Ailin Graef, famed as the Rockefeller of Second Life, makes $150,000 dollars in cold-hard cash every year.

1 Second Life, a virtual reality game created by Linden Labs, boasts more than 20 million users, and has its own currency and currency exchange, Linden Dollars and the Lindex, respectively, and users are able to take their earnings and can exchange in their in-game currency for real world currencies. So where is all this money coming from? One of Graefs tactics is to buy up a large plot of Second Life virtual land for roughly $200 a month for each 16acre plot plus a onetime fee of $1,250, and then build and design buildings using Photoshop. Other players then buy or rent her virtual estate, and for large sums of moneyin 2005, Graef had done this 10,000 times. In another massive online role-playing game (MMORPG) called Entropia, a player sold a virtual nightclub on a private asteroid for $335,000.2 To put virtual economies in perspective, the World Bank Virtual Economy estimated the total revenues of the industry to be 3.0 billion USD.3 Certainly, this blurs the line between real and virtual life, thus introducing a new slew of economic, political, and legal issues that need to be addressed. While the definition of money was limited to physical currencies fifty-years ago, now it applies to virtual currencies. The traditional definition of money is that it must be: (1) a store of valueit holds its value over time, (2) a medium of exchange
1 Sloan, Paul. The Virtual Rockefeller. CNNMoney.com. 1 December 2005. <http://money.cnn.com/magazines/business2/business2_archive/2005/12/01/8364581/index.htm> 2 Boyle, Rebecca. In Largest Virtual Transaction Ever, Real Sale of Pretend Nightclub Nets Half a Million Dollars. PopSci Online. 16 November 2010. <http://www.popsci.com/science/article/2010-11/real-sale-virtual-property-netshalf-million-dollars> 3 Lehdonvirta, Vili. World Bank Economy Report: Secondary Markets worth 3 Billion. Virtual Economy Research Network. 7 April 2011. <http://virtual-economy.org/blog/world_bank_virtual_economy_rep>

people accept it in buy and sell transactions, and (3) a unit of accountthe common benchmark of an economy. Clearly, Linden Dollars, World of Warcraft gold, and many other gaming digital currencies satisfy these criteria, but what about non-gaming digital currencies? There have been innumerable attempts to legitimize a digital currency, some legal, some illegal, but few have gained much traction, until now. In 2009, Satoshi Nakamoto invented the Bitcointhe first anonymous p2p crypto-currency, which lacks any regulation, government, or centralization. In this paper, I set forth the following argument: (1) Though a new technology, Bitcoin does satisfy the definition of money, and relates to other currencies, both past and present, and physical and virtual, but (2) due to its anonymous structure, Bitcoin has mainly attracted counter-economy advocates despite (3) having significant competitive advantages over other micropayment transaction services. As a result, (4) the government will fervently oppose it, but (5) will ultimately fail to effectively and efficiently govern it. I. How is Bitcoin Money? Currently, the Bitcoin adheres to the definition previously detailed; (1) it has had a store of value since its creation, (2) there are markets in which people exchange goods and services for Bitcoins, and (3) it is beginning to serve as a benchmark in a growing Bitcoin economy. However, Bitcoin is different; as contributor Gavin Andreson describes, Bitcoin is the first peer-to-peer currencyit is money created by people instead

of by a central bank or government. Just as BitTorrent and other p2p clients lack any centralization, Bitcoin also lacks any single point of attack or responsibility. The supply of Bitcoins is determined by Bitcoins algorithm, not by a government. The Bitcoin Wikipedia page tersely describes how Bitcoins are created: New coins are generated by a network node each time it finds the solution to a certain mathematical problem (i.e., creates a new block), which is difficult to perform and can demonstrate a proof of work. The reward for solving a block is automatically adjusted so that in the first four years of the Bitcoin network, 10,500,000 BTC will be created. The amount is halved each 4 years, so it will be 5,250,000 over years 4-8, 2,625,000 over years 8-12 and so on. Thus the total number of coins will approach 21,000,000 BTC over time.4 Each coin is a chain of digital signatures that leaves an electronic trail in the Bitcoin. Each user of the Bitcoin client is given an address that can be changed for anonymity purposes which is a hash of the public key of an Elliptical Curve Digital Signature Algorithm (ECDSA) public/private cryptographic key pair.5 Users keys are stored in a digital wallet on their computer. To send Bitcoin from one address to another, Bitcoin publishes the transaction to the network, listing the source, destination address and amount. The Bitcoin is then signed by the source address private key, and the transaction is propagated to all active clients on the network.

