Bitcoin: A Risky Investment for All Consumers

In 2009, Satoshi Nakamoto launched Bitcoin, the world’s first cryptocurrency, a decentralized digital currency which utilizes an encrypted payment system to allow its users to conduct transactions without the need of a financial institution or other “trusted third party”.  [1].  Without any government control over the money supply or interference from third parties, Bitcoin is a “currency” directly controlled by its users. Id.  There are many advantages to using Bitcoin such as low-cost transactions, increased privacy, encrypted security and a self-regulated money supply. [2].  In addition, Bitcoin is not only used as an alternate currency, it can be sold and converted to real cash which makes it an attractive investment asset. [3].  A recent article from the International Business Times stated that 80 percent of the users of Coinbase, a Bitcoin exchange company, are using Bitcoin for investment purposes. [4].    However, Bitcoin may pose as “currency”, it is not considered legal tender and there is uncertainty on how it should be treated under

However, Bitcoin may pose as “currency”, it is not considered legal tender and there is uncertainty on how it should be treated under current laws. [2]. This uncertainty puts investors at risk of significant financial loss with very few legal protections afforded to them. Id. For instance, a Hong Kong Bitcoin Exchange, known as Bitfinex, discovered a recent security breach and nearly 120,000 bitcoins were stolen. [5].  The theft resulted in a loss valued at 77 million U.S. dollars. Id.  Further, Bitfinex calculated as a generalized result of the breach, each user suffered an estimated loss of thirty-six percent of the value of their accounts. [6].  Without any involvement from a bank or financial institution, Bitcoins lost due to fraud or theft is difficult to trace. [7]. In addition, unlike U.S. dollars, Bitcoins are not federally insured which further limits a victim’s ability to recover for losses regarding Bitcoin. Id.

Several Federal agencies have made efforts to clarify the treatment of Bitcoin under relevant U.S. laws but it is still uncertain as to what exactly the government classifies Bitcoins as.  The Financial Crimes Enforcement Network (FinCEN) is a federal agency which serves the primary purpose of protecting against money laundering and other financial crimes. [8]   In a 2014 guidance, the FinCEN did not specifically define or categorize Bitcoin as a currency, commodity, security, etc. [9].  Instead, the agency held that the regulation of Bitcoin would be dependent on how the Bitcoins were being used. Id.  Further, the FinCEN guidance stated Bitcoin use could be divided into the following three categories:

  • Users – Users are merely individuals who use Bitcoin as a form of payment for goods and/or services. Users do not have to register as a money services business and are not subject to FinCEN regulation;
  • Exchangers – An Exchanger is a person or business who sells Bitcoins in exchange for real currency.  Exchangers must register as a money services business and are subject to FinCEN regulation.
  • Administrators – An Administrator is a person or business who controls the issuance and withdraw of virtual currency from regulation and like Exchangers, administrators must register as a money services business and are subject to FinCEN regulations. However, it seems Bitcoin would not apply to this category because its supply is not issued or reduced by a central authority. Id.

 The Commodity Futures Trading Commission (CFTC) issued an order against Coinflip, which operated Derivabit, an online website which Bitcoin users could engage in options and futures trading. [10].    In the order, the CFTC charged Coinflip for operating an illegal, unregistered options trading platform in direct violation of the Commodity Exchange Act (CEA). Id.  It is interesting because the CFTC’s reasoning was that they did not define Bitcoin as a “currency” and instead held that it would be treated as a commodity.  Id. A commodity is generally defined as “a basic good used in commerce that is interchangeable with other commodities of the same type.” [11].  The definition of a commodity under the CEA focuses more on agriculture products but includes that a commodity can be “all services, rights, and interests in which contracts for future delivery are presently or in the future dealt with.” [12].   Although the CFTC order seems to add further legal protections for consumers and investors who use Bitcoin, it is evident that ambiguity remains to how the cryptocurrency should be treated under the law.

 In SEC v. Shavers, a federal court in Texas added to the ambiguity surrounding Bitcoin regulation.  [13].  In Shavers, the SEC alleged that the Defendant fraudulently solicited lenders to invest into Bitcoin Savings and Trust (BTCST) promising at least a 1 percent return. Id.  Instead, Shavers’ false promises resulted in the investors suffering significant financial losses. Id. Shavers argued that the SEC did not have subject matter jurisdiction because Bitcoin were not securities and the transactions involved only Bitcoin and not any actual money. However, the federal court held that “Bitcoin is a currency or form of money, and investors wishing to invest in BTCST provided an investment in money.” In result, the Bitcoin investments were subject to federal security regulations and eventually Shavers was ordered to pay over $40 million in disgorged profits and prejudgment interest. [14].

