Virtual "Currencies": Not actual currencies | White & Case LLP - The first knowledge sharing application in Vietnam

As with any new phenomenon, the rise of digital assets has created a new lexicon. “Blockchain,” “tokens,” and “coins” are now household vocabulary. Central to the discussion are a set of assets generally classified as “virtual currencies” or “cryptocurrencies.”

Although most of these new terms are legally benign, the use of the word “currency” actually implies a conclusion about the legal effect of a cryptocurrency. Specifically, a “currency” is a form of payment that is acceptable as legal payment for all debts. No digital asset currently meets this test, and therefore no digital asset is a currency.1 While virtual currencies and traditional “fiat” currencies may have some features in common, virtual currencies are not actually considered “currencies” under US federal and state statutory law, regulations, or applicable case law. Indeed, the distinction between a currency and a digital asset (such as bitcoin) is fundamental to the technological innovations that set it apart. As cryptocurrencies become more widely held and used, it is critical that holders truly understand the nature and risks of the digital assets they hold—and if they believe they are holding “currency,” they are wrong.

The term “currency” has a very important legal significance in the United States: as stated on each dollar bill, Federal Reserve notes are “legal tender for all debt public and private.” This language appears in the design pursuant to the Coinage Act of 1965, which provides that “United States coins and currency (including Federal Reserve notes …) are legal tender for all debts, public charges, taxes, and duties.”2 The Treasury Department has addressed the meaning of this language, stating that notes carrying such language are a “valid form and legal offer of payment for debts when tendered to a creditor.” However, note that there is no federal legal obligation that a private person or business accept such notes. Indeed, private entities can generally develop their own policies about acceptable tenders.3

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Common (Non-Legal) Definitions of Currency

In relevant part, Oxford’s Living Dictionary defines “currency” as: “[a] system of money in general use in a particular country.”4 Merriam-Webster expands upon this, defining currency as “something (such as coins, treasury notes, and banknotes) that is in circulation as a medium of exchange,” “paper money in circulation,” and “a common article for bartering.”5 “Money” (a term commonly conflated with currency) has a similar definition: “something generally accepted as a medium of exchange, a measure of value, or a means of payment…”6

Under a common, non-legal reading, there is an argument that bitcoin, ether, and other cryptocurrencies could be currencies. They are “in circulation” (insofar as they are “held” by members of the public), and they are designed, at least in part, as a private, non-governmental medium of exchange (despite the fact that their primary current use is apparently as a speculative investment).7

Legal Definitions of Currency

Under US federal and State law, however, non-government issued items clearly cannot be currencies. United States federal law unambiguously defines “currency” as something “of the United States or of any other country that is designated as legal tender and is customarily used and accepted as a medium of exchange in the country of issuance.”8 Thus, under US law, the issuance of currency is a power limited to governments. In the United States, the US Constitution further limits this authority to the federal government, meaning the individual States are themselves barred from creating products intended to be used as currencies.9

Several States have implemented variations of this definition, including Florida (“‘Currency’ means the coin and paper money of the United States or of any other country which is designated as legal tender and which circulates and is customarily used and accepted as a medium of exchange in the country of issuance….”),10 Texas (“‘Currency’ means the coin and paper money of the United States or another country that is designated as legal tender and circulates and is customarily used and accepted as a medium of exchange in the country of issuance.”)11, and California (“‘Currency’ means any coined money, banknotes, or other paper money as are authorized by law which circulates from hand to hand as the medium of exchange.”).12

This legal definition is consistent with multi-State efforts as well. The Uniform Commercial Code, for example, states that “[m]oney” means a medium of exchange currently authorized or adopted by a domestic or foreign government. The term includes a monetary unit of account established by an intergovernmental organization or by agreement between two or more countries.”

New York has codified regulations that contain separate definitions for “Fiat Currency” (“government-issued currency that is designated as legal tender in its country of issuance through government decree, regulation, or law”) and “Virtual Currency” (“Any type of digital unit that is used as a medium of exchange or a form of digitally stored value. Virtual Currency shall be broadly construed to include digital units of exchange that (i) have a centralized repository or administrator; (ii) are decentralized and have no centralized repository or administrator; or (iii) may be created or obtained by computing or manufacturing effort.”)14 New York separated out these categories in the creation of its “BitLicense” regulatory regime for virtual currency providers, presumably in an effort to ensure that the regime was limited in application to virtual currency and did not affect entities interacting with “fiat currency.”

Other pertinent definitions

The Commodity Futures Trading Commission (“CFTC”) has defined a “virtual currency” as a “digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.”15 The former Chairman of the Securities and Exchange Commission (“SEC”) stated on numerous occasions that “[s]peaking broadly, cryptocurrencies purport to be items of inherent value (similar, for instance, to cash or gold) that are designed to enable purchases, sales and other financial transactions. Many are promoted as providing the same functions as long-established currencies such as the US dollar but without the backing of a government or other body.”16

If not a currency, what is Bitcoin?