5Willis,Nathan.Bitcoin.VirtualMoneyCreatedbyCPUCycles.LWN.net.10November2010.

Bitcoin FAQ, last updated 19 April 2011. <https://en.bitcoin.it/wiki/FAQ#How_are_new_Bitcoins_created?>

<http://lwn.net/Articles/414452/>

the Bitcoin is signed by the source address private key, and the transaction is propagated to all active clients on the network. This effectively solves the double spending problem because the network of Bitcoin nodes keeps track of all transactions and before every transaction the coins unusedness will be checked.6 Transactions are collected into a block, which is a permanent record of all transactions that have taken place since the last block was published. As long as a user has the Bitcoin client running, new blocks will be published. Since Bitcoin is a new currency and needs to incentivize participation, generating Bitcoins may be profitable for some dedicated miners. Once a users client solves a block, the user gets fifty new Bitcoins. This may sound like users are capable of generating money, which is somewhat true, but the rate at which Bitcoins are generated in the client computer decreases as more Bitcoins are generated across the network. The average rate of new Bitcoins created for a single clients computer equals (6 * 50 Bitcoins / hour) / (hash rate / the total hash rate of the entire network). Nakamotos initial equation for the average Bitcoin creation rate replaced CPU for hash rate, but Bitcoin miners have turned to GPU instead of CPU because GPUs have a much faster hash rate, thus block creation rate. For example, GPUs like the Radeon HD 5970 can execute 3200 32-bit instructions per clock in comparison to a typical CPU core that can execute 4 32-bit instructions per clock.7 Upon creation in 2009, Bitcoins were easy to generate because the total hash rate of the computer systems in the network was small, but this was also at a
6Bitcoin 7Bitcoin

FAQ, last updated 19 April 2011. <https://en.bitcoin.it/wiki/FAQ#How_are_new_Bitcoins_created?> Wiki, last updated 19 April 2011. <https://en.bitcoin.it/wiki/Why_a_GPU_mines_faster_than_a_CPU>

time when Bitcoins were worth but a few pennies. To put things in perspective now, my 2009 MacBook Pros CPU (1,000 khash/s) will generate fifty Bitcoins every 4590 days on average, in comparison to a Radeon HD 5850 GPU (64,000 khash/s)8 that will generate fifty Bitcoins every 77 days on average.9 Bitcoins even have an active exchange market. The most active exchange market, in which Bitcoins are exchanged for USD, is MtGox.com.10 As of April 2011, the current exchange rate was roughly 1BTC:$1.2USD when just ten months ago the exchange rate was .20BTC:$1USD.11 A prominent Bitcoin forum poster, lfm analyzed the hash rate growth since its launch,12 which another computer scientist commented on, The computing power spent on hashing for mining Bitcoins started to increase exponentially since January 2010 at a fantastic pace. It has doubled every 27 days, continuously, in the last 15 months. This is 10x every 3 months. 100x every 6 months. 1000x every 9 months.13 There is no doubt that Bitcoin is growing rapidly. So how similar are Bitcoins to other types of money? Because Bitcoins are a fiat currency, like the US dollar post-1971, the value of a Bitcoin is determined by how much others are willing to exchange for them. Unless one were to somehow consume the currency himself (e.g., if the currency were rice), the value of each unit of currency equals: Total value of goods and services purchasable / Currency units in circulation
8Username:Racerx.HashRate/CPUComparisonTable.OfficialBitcoinForum.31October2010. <http://www.bitcoin.org/smf/index.php?topic=1628.0> 9BitcoinGenerationCalculator.<http://www.alloscomp.com/bitcoin/calculator.php> 10Note:MtgoxdoesnotserveasanMSB 11 Mt. Gox 24/7 Bitcoin Exchange. <Mtgox.com/history> 12 <http://www3.telus.net/millerlf/hashes.png> 13Bevand,Marc.TheBitcoinCryptocurrency.Zorinaq.6March2011.<http://blog.zorinaq.com/?e=49>

