Bitcoin, the digital gold (rush) and the law
If bitcoin is a commodity, what about bitcoin intermediation?
Social life did not wait the web to become artificial. It has been so since ever. And digital objects are not its only artefacts. Legal objects predated them by centuries…
Now, bitcoin (and other digital currencies) has been claimed to be digital gold. As a matter of fact, it is a digital object with yet an uncertain legal form.
Bitcoin as a commodity
Bitcoin and other virtual currencies have been determined to be commodities by the US Commodity Futures Trading Commission (CFTC) under the Commodity Exchange Act (CEA) in 2015.1
Nowadays, private development of digital currencies is under distress, showing the usual evidence of yet another financial scam by ruthless shadow banksters with political connections, but digital currency plans and multi-currency payment platforms developed by central banks and the early move by the People’s Bank of China into issuing a central bank digital currency may represent a path-breaking financial transformation.2
Back in 2015, encompassing bitcoin as commodity was supportive of it being a sort of digital gold.
Technically speaking, a bitcoin is digital object which contains proof of all previous transactions over it. Transaction parties are identified by digital identifiers which may conceal their actual identity. Bitcoin sole interest is to be exchangeable between two parties.
To be sure, by construction, new bitcoin issuance demands an increasing computation power consuming material electrical energy . So scarcity was expected by design by those who started its issuance process… if some commodity becomes increasingly rare relative to its demand, its exchange price will increase driven by excess demand, implying quite a financial rent position for the ones at the top of its overarching financial pyramid scheme. What was needed was a gold rush on that commodity…
De-centralised gouvernance? De-centralised (distributed) information ? Or deregulated finance?
A gold rush is quite a perfect occasion to generate excess demand. And a gold rush situation occurred shortly after 2009, the year in which bitcoin was established.
2009 is not just one year like any other. At that time when the North-Atlantic Financial crisis of 2007-08 had just disrupted shadow banking and its hazardous networking of bank and non-bank financial intermediaries, bitcoin was providentially established.
While promoters and fans claimed for a de-centralised platform, a de-centralised distributed ledger, and a stampede of de-centralised applications, liquidity-stripped shadow banksters saw the ultimate Eldorado in it: de-regulated private currency issuance.
A commodity which exists by (and with no further use but) being passed from hand to hand
Now imagine snake oil salesmen proposing a new magical product called “Cokaine” which is just functionally equivalent to… cocaine but with a shocking pink colour for its wrapping and smoke.
“she don't lie, cocaine” (Eric Clapton)
Once upon a day in the Green Pastures Land, honorable lawmakers seek to supervise “Cokaine” intermediation (that is, its management, production and distribution). Here is an imaginary dialogue between those snake oil salesmen and The Law:
Snake oil salesmen (proud and bold): Your Honour, “Cokaine” is a synthetic chemical. It is an artificial object and it shall be regulated as such. Intermediaries take neither obligation nor responsibility for its possible eventual usages.
The Law: people of reason would say that “Cokaine” is a drug, it is hazardous if not harmful and similar drug commerce has been either regulated or forbidden already by our legal order.
By analogy, if bitcoin is a currency, currency issuance would be the joint privilege of the central bank and the treasury. On the one hand, currency forfeiting is a felony. On the other hand, what would be central banking without a license? Another dialogue between a bitcoin intermediary and the Law in our imaginary jurisdiction:
Bitcoin intermediary: Please allow, Your Honour. Bitcoin is different… It is not like the currency, it just performs some of its functions as a means of exchange and a reserve of value.
The Law: Well, in this case, issuers of bitcoin should be regulated as an issue bank, provided that the Parliament enable free money issuance again as it used to be before central banks were established…
Bitcoin Intermediary (firm): Let us dissent, Your Honour. We are not issue bankers, we just hold bitcoin wallets on behalf of users.
The Law: Well, bitcoin being functionally equivalent to cash, bitcoin is a cash equivalent and issuing cash equivalents is a privilege of deposit banks.
Bitcoin intermediary (quite worried): Your Honour. In fact, we do not issue cash equivalents, we just enable users to exchange bitcoins…
The Law (less patient): To resume, if you hold and intermediate securities transactions on behalf of your clients, you should be treated as non-bank financial investment funds…
Bitcoin intermediary (visibly agitated): Your Honour, let us amend again our former representation. Bitcoins are not financial assets, and we do not take investment responsibilities, just pure intermediation over them…
The Law (resisting own irritation): If you facilitate exchange of assets, including price-fixing and market-making, you should be treated as regulated exchanges and primary dealers operating through those exchanges…
Bitcoin intermediary (with its last breath): Your Honour, we just let people transfer them through the platform with our assistance…
The Law: Even in this latter case, you should be treated as a payment system such as the Society for Worldwide Interbank Financial Telecommunications (SWIFT).
This dialogue did certainly occur in the Green Pastures Land. What is going on in US?
Bitcoin as de-regulated currency issuance and intermediation
By commodifying bitcoin as a digital object which is generated and intermediated, it comes to be understood as a commodity (by the CFTC) or a property (by the IRS for US federal tax purposes). But that object has no reason to exist and no further purpose but to be transferred from one wallet user to another wallet user, through a governance system of intermediaries managing the software development, the wallet holding, the transaction performance and recording, and the new issuances. As a matter of fact, bitcoin issuance is limited by design, while this digital system is highly concentrated with around fifteen thousand intermediaries organising transactions, and fifteen main issuers.
In fact, no one has an interest in exchanging one bitcoin against another one. Bitcoin platform does not organise some numismatic barter among wallet users. The point and very purpose of this platform is to enable bitcoins to be exchanged against something else, for instance cash and cash equivalents. For this latter financial dimension, a complementary system of intermediaries organise the trading of bitcoins (and other digital currencies), including market-making and even financial derivatives upon their highly volatile exchange prices.
Neither financial transactions involving bitcoins nor operations by entities involved in these two systems (the software platform and its complementary financial infrastructure) are covered by defining bitcoin as a commodity for legal and regulatory purposes.
Concerning regular currencies, only coin collectors do nowadays believe that metallic and paper supports are the only key issues to be addressed. And regular currency is already digital, being held in bank deposits accessible online and attached to debit and credit cards. Who needs yet another digital object to deal with cash transactions?
Concerning law and order, we imagined what would happen in the Green Pastures Land. We already know what happened in the financial Far West of our times.
Biondi, Yuri. "Central Banking in Perilous Times: An Open-Ended Chronicle" Accounting, Economics, and Law: A Convivium, vol. 13, no. 2, 2023, pp. 49-102. https://doi.org/10.1515/ael-2023-0007