If you haven’t heard of Bitcoin yet, you will soon. Bitcoin, the peer-to-peer digital currency launched in 2009 that has since been taking the Internet by storm, debuted before Congress this past November in a hearing before the Senate Homeland Security and Governmental Affairs Committee on the Challenges and Promises of Digital Currencies.
2013 was Bitcoin’s breakout year. Prior to last year, Bitcoin was mainly known for its connection to the Silk Road. According to a criminal complaint announced in October 2013, Silk Road is an underground encrypted website that allows users to purchase drugs and guns anonymously over the Internet using Bitcoin as currency. Today, Bitcoin is also popular among many innovative small business owners looking for novel ways to gain customer loyalty, cut costs by avoiding processing fees charged by credit card companies and e-commerce payment processors, and obtain security in business transactions through Bitcoin’s format of irrevocability. In addition to the many online vendors accepting Bitcoin, in recent months brick-and-mortar businesses that accept Bitcoin have been popping up—Greene Avenue Market stores in New York City and a Subway sandwich shop in Lehigh Valley, Pa., for example. The first Bitcoin ATM launched in Vancouver last November with roughly $95,000 traded through it during the first week, according to reports. While gaining momentum, Bitcoin is not without its critics—the instability in its value and unknown regulatory barriers are two of the major criticisms leveled at Bitcoin.
BTC Internet Gaming
During Bitcoin’s short existence, Internet-based casinos have become one of its most popular outlets. Bitcoin casino operators have been accepting and will continue to accept bets from U.S. players in a legal gray area although some sites maintain certain age and location restrictions. But the question remains: Does this run afoul of U.S. Internet gaming laws?
In 2006, Congress passed the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA)1 after determining that new mechanisms for enforcing gambling laws on the Internet were necessary, especially where gambling crossed state or national borders.2 UIGEA itself doesn’t make Internet gaming illegal; it makes the processing of payments related to unlawful Internet gaming illegal. What is considered “unlawful Internet gambling” under UIGEA are Internet bets or wagers that are unlawful under any applicable federal or state law.3 UIGEA contains an intrastate exception—intermediate routing of electronic data is not considered for the purposes of determining where a bet or wager was initiated and received. The passage of UIGEA led to the screeching halt of Internet gaming in the U.S. as many banks, payment processors and credit card companies refused to transact business in the Internet gaming market.4
Up until 2011, in addition to state laws prohibiting Internet gambling, the Wire Act was also considered a federal trigger for UIGEA. Under the Wire Act, “[w]hoever being engaged in the business of betting or wagering knowingly uses a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest, or for the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers, or for information assisting in the placing of bets or wagers, shall be fined under this title or imprisoned not more than two years, or both.”5 For decades, the U.S. Department of Justice considered the Wire Act applicable to all types of gaming. However, in 2011 the Department of Justice (DOJ) reversed its long-standing position, finding that “interstate transmissions of wire communications that do not relate to a ‘sporting event or contest’ fall outside the reach of the Wire Act.”6 This came in response to an inquiry from Illinois and New York regarding the legality of the use of Internet and out-of-state payment processors for intrastate sale of lottery tickets.
Due in part to the 2011 DOJ opinion interpreting the Wire Act and UIGEA’s intermediate routing exemption, Bitcoin wasn’t the only player on the Internet gaining exposure in 2013. Last year also saw the launch of state-sponsored Internet gaming. Nevada, New Jersey and Delaware have all legalized Internet gaming, and other states may be looking to do the same in 2014. The method by which Nevada, New Jersey and Delaware have moved to legalize Internet gaming places Bitcoin Internet casinos in a tough position—they must decide whether to continue operating under a cloud of legal ambiguity and uncertainty or find ways to adapt to the regulatory environment growing around them. As Bitcoin’s popularity increases, the former option becomes less and less of a possibility.
Bitcoin casinos operated despite the halt in Internet gaming operations in the U.S. post-UIGEA and outside the regulatory schemes launched in Nevada, New Jersey and Delaware on legal theories that were largely based on the uncertainty that was Bitcoin. These theories revolved around Bitcoin’s questionable status as a currency, thus not constituting gambling, and Bitcoin not requiring the use of banks or e-commerce payment processors to process payments, thus not constituting a violation of UIGEA.
