Bitcoin is a virtual currency that is either:
- A totally laughable pipe-dream concocted by computer geeks too nerdy for Star Trek conventions, or,
- A highly valuable currency that will bring economic freedom to those suffering from government induced inflation* and centralized control.
With the bitcoin exchange value skyrocketing after the government seizure of bank accounts in Cyprus, and recent guidance from the Financial Crimes Enforcement Network (FinCEN), it appears bitcoin is gaining momentum to become more mainstream.
US regulation of bitcoin
A peer-to-peer global network checks the validity of each bitcoin through redundant verification. Does this mean that because this system is global, a US citizen needs to file a Report of a foreign financial account (an FBAR form), for amounts over $10,000? In this article, I will discuss what the law should be, and what it will probably end up being.
Commentary on the recent bitcoin guidance from FinCEN
FinCEN is part of the US Treasury and is in charge of detecting Financial crimes such as money laundering and tax evasion. At the bitcoin foundation Patrick Murck wrote about the proposed requirements FinCEN intends to impose on US persons who use bitcoin:
"FinCEN’s position as it relates to bitcoin can be summed up as follows:
- A person may spend money to purchase bitcoin or mine bitcoin and then exchange the currency for goods and/or services without having to register with FinCEN…
- If a person receives real money in exchange for their bitcoin they MAY have to register with FinCEN.
- If a miner exchanges their mined bitcoin for real money they MUST register with FinCEN.
- Anyone transacting bitcoin on someone else’s behalf MUST register with FinCEN.
This framework would wildly expand the reach of FinCEN and the , and would be unfeasible for many, if not most, members of the bitcoin community to comply with….The BSA was never intended to apply this broadly and reach this far into people’s everyday lives."
But the BSA is already broadly reaching into the lives of everyday people!
The FBAR form was born out of the 1970 Bank Secrecy Act. Its purpose? To help the Treasury Department to detect and cut down on financial crimes by making it an obligation for people who are hiding money to tell the Treasury department where they are hiding money (yeah, you read that right). The crimes it was intended to deter were drug smuggling, money laundering and terrorist activity. Flash forward 40 years, and the BSA's spawn, the FBAR, is all about tax evasion (or in most cases, understandable negligence in not knowing there was a FBAR-reporting obligation). Think about this for a second. Has there been any FBAR convictions that involved drug smuggling or money laundering? For every FBAR penalty case I can think of, the underlying crime was tax evasion only.
The insane penalties for failing to file give the IRS the leverage it needs to compel taxpayers to disclose their foreign accounts. Quite simply, the BSA gave the IRS the power to ensnare everyday people with the FBAR form. The FBAR form was supposed to take down international Bond-villain types, not dual citizens, ex-pats, and visa holders, who weren't aware that the United States has the most backwards-ass and volatile tax system in the world.
So what should happen? Will FinCEN require FBAR's filed for bitcoin accounts?
One argument is that bitcoin is not a foreign account, therefore, the FBAR should not be required. In fact, your Bitcoin "wallet" is located on a flash drive. I would expect government regulators not to take such a narrow interpretation. First, because you can take your wallet overseas, it could potentially be foreign and that is good enough for them. Second, because it relies on the international network of validation, that also makes it foreign.
Does this sound preposterous? Well, consider this: if you grow vegetables in your own back yard for your own consumption, using your own labor, the Supreme Court (in Wickard v. Fulburn) has ruled that this conduct is 'interstate commerce subject to regulation'. So I would hardly be surprised to see FinCEN start defining bitcoin accounts as foreign accounts subject to FBAR reporting.
What will happen?
While there is currently no guidance from FinCEN or anyone else at Treasury on whether or not a bitcoin account needs to be reported on an FBAR form, I anticipate there will be. Just like there is no express law that requires bitcoin miners to register as a Money Service Business, challenges to the courts on government overreach routinely fail. And consider, what is perhaps the biggest threat to the dominance of the United States Government is anything that challenges its ability to issue sovereign money and sovereign debt. If these powers were taken away**, Congress would become vastly limited. Think of a state government — a state government can only raise revenues through actual tax receipts, or tax or borrow from bondholders. The US government on the other hand, actually needs neither to continue to chug along. It can just create its own money (and in fact does). And if an administrative agency does overreach, consider that all three branches of Federal government work in collusion to protect and expand Federal power. Thus, if bitcoin becomes an actual viable currency, I expect it, and its account holders, to be treated more harshly than any drug smuggler ever was.
*all inflation is caused by governments.
** In fact, Congress abdicated its Constitutional mandate to mint and coin money, and rather, handed it off to the privately-owned enterprise known as the Federal Reserve.
UPDATE: The Om FBAR case gives hope that the 9th Circuit Court at least would not classify a Bitcoin wallet as a bank. Period.