Just as a dollar cannot be spent twice, Bitcoins cannot eitherand is the first digital currency to solve this problem.14 While very few do succeed in counterfeiting USD, it has become increasingly difficult, if not impossible, and Bitcoins are believed to be analogous in this regard, too. However while counterfeiting dollars is punishable under the U.S. Constitution, Section 8, clause 6, which reads, To provide Punishment of counterfeiting the Securities and current Coin of the United States, counterfeiting Bitcoins is not illegal because it is not U.S. currency. While Bitcoins are similar to the fiat money like the dollar, Bitcoins are also similar to gold. Due to its generation algorithm limiting the number of Bitcoins, Bitcoins are a scarce resource like gold. Skeptics worry that this may result in the same deflationary spiral as the US during the Great Depression era.15 According to the Keynesian economic theory, as Bitcoins become more valuable, less Bitcoins are available and people will start hoarding them. However, unlike the US Federal Reserve Bank, Bitcoin cannot change the rate at which Bitcoins are supplied, because the rate is controlled by the networks algorithm. The total number of coins will be 20,999,999.9769 in 2140, but blocks will still be created, and the use of transaction fees will likely make creating new blocks more valuable from the fees than the new coins being created.16 Thus, Bitcoins will follow a similar path as gold in the sense that the supply will approach a limit. Yale Law student Reuben Grinberg further explains, Bitcoin is likely to be
14Brito,Jerry.OnlineCashCouldChallengeGovernments,Banks.TechlandTIMES.16April2011. <http://techland.time.com/2011/04/16/onlinecashbitcoincouldchallengegovernments/> 15 Bitcoin Wiki, last updated 19 April 2011. <https://en.bitcoin.it/wiki/Deflationary_spiral> 16Bitcoin FAQ, last updated 19 April 2011. <https://en.bitcoin.it/wiki/FAQ#How_are_new_Bitcoins_created?>

attractive to those who like gold-backed currencies because its value depends on the availability of a limited (albeit virtual) resource rather than discretionary actions by central bankers, and thus, the appeal is similar as well. II. Bitcoins Anonymity Promotes Illegal Activities Though disagreements arise discerning whether Bitcoins anonymity is an advantage or disadvantage, Bitcoin does permit a high level of anonymity. The reason Bitcoin is not perfectly anonymous is because every Bitcoin transaction is public; consider the following example: (i) You live in China and want to buy a real newspaper for Bitcoins. (ii) You join the Bitcoin forum and use your address as a signature. Since you are very helpful, you manage to get 30 BTC after a few months. (iii) Unfortunately, you choose poorly the pn from whom you buy the newspaper: you've chosen a government agent! Maybe you are under the mistaken impression that Bitcoin is perfectly anonymous. (iv) The government agent looks at the block chain and Googles (or Baidus) every address in it. He finds your address in your signature on the Bitcoin forum. You've left enough pnal information in your posts to be identified, so you are now scheduled to be reeducated.17

17Username:Themos.anonymity.OldBitcoinWiki.5September2010. <http://www.bitcoin.org/wiki/doku.php?id=anonymity>

