, Anti-Money Laundering Regulation and Emerging Payment
01/02/2014 11:18:02
Technologies, 32 No. 5 BANKING & FIN. SERVS. POLY REP. 1, 56 (2013).

mixing services or Tor to launder money, the BSA would be

ineffective to flag illegal activity.
Ultimately, exchanges based in the United Statesat least those
exchanges well-trusted by the Bitcoin communitydo not necessarily
pose the types of problems contemplated by the FBI such as money
laundering and other illegal activities, even though the BSAs
requirements do not necessarily lead to detection of all criminal activity.
Any new regulations aside from the BSA would not pose more of a
regulatory burden than already exists; the well-trusted exchanges
generally verify the identities of their users and take accountability for
their actions.336 To the extent an illicit user would not care about trust,
however, the FBIs concerns337 will be justifiable, as these users will
likely use the blatantly criminal exchanges.338 The Liberty Reserve
336
See Beyond Silk Road: Potential Risks, Threats, and Promises of Virtual Currencies:
Hearing Before the S. Comm. on Homeland Sec. & Govt Affairs, 113th Cong. (2013),
available at http://www.hsgac.senate.gov/download/?id=e92d0cf1-9df0-44d9-b25a-
d734547c0c30, at 10 ([B]eing a good corporate citizen and complying with regulatory
responsibilities is good for a companys bottom line. Every financial institution needs to be
concerned about its reputation and show that it is operating with transparency and integrity
within the bounds of the law. Legitimate customers will be drawn to a virtual currency or
administrator or exchanger where they know their money is safe and where they know the
company has a reputation for integrity.) (statement of Jennifer Shasky Calvery, Director, Fin.
Crimes Enforcement Network).
337
See NATL DRUG INTELLIGENCE CTR, U.S. DEPT OF JUSTICE, PRODUCT NO. 2008-
R0709-003, MONEY LAUNDERING IN DIGITAL CURRENCIES 1 (2008), available at
http://www.justice.gov/archive/ndic/pubs28/28675/28675p.pdf (Digital currencies provide an
ideal money laundering instrument because they facilitate international payments without the
transmittal services of traditional financial institutions.). Cf. MEIKLEJOHN, supra note 65, at

2 ([A]n agency with subpoena power would be well placed to identify who is paying money
to whom[,] . . . . ultimately mak[ing] Bitcoin unattractive today for high-volume illicit use
such as money laundering.).
338
Interesting issues may arise in connection to prosecutions of criminal activity
involving Bitcoins. For example, seizure of Bitcoins by the government may, by necessity,
involve the governments obtaining both the public and private keys associated with an
account. See supra notes 5660 and accompanying text (discussing private keys). If a user did
not store his or her private key somewhere accessible, would the government be able to
compel this user, who has memorized the private key, to divulge it in order to seize the
Bitcoins? See Brainwallet, supra note 151. Could this user rightly refuse to divulge the key,
citing to his or her rights against self-incrimination under the Fifth Amendment? Cf. Timothy
B. Lee, Fifth Amendment Shields Child Porn Suspect from Decrypting Hard Drives,
ARSTECHNICA (Apr. 24, 2013, 5:05 PM), http://arstechnica.com/tech-policy/2013/04/fifth-
amendment-shields-child-porn-suspect-from-decrypting-hard-drives/ (discussing the argument
that requiring a criminal suspect to decrypt the contents of hard drives suspected to contain
child pornography may violate the Fifth Amendment).
Bitcoin enthusiasts eagerly monitored whether the FBI had actually seized Silk Road-
01/02/2014 11:18:02
related Bitcoins upon Silk Roads closure. See Andy Greenberg, FBI Says Its Seized $28.5
indictment and E-Gold convictions339 eerily foreshadow the BSAs

effect on digital currencies; users of the Liberty Reserve digital currency
were overwhelmingly criminal in nature . . . . [including] peddlers of
various types of online Ponzi and get-rich-quick schemes; computer
hackers for hire; unregulated gambling enterprises; and underground
drug-dealing websites.340 All of these types of users exist within the
Bitcoin ecosystem.341 The BSA regulates Bitcoin exchanges, and
regulation of the exchanges is within the clear reach of the government
to prevent money laundering.
The BSA may not, however, sufficiently effect the goals of
preventing this criminal activity, given the mixing services and Tor
network that enable anonymity.342 Future regulation should target the
mixing services and Tor, perhaps by outright prohibition;343 however,
resorting to prohibition would imply that there is no legitimate reason
for obfuscating the source of funds or ones IP address. Another
weakness in the regulatory scheme may be allowing people to create
value and trade it without indicating the source of the value; regulations
requiring registration of miners would target those criminals that do not
interact with BSA-regulated entities. Right now, however, the
weaknesses inherent in the BSA scheme and the tools that subvert the
BSAs purpose allow the use of Bitcoins to further criminal activity.
Million in Bitcoins from Ross Ulbricht, Alleged Owner of Silk Road, FORBES (Oct. 25, 2013,
12:50 PM), http://www.forbes.com/sites/andygreenberg/2013/10/25/fbi-says-its-seized-20-
million-in-bitcoins-from-ross-ulbricht-alleged-owner-of-silk-road/; Daniel Cawrey, FBI
Proves Seizing Bitcoins Isnt the Same as Owning Them, COINDESK (Oct. 30, 2013, 3:00
PM), http://www.coindesk.com/fbi-proves-seizing-bitcoins-isnt-owning/ (What do you think

