After lurking around for some years, Bitcoin has become quite the buzz. For those fortunate enough to have avoided Bitcoin mania to date, Bitcoin is a digital currency, best explained by Stephen Colbert. It has certain qualities that make it attractive to some people. Specifically, it is not associated with any government, and the algorithm that generates Bitcoin creates a preprogrammed number that cannot be increased faster than they can be “mined.”
Bitcoin appears to have reached the tipping point where enough people treat it as a currency to raise some questions about its future as a currency rather than a fad. In addition to online trading, we now have what might be the first Bitcoin exchange floor in meatspace. An increasing number of people and businesses are willing to take Bitcoin as payment for transactions. Needless to say, this has generated great excitement among some and yawns among others. Some fret that Bitcoin has become a new way for money launderers, drug dealers, and other unsavory characters to engage in illegal transactions untraceably. Others celebrate Bitcoin as the realization of the Libertarian dream of divorcing money from government.
I fall into the yawn category. Back in 2006, we briefly had a similar buzz around the artificial currencies used in massively multiplayer online roleplaying games (MMORGs). Second Life was going to replace real life, news organizations were setting up “Second Life Bureaus,” and Congress actually held hearings on whether to find some way to tax the transactions in imaginary worlds. In a post I wrote back then called “Keep Azeroth Tax Free,” I observed that existing tax law already did the job quite nicely. Imaginary currencies and transactions that stayed within the game and had no impact on the real world stayed imaginary. Transactions impacting the real world, such as selling game-based artifacts for cash or converting game currency to traditional government-backed currency, were already captured by existing regulations.
The U.S. Treasury has now conducted a similar analysis for Bitcoin, and come to the same conclusion. Addressing laws that regulate money transfer service, the Treasury explained in this advisory memo that existing law already addresses virtual currencies. If the transfer is convertible into real money or other value, then it is a money transfer. If the exchange is to facilitate a “bona fide sale” (e.g., I exchange Bitcoin for real goods or services), then it is a sale and not a money transfer. If all it does is swap virtual currencies, no one cares.
In other words, virtual currency does not create an exciting new loophole to engage in illegal transactions or escape taxes — which should be the limit of what policy cares about. To the extent Bitcoin may teach folks that money is simply a medium of exchange and that there is nothing magic about, say, gold or other precious metals — well and good. To the extent Bitcoin crashes and takes down unwary investors — sucks to be them. For all that Bitcoin may create excitement in a subset of the tech set, it is fairly boring from a policy perspective. Hopefully it will stay that way.
Stay tuned . . .