The current Bitcoin community values this feature because they value the government being unable to look into their transactions. Consequently, the press has associated Bitcoins with illicit enterprises like the Silk Road. This anonymous marketplace, only accessible via Tor, lists 1297 registered users, 172 current listings, and 537 transactions as of April 21, 2011.18 Goods range from coffee from Mexico, Alpaca socks from Massachusetts, and most notable to the press, illegal stuff. Although the Silk Road does not allow some listings to be posted, e.g., assassination contracts, child porn, or property acquired through theft, other listings such as listings of illicit substances, destructive technologies, radioactive isotopes, and gene selection technologies have all been deemed permissible.19 Note that while all of these things have been deemed permissible and could be bought or sold, a majority of the transactions seem to be limited to illegal substances.20 III. Bitcoins Competitive Advantages Despite the Silk Road, and for those who want to see Bitcoins flourish legitimately, Bitcoin can facilitate convenient transactions in stark contrast to its current competitors. For example, PayPal requires its users to register a credit card and or bank account, and even more restrictions apply for merchants. For those in third world countries, PayPal only permits sending money, not receiving.
18TheSilkRoad.<http://ianxz6zefk72ulzz.onion> 19Username:Moa.Topic:SilkRoad:anonymousmarketplace.Feedbackrequested.BitcoinOfficialForum.19 April2011.<http://www.bitcoin.org/smf/index.php?topic=3984.180> 20Username:psychedelicious.Topic:Ibid.12March2011.< http://www.bitcoin.org/smf/index.php?topic=3984.msg64483#msg64483>

PayPal also has large overhead, charging up to 2.9% on transactions.21 These restrictions and overhead discourage or entirely restrict many from engaging in online transactions, especially the youth demographic. Online games, such as Facebooks well-known Farmville, could be cases where Bitcoins gain significant traction. Due to the (1) convenience of payment, although iTunes has done this quite well, and (2) unregulated acquisition, e.g., an eight year old could own Bitcoins, developers may be led to target this young demographic. MineThings.com, ChessManiac.com, and a multitude of online poker sites have all adopted this model.22 The BitcoinWeekly agrees with this analysis and calls this demographic the time rich poor teenager who looks to make a quick buck or two. However, Bitcoin also has its disadvantages. Because of its lack of regulation and centralization, all exchanges are final. While this may be viewed under the same light as cash in the real world, if one were scammed or were to accidentally send Bitcoins to the wrong address, it would be a permanent and irreversible exchange. PayPals regulations solve these issues, but Bitcoin cannot. However, in defense, the community argues that if Bitcoin were used primarily for micro-transactions, these harms would be negligible. Another alleged disadvantage is that the supply of Bitcoins is controlled entirely by its algorithm, which means the currency would not be able to adjust under extraordinary circumstances, e.g., someone or a government takes control of 51% of the supply.
21Fees.PayPal.<https://www.paypal.com/cgibin/webscr?cmd=_displayfeesoutside> 22Bitcoin

Wiki, last updated 19 April 2011. <https://en.bitcoin.it/wiki/Trade>

In addition, if the developers of the Bitcoin were to make changes in the software, faith in the currency would be undermined. IV. Bitcoin v. US Government The government has yet to specifically comment on the legalities of Bitcoin, so Bitcoin will be analyzed with regards to decided cases, Federal Law including tax law, and the Constitution. One of the most prominent digital currency cases surrounds E-Gold, a company founded in 1996 with operations based out of Florida, which BusinessWeek described as a gold based banking system that appeals to people who fret about inflation and exchange rate fluctuations.23 The E-Gold company created E-Gold currency, which could be anonymously traded for gold. BusinessWeek also reported E-Gold to be a community of child pornographers, money launderers, and hackers that transacted $1.5 billion in 2005.24 Media is often just hype, but in 2007, E-gold was indicted under 18 USC 1956, which reads, (1) Whoever, knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity, conducts or attempts to conduct such a financial transaction which in fact involves the proceeds of specified unlawful activity (A) (i) With intent to engage in conduct constituting a violation of section 7201 or 7206 of the Internal Revenue Code of 1986; or

23MoneyAintWhatItUsedToBe.BloombergBusinessweek.6January2006.< http://www.businessweek.com/magazine/content/06_02/b3966101.htm> 24Ibid.