about the FBIs ownership of so many bitcoins is there any way for them to access an
encrypted wallet without Ulbrichts help?).
339
See Indictment, United States v. Liberty Reserve S.A., No. 13-CR-368(DLC)
(S.D.N.Y. 2013); United States v. E-Gold, Ltd., 550 F. Supp. 2d 82 (D.D.C. 2008).
340
Indictment 20, Liberty Reserve S.A., No. 13-CR-368(DLC).
341
Specifically the Bitcoin Savings and Trust Ponzi scheme, the extortion attempt on Mitt
Romney, SatoshiDice, and Silk Road all fit these descriptions.
342
Indeed, the online anonymity network Tor is a high-priority target for the National
Security Agency . . . [because it is a] well-designed and robust anonymity tool, and
successfully attacking it is difficult. Bruce Schneier, Attacking Tor: How the NSA Targets
Users Online Anonymity, THE GUARDIAN (Oct. 4, 2013, 10:50 AM),
http://www.theguardian.com/world/2013/oct/04/tor-attacks-nsa-users-online-anonymity. See
Cyrus Farivar, Tor Usage Doubles in Under a Week, and No One Knows Why, ARSTECHNICA
(Aug. 29, 2013, 1:00 PM), http://arstechnica.com/security/2013/08/tor-usage-doubles-in-
under-a-week-and-no-one-knows-why/.
343
Those services might be prohibited by 18 U.S.C. 1956 (LEXIS 2013) (prohibiting
the laundering of monetary instruments and associated activity), depending on how the
01/02/2014 11:18:02
government interprets the statutory language.

IV. BITCOINS, FBARS, FATCA, TAX HAVENS, AND UBS
Of course, money laundering naturally pairs well with shirking

ones tax responsibility. A Department of Justice report on Money
Laundering in Digital Currencies, disseminated before the rise of
Bitcoins, notes that because the value of digital currency accounts
changes with the market performance of the backing commodity, any
profits earned (capital gains) during the withdrawal of digital currency
accounts may not get reported to the IRS unless the digital currency
account holder decides to declare the amount voluntarily.344
Significant tax consequences may arise from utilizing Bitcoins for
financial gain.345 While some believe that gains derived from the use of
Bitcoins in business should be taxed at capital gain rates or even hobby
tax rates in a barter transaction,346 others have compared Bitcoin taxation
to that of virtual currencies in online games.347 One commentator notes
that it is entirely possible that the volume of transactions using virtual
currencies could become significant enough to eventually attract the
attention of the tax authorities . . . [which] could ultimately result in new
344
NATL DRUG INTELLIGENCE CTR, supra note 337, at 6.
345
Different types of gains exist: gains derived from dispositions of assets that are paid
for using Bitcoins and gains derived from trading in Bitcoins.
346
See Leandra Lederman, eBays Second Life: When Should Virtual Earnings Bear Real
Taxes?, 118 YALE L. J. POCKET PART 136 (2009) (arguing for a cash-out rule [that] links
taxation to a highly salient event to prevent imposing income tax on purchases, not sales
and instead taxing virtual currencies such as Lindens, much the way the receipt of barter
credits is taxed pursuant to Rev. Rul. 80-52, 1980-1 C.B. 100 (stating that the value of credit

units must be included by cash method barter club member in year in which units are credited
to members account)). See also David D. Stewart & Stephanie Soong Johnston, Digital
Currency: A New Worry for Tax Administrators?, TAXANALYSTS (Nov. 7, 2012),
http://www.taxanalysts.com/www/features.nsf/Articles/C1A7ED502DD2B84685257AAF005
6A2A2; Tyler S. Robbins, A Primer on Bitcoin Taxation in the U.S., BITCOINTAX.INFO,
www.bitcointax.info/BitcoinTaxDownload.pdf?attredirects=0&d=1 (last updated Nov. 23,
2013).
347
BILL ROUNDS & TRACE MAYER, A LAWYERS TAKE ON BITCOINS AND TAXES (2012)
(also arguing that Bitcoins might be taxable as barter club units, barter property, barter
service, foreign currency, or at times not taxable at all under self-transfer or gift laws). See
also Grinberg, supra note 34, at 17072 (characterizing Bitcoin as competition for virtual
world and game-related currencies). Cf. Adam Chodorow, Tracing Basis Through Virtual
Spaces, 95 CORNELL L. REV. 283, 283 (2010) (discussing different theories of taxation of
virtual income and concluding that the nature of virtual worlds warrants a hybrid approach
[to taxation], where the basis in individual virtual goods is separately tracked, but the basis in
fungible currency is pooled and averaged); Flora Graham, Slapping a Tax on Playtime,
BBCNEWS, http://news.bbc.co.uk/2/hi/technology/7746094.stm (last updated Nov. 25, 2008,
01/02/2014 11:18:02
3:08 PM) (discussing taxation of virtual goods in China).

statutes or regulations that seek to mandate tax reporting for certain

types of transactions involving such currencies.348 One user, in a forum
discussing Bitcoin-related tax issues, asked: Are you going to pay taxes
on your Bitcoin profits? . . . Youre supposed to pay income taxes. It
seems rather easy to get away with not doing it, though . . . at least in
this case.349
Regardless of the theories as to how Bitcoin use should be taxed,
the IRS has not provided any clear guidance on the matter.350 In May
2013, the Government Accountability Office issued a report to the
Senate Committee on Finance, noting that [b]y not issuing guidance,
IRS may be missing an opportunity to address virtual currency tax
compliance risks.351 The report also explained that the availability of
misinformation about taxing Bitcoins on the Internet may cause
unsophisticated taxpayer[s] . . . . to believe that transacting in virtual
currencies relieves them of their responsibilities to report and pay
taxes.352 The IRS commented on the report:
The Service is aware of the potential tax compliance risks posed by off-shore
and anonymous electronic payment systems, and we are working to address
these risks. Our efforts have included discussions with other federal agencies,
evaluating our agents expertise, developing continuing professional education
curricula, providing on-line and classroom training, and creating lead sheets
and questionnaires for agent use during examinations.353
348
Stewart & Johnston, supra note 346.
349
Lynzoi, Comment to Are You Going to Pay Taxes?, BITCOIN FORUM (June 6, 2011,

