What is the Legal Definition of a Virtual Currency?

The way we use language affects legal outcomes. Language is causing legal controversy around so-called “Bitcoin” and “virtual currencies.” Let’s assess the language applicable to the phenomenon popularly known as “Bitcoin.”

What Would a New York BitLicense Cover?

The New York Department of Financial Services proposes to license and regulate virtual currency businesses under a program commonly known as “BitLicense.”  Some people welcome this proposal as an advance for Bitcoin. Others denounce it as a threat to privacy and freedom because it requires a virtual currency business to collect much identifying information about customers.

What exactly does the proposed regulation cover? Section 200.2 Definitions includes this first sentence:

“(m) Virtual Currency means any type of digital unit that is used as a medium of exchange or a form of digitally stored value or that is incorporated into payment system technology.”

How to Interpret the Definition “Virtual Currency”?

The quoted sentence of Section 200.2(m) is a definition of cosmic breadth. Let’s parse it.

First, it covers digital stuff. But in 2014 a lot of stuff is “digital.”

Second, it covers a “unit.” But it does not define the word “unit.” The word “unit” is so broad, especially when we are talking about digital stuff, it more or less covers anything. The word “unit” could mean a number, a word, a song or most any other digital expression.

If the word “unit” includes any expression of any idea, then the draft BitLicense (strangely) starts to raise First Amendment freedom-of-speech issues.

Third, Section 200.2(m) is limited to a digital unit . . .

1. that is used as . . .

A. a medium of exchange; or 

B. a form of digitally stored value;


2. that is incorporated into payment system technology.

Wow. That embraces a lot of territory.

Is an Ordinary Electronic Contract a Virtual Currency?

Let’s consider an example.

Suppose Bob sends a message via Gmail to Sally that says, “I promise to pay $100 for a widget.” And Sally replies, “OK.” That email is (more or less) a legally-enforceable contract.

Under contract law, Sally could then via Gmail assign her rights of contract with Bob to Jack in exchange for a gadget. Further, Jack could hold on to the rights for a while (because they are valuable), storing the emails in Gmail.

Finally, using Gmail, Jack could assign his rights to Maria in exchange for a whats-it.

Thus, arguably, the $100-for-a-widget contract is covered by Section 200.2(m). The contract is – at least arguably – a virtual currency because it is “a digital unit that is used as a medium of exchange or a form of digitally stored value.” It is a set of valuable, stored rights that went digitally from Bob to Sally to Jack to Maria.

Would Google Need a BitLicense?

Furthermore, if Bob, Sally, Jack or Maria has a New York connection, then the operator of Gmail, i.e., Google, would arguably be engaged in a “Virtual Currency Business Activity” for which Google must have a license. Section 200.2(n) of the draft BitLicense regulation defines “Virtual Currency Business Activity” as “the conduct of any one of the following types of activities . . . : (1) receiving Virtual Currency for transmission or transmitting the same; (2) securing, storing, holding, or maintaining custody or control of Virtual Currency on behalf of others”.

Hmm. So a plain reading of the draft regulation results in Google needing a BitLicense. How strange.

Expansive Language is Common in Cyber Law.

It is not unusual in the Internet age for lawmakers to write laws of such immeasurable scope that they arguably lead to strange interpretations.

The state of Connecticut for instance proclaims: “Any person in possession of personal information of another person shall safeguard the data . . . containing the information from misuse by third parties . . .”  Connecticut goes on to define “personal information” as pretty much any data that could be connected to a particular human. Arguably, “personal information” could include any statement, photo, mouse-click or metadata roughly connected to a person.

But to expect absolutely everyone to protect absolutely every iota of personal information of any other person seems a strange and impractical result. Arguably for example it expects great-grandmother to secure the personal information (photos, names, comments, metadata and so on) about her friends that her computer automatically collects in her browser’s cache as she logs onto Facebook.

Enforcement Limited to the Spirit of the Law?

Now, an advocate for New York’s proposed BitLicense regulation might argue it is not the spirit of the law to regulate the provision of email services like Gmail. The spirit of the law is to regulate some other activity that is hard to define.

Likewise an advocate for Connecticut’s data privacy law might argue it is not the spirit of the law to cover every speck of data in the cache of great-grandmother’s browser.

Other computer laws that use expansive words are interpreted according to their spirit. The federal Computer Fraud and Abuse Act for example hinges on "access" to a computer. In 2014 the expansive word “access” to a computer leaves much room for interpretation. In difficult cases authorities interpreting the word “access” strive to find and apply the spirit behind the CFAA.

However, leaving e-commerce laws -- like the proposed BitLicense regulation -- to be interpreted according to their spirit rather than their actual words is problematic.  Imprecisely-worded e-commerce laws (albeit well-meaning) cause confusion.*[See Footnote]

What is the Legal Definition of “Bitcoin”?

So how do the words of the draft BitLicense regulation apply to Bitcoin (or Dogecoin)?

The phenomenon popularly called “Bitcoin” might be described by lots of words. The phenomenon is new and rapidly evolving. It was not created by government. The phenomenon is not necessarily locked into words like “currency,” “unit,” “medium,” “exchange,” “value,” “transmission” or “storage.” Even though some people use words like that in relation to the phenomenon, that does not mean those words are binding on all people who observe and dance with the phenomenon.

Disclaim the Regulated Concepts?

When law like the draft BitLicense regulation relies on spirit rather than precise words to define the novel technology it is regulating, people have room to define their activity relative to that law.

For instance, people and businesses who observe and converse within the “Bitcoin” phenomenon could declare words like these:

We are engaged in a computing relationship. The relationship is evolving. It has not settled into maturity. We declare that said relationship does not involve any “currency,” “unit,” “medium,” “exchange,” “value,” “transmission” or “storage” as those words are enforceably used by the New York Department of Financial Services. We further declare that our computing relationship . . . our communication . . . disclaims the following words and the spirit behind them: "currency," "unit," "medium," "exchange," "value," "transmission" or "storage" as those words are enforceably used by the New York Department of Financial Services. We compute and communicate in the spirit of free speech, but we don’t engage in the activities regulated by the Department of Financial Services.

No Guarantee

Would a declaration like the foregoing guarantee that law will abstain from enforcing the draft BitLicense regulation against people? No.

However, a declaration like that does no harm.

What’s more, for some people a declaration like that could be constructive, especially given that the draft BitLicense regulation (if adopted) is subject to strange interpretation.

Further, those people would be safer from enforcement if they avoid tricking, deceiving or defrauding anyone.

What do you think?

By: Benjamin Wright

Notice: Statements like the above by Benjamin Wright are just public discussion; rely upon them at your own risk. They are not legal advice for any particular situation. If you need legal advice, you should consult a lawyer who has explicitly agreed to provide you advice.

*Footnote: In the mid-1990s Utah adopted legislation to promote cryptographic e-commerce by licensing public-key-infrastructure certification authorities. The legislation was ill-conceived and caused much confusion. Utah eventually repealed the legislation.

Mr. Wright submitted the foregoing as a formal comment to the NYDFS.


1. More analysis of the definition of "Virtual Currency" under NYDFS's proposed BitLicense regulation.

2. Valid questions raised by the imprecise language in draft BitLicense regulation.

Related: How to interpret a contract for payment by Bitcoin.

No comments:

Post a Comment