(ii) With intent to engage in conduct constituting a violation of section 7201 or 7206 of the Internal Revenue Code of 1986; or (B) (i) To conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity; or (ii) To avoid a transaction reporting requirement under State or Federal law, Shall be sentenced to a fine of not more than $500,000 or twice the value of the property involved in the transaction, whichever is greater, or imprisonment for not more than twenty years, or both. Thus, an element of the crime is the concealing of the source, ownership and control of the funds. Here is where Bitcoins may run afoul of the money laundering statute, because it permits anonymity regarding the source and ownership of the funds. As Arnie Scher, Director at the New York office of BDO consulting and a former compliance manager at JP Morgan Chase states, [Bitcoin] avoids every reporting requirement out there, which is scary.25 Merely passing money from one pn to another, with the intent to disguise the source, ownership, location or control of the money is a financial transaction subject to the statute, and money must be a part of a financial transaction related to unlawful activity. A financial or monetary transaction means the deposit, withdrawal, transfer, or exchange, in or affecting interstate or foreign commerce, of funds or a monetary instrument (as defined in section 18 USC 1956 (c)(5) of this title) by, through, or to a financial institution (as defined in section 18 USC 1956 of this
25Adams,Colby.LooselyManagedDigitalCurrencyCouldBeAvenueforCrimeThatsHardtoBlock. MoneyLaundering.com.PostedwithPermissionontheOfficialBitcoinForum.15April2011. <http://www.bitcoin.org/smf/index.php?topic=5907.0>

title), including any transaction that would be a financial transaction under 18 USC 1956 (c)(4)(B) of this title. Moreover, under 18 USC 1957, the government is not required to prove the defendant knew that the financial transaction involved unlawful activity. At sentencing, e-gold faced a maximum of $3.7 million, and its founder faced a maximum prison sentence of 20 years and a fine of $500,000 for money laundering, in addition to a sentence of five years and a fine of $250,000 for operating unlicensed money transactions.26 Although both a physical currency and a virtual currency, Liberty Golds case is another decided case that puts the governments stance in perspective. Liberty Gold was a private currency in the US that consisted of bills, coins, and electronic Liberty Dollars (eLD). In 2007, the companys warehouses were raided by the FBI and was indicted under 18 USC 486, which reads, Whoever, except as authorized by law, makes or utters or passes, or attempts to utter or pass, any coins of gold or silver or other metal, or alloys of metals, intended for use as current money, whether in the resemblance of coins of the United States or of foreign countries, or of original design, shall be fined under this title or imprisoned not more than five years, or both. Though the company did seem to have sinister goals and planned to mix Liberty Dollars into the US currency without people recognizing, the government
26DigitalCurrencyBusinessEGoldPleadsGuiltytoMoneyLaunderingandIllegalMoneyTransmitting Charges.DepartmentofJustice.21July2008.<http://www.justice.gov/opa/pr/2008/July/08crm635.html>

considered it an act of terrorism. In a Justice Department press release, Anne Tomkins, the US Attorney for the Western District of North Carolina stated that Liberty Dollar was a unique form of domestic terrorism that isnt violence, but [Liberty Dollar] is every bit as insidious and represents a clear and present danger to the economic stability of this country.27 If Bitcoin gains traction, it may be viewed under the same scrutiny. Due to virtual Rockefellers like Ailin Graef, Linden Dollars, World of Warcraft gold, and other virtual gaming currencies may meet problems with the U.S. tax code. To be taxed, two applicable principles are valuation, i.e. an asset acquired via digital currency must be capable of valuation, and realization - there must be an accession to wealth over which the taxpayer has complete dominion. In the Duke Law and Technology Reviews Taxation of Virtual Assets of May 2008, Scott Wisnieski sets forth the question in the reviews abstract, The question has thus arisen whether such virtual assets are legal subjects of taxation.28 The prominence of these virtual currencies being exchanged with government currencies like the USD has resulted in the phenomenon known as real money transactions, or RMT. Wisnieski details explicitly what an RMT is, Any time that an individual receives US dollars in exchange for a transfer of virtual assets, that event is either a sale of services or a transfer of property. 61 The event may be seen as a sale of services in that one pn is contracting to acquire virtual assets, be they an avatar, an account, or
27AUniqueFormofTerrorism.NewYorkSun.20March2011.<http://www.nysun.com/editorials/aunique formofterrorism/87269> 28Wisniewski,Scott.TaxationofDigitalAssets.DukeLawandTechnologyReview.10May2008. <http://www.law.duke.edu/journals/dltr/articles/2008DLTR0005.html>

