Bitcoin, which utilizes the underlying technology of all convertible virtual currencies (CVCs), was created by an anonymous user who goes by the name Satoshi Nakamoto. CVCs serve as a digital medium of exchange for goods and services. In his Nakamoto's white paper, Bitcoin: A Peer-to-Peer Electronic Cash System, Nakamoto believed that the current financial systems were inefficient by requiring a third party 'clearing house' (1) to alleviate the risk of fraud through double spending. Nakamoto proposed Bitcoin as a solution tothe current use of financial institutions when dealing with internet commerce.
Implementing "a purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution."(2) Nakamoto believed that the trust- based system, which we have learned to blindly follow, allowed for any dispute to be mediated by the financial institution, creating an inherent weakness in the way we transfer currency. Nakamoto therefore proposed "a solution to the double-spending problem [by] using a peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions."(3)
Compared to a fiat currency (4), CVCs serve a similar use. The Department of the Treasury Financial Crimes Enforcement Network has described CVCs as "a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency."(5) In particular, in most environments CVCs do not have a legal tender status, which is one of the reasons why CVCs lack widespread use. Further, this has created difficulty when attempting to utilize CVCs to pay for goods and services. But the main difference between currency and CVCs is the IRS' guidance on the taxation of CVCs.
If you or your company are interested in further exploring your ability to utilize CVCs and the legal aspects connected to it, please feel free to reach out to Bridgehouse Law to schedule a call to better assess your situation.
1 Clearing house - such as a bank or intermediary, a clearing house acts as a middle man to confirm that the transaction takes place and the transaction is not a subject of fraud.
4 A government backed currency such as the US dollar or Chinese yen