“mit freundlicher Unterstützung des Exzellenzclusters Normative Orders”

1. Introduction

Virtual currencies, especially Bitcoins, have attracted much public attention as well as scholarly interest. Many related issues have, however, not yet been fully clarified and are still being addressed in specialised literature. Particularly whether, despite the fact that they do not have legal tender status in any jurisdiction, Bitcoins could be qualified as “money”, both from a legal and an economic point of view. These questions cannot, however, be regarded as completely distinct from each other. From a legal perspective, the question whether or not a medium fulfils economic functions of money has proven to be relevant – for example, some U.S. court rulings have taken a functional approach when qualifying Bitcoins as money in a legal sense.

In _SEC v. Shavers_(1) the District Court for the Eastern District of Texas ruled that because Bitcoins “can be used to purchase goods or services, and […] used to pay for individual living expenses”, investments in Bitcoin-related opportunities were “investments of money” and, thus, subject to federal securities regulation. Similarly, in addressing a federal money laundering charge the U.S. District Court for the Southern District of New York2 relied upon a dictionary 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.”

Whilst in Germany, virtual currencies have not yet been the subject of any judicial decisions, economic functions of money have played a role, for example, in the interpretation of the term “money” within the meaning of Section 935 para. 2 of the German Civil Code (BGB). The German Federal Court of Justice (BGH)3 held that Euro collectors’ coins – despite acknowledging their legal tender status – were not covered by the term “money” as they lack the necessary “qualities of money”.

“Fehlen den in Rede stehenden Wertträgern […] die Bestimmung und Eignung zum Umlauf im öffentlichen Rechtsverkehr, so ist trotz ihrer formalen Anerkennung als Zahlungsmittel die Geldqualität nicht gegeben” (emphasis added)

Although, in all the aforementioned cases, the issue of economic functions of money or the influence of these features on “money-quality” was deemed somewhat crucial in the interpretation of the law, it has not been discussed to any significant extent. This fact is surprising considering that the issue has spawned a considerable amount of research literature. This article shall first consider the central features of the Bitcoin system, before discussing whether or not Bitcoins fulfil the classic economic functions of money, and the legal implications which such functional classification could have.

2. Central Features of the Bitcoin System

Generally speaking, Bitcoin is an online payment system that can be used to transfer electronic units of value among users of a peer-to-peer network. The nominal unit of the network is referred to as Bitcoin or BTC. The transmission and receipt of Bitcoins is performed by a software or web application called “wallet”, which stores all the information necessary to transact Bitcoins – a cryptographic key pair, involving both a private key and one or more public addresses. While the public key can be given to the transacting partner and acts as a sort of account number, the private key serves as a means of authorising transactions.

The most salient feature of the Bitcoin network compared to usual bank-to-bank transfers is that the proof and transfer of ownership of a Bitcoin is performed without the involvement of a designated third party. The ownership of a Bitcoin-unit is determined on the basis of a publicly accessible transaction history called the “blockchain”. In order to add transactions to the blockchain and thus confirm them irrevocably within the Bitcoin network, the user community needs to provide their computing power. This is done by users performing cryptographic tasks using appropriate software tools. If the result of that task lies within a certain parameter, a “block” involving new transactions will be added to the blockchain and the person finishing the computational work required to validate those transactions will be credited with a certain number of Bitcoins. This (primary) form of acquisition of Bitcoins is commonly referred to as “mining”. As the number of Bitcoins generated per block is set to decrease geometrically, the possible amount of circulating units is limited to approximately 21 million units.

3. Functions of Money

Money is an instrument of economic organization. It differs from traditional means of exchange in that it does not need to match the individual and immediate needs of the exchange partner. Due to its widespread acceptance, money eliminates the need for “double coincidence of wants” between two transacting parties because, depending on the particular circumstances, everyone is willing to trade goods or services for money in some greater or lesser quantity. This results in easier and less expensive trading. According to most economic textbooks, any item used as money takes on three basic functions: It has to work as a medium of exchange, a store of value, and a unit of account.

a) Medium of Exchange

The most important function of money is that it can facilitate transactions in an attempt to satisfy the needs and wants of the person holding it. The functional character of a medium of exchange thus depends on its widespread acceptance among transacting parties, which can ultimately be regarded as a socio-economic question. For Bitcoins to qualify as a medium of exchange they would need to be commonly desired; people would need to wish to possess them, and others would need to wish to spend them.

According to an article in the German daily newspaper “Die Welt”, Bitcoins are currently accepted by more than 750,000 retailers.(4) Among them is the computer manufacturer Dell which has recently integrated Bitcoin as a payment option for private and smaller business customers in connection with online sales.(5) Apart from e-commerce, Bitcoins also enjoy a growing acceptance in everyday commercial activity. For example, in the so called “Bitcoin-Kiez” in Berlin’s Kreuzberg district twenty-five retail shops, companies and associations already accept Bitcoins as a means of payment for goods and services.6 Although the acceptance of Bitcoins is obviously much lower than with legal tender or other national currencies, they do, in a certain number of cases, detach the exchange of goods and services from the satisfaction of mutual needs. From a transaction-cost-theoretical view it seems, however, premature to characterize Bitcoins as “real money”(7) merely because of their growing acceptance in e-commerce. This is especially true because, compared to other means of payment, greater resources still need to be dedicated to information gathering, for example, finding a suitable transacting partner, or value assessment.

