Article Preview: Tales From the Cryptocurrency: On Bitcoin, Square Pegs, and Round Holes by Eric Pacy

Technology and the Internet have become an integral part of many people’s everyday life, including how they communicate, find information, and watch television. Even watches are getting an upgrade —so it is no wonder that currency would follow suit. Enter the Bitcoin!

Bitcoin is a finite, decentralized, virtual form of payment that is transferred over a peer-to-peer network anonymously and almost instantaneously. To synthesize the transaction between the two parties, “miners” use complex algorithms to match parts of the “block chain” in order to complete the transfer of the Bitcoin. As these block parts are “mined” over time, the amount in the block is reduced and the algorithms become even more complex. Because of its virtual form, regulators hesitate to consider Bitcoin as money. Instead, regulators have attempted to classify this new technology as something other than money, using an existing regulatory framework. However, some businesses already accept Bitcoin as a payment method.

So, should Bitcoin be considered money, or should it be classified under another regulatory framework such as a security or a commodity? In his article, Tales From the Cryptocurrency: On Bitcoin, Square Pegs, and Round Holes, 2013–14 New England Law Review Scribes Award winner Eric Pacy resolves that Bitcoin is, in fact, money. This article, which will be featured in New England Law Review’s Volume 49, Book 1, asserts that regulators should treat this virtual currency the same as conventional, “real” money in order to conform with the typical understanding of currency.

Pacy contends that Bitcoin cannot logically be defined as a security (which would allow Bitcoin to be regulated by the Securities Act of 1933 and the Securities Exchange Act of 1934). Securities must involve (1) “a contract, transaction or scheme whereby a person invests his money”; (2) the investment is made “in a common enterprise”; (3) the investor was “led to expect profits”; and (4) such profits are realized “solely from the efforts of the promoter or a third party.” [S.E.C. v. W.J. Howey Co., 328 U.S. 293, 298–99 (1946)]. Pacy argues that Bitcoin does not fit within the securities regulation framework because it does not grow and gain value because of capital investment; it does not have common enterprise features because there is no pooling of assets; and there is no third party relied upon to help realize profits.

Pacy also maintains that Bitcoin cannot be properly classified as a commodity because the Commodity Exchange Act’s definition of commodities implies that commodities are most typically tangible goods that have some inherent value. Obviously, Bitcoin is not tangible because it exists only in cyber space—and furthermore, it is used as a medium of exchange and thus, has no inherent value. Conversely, Bitcoin falls squarely within the economist definition of money, which defines money as: (1) “a medium of exchange,” (2) “a unit of account,” and (3) “a store of value.”

Be sure to read the full article in New England Law Review, Volume 49, Book 1.

Contributing Editor: Chelsea Edwards

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