The Green Sheet Online Edition
June 12, 2017 • Issue 17:06:01
Is bitcoin the end of payments as we know them?
The up-and-down hype over virtual currency is officially on an upswing. And bitcoin just passed $2,000 in value per coin. It is perhaps a good time to revisit some legal issues pertaining to virtual currency ‒ with the ISO's perspective in mind. It's possible to write a stand-alone book on each of the topics in this article, so please note that the information provided is a summary of key highlights only.
What is virtual currency?
Virtual currency is a type of unregulated, digital money that is issued and sometimes controlled by its developers, and used and accepted among the members of a specific virtual community. The most well known virtual currency is bitcoin.
Virtual currencies operate on a public ledger or on a private ledger. In each case, the ledger refers to a master-record of who owns how much of the currency. Where the ledger is public, anyone can see which virtual currency addresses have sent or received the virtual currency and in what quantity. A private ledger, on the other hand, is usually centrally controlled and private – as the name suggests.
Think of virtual currency as banking in the cloud. If one or another computer is down, the balances of all depositors are still recorded in the cloud. It's also possible to transfer value from one bitcoin wallet to another within seconds, and without material fees, to or from anywhere in the world.
Bitcoin is a public-ledger distributed virtual currency. In plain English, that means anyone can see everyone else's (there are millions of accounts) bitcoin wallet balance. That looks interesting on the one hand, but if you factor in that you can create a new bitcoin wallet every few seconds, you realize that it's not that easy to see anyone's real balance. What is more, a wallet address is a code, such as: 1BvBMSEYstWetqTFn5Au4m4GFg7xJaNVN2.
It's actually quite hard to connect people to their virtual currency wallets because wallets can be created and operated without connecting any personal data to the wallet. While this is illegal in some instances, it happens often.
Is virtual currency legal?
Yes, virtual currency is legal. Like other property (that is not controlled), virtual currency can be owned by individuals for personal use without excessively complicated legal compliance.
The IRS treats bitcoin like property and requires that owners of bitcoin report gains or losses to the IRS. Interestingly, of the likely many thousands of people who own bitcoin in the United States, perhaps as little as 802 have actually reported ownership of that asset to the IRS (see "Only 802 people told the IRS about bitcoin – lawsuit," by Jeff John Roberts, Fortune, March 19, 2017).
The takeaway for readers is to keep track of your bitcoin gains and losses so that you can accurately report them to the IRS.
What are the legal issues with virtual currency?
Legal issues associated with virtual currency are everywhere. The fact that virtual currency can facilitate somewhat anonymous, instantaneous, free and even international transactions for no fee means they have become part of the criminal landscape.
Honest, law-abiding businesses starting out in the areas of virtual currency wallets, exchanges or trading platforms must register with the U.S. Department of the Treasury Financial Crimes Enforcement Network (FinCEN), as well as obtain up to 49 individual U.S. state licenses. This process takes years and can cost millions of dollars.
Setting up a national virtual currency business is similar to setting up a national money transmitter business. And the endeavor requires a high level of technical sophistication.
What are the implications for ISOs?
Processing of U.S. dollars from credit and debit cards is not going away anytime soon. (I, for one, certainly hope not). Banks, regulators and the entire economy are too heavily invested in real currency (as opposed to virtual currency).
At least some ISOs' current merchant clients are accepting bitcoin as a form of payment right now. However small, that processing volume is being deducted from the card processing volume on which the ISO usually earns residuals. Certain bitcoin payment processors, such as BitPay, allow merchants to accept bitcoin and receive it as either bitcoin or U.S. dollars. Sooner or later, these new processors will command some market space.
The challenge for ISOs is to apply their best talents – selling and technology – to the new possibilities in virtual currency. There are likely opportunities for ISOs to resell virtual currency processing services to merchants.
ISOs that decide to resell virtual currency services should first verify that the service they are selling is properly licensed at the federal and state level. Companies that are not properly licensed can see their assets frozen and their principals go to prison.
Is this the beginning of the end for conventional processing?
Conventional processing of credit cards and debit cards is the backbone of U.S. retail and is not going away anytime soon. There is simply too much invested in the real currency economy to see it vanish. As the virtual currency economy grows, however, adding processing, lending, accounting and other attributes of real currency, there is a possibility of seeing a real portion of the economy shift from real to virtual currency.
To be clear, most payments are already electronic. The shift from one form of electronic payment (card) to another (virtual currency) is, in some ways, a semantic change. In other ways, however, the change involves huge issues of macroeconomics and even the ability of nations to control their economies. Consequently, a shift from real to virtual currency would require changes on many levels that could not happen rapidly.
What should I do?
Perhaps the best thing ISOs and merchant level salespeople (MLSs) can do is learn about virtual currency and educate their merchant customers who want to know about it. Merchants see ISOs and MLSs as their connection to payments; these payment professionals add value by being out in front and leading on all new topics, including virtual currency.
I also recommend getting a bitcoin wallet at a place like Coinbase and acquiring some bitcoin – just for fun.
In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If you require legal advice or other expert assistance, seek the services of a competent professional. For further information on this article, email Adam Atlas, Attorney at Law, at firstname.lastname@example.org or call him at 514-842-0886.
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