currency. More specifically, the sale is one of advancement services.62 Conversely, if one finds that an individual has property rights in a virtual asset, then a 1001-type realization event has occurred.63 For purposes of establishing a realization event, however, it does not matter whether the virtual asset being transferred is property or a service.29 eBay was once the main hub for most RMTs, but in 2007 the company banned and delisted all RMTs because, as a CNET analyst speculated, eBay is signaling its desire to stay out of the way of what it might see as an ugly future fight with game publishers and government regulators.30 In 2007, South Korea began monitoring and taxing all virtual money transactions, even requiring sellers who make over $13,000 transactions in a given year to have a small business license. Similarly, in China, the worlds number one tax bearer, the government imposed a personal income tax of 20% on profit from RMTs.31 Clearly, RMTs have presented a serious problem for China and South Korea, but has the IRS addressed this? While the Federal law mandates all income be reported for taxes, Nina Olson, a member of the IRS Tax Payer Advocate Service, indicated in 2009 that the economic activities in virtual worlds may present an emerging area of tax noncompliance, in part because the IRS has not provided guidance about whether and how taxpayers should report
29Ibid. 30Terdiman,Daniel.eBayBansAuctionofVirtualGoods.CNET.29January,2007. <http://news.cnet.com/eBaybansauctionsofvirtualgoods/21001043_36154372.html> 31RealTaxesforRealMoneyMadebyOnlineGamePlayers.WallStreetJournalBlog.31October2008. <http://blogs.wsj.com/chinarealtime/2008/10/31/realtaxesforrealmoneymadebyonlinegameplayers>

such activities.32 Nonetheless, there is no doubt that if Ailin Graef were a US citizen, the IRS would eventually come knocking on her door. Obviously, Bitcoin differs from virtual game currencies, but it does meet the criteria of an RMT once the exchange from Bitcoin to USD occurs. Even though RMT only applies to things of stored value, which the government defines as monetary value represented in digital format stored or capable of being stored in electronic media in such a way as to be retrievable and transferrable electronically,33 Bitcoins do have monetary value and meet this definition. In contrast, frequent flyer miles do not meet this definition because they do not have a specific determinable value. Another legal aspect concerns the Bank Secrecy Act and Money Transfer Statutes. Bitcoins, gift cards, Linden Dollars, or anything else of stored value is subject to the Bank Secrecy Act. The Financial Crimes Enforcement Network (FinCEN) interprets this act in hopes to detect and prevent money laundering and the funding of terrorism. The act defines a financial institution to include money service businesses (MSB), which is a pn or business that does business in one or more of the following capacities: (1) Currency dealer or exchanger, (2) Check casher, (3) Issuer/Seller of travelers checks, money orders or stored value, (4) Money Transmitter. In the case of Bitcoins or a digital gift card, prepaid
32McLoone,Sharon.IRSMayPushforTaxComplianceinVirtualWorlds.TheWashingtonPost,Business.8 January2009.<http://voices.washingtonpost.com/small business/2009/01/irs_may_push_for_tax_complianc.html> 33 Department of the Treasury. 31 CFR Part 103. Financial Crimes Enforcement Network; Amendment to the Bank Secrecy Regulations. Federal Register, Vol. 75. No. 123. 28 June 2010. < http://edocket.access.gpo.gov/2010/pdf/2010-15194.pdf>

