A U.S. District Court has recently held bitcoin is “money” or “funds” for the purpose of particular U.S. federal legislation. While the decision (U.S. v Murgio ) may seem uncontroversial, this classification of bitcoin may be significant from a broader regulatory and anti-money laundering (AML) perspective. It is also a fascinating development as we continue to watch where leading global financial jurisdictions will ultimately land on classifying and regulating virtual currencies.
This post was written by Evan Manolios.
Background – the facts
The four defendants were charged for their respective roles in an allegedly unlawful Bitcoin exchange, called Coin.mx. It was also alleged a number of the defendants bribed a credit union official in order to obscure the illegal nature of Coin.mx.
A key aspect of the decision related to the defendants’ attempt to dismiss the charge that they illegally operated an “unlicensed money transmitting business”, on the basis that there was no “money transmitting” with the meaning of the term of the relevant Act.
The Court had no hesitation in finding that bitcoin was “money” or “funds” for the purpose of the relevant section. Turning to the ordinary meaning of the “funds” and “money”, U.S. District Judge Alison Nathan said:
“it is clear that bitcoins are funds within the meaning of that term. Bitcoins can be accepted as a payment for goods and services or bought directly from an exchange with a bank account. They therefore function as pecuniary resources and are used as a medium of exchange and a means of payment.”
The Court also considered the Florida state decision of Florida v Espinoza  which held pretty much the complete opposite – namely bitcoin was not money, nor “payment instructions”. The Court respectfully disagreed with the reasoning in Espinoza, and said that the decision failed to realise that bitcoin qualifies as “monetary value” in that it was plainly a medium of exchange.
Where does this leave us?
From a regulatory perspective, considering bitcoin and other virtual currencies as ‘money’ is a critical step to assessing if, how and where they are regulated and, importantly, if they fall within AML regimes – many (like Hong Kong) are drafted very broadly, while others are not.
We think of particular note was that Judge Nathan took a particularly pragmatic approach to her decision-making, when she said the legislation:
“sought to prevent innovative ways of transmitting money illicitly. It appears that Congress designed the statute to keep pace with evolving threats and this Court must accordingly give effect to the board language Congress employed”.
There are a now two key decisions in the U.S. regarding the status of bitcoin – one Federal decision says bitcoin is money, the other State decision says it isn’t. While in the short term this creates uncertainty and confusion, in the long term we hope that it will contribute to a greater body of literature and discourse topic, which may lead to important legal clarifications on the issue.
More broadly, we believe the decision demonstrates the readiness and willingness of the U.S. courts to grapple with virtual currencies. The Court in Espinoza said applying existing laws regulating money service businesses to bitcoin is “like fitting a square peg in a round hole”. While this is true to an extent, the Court in Murgio sought to tackle the issue head on and apply it to the existing regulatory framework.
Where other major jurisdictions will land on how best to classify and regulate virtual currencies is yet to be seen, with few court cases to date. As we observed back in January 2014 and more recently in August 2016 following the Bitfinix hacking scandal, virtual currencies continue to fall somewhere between the realms of general financial services regulation, banking regulation and currency regulation – depending on where you are and who is setting rules.
They are also gaining in momentum commercially, with press reports in August this year suggesting that four large banks are developing a new form of virtual currency, plus several reports that Mainland China is planning on its own digital medium of exchange.
It’s now a truism to say that regulation follows innovation – in that vein it’s likely to be some time before leading markets legislate to regulate virtual currencies in any great detail (or frankly, at all). Until then, decisions like Murgio provide interesting insight for courts and regulators as to the status of, and the approach to, bitcoin and other virtual currencies.
 U.S. v. Murgio et. al., U.S. District Court, Southern District of New York, No. 15-cr-00769 (Sept 22, 2016)
 Florida v Espinoza No. F14-293 (Fla. Cir Ct. July 22, 2016)
Note: The author does not practice U.S. law. All references to U.S. cases or otherwise relating to U.S.-related matters are based on public information. This post does not constitute legal advice.