Daniela Dekhtyar Role of the State Attorney General – Seminar Paper Role of the State Attorney General in the Oversight of Bitcoin As 2015 comes to a close, positive reviews of Bitcoin are on the rise. Numerous financial press outlets praised Bitcoin’s year, noting that Bitcoin was the world’s best performing “currency”1 in 2015.2 Furthermore, many financial industry experts report that even traditional banks are looking to incorporate the technology behind Bitcoin into their banking practices.3 Though Bitcoin’s short existence has thus far consisted of multiple upswings and downswings, recent funding announcements in Bitcoin-related ventures have given it renewed legitimacy, suggesting that this most recent upswing may have staying power.4 1 Though many refer to Bitcoin as a currency, such terminology is not entirely accurate. See infra note 5 and accompanying text. 2 See Mark Gilbert, Bitoinc Won 2015. Apple . Did Not, Bloomberg (Dec. 29, 2015), http://www.bloombergview.com/articles/2015-12-29/bitcoin-won-in-2015-but-apple-lost-big (calling Bitcoin the “comeback of the year”); Eric Rosenbaum, Bitcoin’s Back: Big Year for Controversial Digital Currency, CNBC (Dec. 28, 2015), http://www.cnbc.com/2015/12/28/only- one-global-currency-trounced-the-dollar-this-year.html [hereinafter, Rosenbaum, Bitcoin’s Back] (“[T]o find what’s arguably been the best global currency in 2015, an investor might need to put quote marks around the term ‘global currency.’”). 3 See Prableen Bajpai, 2015: A Blockbuster Year for Bitcoin’s Blockchain Technology, Nasdaq (Dec. 30, 2015), http://www.nasdaq.com/article/2015-a-blockbuster-year-for-bitcoins- blockchain-technology-cm559938 (reporting Bitcoin’s blockchain technology “has received an overwhelming response from a group, which doesn’t stand bitcoin one bit but is sure in love with blockchain. No points for guessing the group: big banks.”); Rosenbaum, Bitcoin’s Back, supra note 1 (“The number of financial institutions – as well as self-regulatory bodies, like the Depository Trust Clearing – endorsing the blockchain technology has given credit and value to bitcoin.”). 4 See Nathanial Popper, Start-up With Bitcoin in its DNA Stumbles on Fund-Raising Trail, NY Times (Dec. 28, 2015), http://www.nytimes.com/2015/12/29/business/dealbook/cash-call-for-a- new-technology.html?_r=0 (describing Bitcoin’s blockchain technology as “one of the hottest areas of growth on Wall Street today”). Everett Rosenfeld, Bitcoin is One of 2015”s Biggest Winners, CNBC (Dec. 29, 2015), http://www.cnbc.com/2015/12/29/bitcoin-is-one-of-2015s- biggest-winners.html (“[F]unding announcements from bitcoin-related start-ups helped to establish the legitimacy of the sector – and its underlying technology.”). 1 Daniela Dekhtyar – Seminar Paper Perhaps because of the uncertainty regarding Bitcoin’s longevity, government agencies both domestic and abroad have approached oversight rather cautiously. In the United States, federal financial regulators have taken the most significant moves toward regulation, but certain state agencies are jumping in, as well. Undoubtedly, the question on every government agency’s mind (even those that have already addressed Bitcoin in some way) is, “How exactly do I fit in?” This paper argues that there is a role for state Attorneys General (AGs) to play in the oversight of Bitcoin and similar virtual currencies, particularly in the realm of consumer protection. This paper proceeds in four parts. Part I provides an overview of Bitcoin, explaining its goals and how it works. Part II describes Bitcoin’s advantages and risks, highlighting why regulation is necessary. Part III discusses the various approaches that federal government agencies have taken in regulating Bitcoin and explores the potential role for state AGs. Part IV concludes. I. What is Bitcoin? Bitcoin is a decentralized digital peer-to-peer network that allows for the creation and exchange of bitcoins.5 In plain English, Bitcoin is an online payment platform.6 According to its creator, Satoshi Nakamoto,7 the primary purpose of Bitcoin was to establish a means of 5 Bitcoin is colloquially referred to as a currency, but legally its definition as a currency is widely debated. For a discussion of Bitcoin’s classification as a currency, commodity, or investment contract, see Nicholas Godlove, Regulatory Overview of Virtual Currency, 10 Okla. J. L. & Tech. 71 [hereinafter Godlove, Regulatory Overview of Virtual Currency] (2014). 6 See Daniela Sonderegger, A Regulatory and Economic Perplexity: Bitcoin Needs Just a Bit of Regulation, 47 Wash. U. J.L. & Pol’y 175, 181 [hereinafter Sonderegger, Bitcoin Needs Just a Bit of Regulation] (“Bitcoin, at its core, is . a payment system or platform through which payments can be made.”); see also Robert McMillan and Cade Metz, Bitcoin Survival Guide: Everything You Need to Know About the Future of Money, Wired (Nov. 25, 2013), http://www.wired.com/2013/11/bitcoin-survival-guide/ [hereinafter McMillan & Metz, Bitcoin Survival Guide] (stating Bitcoin “operates as an extremely low-cost money-moving platform.”). 