11:02 PM), https://bitcointalk.org/index.php?topic=12792.0. To this, one user replied: Are
you from [the] IRS? mewantsbitcoins, Comment to Re: Are You Going to Pay Taxes?,
BITCOIN FORUM (June 6, 2011, 11:24 PM), https://bitcointalk.org/index.php?topic=12792.0.
350
Stewart & Johnston, supra note 346 (For [Bitcoin] users, the challenge is how to
navigate an ambiguous regulatory climate in which guidance is difficult to come by.).
351
GOVT ACCOUNTABILITY OFFICE, GAO-13-516, VIRTUAL ECONOMIES AND
CURRENCIES 2 (2013), available at http://www.gao.gov/assets/660/654620.pdf. The report
cites the IRSs other priorities, resource constraints, and the need to consider the use of these
recently-developed currencies as reasons for its failure to issue guidance. Id. The report also
appears to recommend eschewing formal guidance, which would require[] extensive review,
which adds to development time and cost. Id.
352
Id. at 13.
353
Id. at 19. In response to the GAOs recommendation of a web statement on the tax
reporting requirements for transactions using virtual currencies, the IRS wrote: We will
provide information to taxpayers on the basic tax reporting requirements for transactions
involving virtual currencies by linking to existing relevant guidance. Id. at 21. One news
report stated that the Senate Finance Committee is looking at language to regulate virtual
01/02/2014 11:18:02
currencies [in] its tax code overhaul. Theyre also considering giving the IRS more money to
There can be no error in assuming that the IRS wants to know

where a taxpayers funds are. Kaplanov argues that since the bitcoin
payment system is not really run by anyone or anything[,] . . . . [t]he idea
of using bitcoins as some sort of offshore bank account is, at best, a
misnomer.354 Despite this argument, in certain circumstances the
Internal Revenue Code requires reports from individuals; the Internal
Revenue Code may very well require these reports from individuals with
Bitcoin accounts. While the BSAs reporting requirements are largely
successful in aiding government agencies in collecting information for
criminal or tax investigations,355 the United States does not have
unlimited reach into foreign jurisdictions with lax standards that
operate money laundering safe havens.356 One scholar argues that it is
reasonable to expect . . . in the foreseeable future that
Cryptocurrencies could replace tax havens as the weapon-of-choice for
tax-evaders.357
Although the BSAs reporting requirements, discussed in Part III,
provide law enforcement with some ability to track tax compliance of
users, the BSA also provides separate rules for banking institutions. This
Part discusses those separate rules, as well as provisions in the Internal
Revenue Code that may be applicable to users with large amounts of
Bitcoins in foreign exchanges or financial institutions. Services such as
e-wallets may fall under the definitions set forth in this Part, triggering
requirements that users and e-wallet providers report certain information
directly to the IRS.358
A. Reports of Foreign Bank and Financial Accounts (FBARs)

The BSA requires a citizen or resident of the United States or a
person in, and doing business in, the United States, to keep records, file
reports, or keep records and file reports, when the resident, citizen, or
person makes a transaction or maintains a relation for any person with a
track virtual tax havens, Senate sources tell TIME. Jay Newton-Small, Why the Deep Web
Has Washington Worried, TIME, Oct. 31, 2013, http://swampland.time.com/2013/10/31/the-
deep-web-has-washington-worried/.
354
Kaplanov, supra note 34, at 130, 151.
355
See Rueda, supra note 222, at 14647.
356
Turner, supra note 225, at 1413. See Meyer, supra note 246.
357
Omri Marian, Are Cryptocurrencies Super Tax Havens?, 112 MICH. L. REV. FIRST
IMPRESSIONS 38, 38 (2013).
358
This Part applies only to those Bitcoin service providers not located within the United
01/02/2014 11:18:02
States.
foreign financial agency.359 Such reports, termed Reports of Foreign

Bank and Financial Accounts (FBARs), must be filed by any United
States person having a financial interest in, or signature or other
authority over, a bank, securities, or other financial account in a foreign
country.360 If the foreign financial account at any point exceeded
$10,000 in value during the previous year, an FBAR must be filed with
the Commissioner of Internal Revenue on or before June 30 of that
year.361 Failure to file the FBAR can result in criminal penalties362 as
well as extensive civil penalties,363 described by one commentator as
draconian.364 Moreover, the Department of Justice may subpoena
records that are required to be kept to substantiate FBAR filings, and a
taxpayer will be unable to resist on the basis of a Fifth Amendment
359
31 U.S.C. 5314(a) (2006).
360
31 C.F.R. 1010.350 (2013). Authors have addressed, but not agreed, as to whether
Bitcoins are securities. See, e.g., Kaplanov, supra note 34, at 14546; Grinberg, supra note
34, at 194205 ([A]lthough bitcoins may resemble investment contracts, they ultimately do
not fall within [the] definition [of securities.]); John William Nelson, Why Bitcoin Isnt A
Security Under Federal Securities Law, LEX TECHNOLOGIAE (June 26, 2011, 11:49 PM),
http://www.lextechnologiae.com/2011/06/26/why-bitcoin-isnt-a-security-under-federal-
securities-law/ (arguing that Bitcoins are not securities). One federal court ruled that a Bitcoin
investment was a securityand that Bitcoin is a currency or form of moneyin connection
with a suit against an alleged Ponzi operator. See Memorandum Opinion Regarding the
Courts Subject Matter Jurisdiction, Sec. & Exch. Commn v. Trendon T. Shavers & Bitcoin
Sav. & Trust, No. 4:13-cv-00416, 2013 WL 4028182 (E.D. Tex. Aug. 6, 2013). For the
purposes of Section IV, this Note assumes that Bitcoins are securities that fall within the scope
of these statutes.
361
31 C.F.R. 1010.306(c) (2013). Records of these accounts must be kept for five years
and must include information such as the account name, the number or other designation of

