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Bitcoin, Virtual Currencies, and the Struggle of Law and Regulation to Keep Pace

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Bitcoin, Virtual Currencies, and the Struggle of Law and Regulation to Keep Pace Marquette Law Review Volume 102 Article 5 Issue 2 Winter 2018 Bitcoin, Virtual Currencies, and the Struggle of Law and Regulation to Keep Pace Follow this and additional works at: https://scholarship.law.marquette.edu/mulr Part of the Banking and Finance Law Commons, Internet Law Commons, Law and Economics Commons, Public Law and Legal Theory Commons, Science and Technology Law Commons, and the Securities Law Commons Repository Citation Bitcoin, Virtual Currencies, and the Struggle of Law and Regulation to Keep Pace, 102 Marq. L. Rev. 447 (2018). Available at: https://scholarship.law.marquette.edu/mulr/vol102/iss2/5 This Article is brought to you for free and open access by the Journals at Marquette Law Scholarly Commons. It has been accepted for inclusion in Marquette Law Review by an authorized editor of Marquette Law Scholarly Commons. For more information, please contact [email protected]. 40986 mqt_102-2 Sheet No. 74 Side A 01/29/2019 13:38:24 TRAUTMAN -MULRVOL. 102, NO.2(DO NOT DELETE) 1/17/2019 8:30 PM BITCOIN, VIRTUAL CURRENCIES, AND THE STRUGGLE OF LAW AND REGULATION TO KEEP PACE LAWRENCE J. TRAUTMAN* At less than a decade old, Bitcoin and other virtual currencies have had a major societal impact, and proven to be a unique payment systems challenge for law enforcement, financial regulatory authorities worldwide, and the investment community. Rapid introduction and diffusion of technological changes throughout society, such as the blockchain that serves as Bitcoin’s crypto-foundation, continue to exceed the ability of law and regulation to keep pace. During 2017 alone, the market price of Bitcoin rose 1,735%, from about $970 to $14,292, causing an investor feeding frenzy. As of September 11, 2018, a total of 1,935 cryptocurrencies are reported, having an approximate market capitalization of $191.54 billion at that date. A brief history of the fast moving adoption of blockchain-based technology is provided, along with a look at the efforts of regulators to keep up with the staggering worldwide growth in the usage of virtual currencies. In the United States, enforcement actions for violations of law involving virtual currencies are brought primarily by: The Commodity Futures Trading Commission (CFTC); The Securities and Exchange Commission (SEC); and The Department of The Treasury through the Financial Crimes Enforcement Network (FinCEN). This Article contributes to the literature and our 40986 mqt_102-2 Sheet No. 74 Side A 01/29/2019 13:38:24 understanding of the constant struggle of law and regulation to keep pace with rapid technological developments. * B.A., The American University; M.B.A., The George Washington University; J.D., Oklahoma City University School of Law. Mr. Trautman is most recently Assistant Professor of Business Law and Ethics at Western Carolina University. He may be contacted at [email protected]. The author wishes to extend particular thanks to the Center for International Business Education and Research (CIBER) at the University of Connecticut and to professors David Noble and Timothy Folta for the opportunity to present this paper before their Blockchain Technology & Organizations Research Symposium 2018. My thanks also to The Academy of Legal Studies in Business (ALSB) for allowing me to present this paper at the 93rd Annual Conference, and for the helpful comments received from members. Thanks also to the following for their assistance in the research and preparation of this article: Taft Dorman; Kyle D. Estudillo, Alvin Harrell; Sarah Jane Hughes; Randolph Robinson, and Tim Trautman. All errors and omissions are my own. C M Y K 40986 mqt_102-2 Sheet No. 74 Side B 01/29/2019 13:38:24 TRAUTMAN -MULRVOL. 102, NO.2(DO NOT DELETE) 1/17/2019 8:30 PM 448 MARQUETTE LAW REVIEW [102:447 I. OVERVIEW .............................................................................................. 449 II. BITCOIN AND VIRTUAL CURRENCIES ............................................ 451 Virtual Currencies .............................................................................. 451 Bitcoin ................................................................................................ 453 Historical Development .............................................................. 453 The Blockchain ........................................................................... 454 Extensive Use of Blockchain Expected ...................................... 456 Bitcoin Bubble? .......................................................................... 459 Rapid Adoption Worldwide ........................................................ 463 Ethereum ..................................................................................... 465 Ripple .......................................................................................... 467 Criminal Application .................................................................. 467 Terrorism and Virtual Currencies ............................................... 469 III. INCREASING PACE OF TECHNOLOGICAL CHANGE .................... 470 IV. U.S. FINANCIAL SYSTEM .................................................................. 473 The Regulatory Challenge ................................................................. 473 Currency, Security, or Commodity? .................................................. 476 Cyber Threat to U.S. Capital Markets................................................ 478 Federal Reserve, U.S., and International Banking System ................ 480 Treasury Department ......................................................................... 482 State Regulation ................................................................................. 485 Delaware ............................................................................................ 486 New York ........................................................................................... 486 New Jersey ......................................................................................... 489 Massachusetts .................................................................................... 489 Texas .................................................................................................. 490 Other States ........................................................................................ 491 40986 mqt_102-2 Sheet No. 74 Side B 01/29/2019 13:38:24 V. SECURITIES AND EXCHANGE COMMISSION ................................. 491 Initial Coin Offerings (ICOs) ............................................................. 492 The DAO ............................................................................................ 495 SEC Enforcement............................................................................... 498 SEC Enforcement Actions ................................................................. 498 PlexCorps ........................................................................................... 499 Munchee Inc. ..................................................................................... 500 AriseBank .......................................................................................... 501 Three Issuers Claiming Involvement in Cryptocurrencies................. 503 BitFunder ........................................................................................... 504 Centra Tech. Inc. ................................................................................ 505 The Winklevoss 2013 Registration Statement ................................... 507 Exchange Traded Fund (ETF) Organizational Schematic ................. 507 Perceived Risk Factors ....................................................................... 508 C M Y K 40986 mqt_102-2 Sheet No. 75 Side A 01/29/2019 13:38:24 TRAUTMAN -MULRVOL. 102, NO.2(DO NOT DELETE) 1/17/2019 8:30 PM 2018] BITCOIN, VIRTUAL CURRENCIES, AND THE STRUGGLE OF LAW 449 Network and Bitcoin Risk Factors ..................................................... 508 Exchange Market Risk Factors .......................................................... 511 Trust and Shares Risk Factors ............................................................ 515 Regulation Risk Factors ..................................................................... 518 SolidX Bitcoin Trust Registration Statement..................................... 519 Status of U.S. Bitcoin-Oriented Exchange Traded Funds (ETFs) ..... 520 Cyber Threat to Industry and Virtual Currencies ............................... 524 Cryptocurrency Exchanges ................................................................ 525 VI. COMMODITY FUTURES TRADING COMMISSION ........................ 525 CFTC Enforcement ............................................................................ 528 CabbageTech, Corp. d/b/a Coin Drop Markets. ................................. 529 Defendants Allegedly Engaged in a Deceptive, Fraudulent Virtual Currency Scheme .................................................................. 529 The Entrepreneurs Headquarters Limited .......................................... 530 ............................. 531 VII. PAYMENT SYSTEM IMPLICATIONS AND REGULATORY UPDATE ............................................................................................ 532 Recent Developments ........................................................................ 532 Uniform Regulation of Virtual-Currency Businesses Act (URVCBA) .................................................................................................... 534
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