Texas Federal Magistrate Reaffirms Ruling that Bitcoin is Money

The question of whether Bitcoin can be considered “money” from both a legal and tax perspective in the United States has been in the news a great deal recently, especially with multiple Judges ruling that Bitcoin was indeed money and the Internal Revenue Service (IRS) seeming to contradict the courts with a stance that deems Bitcoin as property. The latest chapter comes again from Texas and Federal Magistrate Judge Amos L. Mazzant.

The case was filed against Bitcoin Savings & Trust founder Trendon T. Shavers, who is accused by Federal prosecutors of running a Ponzi scheme using Bitcoin.

Shavers is represented by Franklin Jason Seibert of FJ Seibert LLC in U.S. Securities and Exchange Commission v. Trendon T. Shavers et al., case number 4:13-cv-00416, in the United States District Court for the Eastern District of Texas. The SEC is being represented by Jessica B McGee and Philip Moustakis. Moustakis has been active on Bitcointalk.org encouraging members of the community to get involved in the case.

Shavers is being accused by the SEC of using investment money from new investors to pay off interest payments for older investors in what seems to be a classic Ponzi scheme. The charges also claim that Shavers had been transferring investors’ money into his own personal day trading accounts.

According to the complaint he was able to collect more than 700,000 bitcoins worth more than US$4 million (based on average value during company operations). Shaver’s defense is based on two rulings. The first was the recent IRS ruling that Bitcoin is classified as property for tax purposes. The second was the Texas Department of Banking in April 2014 allegedly rejecting Bitcoin as money or an enforceable claim in court in April of 2014.

The defense argues that since Bitcoin is considered property by the IRS and “property” is not part of current law with respect to Ponzi schemes, then his activities were perfectly legal. The Magistrate disagreed however, saying in his order that:

“In twenty-three places throughout the IRS code, money is referred to as property. In fact, the IRS definition and guidance seem to point the court towards the similarities between money and bitcoin for federal tax purposes.”

He also ruled that The Texas Department of Banking’s ruling only applied to the licensing of money exchangers that did not meet the federal definition money exchangers, which is limited to businesses dealing in legal tender.

The defense has the option to appeal this decision to a District Judge and after that, it is likely that the case will go to the Fifth Circuit in New Orleans since there are at least two other similar cases already in the federal court system.

Coin Telegraph asked Edmund Moy, 38th Director of the United States Mint to comment on the Magistrates decision. His comments follow:

“What the judge is saying is that judges determine whether a law was violated. In the case of Bitcoin, there is no federal law that specifically mentions bitcoin, let alone defines it. Lacking a Bitcoin federal law, regulatory agencies can then regulate the aspect of Bitcoin that is consistent with the federal law that created that regulatory agency. Therefore, the IRS sees Bitcoin as a taxable event, the CFTC as a commodity, the FEC as a campaign donation, the SEC as an investment, etc.
So the SEC regulates investments/securities, and therefore has the authority to prosecute ponzi schemes. Ponzi schemes are funded by money, and because this one was funded by Bitcoin, Bitcoin functions like money and therefore they can prosecute the owners of the Ponzi scheme.
And while the IRS has said that Bitcoin meets their definition of property, it hasn’t opined on whether it meets the IRS definition of money. That doesn’t mean Bitcoin is not money, it just means the IRS is currently silent on the issue.”

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Is Bitcoin Money? Lawmakers, Regulators and Judges Don’t Agree