However, the attention Bitcoin received in 2013 from government regulators weakens these arguments significantly.
In addition to the first congressional hearing in November, Bitcoin is getting attention from regulators in several industries—the Securities and Exchange Commission, Financial Crimes Enforcement Network (FinCEN), the Federal Elections Commission and the New York State Department of Financial Services, to name a few.
I. Securities and Exchange Commission
Trendon Shavers is the founder and operator of Bitcoin Savings and Trust, which offered investors up to a 1 percent daily interest rate of return.7 On July 23, 2013, the SEC sued Shavers, accusing him of running a Ponzi scheme, using new investors to pay returns on previous investments and scamming investors out of Bitcoin valued at approximately $4.5 million. The SEC sought to freeze Shavers’ assets.
Shavers argued that the court was without jurisdiction over Bitcoin because the Bitcoin Savings and Trust transactions were not within the securities law of the United States. On Aug. 6, 2013, the court determined the BTCST investments constituted an “investment contract” and were “securities” under Federal Securities Laws, 15 U.S.C. § 77b. Thus, the court had proper subject matter jurisdiction over the suit. In making this determination, the court found it “clear that Bitcoin can be used as money.” Thus, the BTCST investment was considered an investment of money. The court rationalized that Bitcoin can “be exchanged for conventional currencies, such as the U.S. dollar, Euro, Yen and Yuan. Therefore, Bitcoin is a currency or form of money, and investors wishing to invest in BTCST provided an investment of money.”
On March 18, 2013, FinCEN issued interpretive guidance to clarify the applicability of Bank Secrecy Act regulations to virtual currencies, such as Bitcoin. FinCEN determined that “administrators”8 and “exchangers”9 of Bitcoin are subject to money services business registration because the term “money transmission services” does not differentiate between real currencies and convertible virtual currencies. FinCEN determined that although virtual currency “does not have all the attributes of real currency…virtual currency either has an equivalent value in real currency or acts as a substitute for real currency.”10 FinCEN then confirmed that “[a]ccepting and transmitting anything of value that substitutes for currency makes a person a money transmitter” under the FinCEN regulations implementing the Bank Secrecy Act.11
III. Federal Election Commission
This past November, the Federal Election Commission debated the issue of whether to allow campaigns to accept Bitcoin as in-kind contributions at the request of the Conservative Action Fund. A draft FEC opinion advised that Bitcoin contributions could be accepted as in-kind contributions because the FEC regulates two categories of contributions, “money” and “anything of value,” and Bitcoin falls into the latter. The draft opinion to allow the acceptance of Bitcoin contributions was ultimately voted down (for now) in a 3-3 vote, but the FEC’s interest and review of the matter is a big step for Bitcoin. Interestingly, the FEC’s draft opinion chose not to make a determination as to whether Bitcoin constituted “money,” acknowledging the question still remained to be answered.12
IV. New York State Department of Financial Services
New York traders of Bitcoin may be required to obtain a BitLicense from the New York State Department of Financial Services beginning sometime soon. The department announced last week its plans to hold public hearings on the matter in order “to balance both allowing new technologies and industries to flourish, while also working to ensure that consumers and our country’s national security remain protected.”13 At issue in the hearing will be how activities surrounding virtual currencies fit into the department’s current regulatory scheme and/or whether new regulatory guidelines will be necessary due to the “unique characteristics of virtual currencies.”14
V. People’s Bank of China, et al.
U.S. regulators aren’t the only ones taking a hard look at Bitcoin. In December 2013, the People’s Bank of China (along with four other Chinese regulatory bodies) declared Bitcoin not to be a “currency” because it did not possess certain attributes, i.e. legal repayment and enforcement abilities, and ordered Chinese banks and financial institutions not to offer, accept or circulate Bitcoin as such. While people are still free to exchange Bitcoin in China, the pronouncement declared that the Chinese government will implement anti-money laundering measures for exchange sites and require registration with telecommunications authorities. Although the value of Bitcoin dropped drastically as a result of the Chinese pronouncement, some Bitcoin users consider it a positive as a declaration that Bitcoin is a currency that could lead to additional regulatory hurdles for the virtual currency.
