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Bitcoin Financial Regulation: Securities, Derivatives, Prediction Markets, and Gambling

78 Pages Posted: 11 Apr 2014 Last revised: 21 Jan 2015

Jerry Brito

George Mason University - Mercatus Center

Houman B. Shadab

New York Law School

Andrea Castillo

George Mason University - Mercatus Center

Date Written: January 15, 2015

Abstract

The next major wave of Bitcoin regulation will likely be aimed at financial instruments, including securities and derivatives, as well as prediction markets and even gambling. While there are many easily regulated intermediaries when it comes to traditional securities and derivatives, emerging bitcoin-denominated instruments rely much less on traditional intermediaries. Additionally, the block chain technology that Bitcoin introduced for the first time makes completely decentralized markets and exchanges possible, thus eliminating the need for intermediaries in complex financial transactions.

In this article we survey the type of financial instruments and transactions that will most likely be of interest to regulators, including traditional securities and derivatives, new bitcoin-denominated instruments, and completely decentralized markets and exchanges. We find that Bitcoin derivatives would likely not be subject to the full scope of regulation under the Commodities and Exchange Act to the extent such derivatives involve physical delivery (as opposed to cash settlement) or are nonfungible and not independently traded. We also find that some laws, including those aimed at online gambling, do not contemplate a payment method like Bitcoin, thus placing many transactions in a legal gray area.

Following the approach to virtual currencies taken by the Financial Crimes Enforcement Network, we argue that other financial regulators should consider exempting or excluding certain financial transactions denominated in Bitcoin from the full scope of their regulations, much like private securities offerings and forward contracts are treated. We also suggest that to the extent that regulation and enforcement becomes more costly than its benefits, policymakers should consider and pursue strategies consistent with that new reality, such as efforts to encourage resilience and adaptation.

Keywords: bitcoin, securities, derivatives, prediction markets, gambling, internet, virtual currencies, CFTC, SEC

Suggested Citation

Brito, Jerry and Shadab, Houman B. and Castillo, Andrea, Bitcoin Financial Regulation: Securities, Derivatives, Prediction Markets, and Gambling (January 15, 2015). Columbia Science and Technology Law Review (2014). Available at SSRN: https://ssrn.com/abstract=2423461 or http://dx.doi.org/10.2139/ssrn.2423461

Jerry Brito (Contact Author)

George Mason University - Mercatus Center ( email )

3301 N. Fairfax Dr.
Ste. 450
Arlington, VA 22201-4433
United States

HOME PAGE: http://www.mercatus.org

Houman Shadab

New York Law School ( email )

185 W. Broadway
New York, NY 10013
United States

HOME PAGE: http://www.nyls.edu/faculty/faculty_profiles/houman_shadab

Andrea Castillo

George Mason University - Mercatus Center ( email )

4400 University Drive
Fairfax, VA 22030
United States

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