Over a decade ago, Bitcoin was heralded as a new kind of digital money that would address frictions in payments, as well as serve as a unit of account and store of value without the need for centralized governance. Bitcoin’s emergence created an entirely new payment instrument and asset class, one that isexchanged over a set of payment rails supported by distributed ledger technology. Distributed ledger technology allows for a shared, tamper-resistant ledger that is updated by anyone with sufficient computing power, in contrast to traditional recordkeeping systems built on a single ledger managed by a trusted central entity. At the same time, Bitcoin and some other early iterations of cryptocurrencies have exhibited extreme volatility, limited throughput capacity, unpredictable transaction costs, limited or no governance, and inconsistent transparency, which have hindered their utility as a means of payment and unit of account.17

In the years since Bitcoin’s inception, courts and regulators alike have articulated a number of definitions of what, exactly, Bitcoin is. For example, the Financial Crimes Enforcement Network (“FinCEN”) recently released a Notice of Proposed Rulemaking (“NPR”) in which it stated:

[Virtual currency] is a medium of exchange, such as cryptocurrency, that either has an equivalent value as currency, or acts as a substitute for currency, but lacks legal tender status. Blockchain-based types of [Virtual currency] (e.g., Bitcoin) are peer-to-peer systems that allow any two parties to transfer value directly with each other without the need for a centralized intermediary (e.g., a bank or [money transmitter business]).18

A number of courts have also grappled with this definition, although they generally note that Bitcoin – though it may fall under various definitions of a “virtual currency” or “money” – does not have legal tender status and is therefore not “currency” for legal purposes. Excerpts from several such cases are set forth below:

In the Matter of: Coinflip, Inc., D/b/a Derivabit, and Francisco Riordan, Respondents, 2015 WL 5535736, at *5:

“Bitcoin is a ‘virtual currency,’ defined here as a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value, but does not have legal tender status in any jurisdiction. Bitcoin and other virtual currencies are distinct from “real” currencies, which are the coin and paper money of the United States or another country that are designated as legal tender, circulate, and are customarily used and accepted as a medium of exchange in the country of issuance.”

State v. Espinoza, 264 So. 3d 1055, 1063 (Fla. Dist. Ct. App. 2019):

(“There is no dispute that Bitcoin does not expressly fall under the definition of “currency” found in section 560.103(1).”)

But see United States v. Harmon, 474 F. Supp. 3d 76, 90 (D.D.C. 2020) (internal citations omitted):

“Faced with this overwhelming authority, defendant, unsurprisingly, concedes that bitcoin is a medium of exchange, that bitcoin qualifies as funds, and that bitcoin is a form of currency. Indeed, defendant’s own cited authorities repeatedly describe bitcoin as a ‘currency,’ ‘a virtual, sovereign-free currency,’ and ‘an alternative currency.'”
“Bitcoin is just that — a medium of exchange, method of payment, and store of value.”

The Harmon decision reinforces the position taken by the District of Columbia’s Department of Insurance, Securities, and Banking, along with a handful of other State regulatory agencies, that certain virtual currencies such as bitcoin constitute “money” for the purposes of their money transmission regulations. Such States’ money transmission regulations reflect FinCEN’s definition of “money transmission services,” as cited by the court in Harmon, as “the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means.” Bitcoin, accordingly, may be an “other value that substitutes for currency,” and thus “money” for the purposes of both FinCEN and certain States’ money transmitter regulations. In such States, any person providing money transmission services with respect to bitcoin would likely fall within the scope of applicable money transmitter licensure requirements.

Federal Reserve Central Bank Digital Currency

The Board of Governors of the Federal Reserve System (“Federal Reserve”) recently issued for public comment a proposal on whether it should create a central bank digital currency (“CBDC”).20 While we have gone to great length above to show that virtual currencies are not actual currencies, regardless of their name, a CBDC can be a currency under US law, as it would be issued by the federal Government.

The Federal Reserve’s CBDC proposal lists the three types of recognized money in the US:

Central Bank money: this includes both the Federal Reserve notes currently issued and amounts on deposit by commercial banks at Federal Reserve Banks (“Fed Funds”). These amounts are liabilities of the Central Bank and are currency in the US; only these issuances are currency in the US.
Commercial Bank money: this refers to amounts on deposit at commercial banks. These deposits include demand deposits, time deposits and any other kind. They will likely include tokenized deposits as well. Most deposits carry deposit insurance from the Federal Deposit Insurance Corporation (“FDIC”) up to the legal limits. Pursuant to Section 21 of the Glass-Steagall Act, only banks may accept deposits in the United States. Commercial banks allocate cash from deposits into credit as part of the fractional reserve system.
Nonbank money: this refers to digital balances at nonbank financial companies. These are not deposits, which can only be issued by banks, but reflect transactions with these nonbank entities that are ultimately backed by fiat deposits at a commercial bank.