Bitcoin confounds lawmakers as they try to figure out what it is and how it should be regulated. The Bitcoin Foundation notes that Bitcoin is an innovative payment network and a new kind of money. But is it money? Some call it a new form of virtual currency. Others have lauded it as a new type of payment system. So what is it? And why does it matter?
What we call it may not matter much in casual conversation, but how it is categorized does have significant implications when it comes to regulation. If it is “money” or “currency,” then existing laws and regulations may apply to businesses and consumers who issue, sell, or transact with Bitcoin. From banking laws to anti-money-laundering laws and tax regulations—whether these laws apply to the use of Bitcoin depends on how Bitcoin is classified.
At present there is no consensus as to what we should call Bitcoin or how it should be defined for purposes of applying legal rules. As I will discuss in this column, courts and regulators are coming up with different theories and classifications as a way of figuring out whether this new product/payment vehicle is or is not covered by different laws.
As I will also discuss, it appears that lawmakers, at times, restrict the term “money” or “currency” to refer only to government-issued money or legal tender. This conflicts with basic definitions of money, found in both economics texts and in dictionaries. If certain laws are meant only to deal with government-issued currencies, then perhaps we should revise statutory definitions to make such distinctions clearer. In the meantime, we will need to sit back and watch regulators around the globe grapple with whether or not Bitcoin is “money.”
What Is Bitcoin?
I have discussed how Bitcoins are generated in prior columns. As for a definition, Bitcoin does refer to itself as money or currency—issued, however, not by a government, but instead in a decentralized manner.
The Bitcoin Foundation’s Frequently Asked Questions (FAQ) page states that Bitcoin is “a consensus network that enables a new payment system and a completely digital money. It is the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen. From a user perspective, Bitcoin is pretty much like cash for the Internet.”
The FAQ page also notes that “Bitcoin is the first implementation of a concept called “crypto-currency,” which was first described in 1998 by Wei Dai on the cypherpunks mailing list, suggesting the idea of a new form of money that uses cryptography to control its creation and transactions, rather than a central authority.”
So—does Bitcoin qualify as money or currency? Its proponents believe that it is. But to answer that question, one needs to first consider how money is defined.
What Is Money or Currency Anyway?
The International Monetary Fund (part of the World Bank) defines money generally as a “store of value,” which means people can save it and use it later—smoothing their purchases over time; other definitions refer to money as a:
Unit of account, that is, provide a common base for prices; or
Medium of exchange, something that people can use to buy and sell from one another.
Popular definitions of money also focus on the idea of a purchasing unit—often denominated in bills and coins that can be used to purchase goods and services. The key distinction is that money allows for transactions that move beyond barter (where parties exchange goods and services for other goods and services).
So—when looking at definitions—money does not need to be linked to a sovereign or government issuer. It just has to be something that is circulated and is used for exchange.
Currency, by contrast, appears to have a link to a particular country. The Oxford English Dictionary refers to currency as a “system of money in general use in a particular country,” or as another dictionary states, “money that a country uses.” While there is a link to a particular country or state, the term does not require that it be a government-issued currency—just widely used as the medium of exchange by a particular country.
So upon first glance, Bitcoin, would qualify as money or currency; it is a medium of exchange and a unit of account. It just has no link to a particular sovereign.
The question remains, however, whether Bitcoin qualifies under legal definitions of money. And this is where lawmakers and judges have diverged.
Two U.S. Courts Find That Bitcoin Is Money
In 2013, Trendon Shavers, the founder of Bitcoin Savings & Trust (BTCST), an online investment fund, was accused of defrauding his customers out of $4.5 million worth of Bitcoin. Shavers promised investors an incredible weekly return of 7 percent, according to a federal criminal complaint, but shut down his site after collecting more than 700,000 Bitcoins. When the U.S. Securities and Exchange Commission (SEC) charged Shavers with operating an illegal Ponzi scheme, his response was that Bitcoin was not actual currency and therefore his actions were not covered by SEC regulations.
United States Magistrate Judge Amos Mazzant of the Eastern District of Texas ruled that the SEC could proceed with its lawsuit against Shavers because “Bitcoin is a currency or form of money.”
Judge Mazzant wrote: “Shavers argues that the BTCST investments are not securities because Bitcoin is not money, and is not part of anything regulated by the United States. Shavers also contends that his transactions were all Bitcoin transactions and that no money ever exchanged hands. The SEC argues that the BTCST investments are both investment contracts and notes, and, thus, are securities.”
Mazzant disagreed with Shavers’s contentions.
“It is clear that Bitcoin can be used as money,” Judge Mazzant opined. “It can be used to purchase goods or services, and as Shavers stated, used to pay for individual living expenses. The only limitation of Bitcoin is that it is limited to those places that accept it as currency. However, it can also be exchanged for conventional currencies, such as the US dollar, Euro, Yen and Yuan. Therefore, Bitcoin is a currency or form of money, and investors wishing to invest in BTCST provided an investment of money.”
The judge also concluded that Bitcoin investments “meet the definition of investment contract, and as such, are securities.”
More recently, in August 2014, another federal judge, Katherine Forrest, of the U.S. District Court for the Southern District of New York found federal money-laundering statutes “encompass use of Bitcoin”—and that “any other reading” of the law would be “nonsensical.”