2013 saw the SEC argue, and a U.S. District Court accept, that Bitcoin is a form of currency or security subject to U.S. securities laws; FinCEN determined that certain (if not most) practices related to Bitcoin constitute activities require registration under the Bank Secrecy Act; the FEC discussed whether Bitcoin is “something of value” (and left the question as to whether Bitcoin is money); and New York state announced that a close look at Bitcoin is coming.
What does all this mean for the Bitcoin gaming industry?
As U.S. regulators in various industries have taken notice of Bitcoin, it is only a matter of time until gaming regulators do the same, if they haven’t already. Bitcoin gaming operators taking action in the United States are at a crossroads—continue the risk of operating without regard for the trend toward increased regulatory scrutiny or find ways to operate within the Internet gaming regulatory environment that exists today and is likely expanding tomorrow.
How soon will we see an application from a state Internet gaming licensee requesting permission to accept wagers in Bitcoin? Could an operator soon offer the first state-licensed Bitcoin-only intrastate casino? While playing ball with the current regulatory environment of Internet gaming in the U.S. may stunt short-term growth, the spread of Internet gaming in the United States may lend itself to long-term potential.
1 31 U.S.C. §§5361-5367.
2 31 U.S.C. §5361(a)(4).
3 Specifically “unlawful Internet gambling” is defined by UIGEA to mean to “place, receive, or otherwise knowingly transmit a bet or wager by any means which involves the use, at least in part, of the Internet where such bet or wager is unlawful under any applicable Federal or State law in the State or Tribal lands in which the bet or wager is initiated, received, or otherwise made.” 31 U.S.C. §5362(10)(A).
4 Certain Internet gaming operators continued accepting U.S. bets. On April 15, 2011, “Black Friday,” the United States filed criminal charges against the founders of the three largest online poker companies alleging violations of UIGEA, bank fraud and money laundering in order to process transactions to and from their customers.
5 18 U.S.C. § 1084(a). The Wire Act does provide “a safe harbor for transmissions that occur under both of the following two conditions: (1) betting is legal in both the place of origin and the destination of the transmission; and (2) the transmission is limited to mere information that assists in the placing of bets, as opposed to including the bets themselves.” United States v. Cohen, 260 F.3d 68, 73 (2d Cir. N.Y. 2001) analyzing 18 U.S.C. § 1084(b).
6 United States Department of Justice, September 20, 2011. Whether Proposals by Illinois and New York State to Use the Internet and Out-of-State Transaction Processors to Sell Lottery Tickets to In-State Adults Violate the Wire Act. This interpretation was expressed ten years earlier by a District Court in Louisiana and affirmed by the 5th Circuit Court of Appeals, In re Mastercard Int’l, Inc., 132 F. Supp. 2d 468, 480 (E.D. La. 2001) aff’d, 313 F.3d 257 (5th Cir. 2002).
7 Securities Exchange Commission v. Shavers, United States District Court for the Eastern District of Texas (4:13-cv-00416).
8 An “administrator” is a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circulation) such virtual currency.
9 An “exchanger” is a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency.
10 FIN-2013-G001, March 18, 2013. Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies.
11 Id. It should be noted that while this guidance is telling of FinCEN’s view toward virtual currencies, it is only guidance and not a formal rule making process (yet).
12 FEC Draft Advisory Opinion, Agenda Document No. 13-45-B (11/20/2013). The FEC acknowledged “that virtual and other private currencies are the subject of complex legal and philosophical debates regarding their status as ‘money’” and found it not “necessary to resolve this question to address the [issue presented]…Nonetheless, as a policy matter, the Commission has decided to treat Bitcoins as in-kind contributions to facilitate accurate reporting.”
13 November 14, 2013 Press Release from New York State Department of Financial Services.