On the other hand, in their use as media of exchange, the items circulating as “money” compete with other commodities, so that the acceptance of Bitcoins in commercial trade may very well increase. Firstly, the use of Bitcoins is considered legal in most jurisdictions. Secondly, legal tender status of an item is not an essential condition for securing acceptance between transacting parties. If the monetary units issued by a state serve as a general medium of exchange it means that they are acknowledged as economic means of payment.

b) Store of Value
In order to act as a medium of exchange, an item must hold its value over time. This allows one to acquire this item one day and then use it to purchase goods and services at a later date. Obviously, Bitcoins embody value in so far as there continues to be an ongoing demand. Since November 2013 the exchange value of Bitcoins towards the U.S. Dollar has always exceeded USD 150, and in December 2013 it reached a high, exceeding USD 1,100.

There is no doubt that Bitcoins have been far more volatile than gold or most national currencies. The question that remains is how far the quality of a store of value in the aforementioned sense depends on absolute stability. By comparison, the stability of a country’s currency is one of the primary aims of many, if not all, central banks. For example, pursuant to Article 127 TFEU the primary objective of the European System of Central Banks (ESCB) shall be to maintain price stability. It has to be considered, however, that price stability within the meaning of the statute cannot be considered practically absolute. For example, in October 1998 the Governing Council of the ECB quantitatively defined price stability as “a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%”. This demonstrates that a lack of value stability – at least to some extent – cannot be seen as an absolute impediment to the characterization of Bitcoins as a store of value. The monetary value, by virtue of being the result of an evaluation process, is in its very notion not a static parameter. A stable exchange value relative to goods or services should, however, not be regarded as an isolated feature. Among other things, it is necessary to measure units of account relative to economic value.

c) Unit of Account

Money functions as a unit of account in that it provides for a common denominator to designate the prices of the goods or services being exchanged. Everything in the economy can be stated in terms of a monetary unit, i.e. a national currency unit such as Euro or U.S. Dollar. The Bitcoin-system provides for a nominal unit (BTC) that can be used to quantify goods or services and make them comparable. However, the quality of the unit of account as a means to measure economic value can be doubted in the short term. Its volatility towards other currencies may not be the determining criteria for estimating its domestic exchange value. Such fluctuations may, however, very well be an indicator that a certain nominal value expressed in BTC does not allow for a meaningful interpretation of prices, costs, and profits. This is also reflected in the fact that online-retailers that accept Bitcoins as payment usually use dual pricing (e.g. Euro and BTC) where a national currency still constitutes the primary measuring unit for prices.

4. Conclusion

It is not currently possible to say whether and how fast acceptance of Bitcoins or other forms of virtual currencies will increase in the future. The question of whether they can fulfil the economic functions of money can, however, be cautiously answered in the affirmative. In a certain number of cases, the users’ primary objective is not to acquire some kind of investment property but rather a medium that can be used for procuring goods or services at a later date.(8) As the supply of Bitcoins is not subject to the control of a central authority and the possible amount of units in circulation is limited to approximately 21 million, Bitcoins and other forms of virtual currencies can offer an alternative to all forms of money issued by a state.
Like in the case of gold, Bitcoins obtain their value from the fact that they are not reproducible in unlimited quantities but – unlike physical items – offer most of the cost and flexibility advantages that go along with using non-cash means of payment. In view of a worldwide market capitalization of virtual currencies in the amount of approximately five billion U.S. Dollars,(9) the number of units in circulation will, however, not provide a solid basis to compete with national currencies. Although, the use of Bitcoins is considered legal in most jurisdictions, the role virtual currencies will play in the future will, among other things, depend on their precise legal classification. For example, now that the Internal Revenue Service(10) has stated that it will treat Bitcoin as property rather than a currency for U.S. federal tax purposes, a person spending Bitcoins will have to figure out which particular Bitcoin he or she wants to spend, and what the respective tax treatment will be. One consequence of this might be that Bitcoins are no longer fungible, which makes them unworkable as money.

Quellen:
(1) WL 4028182 (E.D. Tex. Aug. 6, 2013).
(2) Faiella et al. v. United States, WL 4100897 (S.D.N.Y. Aug. 19, 2014).
(3) Judgment of June 14, 2013, V ZR 108/12, available at https://openjur.de/u/642750.html.
(4) http://www.welt.de/finanzen/article133566906/Bitcoin-steigt-zum-Geld-fuer-die-Massen-auf.html.
(5) http://www.dell.com/bitcoin.
(6) http://bitcoinkiez.wordpress.com.
(7) See Smith, 57 St. Louis U. L.J. 839, 849 (2013).
(8) See for an empirical analysis on users’ behavior Glaser et al, Bitcoin – Asset or Currency? Revealing Users’ Hidden Intentions, available at http://ssrn.com/abstract = 2425247.
(9) Cf. http://coinmarketcap.com/, as at January 2015.
(10) See Notice 2014-21, available at http://www.irs.gov/pub/irs-drop/n-14-21.pdf.