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With the US Senate setting 18th November as the start date for its committee hearings into bitcoin, it’s time to take a look at some of the more significant events in bitcoin’s short but colorful legal history.

The early timeline featured hacks, heists, drugs, demands for refunds and the first appeals to law enforcement, but 2013 saw official scrutiny rise almost as quickly as bitcoin’s value.

Whether or not bitcoin requires, or should seek, regulatory approval is a major source of heated debate on bitcoin discussion forums, but the regulation issue will remain prominent as long as significant amounts of wealth are at stake.

CoinDesk's 'Is bitcoin legal?' page is a good source of information on bitcoin’s current legal status and the major regulatory players.

Stepping out of the shadows

Though early enthusiasts had already recognized bitcoin’s world-altering potential, its rise to mainstream attention was inglorious at first.

Before 2013, bitcoin was known mainly to non-participants as the currency of choice on online black marketplace Silk Road and its buffet of illegal products and services.

Bitcoin has found it difficult to shake the connection even months after Silk Road’s shutdown, with mainstream and even technology media constantly referring to the ‘link’ in almost every story about digital currency.

US Senators Chuck Schumer and Joe Manchin even called for a 'crackdown' on bitcoin in June 2011, overlooking any merits to the currency and focusing on its “untraceability” and its role in assisting criminal activity.

The US Drug Enforcement Agency (DEA) responded with similar concerns about anonymous digital currencies, referring to them as “emerging threats”.

In early 2012, bitcoin was still considered a hobby for technology enthusiasts, but its impact on the real-world wealth of some had caught the regulators’ attention.

"The anonymous transfer of significant wealth is obviously a money-laundering risk, and at some level we are aware of bitcoin and other similar operations, and we are studying the mechanism behind bitcoin," said Steve Hudak, a spokesman for the Financial Crimes Enforcement Network (FinCEN), in a report published in American Banker.

Bank robberies and legal disputes

Several significant bitcoin-related thefts and hacks have occurred since 2011, each one raising louder questions about the amounts of wealth at stake and a need for further regulation.

Nearly all major bitcoin players have been affected, with varying degrees of user satisfaction with outcomes.

Most of the victims were forced to close amid vows to return in glory someday, while others such as Mt. Gox and BTC-e are still operating today.

TradeHill, the second-largest bitcoin exchange at the time, shut its doors amid regulatory pressure and a six-figure legal dispute, returning investor funds in February 2012.

CEO Jered Kenna said: “Due to increasing regulation, TradeHill cannot operate in its current capacity without proper money transmission licensing.”

The news caused bitcoin’s value to fall from $5.50 to $4.40, as community members offered to donate bitcoin to the ailing company.

Another exchange, BitFloor, fell victim to a large-scale theft of 24,000 BTC in September 2012 (each worth around $12 at the time). Founder Roman Shtylman reported the theft to the FBI.

FinCEN steps in

FinCEN logoFinCEN issued guidelines that bitcoin-related businesses counted as “Money Service Businesses” (MSBs) under US law.

This meant bitcoin businesses were now officially required to provide authorities with information about potentially suspicious transactions and introduce policies to prevent money laundering.

These regulations also affect the more centralized virtual currencies and point systems used in social networks and online games, including Facebook and Second Life.

Lack of a centralized authority meant bitcoin itself could not comply, but any business associated with its use would need to — including individual miners, if they converted their bitcoin to fiat currency.

Still not taken seriously

Despite bitcoin reaching a then-high of $266 in April 2013, people were still having trouble taking the idea of bitcoin having real value seriously.

Unfamiliar with concepts such as the block chain, distributed ledgers, mining hash rates and proof-of-work, commentators resorted to jokes about ‘virtual currency’ with no value because it somehow didn’t really exist.

“Bitcoin has worth just because a bunch of people on the internet have agreed it is worth something - like Psy," joked American political satirist Stephen Colbert, likening bitcoin to the South Korean entertainer responsible for Gangnam Style.

At a meeting of regulators at the New York Federal Reserve, one participant asked if bitcoin could become a viable unit of international exchange and “participants burst out laughing.”

Other bankers didn’t laugh as hard, choosing instead to start unilaterally shutting down the accounts of bitcoin exchanges like New York-based BitFloor and Ottawa-based Canadian Bitcoins.

No, it’s not monopoly money

By May, regulators had stopped chuckling and began to speculate on whether bitcoin was so serious it might need the same kind of regulation as other financial instruments.