such account, the name and address of the foreign bank or other person with whom such
account is maintained, the type of such account, and the maximum value of each such account
during the reporting period. 31 C.F.R. 1010.420 (2013).
362
See 31 U.S.C. 5322 (2006) (penalties up to $250,000 and/or imprisonment up to five
years). See also REPORT OF FOREIGN BANK AND FINANCIAL ACCOUNTS (FBAR)
PROCEDURES, INTERNAL REVENUE MANUAL 4.26.17.5.4, available at
http://www.irs.gov/irm/part4/irm_04-026-017.html (last visited Nov. 2, 2013) (citing 5322
as the authority for criminal FBAR penalties).
363
For a discussion of the history of civil penalties for failure to file an FBAR, see
BUREAU OF NATL AFFAIRS, FOREIGN INCOME PORTFOLIOS: TAXATION OF FOREIGN
PERSONS U.S. INCOME at 907-3rd, XIII, A. General Reporting Requirements, available at
20XX WL 10503577. See also Charles E. Chromow, Dealing with FBARs, 23 J. INTL TAX.
54 (2012). Civil penalties vary from $10,000 per account if the non-filing of the FBAR was
not willful, 31 U.S.C. 5321(a)(5)(B)(i) (2006), to the greater of $100,000 or 50 percent of
the amount of the transaction or balance of the foreign account at the time of the violation if
the non-filing of the FBAR was willful, 31 U.S.C. 5321(a)(5)(C) (2006).
364
Anthony E. Parent, Do You Have to File an FBAR for a Bitcoin Account?, IRS MEDIC
01/02/2014 11:18:02
(Mar. 28, 2013), http://www.irsmedic.com/2013/03/28/bitcoin-and-fbar/.

privilege against self-incrimination.365 One author notes that he would

hardly be surprised to see FinCEN start defining bitcoin accounts as
foreign accounts subject to FBAR reporting,366 probably because you
can take your wallet overseas . . . [and] because it relies on the
international network of validation, [which] also makes it foreign.367
The categories foreign financial agency and money transmitting
business are mutually exclusive under the BSA.368 If a foreign Bitcoin
exchange or e-wallet somehow is not subject to the reporting
requirements of section 5331, it may nevertheless be a foreign financial
agency, depending on the type of service provided. E-wallet provider
Paymium might be such a foreign financial agency, having partnered
with a payment services provider that has a relationship with the French
bank Credit Mutuel Arka.369
B. Foreign Account Tax Compliance Act (FATCA)
The Foreign Account Tax Compliance Act (FATCA), enacted in

2010,370 created an Internal Revenue Code section that requires
taxpayers to disclose specified foreign financial assets if the aggregate
365
See, e.g., In re Grand Jury Subpoena, 696 F.3d 428, 43132 (5th Cir. 2012); In re
Grand Jury Proceedings, 707 F.3d 1262, 127374 (11th Cir. 2013); In re M.H., 648 F.3d
1067, 1077 (9th Cir. 2011).
366
Parent, supra note 364.
367
Id.
368
A foreign financial agency includes a person acting outside [of] the United
States . . . as a financial institution, bailee, depository trustee, or agent, or acting in a similar

way related to money, credit, securities, gold, or a transaction in money, credit, securities, or
gold. 31 C.F.R. 1010.100(v) (2013). A money transmitter or money services business
shall not include a foreign financial agency that engages in financial activities that, if
conducted in the United States, would require the foreign financial agency to be registered
with the SEC or CFTC. 31 C.F.R. 1010.100(ff)(8)(ii) (2013).
369
See supra note 305 and accompanying text. Paymiums Terms of Service do not
clearly indicate whether Paymiumand its subsidiariesconsiders itself to be a foreign
financial agency or a money transmitting business. See Terms of Service, Bitcoin-Central
https://bitcoin-central.net/page/tos (last updated Sept. 13, 2013) (requiring, [b]eyond the
limits stipulated by the regulations, and in particular Article R. 561-16-1 of the French
Monetary and Financial Code . . . [and] even below the minimum thresholds fixed by law,
various documents for validation of a payment account). Paymium intimates that, for
whatever reason, it may be required to disclose the identities of its users. See id. (noting that a
customers personal data collection may be registered in one or more files in compliance
with applicable laws for purposes of compliance with any applicable law or regulation,
including the prevention of money laundering and terrorist financing).
370
Hiring Incentives to Restore Employment Act, Pub. L. No. 111-147, 124 Stat. 71
01/02/2014 11:18:02
(2010).
value of those assets exceeds certain thresholds . . . [on] Form 8938.371

Congress enacted FATCA in an attempt to substantially increase the
U.S. income tax compliance of U.S. persons who have foreign bank and
investment accounts and other foreign assets,372 that is, in an attempt to
prevent taxpayers from using tax havens to conceal their funds from the
IRS.373
FATCA disclosure requirements are similar to those of the
FBAR,374 though filing a Form 8938 does not exempt filers from FBAR
filing requirements.375 FBAR reporting has other law enforcement
purposes in addition to tax administration. As a consequence, different
policy considerations apply to Form 8938 and FBAR reporting.376
Section 6038D of the Internal Revenue Code requires that any
individual who holds any interest in a specified foreign financial asset
shall attach to such persons return . . . [specified information] with
respect to each such asset if the aggregate value of all such assets
exceeds $50,000.377 A specified foreign financial asset is defined as
any financial account, if maintained by a foreign financial institution,
any stock or security378 issued by a person other than a United States
person, any financial instrument or contract held for investment that has
371
Explanation of Section 6038D Temporary and Proposed Regulations, IRS,
http://www.irs.gov/Businesses/Corporations/Explanation-of-Section-6038D-Temporary-and-
Proposed-Regulations (last updated Apr. 12, 2013). Accord Form 8938, IRS (Nov. 2012),
available at http://www.irs.gov/pub/irs-pdf/f8938.pdf; Instructions for Form 8938, IRS (Nov.
2012), available at http://www.irs.gov/pub/irs-pdf/i8938.pdf.
372
Key Provisions of the Foreign Account Tax Compliance Act, 58 FED. TAXES WEEKLY
ALERT NEWSL. 24 (Aug. 23, 2012).

