Legal Tender, Illegal Tender: Will Bitcoin be Banned?

By Vitalik Buterin
Bitcoin Weekly
Wednesday, April 13, 2011

http://bitcoinweekly.com/articles/legal-tender-illegal-tender-will-bitcoin-be-banned

Recently, Bernard von NotHaus was convicted for creating the Liberty Dollar, an alternative currency backed by precious metals, and the FBI now seek to confiscate the $7 million in metals that the dollars are backed by. He was charged under two sections of US law:

• 18 USC 485: "Whoever falsely makes, forges, or counterfeits any coin or bar in resemblance or similitude of any coin of a denomination higher than 5 cents or any gold or silver bar coined or stamped at any mint or assay office of the United States... shall be fined under this title or imprisoned"
• 18 USC 486: "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"

Aside from these, the standard conspiracy charge, was of course, also tacked on. The first charge, that of counterfeiting, is rather frivolous - looking at Liberty dollar bills and coins vs the US government minted ones, the bills don't even look similar. Sure, some inattentive person could mistake the silver liberty coin for a quarter, but if you want to scam an inattentive cashier for pennies you could just as easily pass a Russian kopeck. The FBI said that one of the aims of the Liberty Dollar was to mix it in with standard currency. Trying to read some sense into this statement, we get the impression that they see it as some evil conspiracy to sneak various US dollar-like coins into the market to devalue the US dollar by making everyone forget what US currency looks like. The second charge is more serious, however, and it seems that any gold or silver coin, no matter how different from the US dollar, would be covered under it. According to research by David Rostcheck, this section was originally written in 1864 with the intent of preventing counterfeiting, and was constitutionally justified by the section that allows the government to "provide for the Punishment of counterfeiting". The expansive interpretation of the act, that all alternative currencies made with metal are banned, is, according to Rostcheck, disproved by Las Vegas casino tokens, which are made of metal and do essentially operate as a competing currency in Las Vegas - you can buy goods and services for them outside of casinos. As evidence of his interpretation, we have the fact that Chapter 25 of the United States Code, which contains 18 USC 485-486, is titled "Counterfeiting and Forgery". What happens to this case in the appeal remains to be seen.

Fortunately, neither charge applies to Bitcoin as written, because bitcoins do not exist as physical metal. However, while the original intent of 18 USC 486 was to prevent counterfeiting, now the government is perfectly willing to use it to enforce the US government's monopoly on legal tender. The prosecuting attorney general referred to the minting of Liberty Dollar coins as "a unique form of domestic terrorism", saying that "while these forms of anti-government activities do not involve violence, they are every bit as insidious and represent a clear and present danger to the economic stability of this country." This shows that many in the US government see alternative currencies in general as a threat, and if they turn their attention to Bitcoin, they would be willing to use whatever legal means available to bring it down. While 18 USC 485-486 do not qualify as sufficient legal means no matter what spin a lawyer might put on them, other laws might.

One angle of attack that I can see the federal government taking is that of using money laundering and narcotics laws against Bitcoin. As a previous Bitcoin Weekly article pointed out, "Bitcoins are already being used for counter-economic purposes, by at least one person, the operator of The Silk Road anonymous marketplace... the marketplace there has categories for various drugs, as well as one for weapons." Bitcoin's anonymous nature makes it very easy for it to be used for the sale of illegal goods. Tax evasion is also a practical application, and one seminar in a recent Agora IO conference openly advocated ignoring tax and license requirements, as well as using Bitcoin to do so. The Bitcoin community has a very strong libertarian and crypto-anarchist (the precise term is agorist) fan base, one that sees breaking the law as a perfectly legitimate activity that is merely risky, just like walking around alone at night in a high-crime neighborhood - fines are equivalent to getting mugged, jail to getting kidnapped. If the risk is sufficiently low, then go ahead and break the law. The government relies on the perception of legitimacy to survive, so it will fight against such an ideology tooth and nail, and if Bitcoin is too strongly linked to agorism it will itself be persecuted.

It is true that Bitcoin is cryptographically secure, and the government is powerless to stop or even detect a technologically savvy user using it. However, pragmatically it is necessary to understand that the majority of people now do see the government as legitimate and, if Bitcoin was banned, would not use it out of a desire to be good upstanding citizens. The Bitcoin economy would lose 90% of its user base and the value of Bitcoin would crash. Therefore, Bitcoin needs to become a viable currency for legitimate business transactions. Advantages to Bitcoin other than its secrecy need to be highlighted. As I have previously described, Bitcoin can be used in microtransactions, and entirely internet-based Bitcoin employment is an emerging market, with listing boards such as bitcoinjobs.com gaining popularity. It is necessary that either established businesses start taking up Bitcoin, of which we have seen a glimpse with a Google engineer releasing an alternative Bitcoin client, for a new Bitcoin economy needs to grow. Even if you are an agorist and your final goal is to supplant the US government, this revolution is not yet nearly powerful enough to leave the stealth phase.

Reprinted with permission.

For further reading:
"Bitcoin and Anarchy", Practical Agorism, April 13,2011
"Liberty Dollar II – Did Prosecutor Anne Tompkins Violate Ethics Rules?", Bill Rounds J.D., April 11, 2011
"Bowling for Bitcoins: Interview with Gavin Andresen", The Bitcoin Bulletin, April 9, 2011