Bitcoin: A Commodity Requiring International Regulation
Chris Sungwon Lee, Vol. 37 Associate Editor
[Ed. note: Compare Eddie Mears’ article of March 2015.] Bitcoin’s value has surged over the years as people are turning to Bitcoin as an alternative form of currency. Despite their increasing use, Bitcoin has reigned largely free of regulations. Regulators have been slow to respond partly because of their unpreparedness in tackling Bitcoin’s distinct features. But as Bitcoin’s risks grow with its importance, regulators are at a critical juncture of having to scurry to create a regulatory framework. Federal Judge Decrees Bitcoin a Commodity Because of Bitcoin’s unique features, one can view Bitcoin as a commodity, asset class, or security. Effective regulation is possible with any of these classifications. For instance, the Securities and Exchange Commission (SEC) may favor considering Bitcoin as securities since that would grant SEC power to charge bitcoin uses in illegal purposes such as fraud, money laundering and commerce in narcotics. IRS rules have already established Bitcoin as property, not currency. On September 17th 2015, the Commodity Future Trading Commission followed suit by declaring Bitcoin as a commodity covered by Commodity Exchange Act (CEA). Although this result was expected, this is the first time the CFTC has officially declared its position. The CFTC stated that, “Bitcoin and other virtual currencies are commodities covered by the commodity exchange act”; thus, the CFTC will hold the digital currency companies to the same standards as the companies the CFTC has traditionally put under its purview. The CFTC decided that Coinflip, a Bitcoin operator, violated Section 4c(b) and 5h(a)(1) of the CEA in operating a swap execution facility without registering. CFTC ordered Coinflip and its CEO Francisco Riordan, to cease trading. Treating Bitcoin as commodity now officially allows any contracts or options on bitcoins that are traded on an exchange or market to be treated as investment property under Article 9. This is a statement that the virtual currencies are under the CFTC’s purview. The CFTC now asserts its authority to provide oversight of the trading of virtual currencies and options, and can bring charge sin the event of wrongdoings. It is therefore part of the ongoing efforts by the regulators to bring virtual currencies within the scope of regulation. Proponents of Bitcoin have long viewed regulation as anathema, because regulation might take away what Bitcoin is most prized for: anonymity. Nevertheless, the registration requirement, in reducing the potential for abuse, may have the effect of getting the Bitcoin exchanges off the ground. Although the CFTC has declared broad enforcement powers to regulate commodities, it has not yet laid out any detailed plains to regulate virtual currencies. Complications related to International Coordination While some regulations might do some good, I agree with proponents that too much regulation will wipe out Bitcoin’s efficiency advantage over traditional currency. To avoid the costs of complying with the patchwork of local regulations overburdening the virtual currency market, regulators must work at both anationwide and an international level to come up with an international regulatory framework. Furthermore, because Bitcoin is growing in its importance in international commerce, crises in connection with Bitcoin such as speculative attack will be international in scope. As its importance grows, its potential to create fluctuations in foreign currency markets becomes more significant. The best institution to be able to deal with these threats may be the International Monetary Fund (IMF), since the IMF can coordinate the stabilization of the foreign currency exchange market in the case of a speculative attack related to Bitcoin. However, in order to do this, the IMF must be empowered to supply the Bitcoin needed to counter the destabilizing effect of a speculative attack by bitcoin users on a nation’s currency. Article VII of its Articles of Agreement allows the IMF to replenish its holding of a member nation’s currency. But the CFTC’s classification of bitcoins as commodities poses additional challenges for IMF to claim domains over Bitcoin regulations. The Future The regulators will have to imagine a regulatory scheme outside of the confines of the traditional regulations. Some progress is already underway. For instance, the Commonwealth Bank of Australia will work with some of the largest banks to turn virtual currencies into a safer and more efficient way to transfer money around the world and possibly substitute the traditional money transfer system. But the existing regulation is regrettably at a localized state.
 Kevin V. Tu & Michael W. Meredith, Rethinking Virtual Currency Regulations in the Bitcoin Age, 90 Wash. U. L. Rev. 271, 273 (2015).  Gemma Varriale, Bitcoin: How to Regulate a Virtual Currency, IFLR (Sept. 21, 2015), http://www.iflr.com/Article/3245397/Bitcoin-how-to-regulate-a-virtual-currency.html.  See John Biggs, IRS Rules Bitcoin Is Property, Not Currency, TechCrunch (Sept. 22, 2015), http://techcrunch.com/2014/03/25/irs-rules-bitcoin-is-property-not-currency/.  In re Coinflip, Inc., CFTC No. 15-29, http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfcoinfliprorder09172015.pdf (Sept. 17, 2015).  Id.  Jeffery Snyder, Bitcoin: Currency, Commodity or None of the Above?, National Law Review (Sept. 21, 2015), http://www.natlawreview.com/article/bitcoin-currency-commodity-or-none-above.  Luke Kawa, Bitcoin is Officially a Commodity, According to U.S. Regulator, BloombergBusiness (Sept. 21, 2015), http://www.bloomberg.com/news/articles/2015-09-17/bitcoin-is-officially-a-commodity-according-to-u-s-regulator.  Jon Fingas, US Regulator Accepts Bitcoin as a Commodity, Engadget (Sept. 21, 2015), http://www.engadget.com/2015/09/19/cftc-recognizes-virtual-currency.  See Yogesh Malhotra, Future of Bitcoin & Statistical Probabilistic Quantitative Methods: Global Financial Regulation, FinRM (Sept. 21, 2015), http://yogeshmalhotra.com/Future_of_Bitcoin.html.  Martin Tillier, Why Bitcoin Supporters Should Push for International Regulation, (Sept. 21, 2015), http://www.nasdaq.com/article/why-bitcoin-supporters-should-push-for-international-regulation-cm514503.  Nicholas Plassaras, Regulating Digital Currencies: Bringing Bitcoin within the Reach of the IMF Regulating Digital Currencies, 14 Chi. J. Int’l L. 377, 399 (2013).  Id.  Id. at 393.  Id. at 399.  Jessica Sier, CBA Joins Global Banks in Project to Explore Bitcoin Model, (Sept. 22, 2015), http://www.afr.com/technology/cba-joins-global-banks-in-bitcoin-research-20150916-gjo40b.