373
See generally Emily Wang, The Opaque Future of Tax Information Sharing Between
the United States and China: An Analysis of Bank Secrecy Laws and the Likelihood of
Entrance into a Tax Information Exchange Agreement, 35 HASTINGS INTL & COMP. L. REV.
411, 41425 (2012) (describing how offshore accounts facilitate tax evasion especially in
foreign jurisdictions that have strict bank secrecy laws).
374
See 26 U.S.C. 6038D(c) (LEXIS 2013) (requiring disclosure of the maximum value
of the asset during the taxable year, as well as: the name, address and account number, if an
account; name, address, and class of security or stock, if a stock or security; and such
information as is necessary to identify such instrument and any parties associated with it, if an
instrument, contract, or interest).
375
Explanation of Section 6038D Temporary and Proposed Regulations, supra note 371.
Because of differences in key definitions between the BSA and the Internal Revenue Code,
i.e. financial account, certain foreign financial accounts may be reported on one but not
both forms. Id.
376
Id. (noting the differences between FBAR and Form 8938 filing requirements).
377
26 U.S.C. 6038D(a) (LEXIS 2013).
378
Again, this Note assumes that Bitcoins are securities for the purposes of this Part. See
01/02/2014 11:18:02
supra note 360 and accompanying text.

an issuer or counterparty which is other than a United States person, or

any interest in a foreign entity.379 The Treasury Regulations provide
further guidance as to the kinds of assets that qualify for reporting under
section 6038D:
Examples of assets other than financial accounts that may be considered other
specified foreign financial assets include, but are not limited to . . . [a]
currency swap, . . . commodity swap, equity swap, equity index swap, credit
default swap, or similar agreement with a foreign counterparty; and . . . [a]ny
option or other derivative instrument with respect to . . . any currency or
commodity that is entered into with a foreign counterparty or issuer.380
E-wallet provider Blockchain.info disclaims:
Qkos Services Ltd does not pretend to be a bank or regulated financial

institution. Any Bitcoins stored using Blockchain wallet are not in Qkos
Services Ltds control[;] we simply provide an interface to access them. Qkos
Services Ltd does not have control over or take any responsibility for any
transactions made through our wallet service.
Any use of the term Money on this website refers to virtual currency only.
Bitcoins are credit vouchers of which Qkos Services Ltd is not the issuer. Qkos
Services Ltd makes no guarantees that bitcoins can be redeemed at the
purchase price. Any exchange rates displayed are provided by 3rd party
services and are not indicative of the Bitcoin being backed by any commodity
or other form of money or having any other tangible value at all.381
Blockchain.info may very well state that Qkos Services Ltd is not
an issuer or that Bitcoins are not backed by any commodity. This

disclaimer likely would make no difference, however, in a governments
interpretation of the applicable laws.
A taxpayer is not the only entity that may be compelled to report
379
26 U.S.C. 6038D(b) (LEXIS 2013). A foreign financial institution includes any
entity that accepts deposits in the ordinary course of a banking or similar business, holds
financial assets for the account of others, or is engaged in, inter alia, the business of investing,
reinvesting, or trading in securities. 26 U.S.C. 1471(d)(5) (LEXIS 2013) (emphasis added).
A financial account includes any depository account maintained by, any custodial account
maintained by, and any equity or debt interest in a financial institution. 26 U.S.C. 1471(d)(2)
(LEXIS 2013).
380
26 C.F.R. 1.6038D-3T (2013) (emphasis added).
381
Blockhain.info Disclaimer, BLOCKCHAIN.INFO, http://blockchain.info/disclaimer (last
visited Nov. 1, 2013). See My Wallet, BLOCKCHAIN.INFO, http://blockchain.info/wallet/ (last
visited Nov. 24, 2013) (The beauty of bitcoin is that its fully decentralized, no government
01/02/2014 11:18:02
or corporation can block payments or revoke accounts.).

the taxpayers interest in foreign financial assets; the foreign financial

institution itself may be required to report to the IRS information about
the taxpayer who has such an interest. Section 1471 of the Internal
Revenue Code provides that [i]n the case of any withholdable
payment382 to a foreign financial institution which does not meet the
requirements of subsection (b), the withholding agent with respect to
such payment shall deduct and withhold from such payment a tax equal
to 30 percent of the amount of such payment.383 Subsection (b) deems a
foreign financial institution in compliance with subsection (a) if it has
entered into an agreement with the Secretary of the Treasury to, inter
alia, provide the IRS with the name, address, and taxpayer identification
number of each account holder who is a United States person, as well as
the account number, account balance, and withdrawals from the
account.384 A Bitcoin hedge fund located in Malta prohibits United
States persons or institutions from accessing or investing in the fund,
noting that the fund wishes to avoid the FATCA reporting implications
for foreign financial institutions.385
A foreign financial institution, as well as any other person
acceptable to the IRS, may become a qualified intermediary, or a party
to a withholding agreement with the IRS.386 Qualified intermediaries
assume certain documentation and withholding responsibilities in
exchange for simplified information reporting for foreign account-
holders and the ability to avoid disclosing proprietary account-holder
information to a withholding agent that may be a competitor. . . . In
effect, the IRS trusts foreign banks . . . .387
An example of a qualified intermediary is United Bank of

Switzerland (UBS); UBS entered into a qualified intermediary
agreement with the IRS in which the bank, in exchange for favorable
status as a U.S. withholding agent, agreed to ensure that its United States
382
A withholdable payment includes any payment of U.S. source FDAP income, that
is, fixed or determinable annual or periodic income as prescribed by further regulations, and,
for any sales or dispositions occurring after December 31, 2016, any gross proceeds from the
sale or other disposition of any property of a type that can produce interest or dividends that
are U.S. source FDAP income. See 26 C.F.R. 1.1473-1 (2013). It is unclear, if not unlikely,
that deposits of Bitcoins could qualify as withholdable payments.
383
26 U.S.C. 1471(a) (LEXIS 2013).
384
26 U.S.C. 1471(b)(c) (LEXIS 2013).
385
Matonis, supra note 137.
386
26 C.F.R. 1.1441-1(e)(5)(iii) (2013).
387
Laura Szarmach, Piercing the Veil of Bank Secrecy? Assessing the United States
01/02/2014 11:18:02
Settlement in the UBS Case, 43 CORNELL INTL L.J. 409, 42223 (2010) (citation omitted).
clients submitted forms to the IRS disclosing their foreign financial

