Legal Consistency in Cryptocurrency

Reprint of an article I wrote for cryptocoinsnews.com.

For those looking to participate in crypto-commerce, uncertainty about how the law will treat virtual currency transactions can be a stumbling block.

Because virtual coins are permissionless innovation, commerce and its rules are developing from the ground up along with data and process infrastructure.  As regulators encounter bitcoin, they issue ad hoc statements about what the nature of virtual currency and what it means to deal in them, setting off a furor of discussion over what the ruling or advisory means.

Examples of regulatory action include:

The United States Internal Revenue Service advises that virtual currencies are commodities for tax purposes.  The U.S Commodity Futures Trading Commission actively regulates bitcoin trading.

United States and other countries include virtual currency in their securities regulation umbrella, charging miners with securities law violations.

The European Union held that virtual currencies are treated as currency are exempt from VAT tax, and the Australian Tax office held that virtual currencies are not currencies. Australian regulators are trying to reverse the tax office ruling, which is seen as stifling to development.

The legal landscape changes constantly, frustrating those who want to plan according to a top-down blessing of future business in the cryptocurrency markets. This seeming inconsistency is not a symptom of the law not knowing what to do about cryptocurrency. It’s evidence of the law working like it should, in a functional, rather than prescriptive manner.

The diverse statements about the nature of virtual currency may leave the impression that there exists more uncertainty within the law than there is.  What these examples show is that cryptocurrency is not one thing, it’s many things. In issuing ad hoc statements, regulators are showing us the law working as it should.  Each statement comes from a mission-based perspective and contains itself to an issue. If one uses bitcoin in “X” manner, then one falls within the regulatory scope of whatever agency is charged with overseeing  “X” processes in the law.  This approach, while not giving strict rules to follow, only regulates bitcoin when it touches the traditional legal system in a way that must be handled.

Regulation of cryptocurrency in its infancy would prove destructive to the regulating jurisdiction’s economy. By regulating bitcoin proactively, jurisdictions limit the use to which this paradigm-shifting technology may be applied. Clumsy regulation is also why self-enforcing legal contracts are the key to smart contract development. In most jurisdictions, “freedom of contract” is a fundamental principle. The law’s experience with human fact patterns will allow us to create smart contracts that solve countless legal and commercial puzzles within a healthy ecosystem based on mutual assent, predictability and transparency.

Regulating virtual currency too soon limits the ability to unlock the power of smart contracts to solve problems without drawing from traditional legal system resources. Seeking top-down rules from the law before the facts are known is unwise, and contrary to development of healthy common law principles.

According to the law, bitcoin is what people do with it, and that is how it should be.

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