As you can see, Bitcoin remains a risky “investment” due to its lack of uniformity under our current laws, leaving consumers and investors with little clarity of the protections afforded to them in their involvement with Bitcoin-related transactions.  Nevertheless, Bitcoin continues to develop as a promising technology used for business.  Despite the concerns with its regulation, Bitcoin has not lost any significant value, Bitcoin-related businesses continue to develop and many Fortune 500 companies such as Dell, Expedia and Microsoft now indirectly accept Bitcoin as payment. [15, 16].  It will be interesting to see if the government will continue to let federal agencies and courts interpret how Bitcoin should be regulated based on current law or if specific legislation will be implemented.

I’ll leave you with a few questions to consider:

(1) Do you think Bitcoin its best to classify Bitcoin as a commodity, currency, security, etc.?

(2) Should the federal government prevent people from investing in Bitcoin until more specific regulations are in place to protect its investors from losses due to fraud and/or theft?

(3) Do you think Bitcoin or another virtual currency will ever be considered legal tender in the United States?  Would this be a good or bad thing?

[1] Bitcoin: A Peer-to-Peer Electronic Cash System, Satoshi Nakamoto,

[2] Bitcoin: Questions, Answers, and Analysis of Legal Issues,



[5] Bitcoin Value Falls Off the Cliff after $77 Million Stolen in Hong Kong Exchange Hack,




[9] FinCEN on Virtual Trading Platform,

[10] Feds Target Bitcoin Options Site, Declare Cryptocurrencies as Commodities,



[13] SEC v. Shavers,


[15] Three Reasons Why Bitcoin Isn’t Dead Yet,


~ by mikebufl on October 9, 2016.

9 Responses to “Bitcoin: A Risky Investment for All Consumers”

  1. From what I have read about Bitcoins thus far (the readings for blogs 1 and 2), it seems to function as money and thus should be considered a form of currency. After trading Bitcoins for goods, it is even possible to convert Bitcoin to real cash!

    The point I find confusing is how the Financial Crimes Enforcement Network (FinCEN) is okay with regulating Bitcoin on a case-by-case basis depending on how it is being used. This seems to only hinder the regulation of Bitcoin as what may be illegal in one context may be legal in another.

    I think it is too late for the federal government to step in and try to prevent people from investing in Bitcoin until more specific regulations are put in place to protect investors from losses that may arise through fraud and/or theft. Now that Bitcoin is somewhat established as a way to trade Bitcoins for goods over the internet, there will always be those who will want to use Bitcoin for their online transactions. The mere fact that Bitcoin can get over the barrier of exchange fees and transaction costs is an incentive for people to continue using Bitcoin as a form of currency to complete their online transactions. [1].

    If not Bitcoin, then some other form of virtual currency will eventually be considered legal tender in the United States and even globally. This is not necessarily a bad thing; however, it comes with its own set of problems. Having virtual currency will encourage micro-transactions which will support small online businesses and individuals. [1]. However, there is a possibility that exchanges that allow a user to store a Bitcoin online will get hacked, just like with what happened to Mt. Gox or the Hong Kong Bitcoin Exchange. [2]. Unfortunately, anything over the internet can be hacked into by an experienced hacker, even with a very simple device – i.e. Target’s POS system was hacked by a software that was bought in a cybercrimes forum for the sum of $1,800! [3].




  2. Bitcoin is best classified as a currency. A security is either a debt security or an equity security. With a debt security, you owe money to the lending party, and with the equity security, you purchase a stock in corporation. [1]. Neither of them occurs when buying bitcoins. When you purchase bitcoins, you don’t owe money to another person or gain interest in a company, you merely purchased a virtual currency. A commodity “is a good used in commerce that is interchangeable for commodities of the same type.” [2] Bitcoin can be used to trade any type of goods and service; it is not limited to other virtual currencies. Therefore, a bitcoin should not be classified as a commodity. Bitcoin might not be regulated or controlled by financial authorities; however, its value still fluctuates based on the behavior of its users. [3]. It increases and decreases in value just like regular currencies. Additionally, it is used to obtain various things online. Those factors favor to classify bitcoin as a currency.