While a full analysis of the CBDC proposal is beyond the scope of this alert, the proposal can be understood as proposing to offer a digital version of #1 to the general public, likely through #2. In other words, the CBDC proposal could create a new form of currency that is as widely accepted as Federal Reserve notes but as easily transferable as commercial bank deposits.

The Money Supply: How does the Federal Reserve measure it?

One last note on currency—the Federal Reserve measures the money supply as part of its ongoing conduct of monetary policy. In looking at the components of this measurement, we can see what the Federal Reserve believes to be currency in the US. So what is included?

The money supply consists of “M1” plus “M2” (we are collapsing certain unrelated adjustments, such as seasonal effect). M1 consists of: (1) outstanding (issued) currency, (2) demand deposits at commercial banks, and (3) other liquid deposits not meeting the definition of demand deposit. M2 consists of (1) time deposits and (2) money market mutual fund (“MMMF”) retail balances.21

Not a virtual currency in sight, which means that the Federal Reserve does not even consider virtual currencies to be money, let alone currency.

Conclusion

Virtual currencies and the technology that permit them have quickly become interesting new asset classes with exciting use cases. Whatever they may become, they will not be currencies in a formal sense, the issuance of which is limited in the US to the federal Government. Individuals and business should take caution, however, so as to not become ensnared in certain federal and State regulatory regimes that include virtual currencies in their “money”-oriented requirements and prohibitions.

1 Currency should not be confused with “money,” which is a broader concept that encompasses things with value that can be exchanged for goods and services. See L. Bindewald, Inconsistent Definitions of Money and Currency in Financial Legislation as a Threat to Innovation and Sustainability, 14 J. Risk Financial Manag. 55 (2021).
2 31 U.S.C. § 5103 (2022).
3 Subject, of course, to any state laws that may restrict this flexibility. See Legal Tender Status, US Department of the Treasury (Feb. 8, 2022), https://www.treasury.gov/resource-center/faqs/currency/pages/legal-tender.aspx.
4 Currency, Oxford Living Dictionaries (English) (Feb. 8, 2022), https://perma.cc/2W9R-KQEJ.
5 Currency, Merriam-Webster English Dictionary (Feb. 8, 2022), https://www.merriam-webster.com/dictionary/currency.
6 Money, Merriam-Webster English Dictionary (Feb. 8, 2022), https://www.merriam-webster.com/dictionary/money.
7 But see David Yermack, Is Bitcoin a real Real Currency? An Economic Appraisal, Handbook of Digital Currency 31-43 (2015), https://www.sciencedirect.com/science/article/pii/B9780128021170000023?via%3Dihub (“Bitcoin appears to behave more like a speculative investment than a currency.”).
8 See, e.g., 31 C.F.R. § 1010.100(m) (2022); See also 12 U.S.C. § 4001 (defining “cash” as “United States coins and currency”).
9 US Const. art. I, § 10, cl. 1 (“No State shall…coin Money…”).
10 Fla. Stat. Ann. § 560.103 (Regulating MSBs).
11 Tex. Fin. Code § 151.301.
12 Cal. Bus. Prof. Code §22515. See also Cal. Fin. Code § 2003(p) (defines “money” as “a medium of exchange that is authorized or adopted by the United States or a foreign government.”).
13 U.C.C. §1-201(24) (Unif. L. Comm’n 2012).
14 N.Y. Comp. Codes R. & Regs. tit. 23 § 200.2 (2022).
15 An Introduction to Virtual Currency, CFTC (Feb. 8, 2022), https://www.cftc.gov/Bitcoin/index.htm.
16 Chairman’s Testimony on Virtual Currencies: The Roles of the SEC and CFTC, SEC (Feb. 6, 2018), https://www.sec.gov/news/testimony/testimony-virtual-currencies-oversight-role-us-securities-and-exchange-commission.
17 Governor Lael Brainard, Board of Governors of the Federal Reserve System, Digital Currencies, Stablecoins, and the Evolving Payments Landscape, (Oct. 16, 2019), https://www.federalreserve.gov/newsevents/speech/brainard20191016a.htm.
18 Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets, 85 Fed. Reg. 83840 (proposed Dec. 23, 2020).
19 31 C.F.R. § 1010.100(ff)(5)(i)(A).
20 Board of Governors of the Federal Reserve System, Money and Payments: The US Dollar in the Age of Digital Transformation (2022), https://www.federalreserve.gov/publications/files/money-and-payments-20220120.pdf.
21 Board of Governors of the Federal Reserve System, Money Stock Measures – H.6 Release (January 25, 2022), https://www.federalreserve.gov/releases/h6/current/default.htm

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Virtual “Currencies”: Not actual currencies | White & Case LLP