7 Satoshi Nakamoto is the pseudonym of an anonymous programmer or group of programmers who released the software for Bitcoin onto the internet in 2009. See McMillan & Metz, Bitcoin 2 Daniela Dekhtyar – Seminar Paper processing electronic payments independently of financial institutions.8 Nakamoto argued that the dominant mode of online financial transactions today increasingly relies on financial institutions to act as intermediaries between senders and beneficiaries of payments and that such reliance has numerous disadvantages.9 First, requiring a single third party (the financial institution) to mediate disputed transactions yields transaction costs; the greater the number of transactions, the greater the number of disputes, and the longer it takes for a single party to resolve those disputes.10 Second, reliance on financial institutions places a practical limit on transaction size; because intermediaries charge fees for processing transactions, it becomes impractical for sellers to provide a low-value product online unless a certain minimum volume of Survival Guide, supra note 6 (“About five years ago, using the pseudonym Satoshi Nakamoto, an anonymous computer programmer or group of programmers built the Bitcoin software system and released it onto the internet.”). While the true identity of this programmer(s) remained unknown for years, less than one month ago, numerous tech media outlets reported that Nakamoto’s true identity was likely discovered; Nakamoto is actually a pseudonym for an Australian businessman, Craig Steven Wright, and a deceased U.S. forensic researcher, Dave Kleiman. See Sam Bidde and Andy Crush, This Australian Says He and His Dead Friend Invented Bitcoin, Gizmodo (Dec. 8, 2015) http://gizmodo.com/this-australian-says-he-and-his- dead-friend-invented-bi-1746958692 (“According to a cache of documents provided to Gizmodo which were corroborated in interviews, Craig Steven Wright, an Australian businessman based in Sydney, and Dave Kleiman, an American computer forensics expert who died in 2013, were involved in the development of the digital currency.); Andy Greenberg and Gwen Branwen, Bitcoin’s Creator Satoshi Nakamoto is Probably This Unknown Australian Genius, Wired (Dec. 8, 2015), http://www.wired.com/2015/12/bitcoins-creator-satoshi-nakamoto-is-probably-this- unknown-australian-genius/ (“In the last weeks, WIRED has obtained the strongest evidence yet of Satoshi Nakamoto’s true identity. All signs point to Craig Steven Wright, a man who never even made it onto any Nakamoto hunters’ public list of candidates, yet fits the cryptocurrency creator’s profile in nearly every detail.”). 8 See Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System (2009), https://bitcoin.org/bitcoin.pdf (“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”). 9 See id. (“While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model.”). 10 Id. 3 Daniela Dekhtyar – Seminar Paper that product can be sold.11 Lastly, Nakomoto argued that reversibility of payments, a staple feature of online transactions cleared by a financial institution, creates “costs and payment uncertainties” for merchants whose transactions are disputed.12 Nakamoto’s solution was Bitcoin: a peer-to-peer network that would allow senders and beneficiaries of payments to transact directly with one another, without the need of a trusted third party like a financial institution. I.A. How Bitcoin Works Bitcoin has two key features. First, bitcoins are electronically created and stored. Bitcoin users create bitcoins by a process called “mining.” 13 All of the bitcoins ever created and all of the transactions ever conducted via Bitcoin are recorded in a virtual public ledger known as the “block chain.” 14 To mine for new bitcoins, a user must verify the block chain by solving a complex mathematical problem. 15 If that problem is solved successfully, 25 bitcoins are produced.16 The opportunity to verify the block chain (and as a result mine bitcoins) arises when 11 Id. 12 Id. 13 Bitcoin Project. How Does Bitcoin Work?, https://bitcoin.org/en/how-it-works [hereinafter, Bitcoin Project, How Does Bitcoin Work?] (last visited Dec. 28, 2015). 14 See id. (describing block chain as shared public ledger used to confirm transactions and ensure bitcoins are truly owned by purchaser); see also Kevin V. Tu & Michael W. Meredith, Rethinking Virtual Currency Regulation in the Bitcoin Age, 90 Wash. L. Rev. 271, 281 (2015) [hereinafter, Tu & Meredith, Rethinking Virtual Currency Regulation] (explaining Bitcoin users authenticate and approve transactions which are submitted to public ledger called “block chain”). 15 Duncan Elms, Bitcoin Explained, Vimeo (Sept. 2014), https://vimeo.com/63502573 [hereinafter Elms, Bitcoin Explained]. 16 See id. In 2016, the reward for mining, i.e. the number of bitcoins produced, will be halved.