access involves transmission from one point to another of funds that have been paid in advance, which does suit the FinCENs definition of a Money Transmitter, any other pn engaged as a business in the transfer of funds.34 Thus, Bitcoins are of stored value, a Bitcoin user acts as a Money Transmitter, thus also an MSB, and therefore is subject to the regulations of the Banking Secrecy Act. To date, FinCENs amendment to the Banking Secrecy Act is the most specific ruling regarding whether or not using Bitcoin is legal. This instructive ruling determined that (1) the companys digital gift cards were of stored value, (2) the company was acting as a money transmitter, thus an MSB, but (3) FinCENs Banking Secrecy Acts regulations only applied for exchanges under $1000 per day per pn.35 This ruling seems to imply Bitcoin is legal under the BSA, as long as transfers are below the daily limit. In other words, if a user of the Bitcoin client were to transmit over $1000 one day, it would be illegal unless he was registered as an MSB. However, Bitcoin is only legal under $1000 with regards to FinCENs current law, but could very well be subject to a similar ruling as US. v. E-Gold, namely, 18 USC 1956: To conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity.36

34Starr,Judith.FinCENRulingDefinitionofMoneyTransmitter(MerchantPaymentProcessor).FinCEN.gov. 19November2003.<http://www.fincen.gov/news_room/rp/rulings/html/fincenruling20038.html> 35ElHindi,Jamal.WhetherCertainOperationsofaServiceProvidertoPrepaidStoredValueProgram ParticipantsisaMoneyServicesBusiness.FinCEN.gov.22January2009. <http://www.fincen.gov/statutes_regs/guidance/html/fin2009r001.html> 36U.S.Code:Title18,PartI,Chapter95,1956.

With E-Gold, Liberty Dollar, and the Silk Road in mind, the government will certainly deem Bitcoin to be illegal, but as many of its users hope and argue vehemently, the law will not be able to effectively govern Bitcoin. On June 3, 2008, the National Drug Intelligence Center published a comprehensive report, Money Laundering in Digital Currencies, assessing how the appeal of digital currencies have gained notoriety among drug money laundering communities. Explicitly claiming digital currencies provide an ideal money laundering instrument because they facilitate international payments without the transmittal services of traditional financial institutions,37 even the government recognizes the difficulty law enforcement faces. The report continues to describe the governments dismal status quo as one that needs to close the regulatory loophole that drug traffickers will increasingly rely upon.38 However, most Bitcoin users do not seem to care whether or not Bitcoin is deemed legal or illegal by the US government. In March of 2011, one prominent user attempted to legitimize BitcoinUSA as an MSB that exchanged Bitcoins for ACH drafts and Money Orders by mail, according to FinCENs regulations and the Banking Secrecy Act.39 In order to register as a BitcoinUSA user, one had to provide a valid email address, official ID (State Drivers license or a National

<http://www.law.cornell.edu/uscode/718/usc_sec_18_00001956000.html> 37Introduction:MoneyLaunderinginDigitalCurrencies.NationalDrugIntelligenceCenter(NDIC).3June 2008.<http://www.justice.gov/ndic/pubs28/28675/intro.htm#start> 38http://www.justice.gov/ndic/pubs28/28675/outlook.htm#start 39Ibid.

Passport), and verification of [the users] mailing address.40 Despite the effort, BitcoinUSA shut down after one month.41 Additionally, in discussions regarding Bitcoins legality, users have pointed to many legal loopholes, e.g. stateless pns,42 and have responded with comments like Who cares? and De facto, thats all that matters.43 This may only be a portion of the community, but BitcoinUSAs short existence seems to indicate that Bitcoin users disregard the law. V. Can the Government defeat Bitcoin? Despite Bitcoins inherent p2p structure that is immune to pure elimination, the government does have a few viable ways to either significantly devalue it and or fiercely prosecute the few they catch who use it.44 First and foremost, as with any economy, and especially a small one like Bitcoins, if the value of the currency begins to plummet, people will exchange their currency for another safer investment. Thus, the fair argument stands that if the government were to effectively diminish the value of the Bitcoin, most of its users would abandon it. As a result, along with the fact a large portion of the country rather not break the law, which the government would certainly fervently