accounts.388 Instead of complying with the Qualified Intermediary
Agreement, however, UBS expressly violated its terms.389 Moreover,
based on its business trips to the United States, UBS had sufficient
minimum contacts in Florida to justify the exercise of personal
jurisdiction;390 a John Doe Summons391 was issued in connection with
the failure to comply with the Qualified Intermediary Agreement.392
Eventually, [p]rior to trial, the parties reached a deferred
prosecution agreement wherein the bank agreed to pay a fine to the
government in the amount of $780 million. Under the terms of the
agreement, UBS also agreed to disclose the names of certain account
holders to the IRS.393 The Department of Justice issued a press release
warning that [t]he veil of secrecy has been pulled aside and [that the
FBI would] continue to aggressively pursue those who shirk their federal
tax obligations or assist others in doing so.394
It is unlikely that Bitcoin e-wallets or exchanges, especially those
that have openly flouted the law, would ever enter into qualified
intermediary agreements with the IRS. The benefits of these kinds of
agreements395 accrue only to those entities that fully fall within the scope
388
See Emily Ann Busch, To Enforce or Not to Enforce? The UBS John Doe Summons
and a Framework for Policing U.S. Tax Fraud Amid Conflicting International Laws and
Banking Secrecy, 83 TEMP. L. REV. 185, 18788 (2010).
389
Id. UBS helped conceal approximately $20 billion in assets from the IRS in
undeclared accounts by assuring its U.S. clients that it would not divulge their identities to the
IRS and advertising and instituting a sham corporation as another way to circumvent the
Qualified Intermediary Agreements terms and U.S. law. Id. at 18990.

390
Id. at 190.
391
See 26 U.S.C. 7609(f)(1) (2006) (enabling the IRS to investigate the tax compliance
of an ascertainable group or class of persons in certain circumstances).
392
See Petition to Enforce John Doe Summons, United States v. UBS AG, No. 1:09-cv-
20423-ASG, 2009 WL 864716, 67 (S.D. Fla. Feb. 19, 2009). See also Press Release,
Dept of Justice, UBS Enters Into Deferred Prosecution Agreement: Bank Admits to Helping
U.S. Taxpayers Hide Accounts from IRS; Agrees to Identify Customers & Pay $780 Million
(Feb. 18, 2009), available at http://www.justice.gov/tax/txdv09136.htm.
393
Verdict and Settlement Summary, Internal Revenue Service v. UBS AG, No. 1:09-cv-
20423-ASG, 2009 WL 674280 (S.D. Fla. Feb. 18, 2009). See Press Release, Dept of Justice,
supra note 392 (In light of the banks willingness to acknowledge responsibility for its
actions and omissions, its cooperation and remedial actions to date, and its promised
continuing cooperation and remedial actions, the government will recommend dismissal of the
charge, provided the bank fully carries out its obligations under the agreement.).
394
Press Release, Dept of Justice, supra note 392 (quoting John A. DiCicco, Acting
Assistant Attorney General of the Justice Departments Tax Division).
395
Such benefits include reduced reporting requirements. See generally Millet, supra note
01/02/2014 11:18:02
300.
of the relevant provisions of the Internal Revenue Code and thus were
already required to make various disclosures to the IRS. In the case of
Bitcoins, the applicability of the relevant sections is not as clear. In fact,
those Bitcoin service providers that openly flout the law likely will never
have the motivation to enter into a qualified intermediary agreement in
the first place. Enforcing a violation of a qualified intermediary
agreement, moreover, might not be within the reach of the law, as
internet-based Bitcoin service providers might not be subject to personal
jurisdiction of the courts.396 Bitcoin service providers could also make
good on their threats to simply move their websites to different
jurisdictions.397
The U.S. Attorney for the Southern District of Florida explains that
UBSs failure was motivated by moneythe business was too
profitable to give up. This was not a mere compliance oversight, but
rather a knowing crime motivated by greed and disrespect of the law.398
That statements applicability is only magnified by the crime-fostering
anonymity surrounding the use of Bitcoins.399
C. Bitcoin User Compliance with FBAR and FATCA Filing

Requirements
It may not be clear how gains derived from dealings in Bitcoins
396
See James C. Smith, Online Communities as Territorial Units: Personal Jurisdiction
Over Cyberspace After J. McIntyre Machinery, Ltd. v. Nicastro, 57 ST. LOUIS U. L.J. 839, 850
(2013) (arguing that personal jurisdiction may not be apparent when a transaction in digital

goods goes awry, [because] the injury is really suffered in cyberspace, not in any particular
state). Smith appropriately notes that [n]ow that an online transaction involving the
exchange of money for digital goods or services need not even use a bank or a currency issued
by any government, ties between cyberspace and physical space have been even further
loosened and weakened. Id. at 849. Cf. Order Granting Motion to Quash Service of Process
for Lack of Personal Jurisdiction, Cartmell v. Bitcoinica LP, No. CGC-12-522983 (Cal.
Super. Ct. Jan. 25, 2013), available at http://webaccess.sftc.org/scripts/magic94/
Mgrqispi94.dll?APPNAME=web&PRGNAME=casenumberprompt22 (enter 522983)
(Plaintiff failed to produce facts showing Defendant Intersango, Ltd has any California
contacts relevant to this case.).
397
See MPEX, supra note 324 (In case the domain is confiscated or otherwise lost
MPEx will move to a different domain, in a different jurisdiction. Should the same happen
again, MPEx would move to what will at the time be a solid alternative for a free Internet, be
it the TOR network, namecoin or some equivalent DNS or any comparable solution. No
government will ever be able to stop the Internet, in general.).
398
Press Release, Dept of Justice, supra note 392.
399
That is not to say that there are not legitimate reasons for anonymity or legitimate uses
01/02/2014 11:18:02
of Bitcoins.
should be taxed or whether or not foreign Bitcoin exchanges or foreign

