The danger of using the term ‘crypto currency’
It is not hard to see why the authorities are concerned about digital currencies. Any bearer instrument tradable for monetary value has the potential to be used for criminal purposes. Late 2013, after the North American Bitcoin conference earlier in the year, a task force involving the Miami Police Department and the US Secret Service began investigating bitcoin trading activity in the area. At random, investigators chose a young Bitcoin trader, called Michel Espinoza, to focus their investigations on.
Espinoza was contacted by Detective Ricardo Arias and Special Agent Gregory Ponzi via bitcoin marketplace LocalBitcoins. They arranged several meetings between January and February 2014. It was during those meetings that undercover agents indicated that they intended to purchase stolen credit card numbers with the digital currency. In February 2014, Espinoza was arrested in a Miami Beach motel for agreeing to sell USD 30,000 worth of Bitcoin and subsequently selling USD 1,500 of Bitcoin to an undercover police officer he had met on an exchange site called LocalBitcoins.com (source: interview with mr Michel Espinoza).
Prosecutors charged that Espinoza violated Florida law on money laundering and for operating an unlicensed money transmitting business. Espinoza defense lawyer however, argued that these laws do not apply to Espinoza’s case, because he was not selling currency, but so-called crypto currency.
The status of crypto currencies
United States federal regulators are divided about whether or not crypto currencies should be seen as money/currency or not. The Internal Revenue Service regards it as property, but the Treasury Department’s Financial Crimes Enforcement Network regulates it as a currency.
In 2016, a Miami court judge ruled that Bitcoin is not the same as what normally is seen as money. The extremely interesting ruling states that:
Bitcoin may have some attributes in common with what we commonly refer to as money but differ in many important aspects. White Bitcoin can be exchanged for items of value, they are not commonly used means of exchange. They are accepted by some but not by all merchants and service providers. The value of Bitcoin fluctuates widely and has been estimated to be eighteen times greater than the U.S. Dollar. Their high volatility is explained by scholars as due to their insufficient liquidity, the uncertainty of future value, and the lack of a stabilization mechanism. With such volatility they have a limited ability to act as a store of value, another important attribute of money.
Bitcoin is a decentralized system. It does not have any central authority, such as a central reserve, and Bitcoins are not backed by anything. They are certainly not tangible wealth and cannot be hidden under a mattress like cash and gold bars.
Conclusions
I fully agree with the Miami judgement. So-called crypto currencies and money are totally different, although the original idea was to replace money (Nakamoto, 2008):
A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network.
I consider the term crypto currency misleading. The electronically coded information, commonly called ‘crypto currency’ is not a coin nor a currency. They can be exchanged for money, goods and services (because there is a demand for ‘crypto currency‘), and therefore should be called crypto medium of exchange (abbreviation: ‘CME’) or something similar.This does not mean that these “bits of data” play a less important role in the economy than money. In my opinion, the CME will revolutionize the economy in a positive way. However, it has extremely high bubble-potential if it is not characterized in a correct manner; meaning a manner that does not mislead the public.
The documents in the Espinoza-case can be downloaded here and here.
Further reading
- Greenberg, A. (20 April 2011). Crypto Currency. Forbes.com
- Cryptocurrencies: A Brief Thematic Review. Social Science Research Network
- Economist Staff (31 October 2015). Blockchains. The great chain of being sure about things. The Economist
- Larson, J. (November 2016). Implications of Bitcoin Not Being Actual Currency: The Espinoza Case. American Bar Association, Tax Times.
- Nakamoto, S. (22 August 2008). Bitcoin: A Peer-to-Peer Electronic Cash System.
- Simonite, T. (5 September 2013). Mapping the Bitcoin Economy Could Reveal Users’ Identities. MIT Technology
- Store of Value. A cryptocurrency blog. List Of High Profile Cryptocurrency Hacks So Far (August 24th 2017)