40Username:davidonpda.Topic:BitcoinUSA.comNewUSBasedexchanger.BitcoinOfficialForum.8March 2011.<http://www.bitcoin.org/smf/index.php?topic=4276.0> 41Ibid. 42Username:TheMadhatter.Topic:IsbitcoinlegalintheUS?BitcoinOfficialForum.1July2010. <http://www.bitcoin.org/smf/index.php?topic=227.msg1904#msg1904> 43http://www.bitcoin.org/smf/index.php?topic=6000.0 44Todate,therearenoknownhacksoreasywaystocheatthesystem

declare if they were to even attempt to devalue Bitcoins, very few would continue using Bitcoins. The most credible attack the government could carry out is known as the 50% power attack or the mining cartel attack. According to the words of the very creator himself, Bitcoin works only as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.45 Owning 50% or more of the power generating Bitcoins would result in blocks being rejected from other nodes and the cartel would be creating longer chains of blocks than the rest of the network. While this would make the remaining Bitcoins not owned by the cartel more valuable, it would eventually throw the network out of balance. In March of 2011, the UK government paid 15 million pounds for a 190 TFLOPS supercomputer,46 so a prominent forum poster estimated the cost to overthrow the Bitcoin network to be roughly 60 million British pounds, based on the estimate that the Bitcoin network is currently ~2 PFLOPS.47 However, this figure will only become much more expensive when considering another estimated just five months before that it would only take 42 Radeon 5970 graphics cards, roughly $100,000, to control 50%.48 The second attack would be to make converting Bitcoins into USD as difficult as possible. As exchanges like MtGox and Bitcoin banks become more

45Nakamoto,Satoshi.Bitcoin:APeertoPeerElectronicCashSystem.Bitcoin.org. <http://www.bitcoin.org/sites/default/files/bitcoin.pdf> 46Brewster,Tom.FujitsuReturnstoUKSupercomputing.ITPro.22March2011. <http://www.itpro.co.uk/632131/fujitsureturnstouksupercomputing> 47Username:vladimir.Topic:inUKcostof50percentattackonbitcoinis60millionpounds.OfficialBitcoin Forum.22March2011.<http://www.bitcoin.org/smf/index.php?topic=4783.0> 48Username:devout.Topic:Governmentvs.Bitcoin?OfficialBitcoinForum.1November2010. <https://www.bitcoin.org/smf/index.php?topic=1630.0>

frequently used, users will become more reliant on their services. As BitcoinWeekly indicates, Bitcoin banks could facilitate faster transactions between users, which now can take as long as 10 minutes to validate,49 and immediate currency exchanges between Bitcoins and USD. If the government shut down such services like MtGox or BitcoinCentral that provide such necessities, BitcoinWeekly agrees, colossal damage would be done.50 While these are the most likely attacks, there are certainly possible others, e.g. wallet Trojans, create a competitive virtual currency, etc. But for now, these are mainly speculation. VI. Conclusion In the long term, the government will eventually need to address virtual currencies like Bitcoin. But cryptology will only improve and those looking to circumvent the system will always find a way. No doubt, the government will fight back, but it will need to eventually realize that digital currency is the future. Americans are spending more time than ever on the Internet, and even more on their mobile smart phones, and sooner than later the physical wallet will disappear. The 2007 recession infuriated people around the world, and if the government wants to compete with digital currencies like Bitcoin, it may have to be more transparent and responsible with its regulations. As convoluted and complex the government may be, it needs to understand the gravity of its actions

49Buterin,Vitalik.ExpandingtheBitcoinEconomyLegitimateBusinessesandFood.BitcoinWeekly.23April, 2011.<http://bitcoinweekly.com/articles/expandingthebitcoineconomylegitimatebusinessesandfood> 50Username:Nefario.AnonymousmoneyNeedsanAnonymousExchange.BitcoinWeekly.22April2011. <http://bitcoinweekly.com/articles/anonymousmoneyneedsananonymousexchange>

and how it may influence the countrys faith in the US Dollar. Or, as Yosemite Sam once said, If you cant beat em, join em.