Bart Chilton, a commissioner at the Commodity Futures Trading Commission (CFTC) which regulates derivatives, was quoted by the Financial Times as saying: “It’s not monopoly money we’re talking about here — real people can have real risk in these instruments, and we need to ensure that we protect markets and consumers, even in what at first blush appear to be ‘out there’ transactions.”

Authorities began to realize information-gathering was probably a more meaningful course of action than haphazard statements and rulings.

Exactly where the authorities stood on bitcoin’s status as real money was becoming clear, though, with the Department of Homeland Security seizing around $5m in funds from Mt. Gox for being an unlicensed money transmitter and cutting the exchange off from payment processor Dwolla.

Dwolla has since made efforts to distance itself even further, ending all bitcoin support in October 2013.

Cease!

Perhaps the most bizarre regulatory move in bitcoin’s history came in June 2013, when California’s Department of Financial Institutions (DFI) sent a cease-and-desist letter, not to any bitcoin-trading business, but to the Bitcoin Foundation, claiming it “may be a money transmission business”.

Asserting it was neither a business nor a transmitter of money, the foundation responded about 10 days later with a statement that also noted bitcoin was not a payment instrument under Californian law anyway.

Here come the scams

By July 2013, bitcoin proved itself quite similar to the world’s other currencies when Texas man Trendon T. Shavers was charged by the US Securities and Exchange Commission (SEC) for operating a bitcoin Ponzi scheme through his company Bitcoin Savings and Trust (BTCST).

He had promised earlier investors 7% no-risk returns, paying them with bitcoins from new investors. The SEC subsequently issued an investor alert warning specifically of the scams and risks associated with digital currencies.

Bitcoin is a currency … sort of

different currency notesThe following month, in response to the Shavers case, a Texas judge served up a rare actual ruling on bitcoin’s nature by declaring it “a currency or form of money”.

This ruling gave the SEC official jurisdiction over bitcoin-related matters for the first time.

However, the ruling came from a relatively low-level court and even contradicted FinCEN guidance, which “expressly stated that virtual currencies like bitcoin are not ‘currency’, such as legal tender or fiat currencies”.

FBI, please look into this

The US House of Representatives Committee on Appropriations published the Commerce, Justice, Science and Related Agencies Appropriations bill for the 2014 fiscal year, referring to bitcoin in a report that referenced only the criminal activity surrounding its existence.

The bill directed the FBI to investigate and provide a briefing on the “nature and scale of risk posed by such an ersatz currency”.

Tell us more

At this point, authorities began to realize information-gathering was probably a more meaningful course of action than haphazard statements and rulings from disconnected legal bodies, or concerns about illegal activity.

The New York Department of Financial Services (DFS) issued subpoenas to 22 bitcoin-related companies to provide information on their operations and consumer safeguards.

Companies like BitInstant, Coinbase, Dwolla and the Winklevosses were among those summoned.

While some of the companies welcomed the opportunity to cement their legitimacy, others claimed the subpoenas were more intimidatory in nature and would stifle innovation.

The US Senate continued this line, starting August 2013, when the Committee on Homeland Security and Governmental Affairs sent a letter to Janet Napolitano, secretary of the Department of Homeland Security “for information on any policies, guidance, plans and strategies they have that pertain to virtual currencies”.

The letter highlighted the rise in interest surrounding virtual currencies and their unique attributes, referencing Trendon Shavers’ Ponzi scheme, the Mt. Gox account seizures and the Winklevoss twins’ S-1 filing for a bitcoin exchange-traded fund.

Similar letters were sent to the Department of Justice, the Federal Reserve, Department of Treasury, the SEC, the Office of Management and Budget, and the Commodities Futures Trading Commission.

18th November was later confirmed as the date for the committee hearings, and several representatives from the bitcoin world were invited to testify, including the Bitcoin Foundation who will send a representative to present arguments in bitcoin’s favor.

On the upside

In something of a rare public compliment for bitcoin from the world of traditional finance, François R. Velde, senior economist of the Federal Reserve in Chicago wrote a glowing paper titled “Bitcoin: A Primer” in which he wrote bitcoin was a “remarkable conceptual and technical achievement, which may well be used by existing financial institutions.”

He further described bitcoin as an “elegant solution” to the digital currency problem and claimed its value derived from certain beliefs about the nature and function of money, and the amounts of fiat currencies traded for it.

What happens next is anyone's guess, but stay tuned to CoinDesk to find out what happens at the committee hearings being held in Washington DC next week.

The leader in blockchain news, CoinDesk is an independent media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. Have breaking news or a story tip to send to our journalists? Contact us at [email protected].

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