financial agencies fall within the definitions of the BSA or Section
6038D. Nevertheless, users who should have and failed to file FBARs or
Forms 8938 may be treated similarly to those taxpayers who fail to file
appropriate forms and disclosures with the IRS: the IRS may encourage
the voluntary disclosure by the taxpayer by reducing applicable penalties
for noncompliance.400 Moreover, the IRS has also noted that [p]enalties
should be asserted only to promote compliance with the [various]
reporting and recordkeeping requirements . . . [to] achieve the desired
result of improving compliance in the future.401 One thing is certain:
Cryptocurrencies possess the two most important characteristics of a

traditional tax haven. First, because there is no jurisdiction in which they
operate (they are held in cyberspace accounts known as online wallets),
they are not subject to taxation at source. Second, cryptocurrency accounts are
anonymous. Users can start as many online wallets as they want to buy or
mine Bitcoins and trade them without ever providing any identifying
information.402
From a tax-evasion point of view, [Bitcoins] are particularly

attractive.403 With Bitcoin e-wallets and exchanges (and perhaps
Bitcoin holders) openly flouting the law in the same way as UBS did,
perhaps the IRS would still be willing to enter into deferred prosecution
agreements with noncompliant users. Nevertheless, even enforcing these
provisions against e-wallets and exchanges would not eliminate the
threat that anonymity may be achieved through mixing and the Tor
network.

V. CONCLUSION
Bitcoin service providers, especially exchanges and e-wallets, are

subject to regulation; the only real questions that remain are (1) whether
the Bitcoin service providers and/or users will comply with these laws404
400
See generally Leandra Lederman, The Use of Voluntary Disclosure Initiatives in the
Battle Against Offshore Tax Evasion, 57 VILL. L. REV. 499, 50217 (2012) (discussing the
IRSs various initiatives to encourage voluntary disclosure of offshore tax evasion).
401
Chromow, supra note 363, at 58 (citing the Report of Foreign Bank and Financial
Accounts (FBAR) Procedures, Internal Revenue Manual 4.26.17.4.2.).
402
Marian, supra note 357, at 42.
403
Id.
01/02/2014 11:18:02
404
See, e.g., cryptoanarchist, supra note 369 and accompanying text.
or openly flout them, using the internet as a veil;405 (2) to which of the
various applicable laws will particular Bitcoin service providers submit;
and (3) whether the laws are sufficient to prevent the targeted criminal
activity such as money laundering and tax evasion. As a result of the
applicability of these regulations, the reporting requirements under the
BSA and the Internal Revenue Code directly challenge the anonymity so
cherished by many Bitcoin users.
After distrusting financial institutions, Bitcoin proponents
submitted to Bitcoin exchanges, e-wallets, and other services, which has
ironically resulted in the very trust-shattering events of theft of which
these very Bitcoin proponents have accused the more stable and
trustworthy financial institutions. Even more ironically, Bitcoin
proponents using the more trusted exchanges are submitting to regulated
entities: While the original purpose of Bitcoin was that there was no
central bank and regulation, Bloomberg confirms yet again the
legitimation of Bitcoins[;] . . . Bitcoins and U.S. dollars will soon appear
on the same screen, side by side. Traders, start trading.406 Legal counsel
for the Bitcoin Foundation commented that the Liberty Reserve
indictment is just another giant, flashing warning light to bitcoin
exchanges: If youre not compliant, there are some serious risks, both at
the federal and state levels.407 Bitcoin proponents may attempt to
influence future regulation,408 but the future will, in the words of the
FinCEN director, bring clarity and regulatory certainty for businesses
and individuals engaged in money transmitting services and offering
405
See, e.g., MPEX, supra note 323 and accompanying text.

406
Dillet, supra note 155.
407
Reed Albergotti and Jeffrey Sparshott, U.S. Says Firm Laundered Billions,
WALL ST. J., http://online.wsj.com/article/SB1000142412788732385580457851112123
8052256.html (last visited Aug. 19, 2013) (quoting Patrick Murck, legal counsel for the
Bitcoin Foundation, a trade group that promotes bitcoin software and security standards).
408
The Bitcoin Foundation issued a response to FinCENs proposed rule that would
impose special measures against Liberty Reserve as a Financial Institution of Primary Money
Laundering Concern. See Letter from Bitcoin Foundation to Director of FinCEN, July 19,
2013, available at http://www.scribd.com/doc/154799860/Bitcoin-Foundation-Comments-on-
Liberty-Reserve-Special-Measures-NPRM (discussing Imposition of Special Measure Against
Liberty Reserve S.A. as a Financial Institution of Primary Money Laundering Concern,
FinCEN, RIN 1506-AB23, available at http://www.fincen.gov/statutes_regs/files/311--LR-
NPRM-Final.pdf) (The Bitcoin Foundation is concerned that because the Finding and the
Proposed Rule seem to emphasize language such as virtual currency, web-based, and
anonymous they may be misinterpreted to conflate Liberty Reserves activities with virtual
currency generally. Accordingly, the Bitcoin Foundation encourages FinCEN to clarify its
description of Liberty Reserves wrongful activity in the Final Rule in order to provide clarity
01/02/2014 11:18:02
and guidance to virtual currency industry members . . . .).

virtual currencies.409
Although no other payment system in existence grants you the
same level of freedom and control over your money that Bitcoin does, at
the same time it can also be its greatest weakness.410 Flexcoin.com,
The Worlds First Bitcoin Bank,411 warns users to avoid disclosure of
their account information: [a]s a general rule of thumb treat your
Flexcoin account as you would your bank account.412 In addition to the
already present risk of cyber-attacks on banks, however, Flexcoin.com
highlights the increased risk of using its banking services merely
because it deals in Bitcoins; We have found that the hacking attempts at
bitcoin-related sites greatly exceed that of actual banks.413
The government may indicate that it wishes to enforce the BSA and
Internal Revenue Code provisions against Bitcoin websites, businesses,
and users, either by enforcement of its current laws or by promulgating
further regulations explicitly encompassing Bitcoin-based transactions
and businesses. Should the government express a clearer intent to
regulate Bitcoin exchanges and e-wallets, the dividing line between
trustworthy/compliant Bitcoin exchanges and illegitimate exchanges will
become even clearer than it is now. If the government has not
determined that Bitcoins pose enough of a threat, however, the status
quo of uncertainty will continue as a result of the lack of regulation. It
could be that the government will take action only if there is another
jarring national event, more prominent than the Mitt Romney tax return
extortion attempt.
The current regulatory scheme, however, is insufficient to protect
against the threats of money laundering, tax evasion, and other criminal