    Many legislators are unfamiliar with the concepts of bitcoin and what it entails. This could lead to the argument that the government should prevent individuals from engaging in the bitcoin trade until further regulations are put in place. [4]. If the government would hinder the trade now, then there would be no incentives for our politicians to update our laws and battle with the classification and regulation of bitcoin and its economic effects. One of the reasons bitcoin is vulnerable to fraud and theft is because there is no central authority governing its trade. Once a central authority is put in place, it would be harder for money launders and criminals to use virtual currencies. [5].

    Bitcoin will be seen as legal tender one day. Our entire world is moving online. For example, almost everyone shops online now and we stay in contact with our family and friends online. It is just a matter of time until more people want to have digital currencies. Bitcoin is void of any political interference and its value is controlled by its users. Companies can conduct business without worrying about exchange rates. Therefore, it would be good thing if virtual currencies would become the norm. Bitcoins has been used a lot to fund illegal activities. It is used to buy drugs or to fund terrorist organizations. [6]. I believe once it is more regulated, it will minimize its anonymity which would lead to a decrease in using bitcoins for illegal activities.


  3. I think Bitcoin is best classified as a currency. It lacks the feel of any of the securities listed in the Securities Act of 1933 [1] and it is commonly used to purchase commodities. However, the author is correct to point out that there is still uncertainty as to Bitcoin’s legal classification. Without having the same protections and priorities given to money, Bitcoin is an extremely risky and uncertain asset.

    However, that has not stopped investors from exploring opportunities in Bitcoin. The greatest public example would be the Winklevoss twins and their VC firm Winklevoss Capital. [2]. The Winklevoss brothers now own at least 1% of all outstanding Bitcoins [3] and they are pushing to establish an exchange-traded fund that will further blur the legal taxonomy of Bitcoin by establishing a security indexed to the hyper-volatile market price of Bitcoin. [4].

    Others have suggested that investment into Bitcoin is not investment at all, but merely speculation. [5]. However, given the huge risk of fraud and theft from hacking, it might be better to call it gambling. In any case, the federal government would do best to legislate quickly and thoroughly across the entire code or not at all. Labeling Bitcoin as a currency would help to stabilize uncertainty but delayed legislation could have ripple effects that would be devastating for companies that have an established niche. I believe the states face the same pressure to address their U.C.C. provisions, and I think that any change should be a model statute to ensure uniform implementation – preferably in unison.

    However, even given the legislative hurdles and the negative perception of Bitcoin [6], I think it will eventually integrate into mainstream commerce. There is a huge advantage that comes with the free use of Bitcoin and other virtual currencies. Notably, there would be reduced transaction costs as it would operate without the fees charged by popular credit cards and check cashing services In addition, it would open up banking-like services and electronic markets to people with low credit scores who do not qualify or cannot afford a bank account or a credit card. Benefits might even extend to developing nations where cell phones have propagated faster than credit. With merely a text function, even the poorest rural communities could participate in banking and gain greater access to microloans.

    [1] See 15 U.S.C. § 77b(a)(1) (2016).
    [2] See
    [3] Id.
    [5] Id.

  4. Bitcoin should be considered a currency. Whether some people are only considered “users” and not “exchangers” it does not matter because it is still being used by the exchangers as currency. Bitcoin cannot have a different legal definition based on how it is being used. Leaving that type of ambiguity for courts and law enforcement would only complicate a situation that is already quite complex.

    The federal government should not be permitted to prevent people from investing in Bitcoin. If individuals want to invest, they should be aware that they are doing that at their own risk. There is no promise that the federal government will protect them from bad deals (other than apparent contract law, I would assume) and it should stay that way until the government actually decides how to deal with Bitcoin. There are too many jurisdictions in the US with conflicting opinions about Bitcoin’s legal status as currency. Before the government steps in and prevents people from using Bitcoin as an investment, they should have regulations in place that are specific and clear to all jurisdictions in the US.

    I think that the world has become much more virtually-dependent. So, it is only a matter of time before Bitcoin or some other type of virtual currency is accepted as money. I am hesitant to the concept of virtual currency. My hesitance might come from not understanding how the currency is regulated and tracked within Bitcoin (this is probably of my own ignorance). It is just such a novel concept to me that I am reluctant to fully trust virtual currency. With so many companies working overseas, I could imagine that a virtual currency would be extremely useful for businesses. I would just like to know that is it more reliable before believing it is a huge benefit to society as a whole.

