Is Bitcoin money? This US federal judge says “NO”

When talking about the strange and sudden appeal of Bitcoin, financial expert Brian Wolfe likes to compare it to money as we know it, the U.S. dollar.

When you ask someone where their money comes from, they will often say from a bank. A more sensible response from Wolfe is probably the Federal Reserve.

Now these same people are asking where does Bitcoin come from, or even better, what is Bitcoin?

"People don't fully understand bitcoin," said Wolfe, an assistant professor of management finance at the University at Buffalo's College of Business. "It's a little bit of a novelty for consumers."

What’s new is that bitcoin has doubled in value since last year, shaking up financial markets and taking other so-called cryptocurrencies with it since it burst onto the scene in 2009.

Now, a federal judge in Buffalo is wading into the national debate, declaring that Bitcoin isn’t money at all.

In a local money laundering case, U.S. Judge Hugh B. Scott recently ruled that Bitcoin is similar to a commodity, akin to a collectible, rather than a currency.

While Scott’s decision may not stand up — a reviewing district judge may take a different stance — it raises the types of legal issues that people and businesspeople are eager to move away from traditional forms of money.

Wolfe said bitcoin may not be the ultimate answer, but cryptocurrencies and what they represent are here to stay — a fast, distributed, low-cost way to conduct digital transactions that is protected by encryption.

He said: I think it is inevitable, the underlying technology of Bitcoin is extremely powerful.

A virtual currency

Of course, this begs the question — what is Bitcoin?

Bitcoin advocates describe it as a digital or virtual currency that is a medium of exchange and, unlike the dollar, is decentralized. There is no central bank or middleman, and bitcoin transactions can be made directly between two parties.

Bitcoin also allows consumers to avoid transaction or banking fees. Because the technology is used to transmit and store information, there is a sense of anonymity and security.

Experts say Bitcoin's anonymity is overstated, but law enforcement officials say it remains a popular form of transaction for criminals engaged in everything from sex trafficking and drug smuggling to identity theft and illegal weapons sales.

"It's certainly prevalent among people who use hacker sites and want to hide their tracks," said Assistant U.S. Attorney Wei Xiang.

Anonymity and the lack of middlemen are at the root of Bitcoin’s appeal, and demand from consumers and investors drives the ups and downs of Bitcoin’s value. Think of it like a stock or precious metal that is constantly changing.

Think of Bitcoin as electronic cash, but Bitcoin is actually a complex, encrypted computer program product. New Bitcoins are brought into circulation every day by miners who use their own computers to process transactions.

To record a transaction, a miner must find a network counterpart to a new ledger page in the constantly updated database of bitcoin transactions, which means miners must participate in a computational race. The winner gets new bitcoins.

From that point on, those bitcoins will become part of the current 16 million bitcoins in circulation, available to consumers, investors, criminals and non-criminals alike.

There are many stories of people getting rich from Bitcoin. For example, a Norwegian bought 5,000 Bitcoins for $27 in 2009, and soon forgot about them. Six years later, he remembered that he still had these Bitcoins, and the value of these Bitcoins had reached $980,000.

In 2009, Satoshi Nakamoto created Bitcoin. Many people believe that Satoshi Nakamoto is not one person, but many people. Bitcoin has increased in both usage and value, and is also very volatile compared to the US dollar. In the past year, Bitcoin has increased in value from $420 to $1,166.

Can it be considered money laundering if it is not a currency?

Despite its tarnished reputation due to its use by drug dealers and terrorists, Bitcoin has gained some legitimacy as an online payment method. An increasing number of vendors and retailers accept it, including Microsoft and Expedia. There are even Bitcoin ATMs in some cities, including Toronto.

Scott does not deny the value of Bitcoin, but in his opinion, it does not make them money. Scott defines currency as a financial instrument or a medium of exchange that assesses value, is regulated, and is protected by sovereign power.

Yes, bitcoins have value, but they are not regulated and are not backed by a government or central authority. Instead, Scott noted, “the purpose of bitcoin is to be untangled with sovereign governments.”

The judge stated in his ruling:

“Money is not just any financial instrument and medium of exchange that people can devise on their own.”

Scott said he can’t rule out the possibility that bitcoin could one day become a widespread and routine form of exchange. But until then, bitcoin will remain a commodity, compared to collectibles like “marbles, beanie babies or Pokemon trading cards.”

While Scott’s decision, a recommendation to U.S. District Judge Charles J. Siragusa, raises interesting questions about bitcoin law, it’s unlikely to move forward in court. Defense attorneys in the money laundering case led a decision to withdraw their motion to disregard the ruling. That’s in part because Siragusa has indicated he may reject Scott’s recommendation.

Early on, Siragusa noted the far-reaching consequences of Scott's decision, which was particularly evident in the money laundering case against 31-year-old Rochester man Richard Petix.

Petix, who has a history of child pornography crimes, was accused of selling $13,000 worth of Bitcoin to an undercover federal agent for drug distribution and money laundering. Scott recommended that the money laundering charge against Petix be dismissed because Bitcoin is not money.

Despite Scott's advice, Petix's defense attorneys withdrew the dismissal and now plan to take his case to trial, in part because of Siragusa's anticipated decision and because they want a quick resolution. They also claim their client is staying away from criminal elements on the dark web and using Bitcoin to mask his identity and location.

Defense attorney Matthew R. Lembke said:

“This kid is trading Bitcoin like someone would trade baseball cards, stamps or coins.”

Federal Government Split on Bitcoin

Bitcoin is, by its very nature, difficult to comprehend. Many people still find the concept of a computer program producing money or currency that can increase or decrease in value a bit far-fetched, even in the digital age.

While lawyers debated Scott’s decision, whether it added to the confusion or helped to clarify, the judge was not the only one to believe that Bitcoin is not money.

The IRS defines Bitcoin as "property," not currency, which allows it to be taxed and opens the door for Bitcoin owners to pay capital gains. In contrast, the U.S. Treasury Department classifies it as a decentralized virtual currency.

Until governments agree on what Bitcoin is, experts say it will struggle to reach the same level of legality as many traditional forms of money.

Prosecutor Wei Xiang said:

“Bitcoin has some mainstream appeal, and if enough people accept it, then maybe it won’t go away. Maybe it’ll stay here forever.”

Wolfe believes that Bitcoin will be around for a while, and the biggest reason is that "blockchain is behind it."

Blockchain technology also eliminates the “middleman” role typically played by a financial services company in business transactions, which is why many banks and exchanges are researching and investing in the technology.

The cryptocurrency has suffered a few setbacks, most notably the disappearance of $450 million worth of bitcoins from Japan’s Mt Gox in 2014, which was later discovered to have likely been stolen after the exchange eventually declared bankruptcy.

Wolfe said:

“Bitcoin survived that catastrophe. The cryptocurrency is interesting enough and valuable enough to survive something like Mt. Gox.”