activity. The mixing technologies414 and the Tor network415 provide
tools for criminals to stay off the grid to conduct criminal activity
and/or money laundering, completely apart from the fact that a given
exchange might comply with the BSA. Future regulation should
consider prohibiting these types of services, or requiring registration of
409
Remarks of Jennifer Shasky Calvery, Director, Financial Crimes Enforcement
Network, The Virtual Economy: Potential, Perplexities and Promises, June 13, 2013,
available at http://www.fincen.gov/news_room/speech/pdf/20130613.pdf.
410
Vitalik Buterin, Bitcoin Self-Defense, Part I: Wallet Protection, BITCOIN MAGAZINE
(May 16, 2013), http://bitcoinmagazine.com/bitcoin-self-defense-part-i-wallet-protection/.
411
FLEXCOIN, supra note 152.
412
Id.
413
Id.
414
See supra Part III(B).
01/02/2014 11:18:02
415
See supra Part III(B).
miners in attempts to track those criminals that might not interact with
BSA-regulated entities. These types of actions, however, imply that
there is no legitimate reason for obfuscating the source of funds or ones
IP address.
Senator Tom Carper, Chairman of the Senate Homeland Security
and Governmental Affairs Committee, remarked that [r]ather than play
whack-a-mole with the latest website, currency, or other method
criminals are using in an effort to evade the law, we need to develop
thoughtful, nimble[,] and sensible federal policies . . . .416 The authority
to regulate these services falls squarely within the commerce clause and
the underlying purposes of the Bank Secrecy Act.
To true Bitcoin proponents, the acceptance of Bitcoin into
mainstream commerceand the government regulation that has come
with this acceptancebetrays the original purpose of the Bitcoin
protocol and the cypherpunk tenets it represents:
[Cypherpunks] write software to defend privacy, and since we cant get

privacy unless we all do, were going to write it. . . . We dont much care if
you dont approve of the software we write. We know that software cant be
destroyed and that a widely dispersed system cant be shut down. Cypherpunks
deplore regulations on cryptography[;] . . . Cryptography will ineluctably
spread over the whole globe, and with it the anonymous transactions systems
that it makes possible.417
Nor is there any indication that the cypherpunk movement is

weakening.418
Until such time as the government clarifies its position on
regulating Bitcoin use, legitimate and illegitimate Bitcoin users alike

will continue to rely on and trust Bitcoin service providers who can
416
Chairman Carper Statement on the Unveiling of the So-Called Silk Road 2.0
Website, U.S. SENATE COMM. ON HOMELAND SEC. & GOVERNMENTAL AFFAIRS (Nov. 6,
2013), http://www.hsgac.senate.gov/media/majority-media/chairman-carper-statement-on-the-
unveiling-of-the-so-called-silk-road-20-website.
417
Eric Hughes, A Cypherpunks Manifesto, ACTIVISM.NET (Mar. 9, 1993),
http://www.activism.net/cypherpunk/manifesto.html.
418
See DARKWALLET, https://darkwallet.unsystem.net/ (last visited Nov. 13, 2013)
(Many prominent Bitcoin developers are actively in collusion with members of law
enforcement and seeking approval from government legislators. We believe this is not in [the]
Bitcoin user's self interest, and instead serves wealthy business interests that make up the self-
titled Bitcoin Foundation. . . . We must preserve the principles of Satoshi Nakamoto. . . . We
will launder our money. We will buy drugs online. We will avoid taxes. We will withdraw our
01/02/2014 11:18:02
economic participation from corrupt bankers and parasite politicos.).

demonstrate the indicia of trustworthiness that compliance with current

regulations brings: verification of identity.

01/02/2014 11:18:02

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34375-qlr_32-1 Sheet No.

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TRUST, IDENTITY, AND DISCLOSURE: ARE BITCOIN

On September 2, 2012, less than ten weeks before the general

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136 QUINNIPIAC LAW REVIEW [Vol. 32:1

allow interested parties . . . to compete to have the encryption key to

Who-ever [sic] is the winner does not matter to us.3

The person posted two Bitcoin addresses4 to which Bitcoins could

34375-qlr_32-1 Sheet No. 72 Side B

Machine, located in the corresponding footnote.

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2013] BITCOIN EXCHANGES 137

BitInstant, LLC,9 a Bitcoin payment processor and exchange service,

Bitcoin For Free, FORBES (Sept. 7, 2012, 2:32 AM), http://www.forbes.com/sites/

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2012, 2:10 PM), http://www.globalpost.com/dispatch/news/regions/americas/120906/what-

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2013] BITCOIN EXCHANGES 139

address? How could law enforcement have found the alleged

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regulatory scope of existing United States law.34 This Note instead

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amounts and transactions. Kaplanov, supra note 34, at 153 n.266.

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scheme for a group of untraceable digital pseudonyms to pay each other

The traditional banking model achieves a level of privacy by limiting access to

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http://bitcoin.org/bitcoin.pdf (last visited Oct. 27, 2013).

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2013] BITCOIN EXCHANGES 143

without telling who the parties were.47

Nakamoto also created Bitcoind,48 the original Bitcoin client,49 an

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To understand how Bitcoins are created, one must first understand

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2013] BITCOIN EXCHANGES 145

which is known to the public, to a transaction message specifying how

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9:52 PM), http://spectrum.ieee.org/computing/software/bitcoin-the-cryptoanarchists-answer-

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2013] BITCOIN EXCHANGES 147

Even though no central authority distributes a correct copy of the

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Function, BITCOIN WIKI, http://en.wikipedia.org/wiki/Cryptographic_hash (last modified Oct.

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