  5. 1. Again, I believe that, for the time being, Bitcoin should not be considered a currency but perhaps a commodity. Currency generally has an air of legitimacy about it that Bitcoin simply does not have because it is not officially recognized as currency, cannot be considered legal tender, is not insured or secured, and does not have any form of hard value backing it up. To continue considering its use money laundering while not also explicitly stating that it is not legal to use allows for the great possibility that those using it will not have notice of the possibility of criminal prosecution. Until a definitive choice is made regarding its classification, Bitcoin should not be used as a means through which to prosecute individuals using it.
    2. No it should not, for the time being Bitcoin is not an actual commodity, is not insured by the government, and is therefore private property the government does not really have a stake in. As of now it can hardly prosecute individuals for defrauding other people while all are using an illegal trading platform and yet not prosecute the victims as well. The government should attempt to resolve its approach to Bitcoin as quickly as possible but stay out of Bitcoin until it does so. This could result in people losing investments or property but Bitcoin is an unregulated sphere and its users alone are responsible for the consequences while we decide what to do with Bitcoin.
    3. I am only sure that I have no clue whatsoever. I think the government would be better served allowing Bitcoin (and other VCs) to be considered property, then taxing and regulating it. This would allow its users to continue using it without making it less valuable than U.S. Dollars. That being said there are clear advantages and drawbacks to each course of action. If it becomes currency it could supersede the dollar – I have nowhere near enough knowledge in the area to know if this would be good or bad. However, it could also create a uniform global currency for some transactions that would be very helpful. If it were kept as a commodity, it could create revenue for governments while simultaneously allowing shady transactions to occur (those occur with any currency regardless). In either event, the government should regulate Bitcoin and curtail attempts to use it to prey on others.

  6. I think Bitcoin is best classified as currency. After reading about what Bitcoin is and how it is used i can understand the confusion on how to classify Bitcoin. On a functionality level Bitcoin basically functions just like any other currency in that it has value and can be traded for goods or services. The thing that makes Bitcoin different is the lack of regulation by government and the fact that Bitcoin is not run by a centralized entity. The lack of regulation and fact the Bitcoin is not run by a centralized entity can be used as arguments for why Bitcoin should not be considered currency. I think a main thing that makes Bitcoin different from other currencies it the way it is created and issued. It is my understanding that a number of people who understand the inner working of Bitcoin can do what is called mining and create more Bitcoins for themselves. This seems to go against Bitcoin being considered as currency because unlike other currencies anyone can create Bitcoin which can affect the value of the Bitcoins.

    I do not believe that the Federal Government should prevent people from investing in Bitcoin until more specific regulations are in place to protect investors from losses due to fraud and or theft. People who invest in Bitcoin should do research into Bitcoin before investing and become aware of all the risks involved in such an investment. Bitcoin investors should be aware that there is no federal protection from fraud or theft involving Bitcoins, and base their decision on whether to invest or not knowing of the full risk involved. Even with these risks Bitcoins are being traded and can be a valuable investment that shouldnt be prohibited by the federal government. It is the investors responsibility to know the risk of any investment and it should be no different with Bitcoin, if investors are willing to knowingly take the risks involved there should be free to do so as they please as long as they are acting within the law.

    I think it is possible that Bitcoin could be considered legal tender in the United Stated in the future. I think a lot more research will have to be done to determine how to regulate Bitcoin and try to limit the risk of fraud or theft and come up with proper remedies in situations involving fraud or theft. If properly regulated Bitcoin could become a useful currency in many ways including internet purchases, low cost trading, and avoidance of different exchange rates in international transactions. If not properly regulated Bitcoin can be a dangerous way for criminals to launder money and commit other illegal activity.

  7. I think one thing that’s important to distinguish in the FinCEN’s treatment of Bitcoin is that their focus is on regulating money services businesses (MSBs). From my understanding they treat Bitcoin as currency but the entities using Bitcoin differently because only some engage in the type of behavior that gets them classified as MSBs, similar to how any individual person can use cash or a credit card without being a MSB.