“There is no doubt that if a narcotics transaction was paid for in cash, which was later exchanged for gold, and then converted back to cash, that would constitute a money-laundering transaction. One can money launder using Bitcoin,” Forrest said. Based on this conclusion, she denied a defendant’s motion to dismiss a federal money laundering charge.
The defendant, Ross Ulbricht—the creator of the infamous website for trade in illegal goods and narcotics, Silk Road—was charged in 2013 with unlawfully operating an unlicensed money transmitting business. (Silk Road accepted Bitcoin as means of payment.) Ulbricht argued that the charge should be dismissed because Bitcoin is not “money” within the meaning of the federal anti-money laundering statute.
The court disagreed, relying upon the dictionary style definition of “money” to conclude that Bitcoin “clearly qualifies as ‘money’” as it “can be easily purchased in exchange for ordinary currency, acts as a denominator of value, and is used to conduct financial transactions.” The court additionally relied on Congress’s intent that anti-money laundering statutes keep pace with new threats and techniques and cited SEC v. Shavers.
So in at least two instances, judges have interpreted federal statutes to encompass a more general definition of money that does not restrict the term solely to government-issued money.
Some Regulators and Judges Think Bitcoin Is Not Money
In June 2014, a court in the Netherlands issued a ruling in a civil lawsuit as to that has how Bitcoin should be treated under Dutch law. Notably, the court found that Bitcoin does not meet the definitions of “common money,” “legal tender,” or “electronic money,” ruling that Bitcoin is a commodity-like medium of exchange like gold.
The Dutch case involved a 2012 Bitcoin sales transaction and contract between two unnamed parties that was not fully performed. The buyer had attempted to buy 2,750 Bitcoins from the defendant seller but only received 990 Bitcoins.
At the time of the attempted sale, the buyer prepaid the full contract price of €22,000 for the entire purchase, (about €8 per Bitcoin). After repeated delays in the delivery of the remaining Bitcoins, the buyer sued the seller. The Dutch court ruled in favor of the buyer and ordered the defendant to pay back the original value of the 1,760 Bitcoins that were not delivered (worth approximately €14,000 at the time).
The court, however, did not award the buyer the €130,000 in damages he sought as lost profits that he would have earned during Bitcoin’s rapid price surge last year. The court discussed the nature of Bitcoin in its ruling, noting that it is neither electronic money nor legal tender in the Netherlands. This definition of electronic money, the court ruled, is limited to Euros issued by the European Central Bank (ECB).The court reportedly cited statements made by the Dutch Minister of Finance when ruling that Bitcoin does not meet the definition of electronic money.
Ultimately, the judge concluded that none of the definitions of common money under the Dutch Civil Code apply to Bitcoin. The judge did acknowledge that Bitcoin can be accepted as a form of payment in the Netherlands. Had Bitcoin been deemed money, the transaction would have been considered a foreign exchange contract, and thus the buyer might have been entitled to exchange rate loss.
In the United States, the IRS announced that it would treat Bitcoin as property rather than currency for tax purposes. The IRS pointed out that “it does not have legal tender status in any jurisdiction.” The IRS, it seems, was connecting currency to legal tender and as such would not equate it with other forms of money.
In a similar move, the Australian Taxation Office (ATO) stated that it will not treat Bitcoin transactions as money. In August 2014, the ATO released guidance on “crypto-currencies,” stating that saying Bitcoin will be taxed like a non-cash barter transaction.
A Bitcoin transaction was akin to a barter arrangement, whether conducted online or in brick-and-mortar shops, and therefore had similar tax consequences, the ATO said. “The ATO’s view is that Bitcoin is neither money nor a foreign currency and the supply of Bitcoin is not a financial supply for goods and services tax purposes,” it said. “Bitcoin is, however, an asset for capital gains tax purposes.”
According to news reports, some Australian businesses that accept Bitcoin as payment for goods or services had been hoping that it would be treated under tax law as an equivalent to money. This is because it would make record keeping and tax compliance easier.
What Is the Way Forward?
Lawmakers will be examining their laws on the books to see whether Bitcoin transactions will be covered by different types of statutes and regulations—for civil, criminal, and administrative purposes. As they do so, it will be important for policymakers to reexamine their statutory definitions of money and currency—to see whether they are being used in a way that makes sense.
If lawmakers intend for certain rules to apply only to legal tender—that is, government-issued money—then perhaps statutes should be clear on this point.
And Bitcoin fans and proprietors will continue to pursue the “Bitcoin is money” argument. A Bitcoin company called Bitonic has launched a crowd-funded campaign aimed to support efforts to define Bitcoin as money in the Netherlands.
The campaign has been dubbed Bitcoin is Geld (“Bitcoin is money”) and has so far raised more than 30 BTC. The cause enjoys the support of the Dutch Bitcoin Foundation.
Bitcoin is Geld will use the funds to promote legislation beneficial to Bitcoin users in the Netherlands, effectively defining Bitcoin as money in that country.
The campaign website indicates that the campaign was formed after a Dutch judge stated that Bitcoin is not considered “real” money, and the campaign now plans to take “the judge’s statement to a higher court by giving reasons as to why Bitcoin should be defined as money.”
As legislators and agencies across the world attempt to understand, classify, and regulate Bitcoin, one can only hope that they will provide clearer guidance so that those who engage in Bitcoin transactions can anticipate how the law might affect those transactions.

Anita Ramasastry is the UW Law Foundation Professor of Law at the University of Washington School of Law in Seattle, where she also directs the graduate program on Sustainable International Development. She is also a member of the Law, Technology and Arts Group at at the Law School. Ramasastry writes on law and technology, consumer and commercial law, and international law and globalization.