By Software Freedom Law Center | September 17, 2014
There has been a growing interest among Free and Open Source Software (“FOSS”) projects in the use of crypto-currencies such as Bitcoin and its myriad derivatives (hereinafter “Bitcoin”). However, uncertainty over the treatment of these currencies by US law has dissuaded developers from from using Bitcoin. This post provides some general guidance on the legal consequences of using such convertible virtual currency.
Please note that different jurisdictions address the issues related to Bitcoin differently. The comments provided in this post are restricted to U.S. law. If you are uncertain of your legal obligations, contact the Software Freedom Law Center or seek other legal counsel.
In the United States, the use of Bitcoin is not considered illegal of its own accord. A number of agencies are currently involved in the regulation of Bitcoin. At the Federal level, the Financial Crimes Enforcement Network (“FinCEN”), the relevant bureau of U.S. Treasury that polices the financial system against illicit usage has issued some guidance on usage of virtual currencies. This guidance broadly explains the obligations for those who deal in virtual currencies in different capacities. The Internal Revenue Service (“IRS”)notice treats Bitcoin units as property rather than currency and subjects them to the general procedures of the tax code that are applicable to transactions involving property. US Consumer Financial Protection Bureau (CFPB) has issued an advisory warning to the consumers that highlights the risks posed by virtual currencies but these guidelines run on the lines of general User Beware guidelines and don’t speak to the legality of virtual currencies. New York Department of Financial Services (NYDFS) is working on Bitcoin Regulations and are receiving comments from the general public until first week of October, 2014.
For the purpose of this post, we shall concentrate on uses of virtual currencies by FOSS projects. Bitcoin usage broadly falls into one of the following two categories: a user or an administrator or money transmitter.
A user is defined as one who transacts with Bitcoin as a virtual currency equivalent (e.g, purchase of goods and services, purchase of another virtual currency or real currency) for the user’s own investment or use. The process by which such a user obtains Bitcoin, whether by “mining”, “purchasing” or “harvesting” is immaterial.