    I think Bitcoin should be classified and regulated as currency. It was designed to act as currency, it is used to purchase millions in dollars’ worth of goods and services, and is considered by its own community to be a substitute for traditional money. Personally as someone who is perfectly happen with using regular money and not buying illicit goods online, if I used/purchased bitcoins I would treat them as a commodity/investment because of the high volatility and my own unease about using such an unpredictable item to purchase stuff. I think some of that discomfort has to do with being used to USD which is a very stable and reliable currency.
    (Full disclosure I own about ~.0005 bitcoin, which some guy tweeted to me because I was tweeting about the College Football Bitcoin Bowl)

    I don’t think the federal government should prevent people from purchasing and investing in bitcoin because I think existing regulations if applied do enough to protect investors and I think that with something on the cutting edge like Bitcoin there is value in letting the market figure itself out before crafting more targeted regulations. I would also be worried about over-discouraging the creation of other new online financial instruments.

    I don’t think Bitcoin will ever be considered legal tender in the United States, I have a hard time believing the government would allow a platform where they lack basically any controls to reach legal tender status. I do expect that the government will eventually catch up and for there to be a virtual currency component of USD in a way that is more available to the public. As it is most USD transactions happen virtually from computer to computer rather than hand to hand with cash so extending that further into a virtual currency wouldn’t surprise me at all.

  8. I think Bitcoin should be best classified as currency. Bitcoin already operates as money; they have some type of cash value, they can be exchanged for goods and other currency, etc. They already have all of the characteristics of currency, so they might as well be categorized as such.

    I do think that the federal government should prevent people from investing in Bitcoins until more specific regulations are in place. The situation regarding Bitcoin is too capricious right now. I do not think we know enough about Bitcoin, or at least I do not think that the government has fully recognized all of the potential implications of Bitcoin. Because this issue has not bee properly addressed, there is a lack of legislation and regulations surrounding Bitcoin. As a result, individuals are not granted or afforded the same type of protection from fraud and theft as individuals who invest in other things, such as real property, are afforded.

    I am not really sure if Bitcoin or another form of virtual currency will ever be considered legal tender. This is actually a really good question… I want to say no, Bitcoin will never be considered legal tender because it just does not seem like something the US would condone. Even paper money started off being backed up by gold; bitcoin is all virtual. However, I am hard-pressed to say this would never happen. Just looking back historically, gold was the first standard of currency. Then silver, nickel, and other minerals became acceptable forms of currency. Then we began printing paper money which started off being backed up by gold. But in 1971 paper currency stopped being backed by gold and instead began to be backed by the full faith and credit of the US Government. Then we converted this paper money to electronic versions with the introduction of credit and debit cards. Seeing how the history of currency has advanced, it would not be too far-fetched to find that in a few years virtual currency became legal US tender backed by the full faith and credit of the US Government.

  9. (1) I think that Bitcoin is best classified as a form of currency. I understand that it’s difficult to categorize it as one thing because it has many functions, but I think that one of the most attractive qualities about Bitcoin is that it can be converted into real cash. I’ve also noticed that most people refer to Bitcoin as virtual or digital currency rather than commodity, security, investment property or some other name. When users look at the number of Bitcoins they have in their possession, they see a dollar value and when fraud or theft occurs, their loss is calculated with a dollar value. Also for anti-money laundering regulation purposes, I think that Bitcoin is best classified as a form of currency.

    (2) The federal government should not prevent people from investing in Bitcoin until more specific regulations are in place. If people choose to use Bitcoin, then there are risks associated with that just like there are risks associated with other financial transactions. Bitcoin users enjoy a number of benefits which was discussed in the blog such as low cost transactions, increased privacy, encrypted security, no interference from third parties and self-regulated money supply. This is why people use Bitcoins. They like having direct control over their “money”. However, all of these benefits come with disadvantages. When fraud or theft occurs, it’s hard to trace and Bitcoins are not federally insured. These are the risks associated with not using a financial institution or trusted third party. I think the federal government should aim to create more specific laws to regulate this new and developing form of currency while people have the freedom to use this payment system. Fraud, theft and breaches occur all the time even with the most secure payment systems. If Bitcoin was wildly out of control, I could understand the federal government preventing people from investing until more specific regulations are in place but that doesn’t seem to be the issue.

    (3) I do not think Bitcoin or another virtual currency will ever be considered legal tender in the United States because even though it functions and has the characteristics of money, at the end of the day it’s not traditional paper or coin money. Legal tender is an official form of payment that is valid for meeting financial obligations like public and private debts, charges, taxes and dues. I think public entities and private institutions would be extremely hesitant to accept Bitcoin as legal tender. The future of Bitcoin is uncertain whereas traditional paper and coin money has been around forever.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: