Is UCC Article 9 Going to Kill the Use of Bitcoin by US Businesses?

Warning to Bitcoin enthusiasts: if you airily try dismissing UCC Article 9 as a nothigburger, you’ve just established you are unqualified to comment on commercial transactions in the US. Read what follows and be warned.

A new post at Credit Slips by Bob Lawless, based on a discussion with Professor Lynn LoPucki, raises a fundamentally important issue that will severely hamper the use of Bitcoin in commercial transactions once the issue is understood. As we’ve indicated in previous posts, the idea that Bitcoin might someday as anything other than a vehicle for speculation and a curiosity depends on whether it obtains a decent level of acceptance as a means of purchasing real economy goods and services. And as we will discuss in due course, forget about changing the UCC to accommodate Bitcoin; new Basel regimes are decided and implemented faster than changes to the UCC.

Readers who have followed us during the foreclosure crisis and read posts on chain of title issues will have heard us mention the UCC, because it played a critical role in analyzing securitizations. For newbies who are not lawyers (and forgive this for being a bit of a broad-brush treatment), UCC stands for “Uniform Commercial Code”. It is foundational legislation which was devised with considerable care and has been adopted in some form by all 50 states. Key sections from Wikipedia:

The Uniform Commercial Code (UCC or the Code), first published in 1952, is one of a number of uniform acts that have been promulgated in conjunction with efforts to harmonize the law of sales and other commercial transactions in all 50 states within the United States of America…

The UCC is the longest and most elaborate of the uniform acts. The Code has been a long-term, joint project of the National Conference of Commissioners on Uniform State Laws (NCCUSL) and the American Law Institute (ALI), who began drafting its first version in 1942…

The overriding philosophy of the Uniform Commercial Code is to allow people to make the contracts they want, but to fill in any missing provisions where the agreements they make are silent. The law also seeks to impose uniformity and streamlining of routine transactions like the processing of checks, notes, and other routine commercial paper.

Article 9 governs secured transactions in movable property (as opposed to real estate). A secured transaction enables a lender to take a security interest in property to provide a means of obtaining repayment if the borrower defaults. In other words, if the borrower does not make good on his loan payments, the lender can seize specific, agreed upon collateral. Of all the articles of the UCC, Article 9 has been the most widely copied abroad. Again from Wikipedia:

Article 9, which established a unified framework for security interests in personal property, directly inspired the enactment of Personal Property Security Acts in every Canadian province and territory but Quebec from 1990 onward, followed by the New Zealand Personal Property Securities Act 1999 and then the Australia Personal Property Securities Act 2009.

So what does this have to do with Bitcoin? I’m going to quote liberally from the Credit Slips post and unpack as needed:

As many readers will know, all 50 states have enacted the UCC with only minor variations. Article 9 governs security interests in personal property…The bank that gave you a car loan has an Article 9 security interest in the automobile serving as collateral for the loan, and the bank providing operating capital for your corner bakery similarly may have an Article 9 security interest in the inventory, equipment, and accounts at the store. Article 9 is one of those laws that only specialists tend to know, but it plays an important role in the flow of commerce.

The bakery example was deliberate given this news about a Durham, NC, bakery accepting bitcoins. I have no idea about the financial circumstances of this particular bakery, but to understand the point assume it has loan from a bank secured by the bakery’s “inventory, goods, equipment, accounts, and general intangibles.” Such an arrangement would not be uncommon and would effectively give the bank an Article 9 security interest in all of the bakery’s property that is not real estate, sometimes referred to as a “blanket lien.”

When a customer pays the bakery with bitcoins, those bitcoins certainly now become part of the bank’s collateral…

The bank’s security interest will attach to the bakery’s bitcoins. When the bakery uses bitcoins to buy flour from a supplier, the bank’s security interest will continue to encumber them. UCC section 9-315(a)(1) provides that the bank’s security interest “continue in collateral notwithstanding . . . disposition thereof unless the security party authorized the disposition free of the security interest. The supplier is not protected by the “buyer in ordinary course” provision of 9-320(a) because that provision only strips security interests from “goods.”

Further, the security interest will remain with the bitcoins through subsequent transfers (UCC § 9-325). A remote transferee of the bitcoins will take the bitcoins subject to the bank’s security interest. Assuming the bank has taken the easy steps to perfect its security interest, which it almost always will have, the bank can seize the bitcoins as collateral if the bakery’s debt goes unpaid. The possibility of another party with superior property interest in a bitcoin would seem to substantially dampen their utility as a medium of exchange.

Yves here. Here is the layperson recap. If anyone takes Bitcoins from a business that has a blanket lien (and you as someone dealing with that business won’t know the state of their finances) and that business gets in trouble, the bank can go after any current holder of Bitcoins that have passed through that business’ accounts. This is not the case with money because Bitcoin is considered to be property under the UCC, not money. As the post stresses, “money”

…is a “medium of exchange currently authorized or adopted by a domestic or foreign government” (UCC § 1-201(b)(24)). To the best of our knowledge bitcoins are not currently authorized or adopted by a domestic or foreign government.

This by the way, happens to conform with the definition used by FinCEN, the bureau of the US Treasury that handles money-laundering and FinCEN’s definition is almost certain to be adopted by the IRS. So people who use money to engage in transactions with businesses don’t have that problem, but Bitcoin users will.

So to recap: Bitcoin is property, and when you exchange the property of a business (its goods, like its doughnuts or other inventory for sale) for other property, like your Bitcoins, the next person who takes the Bitcoins (now regarded as property of the bakery) has any blanket liens of the bakery attach to those Bitcoins.

How big a deal is this? Because liens are not reported by type, good statistics are non-existent. However, it’s a very real possibility that many of the small businesses you deal with have a blanket lien. Small business credit is extremely difficult to come by. Unless its needs can be financed by credit cards (which are almost always guaranteed personally by the owner in the fine print), borrowing against the businesses’ real estate (if it has any with enough equity) or it only needs to finance specific equipment (like a car or truck), a blanket lien is likely to be its cheapest route. And bigger businesses, which are in a better position to get business loans (against the cash flow of the operation) can also be required to take a blanket lien if they fall behind and the lender reworks their loan (they’ll take more collateral as the price of forebearance). From Equipment and Tool Institute:

Most loans will require collateral unless you’re a very strong client. Usually this will be a ‘blanket lien’, meaning they will file UCC-1’s on all your business assets. Other common collateral can be in the form of a home or automobile, land and commercial buildings, CD, savings or investment accounts…There is no easy way to get a 1:1 relationship between the collateral and your equipment, you can’t repossess half a building, so often times the banks ask for a lot more collateral than what you’re borrowing.

Now Bitcoin enthusiasts will try arguing, “Haha, Bitcoin is anonymous, just see if those banks can find who has the bakery’s Bitcoins now!” As a lawyer wrote us regarding similar claims on our post regarding the likely IRS treatment of Bitcoins:

The better word for Bitcoin is traceable. If it can be traced, it ain’t anonymous.

All it requires is a subpoena–a rather primitive piece of paper. The irony is that the longstanding reason people refuse to go cashless is because they know Monex and other electronic money are traceable. It’s always been possible for the whole system to be cashless.

Lynn LoPucki, in comments, explained how this might go in practice (in this case, the party that took Bitcoin from the bakery is a supplier):

…consider the example of the bakery and the supplier. After the bank calls the bakery’s loan and gets a judgment against the bakery, it conducts discovery to see where the bakery’s bitcoins went. The bakery will be compelled to testify as to the identity of the supplier. Then the supplier will be compelled to testify as to the present contents of the supplier’s bitcoin account. If the supplier fraudulently transfers the coins before the bank can seize them, the supplier is liable to the bank — in real dollars.

So everybody in the transaction chain from the bakery onward has an incentive to rat out the next party in the Bitcoin transfer chain. If they identify the next Bitcoin party, they’ve passed the lien hot potato onward. Otherwise, they have to pay hard cash if they fraudulently transfer the Bitcoins (and dumping Bitcoins to try to stay out of the bank’s clutches has extremely high odds of being deemed to be a fraudulent transfer).

The Credit Slips article did go through some possible remedies for the UCC mess, but did not seem terribly optimistic about any of them. In theory, a government could authorize Bitcoin as a medium of exchange in such a manner that the UCC will regard it as money. But that is utterly at odds with the pet idea of Bitcoin promoters that it is free of and needs no official supervision, backing, or control. For legal eagles, there’s also a discussion of the rules for co-mingled collateral, but the post authors didn’t think it would be likely as a save, and no one in the post’s comment section disagreed.

And as we said, don’t even think of getting the UCC amended to deal with this issue. Of all the possible fixes, that is the most remote. The solons at the American Law Institute who work on UCC matters are extremely slow and deliberate. They are now occupied with considering how to modify the UCC to deal with securitizations and foreclosures in light of the chain of title mess (in other words, they are looking at the UCC as a backdoor route to coming close to having a uniform foreclosure statute). This project has already been in motion for years (some draft language was proposed in 2010) and it is still not even at the stage where language has been drafted for review and approval by the states.

Moreover, the ALI has proposed a major amendments that have failed to be implemented. For instance, in 2003, NCCUSL and the ALI presented major amendments to Article 2 along with changes to Articles 2A and 7. Not a single state passed the fixes after eight years, so NCCUSL and the ALI withdrew the proposal in 2011. Bitcoin isn’t even remotely on the ALI’s radar. And there is not any evidence of states feeling the need to change their laws to accommodate Bitcoin fans.

The Credit Slips post concludes:

Even if there some arguments that the security interest does not stay with the bitcoins, the problem is the uncertainty, and the uncertainty would seem to be enough to undo the attractiveness of bitcoins. Either Lynn and I have missed something about how bitcoins work and their interaction with Article 9, or the Bitcoin proponents have failed to notice how Article 9 could unravel the whole enterprise. Up until now, bitcoins have not become a substantial part of mainstream commerce such that the Article 9 problem may have been of little consequence, but if bitcoins are to become part of mainstream commerce, the Article 9 problem must be solved.

And finally, Georgetown Law professor Adam Levitin, who has more real world and policy experience than most professors, and is also an expert on the UCC and payment systems, thinks that the claim that Bitcoin will result in big savings to merchants would not persist at meaningful transaction volumes, which require far more infrastructure. His remarks via e-mail:

Critically, there doesn’t seem to be any particular social good from Bitcoin. I don’t see why I would want to use Bitcoins over dollars. The no merchant fee thing is hogwash. There are no merchant fees currently because there’s low transaction volume. As transaction volume rises, we will see transaction fees, and given that they’ve got to be individually negotiated with whoever is doing the mining, I don’t see a way to make this work seamlessly for large scale commerce. Regulators haven’t banned bit coins yet because there isn’t an real strong case for doing so, but there isn’t any case for facilitating it either.

The IRS and UCC issues each have the potential to considerably dim interest in Bitcoin, and the cheery assumption that it will have much lower transaction fees to merchants were it to every scale up is likely to prove illusory. So with the basic premises of this form of property looking more dubious the more it is scrutinized, it’s an open question how long this bubble will last.

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100 comments

  1. weinerdog43

    Just to amplify the ‘old piece of paper’ meaning of a subpoena, it is wise to look at the Latin root. ‘Sub’, meaning ‘under’, and ‘peona’ meaning ‘penalty’. Or, ‘Under Penalty’. In other words, the subpoena has the full authority of a judge to order its compliance. Failure to abide by a subpoena risks a visit from a sheriff’s deputy to have you come in and explain to the judge why you are ignoring his/her request for information.

    At the risk of conflating bitcoin with MERS, sometimes its nice to have a simple piece of paper. Complexity does not necessarily mean better.

    1. scraping_by

      Conflating Bitcoin and MERS isn’t a risk; it’s a base-level observation.

      Both take ownership from a reasonably objective, well-tried system to a computer database held by distant, unaccountable operators. The backup of law is bypassed in both, a property holder’s only recourse being the whim of the database owner and operator. And following the idea of ownership being a social convention, the conventional process is replaced with the fashions and needs of the database holders.

      Both suffer from chronological snobbery. Just because it’s newer doesn’t mean it’s better.

      1. Nathanael

        The difference is that Bitcoin isn’t pretending to have anything to do with real land ownership. If MERS were a database of, say, Farmville land, it probably would be no worse than the existing situation in Farmville.

        MERS is pretending to be involved in real property transactions, when it can’t be (it’s actually illegal and there’s an entire, much more functional system for real property ownership records).

        To put it another way: Bitcoin is optional. MERS is trying to force itself on all of us.

  2. Gavin Andresen

    Is this not the way it would work:

    Simple case:
    1) bakery trades cupcakes for bitcoins.
    2) bakery goes bankrupt: creditors gets bitcoins.

    Complicated case:
    1) bakery trades cupcakes for bitcoins
    2) bakery trades bitcoins for flour
    3) bakery goes bankrupt: creditors gets flour

    You seem to be arguing that creditors could get the flour AND the bitcoins that were traded for the flour. That seems ridiculous; surely the UCC has provisions for barter transactions that don’t involve creditors tracking down and reclaiming assets that were bartered away.

    1. Yves Smith Post author

      This actually is well trafficked territory from the 1970s, when high inflation made barter more common. So this is not virgin terrain.

      And this is indeed how it works in barter transactions if you are dealing with a creditor who has a blanket lien.

      1. Sneeje

        Yves is, of course, right because liens restrict the rights of all parties in a property transfer, regardless of the characteristics of the exchange.

      2. Nathanael

        Yes, Gavin has it right. And Yves agrees that Gavin has it right.

        So what’s the problem? This is how it’s supposed to work, this is how it has always worked, it doesn’t create any problem for bitcoin.

        Bitcoin has other fatal problems (deflation, for example), but this isn’t one of them. There is no UCC concern.

        1. Nathanael

          I’m going to dig into this even further with some Wikipedia quotes:

          ” The holder may “perfect” the security interest to put third parties on notice thereof. Perfection is typically achieved by filing a financing statement with government, often the secretary of state located at a jurisdiction where a corporate debtor is incorporated. Perfection can also be obtained by possession of the collateral, if the collateral is tangible property.”

          If the lender does not actually possess the collateral, then the lender generally cannot have a perfected (or “legal” as opposed to “equitable”) lien against the property.

          The only exceptions — the only situations where the lender can establish ap perfected “legal lien” which will run with the property — are property where there is a well-established state government procedure for putting third-party purchasers on notice. This applies to land (obviously), but also to automobiles (due to the registration system). But it doesn’t apply to bags of flour. Or unregistered securities. Or bitcoins.

          “Absent perfection, the holder of the security interest may have difficulty enforcing his rights in the collateral with regard to third parties,”
          Difficulty? Total impossibility, most of the time.

          1. Yves Smith Post author

            You don’t understand what “perfection” means under the law. That just means the lender has taken the steps necessary to “perfect” as in assure, his interest in property. For instance, when you are doing a mineral rights deal, you need to have “perfected” your rights before you can start mining.. Banks have that all taken care of in their standard language and procedures in secured lending. Perfection is not an issue unless the bank really screwed up.

    2. mark

      Actually, the way it is being described, not only would the bank have a lien on the flour and the bitcoin. It would also have a lean on the cupcakes and could go after the buyer of the cupcake. This is ridiculous.

  3. Austin

    Interesting thought process. But. Oops. Federal Precedent has already stated Bitcoin is a legitimate currency (SEC v. Shavers and Bitcoin Trust). Also, Cyprus has already adopted the currency. Double ouchie.

    1. Yves Smith Post author

      No, Lee Sheppard addresses Shavers in her paywalled Tax Notes article.

      The Shavers decision is not germane because all the SEC has the authority to address is whether Bitcoin is a security or not. It has no say at all on the question of whether it is a currency. We discussed that matter in the post we linked to, which I suggest your read before offering uninformed Bitcoin PR.

      In addition, FinCEN has ALREADY determined that Bitcoin is not a currency, and the IRS is almost guaranteed to follow (it would be unheard of for one branch of the Treasury to differ with another, and FinCEN separately has vastly more clout with other central banks).

      And you’ve completely misrepresented the state of play in Cyprus:

      Now the central bank has weighed in, and it doesn’t like Bitcoin at all.

      It said in a statement (in Greek) Friday that it “does not approve any activity that falls within its purview, unless it can ensure the legality of that activity. Activities without the necessary licensing are in breach of legislation.”

      So, is the institution –accused of failing to control the economy on the tiny Mediterranean island and allowing rampant tax avoidance and money laundering- saying Bitcoin is illegal?

      Not quite. Instead it warns that there are big risks associated with using the currency.

      http://blogs.wsj.com/moneybeat/2014/02/07/central-bank-of-cyprus-does-not-like-bitcoin/

      It is most decidedly not a government approved or authorized currency in Cyprus. The fact that it is not illegal to trade it for goods does not make it a legal currency. You can trade baseball cards for goods if you are so lucky as to find someone who will take them, but that does not make baseball cards currency either.

  4. Cui Jin Fu

    I tend to agree that Bitcoin does not have a bright future, but I’m not convinced this UCC concern is real. Suppose the bakery with a blanket lien uses bitcoins to purchase some new equipment and then the bank subsequently calls in the loan. Does the bank then have a claim against both the equipment and the bitcoins? It seems legally absurd that they would. In effect, it sounds like usage of bitcoins would effectively be seen as a barter transaction. Does the UCC not have any provision for bartering of goods between businesses?

      1. Nathanael

        The UCC concern is a fake. See my comment at the bottom. It doesn’t matter whether it’s currency. T-bills and corporate stock aren’t currency either. They’re all personal property. Liens on personal property don’t run with the property — particularly not generic ones like “secured by all the business’s property”. Once alienated for fair value to a bona fide non-colluding third party, personal property loses any liens it had. The liens run with the person, not with the property; when you accept the bitcoins from the bakery in exchange for (say) baking equipment, the liens detach from the bitcoins and attach to the baking equipment.

        This is very long-standing doctrine and it’s very important to all commercial transactions. Banks couldn’t accept T-bills if it wasn’t true. People couldn’t accept CHECKS from businesses if it wasn’t true. (They aren’t currency either, and they could have liens on them.) You couldn’t buy damn near *anything* if it wasn’t true.

        Obviously there’s a recapture possibility if the bitcoins are traded away for *less than their fair value*, but if they’re traded away at the going rate, the bona fide purchaser for value doctrine makes sure that liens don’t carry over.

        Bitcoin is going to collapse for other reasons, but the UCC concern is nonsense.

        1. Yves Smith Post author

          Nathaniel,

          With all due respect, what you’ve written is so wrong on so many levels that it just establishes that you way out of your depth and thus not competent to opine.

          Banks hold T-bills in their trading books or on behalf of customers in brokerage accounts or managed funds. Banks do NOT accept Tbills as payment. They accept funds (which are currency, wire transfers or checks).

          And your remark about checks is really embarrassing. Please look at the face of a check. It is an instruction to your bank to make a payment to the named party in DOLLARS, which is recognized under the law as a currency.

    1. alex morfesis

      the UCC is absurd. It was written by bank lawyers to give them a grip on your private parts.
      UCC 9-203-c is what is being described in the article but the 9-306 part is still open to judicial interpretation…others will argue that you can’t win in UCC arguments. They just need better lawyers…but lawyers mucking up burpcoin will still kill its usefulness…

      the PEB is a private bankster enterprise, with revisions called for and made whenever too many judges rule in the favor of consumers or small business.

      In fact, the entire UCC was not designed to “help commerce”, but was designed to overturn the pro consumer rulings of the post depression era. The history of the UCC is a ALEC type piece of interesting reflection on democracy.

      BUT, I dont really want to say much to encourage burpcoin2lips as it is something only someone like Belfort would come up with…

      the sooner it dies, the better for all of us…

      the ucc though requires perfection and in north carolina(the example provided), as in most places, the item has to be specified, the “any and all other” nonsense in most bank paperwork is questionable and can be rattled by a decent attorney for the party who is having an attempt to convert their control of an asset to the bank.

      but burpcoin2lips are amusing.

      god knows how many impotent, incompetent and incontinent geriatrics will be telling their grand kids that the reason they pissed away their lives with computer screen capitalism was they knew, out there somewhere, one day, the “millions” that were stolen from them would be found, meanwhile, kid, can you get me a beer, I have to try to figure out how to get to the next screen on call of dudu version 73.1

  5. milesc

    It certainly raises an interesting legal question (one of many when it comes to existing laws – drafted before the advent of cryptocurrencies – that prima facie treat bitcions and “money” or “currency” differently).

    One of the comments to the original article points out that Germany already recognises bitcoin as a “unit of account” (good for tax and trading purposes in Germany – link: http://www.cnbc.com/id/100971898.) – does that mean bitcoins are already “a medium of exchange currently authorized or adopted by a domestic or foreign government”?

    The quote from Adam Levitin – “There are no merchant fees currently because there’s low transaction volume. As transaction volume rises, we will see transaction fees, and given that they’ve got to be individually negotiated with whoever is doing the mining, I don’t see a way to make this work seamlessly for large scale commerce.” – makes no sense. Except in rare cases, bitcoin transactions already include nominal fees (try sending a transaction without a fee and see what happens). As transaction volume increases, miners will necessarily earn more of those (nominal) fees. There is nothing to negotiate. If he is referring to the limited block size and suggesting that transactions with lower fees will one day be ignored, he is wrong. Everyone is well aware of Bitcoin’s current limitations. The block size – and indeed the other “rules” of the Bitcoin protocol – can, with consensus, be changed. Tangent: I do wonder whether the consensus will ultimately be that bitcoins should continue to be minted at a fixed rate beyond 2140.

    Regarding your final quip, “it’s an open question how long this bubble will last.”, being a global phenomenon, and not wishing to discount the importance of a US market, Bitcoin will continue regardless.

    In this instance, I expect the law will adapt. It has done pretty well so far.

    1. Nathanael

      Bitcoin will collapse because it’s a deflationary currency. Since it’s deflationary, it will stop being useable as a currency fairly soon. When it stops being useable as a currency, the demand for it will go away, because it has no inherent use (unlike gold, which can be used for electronics and jewelry).

      For more on why a deflationary currency doesn’t work, see the entire history of the world. Basically, it ends up being hoarded rather than traded, and then it’s not a currency any more.

      1. Nathanael

        (An alternative “computational currency” to Bitcoin, one which is inflationary at the right rate, might actually function. It would be interesting to see if one is developed.)

        1. milesc

          I do wonder if there will be a consensus decision to change Bitcoin and allow for the mining of bitcoins beyond 2140. Not impossible.

        2. OpenThePodBayDoorsHAL

          The echo chamber of public discourse is so fraught on the subject of deflation that I thought I’d jump in here.
          Occam says let’s keep it simple: when you buy something, would you rather it is cheaper, or more expensive? I thought so.
          So what has to happen for something to be cheaper? I’d suggest it’s two things. The good needs to have been more cheaply produced, or procured. That happens as mankind gets more *productive*. That is what is known as PROGRESS. We no longer, for example, need to spend half our labor growing food. But the second thing that needs to happen is that the unit of account that we measure goods with, the money, needs not to have declined in value relative to that good. No use that wheat farmers get more productive if it takes $50 to buy a loaf of bread because the steward of the currency has manufactured too much of it.
          Think about it: fiat system apologists always remind us that fiat currencies can be printed in unlimited quantities. So the only condition under which there is deflation is a catastrophic collapse in demand. Yes this should be a worrisome condition. But what if the users of a currency knew the supply would remain stable? Gee, they’re hungry, I’d wager they’d still buy that loaf of bread.
          We are so conditioned by the fiat trap and have been so brainwashed that “sound money” is somehow seen as a problem.
          But hey, I’m all ears. Let’s all get rich, Dow 30,000! (loaf of bread $100.00…)

    1. alex morfesis

      UNCITRAL adopted by your very own country
      in 1976
      convention on the international sale of goods, etc
      south africa is not alone in this

        1. alex morfesis

          hey if folks in indonesia and russia want to trade some burpcoin2lips with some 37 year old gun loving gamer waiting for his mom to bring him down his grilled cheese in the basement…more power to them…I am sure there are civil liberties that will guarantee when you want to cash out and convert those burpcoin2lips into something you can use, like food, there wont be anyone in the government from those two switzerland type countries to worry about…

  6. Anon48

    Great article.

    Also, hope all the Bitcoin users are keeping meticulous records of all their Bitcoin transactions.

    As property, they have to have records of what paid and what was received for each Bitcoin transaction to properly report capital gains and losses for tax purposes. And as is obvious, because the Bitcoin price changes with time, the record keeping becomes more complex.

    Reminds me of early years in the 80’s when mutual funds were first becoming widely utilized. Some people were able to write checks to pay bills with these funds… and frequently did so, not realizing that each time they wrote a check on the fund, it was a separate taxable event that had to be tracked and reported with their tax return. Unfortunately, they learned the hard way after year end when informed they had voluminous lists of security sales transactions for which the cost basis and sale price of each transaction had to be researched and reported.

    Nowadays, most brokers will provide year end summaries of capital gain transactions (buy date, sell date, sale price and cost basis). So for most folks this is no longer a major issue.
    Wonder if Bitcoin exchanges have any tax reporting responsibilities? If not, how long do you think it will be before IRS gets them in its crosshairs?

    1. Anon48

      BTW- could be worse, as its not inconceivable that IRS could take the position that for some people Bitcoins could be considered “personal” property thereby limiting the ability to deduct losses.

    2. Nathanael

      “Also, hope all the Bitcoin users are keeping meticulous records of all their Bitcoin transactions.”

      Yeah, you gotta do that for anything which might gain in value.

      People who deal with two different currencies (for instance, spending half the year in London and half the year in the US) know this already.

  7. Joseph

    In the hypothetical bank & bakery situation, would it be possible for the bank to make a blanket agreement as part of the loan contract to let bitcoins go out the door as payment by releasing its security interest in the bitcoins? The law cited seems to allow for that —
    “…continue in collateral notwithstanding . . . disposition thereof unless the security party authorized the disposition free of the security interest.”

    1. Yves Smith Post author

      The bank has absolutely no reason to do so. A bank will not release its security interest until the bakery has repaid the loan in full. That’s the whole point of having a security interest (lien on collateral) in the first place.

    2. Nathanael

      ““…continue in collateral notwithstanding . . . disposition thereof unless the security party authorized the disposition free of the security interest.””

      This is what we call “unenforceable” because of the bona fide purchaser for value doctrine.

      1. Yves Smith Post author

        Bankruptcy lawyers and judges would not agree with you. And a bankruptcy judge is the one who makes these determinations in most cases.

  8. susan the other

    Interesting bit about the National Conference on Commissions on Uniform State Laws. The UCC will be used to resolve future foreclosure discrepancies uniformly but these efforts have not yet convinced states to sign on. Stg. I heard recently to with this (I bet) is the attempt to usurp states’ jurisdiction over recording land titles and create a national title registry. So will this new set of rules address false securitizations; intentionally destroyed notes; multiple sales of the same security, etc and all the missing allonges of these crimes which might make their national title registry a complete joke? Nevermind. Let the smart guys figure it out one more time.

    1. alex morfesis

      the only positive thing I can think of in the never ending attempt at lenders to convert a home foreclosure into a car repo is the Uniform Nonjudicial Foreclosure Act, and the fact it has somehow never been turned into law…

      in fact, the foreclosure mess as it exists was not to have been so, but Thacher Proffitt was not able to get the legislation in place, which explains all the loose ends in the foreclosure process. TP was the law firm that decided to fold when they realized all the pieces of the puzzle had not come together before the crash came. TP, like the securitizations they put together…

      the banks over the years have been able to convince people that there is a thing called title theory and lien theory…In those states where the funding source is claiming they gave you a trust deed loan (NOT A MORTGAGE – FTC type false advertising) and that you are in a “title” State, where you don’t own the home and have no “ownership” interest until you pay off the outstanding debt on the home. This Trust Deed, as the banks in foreclosing will state, is NOT a mortgage loan, but simply a “contract and agreement”. Almost ALL “Trust Deed” states still in fact have laws and rulings for mortgage loans, but the banks “collude” to not offer you a mortgage loan and instead give you a “trust deed” home financing agreement.

      The industry has been trying since the 1920’s to pass the UNFA, the last attempt being a regurgitation done in 2002.

  9. Oren Baldinger

    I see one possible oversight in this analysis- the baker would most likely not be accepting bitcoins directly, but would be using a processor like Bitpay (http://bitpay.com) to handle the transaction. Prices and payment (from the processor to the baker) are all in dollars, and the processor handles all the conversions/fluctuation risk/holding bitcoins. I’m not entirely sure what the implications of this extra layer are, since the baker technically never receives bitcoins, despite allowing customers to pay with them.

    Sidenote: Bitpay et al. charge around 1% per transaction- while still lower that credit card gateways (if nothing else competition is good) this definitely tempers the “no transaction fees” exuberance, at least for commerce.

    1. Dan Kervick

      What puzzles me is why someone would go through such a process in the first place, rather than just ask for dollars for the baked goods. Why pay money to a third party to process bitcoin receipts from the buyer and then covert them to dollars, when you can just get dollars from the buyer?

      1. Oren Baldinger

        Well, three main (although not great) reasons I can think of. The first being it simplifies international commerce across multiple currencies, although that doesn’t really apply to local businesses. The second is if I have a lot of bitcoin that I want to spend, converting it into dollars takes time (ACH delays) and I take a hit on conversion fees. To use them in the real economy effectively, I really need to be able to spend them directly. The more places I can do that, the more useful the bitcoin is. Kind of a tail-wagging-the-dog scenario though. The third is more idealogical, to break the Visa/Mastercard monopoly on digital commerce. This assumes bitcoin remains legal.

      2. milesc

        For a merchant it’s 1% off the sale and daily settlement (and for online, zero chance of fraud/chargebacks) when using BitPay or Coinbase vs 2-5%, weekly settlement and the threat of fraud/chargebacks when using VISA/Mastercard/Amex.

        For a merchant, it’s a no brainer – even a short term boost in sales or small gain in customer numbers would be worth the minimal effort. Overstock.com expects to process $10-15 million dollars of bitcoin denominated sales this year, not an insignificant amount!

  10. Sock puppet of liberty

    The good news is that soon there won’t be any banks! Fiat money is backed by violence and fear, as our civilization grows in complexity it will become increasingly harder to scale structures based on that. Bitcoin is traceable by default, but it’s pretty easy to make it anonymous, one method is to exchange it for another cryptocurrency (or 30), then back into bitcoin. Software can do this automatically, adding to the liquidity of the market while you sleep. For me what’s uncertain is the near future, how will all of this play out? I think in the near term it is actually safer for a small business to be in the tax situation of transacting in bitcoin rather than dollars simply because there are more laws/penalties based on dollars. I think a darknet based business offers more protection and limited liability than an LLC, or even an offshore corporation. No one can even count the number of laws we have, much less comply with them — and that’s a great incentive to take a risk.

  11. Josh Stone

    There’s been some misunderstanding here when it comes to bitcoins and property. Bitcoins are not property, they’re cryptographically signed messages.

    Suppose a bakery decides to accept bitcoins from a customer. The baker generates a private key and from that produces a bitcoin address. The customer scans the address and then sends a message to the Bitcoin network signed by one of his private keys saying that he wants to transact with the bakers address. The Bitcoin network verifies the message and the transaction is complete.

    Next lets say that the baker decides to pay a supplier using bitcoins. The baker sends a message signed by his private key to the Bitcoin network saying that he’d like to transact with the suppliers bitcoin address. The Bitcoin network verifies the message and the transaction is complete.

    The private key which the baker generated to facilitate the transaction is still in his possession after paying the supplier. The private key is his property and the bank can make a lien on that if they want. They can’t make a lien on the supplier because the private key used by the supplier to facilitate the trade was never the baker’s property.

    1. Yves Smith Post author

      You are really behind on this issue. Go read our summary of FinCEN’s and the IRS’s position on this.

      http://www.nakedcapitalism.com/2014/03/bitcoin-currency.html

      The fact that people will trade goods with tangible value for Bitcoin means it is NOT just messages. It has been ascribed value, like collectable baseball cards, and hence is property. You can call it whatever you want, but don’t expect courts and the tax man to follow your views. There’s a well established legal and regulatory framework for commercial transactions, and it’s not as hard as you think to slot where Bitcoin fits in.

      FinCEN, and the IRS is pretty sure to follow, regards Bitcoin as tradeable property. You don’t have a vote in this.

      1. Josh Stone

        They literally are messages. I’m only giving you the facts of how Bitcoin works. If you think I’m behind on the issue please explain to me what property the bank would actually confiscate?

        1. Josh Stone

          And what is your opinion on my final paragraph and how does it fit into UCC article 9.

          ” The private key which the baker generated to facilitate the transaction is still in his possession after paying the supplier. The private key is his property and the bank can make a lien on that if they want. They can’t make a lien on the supplier because the private key used by the supplier to facilitate the trade was never the baker’s property.”

          1. Yves Smith Post author

            I said I didn’t see any point in indulging you further but you couldn’t take “no” for an answer, could you?. You’ve gone from possibly being thick-headed to making it clear you are a troll.

            The private key is not the consideration. That’s like saying the license key is the software.

            Go hire a UCC expert and educate yourself.

            1. OpenThePodBayDoorsHAL

              Yves I’m not so sure and while we’re trying desperately to find ways for Bitcoin NOT to work we should look into this objection more closely. The software/license key example you cite may not apply. When I have Windows on my laptop, those bits unarguably reside on a machine which is in my possession. My ability to use those bits is governed by my having a valid license key. But Bitcoin “usage” is a different matter. I never “own” or “possess” a Bitcoin on my laptop, or arguably “have” one in my possession, ever. “Bitcoins”, in fact, do not exist; and thus may not fall into a definition of “property”. I only have the license key that allows me to change an entry on the Bitcoin ledger, but that license key has no function or value of themselves separate from the Bitcoin network.
              As I ponder it a bit…maybe it’s more like a health club membership? Let’s say I paid $1000 for an annual membership, can my wife divorce me and receive 1/2 of those usage rights in a settlement? Maybe some persons with backgrounds in law can chime in.

        2. Yves Smith Post author

          You clearly did not bother to read the post, so I don’t see why I should keep spoon feeding some who chooses to be obtuse. And your “literally just messages” is a further illustration. I could just as easily say, “An ebook is just messages” but people ascribe value to them, pay for them, hence they are property.

          This was in the post:

          Further, the security interest will remain with the bitcoins through subsequent transfers (UCC § 9-325). A remote transferee of the bitcoins will take the bitcoins subject to the bank’s security interest. Assuming the bank has taken the easy steps to perfect its security interest, which it almost always will have, the bank can seize the bitcoins as collateral if the bakery’s debt goes unpaid. The possibility of another party with superior property interest in a bitcoin would seem to substantially dampen their utility as a medium of exchange….

          …consider the example of the bakery and the supplier. After the bank calls the bakery’s loan and gets a judgment against the bakery, it conducts discovery to see where the bakery’s bitcoins went. The bakery will be compelled to testify as to the identity of the supplier. Then the supplier will be compelled to testify as to the present contents of the supplier’s bitcoin account. If the supplier fraudulently transfers the coins before the bank can seize them, the supplier is liable to the bank — in real dollars

        3. Mark

          In the past, governments have also tried to legislate the value of Pi. Of course, none of that changes the true value of Pi, it only means that bridges build according to lawful specifications will collapse.

          Similarly, FinCEN and IRS can say what they like, but none of that changes the fundamental nature of bitcoin. For something to be property, it needs to fulfill a minimum set of criteria. Ascribing value is not enough. Collectible baseball cards are a poor analogy because by their physical nature they cannot simply go poof and disappear by consensus. Intellectual property is also a poor analogy because with bitcoin, it’s not the information itself that is valuable but what people agree to do with it.

          Who “owns” a bitcoin is decided by the software and by the software alone. End of story. That is how bitcoin actually works. In fact, that’s the very definition of bitcoin.

          That is not to say that that the government cannot do damage to the bitcoin ecosystem by legislating the color of the sky. Just like bridges built according to Pi=3.2 will collapse, business that run according to a legal but technically false definition of bitcoin are broken and will collapse.

  12. John Steeley

    I don’t think this is really how the Bitcoin payment system works. From what I can gather when a Bitcoin purchase is made the business/establishment actually receives dollars, not Bitcoin. The Bitcoin used by the purchaser is exchanged through the Bitcoin system for dollars, which is used for the purchase. In essence, it’s the person on the other side of a Bitcoin trade that is actually supplying the money, that is dollars, for the purchase. I don’t think establishments ever take possession of Bitcoin.

    Bitcoin is doomed anyway, but I don’t think this is why. I could be wrong.

    1. Yves Smith Post author

      No, businesses advertise that they accept Bitcoin. They may post or check exchange rates to determine Bitcoin equivalents of dollar prices, and they may then or later convert but they are accepting Bitcoin, but the whole gimmick, um, point, is that they accept Bitcoin directly for purchases. And as a political matter, the proponents want Bitcoin to be accepted, not to have it be the equivalent of baseball cards you have to trade in for government authorized currency to use it.

      1. nowhere

        What I would like to know is how the Bitcoin “market” compares in size and value to other markets that the large financial players work in. Is it large enough to attract the attention of the likes of Morgan and Goldman for the purposes of speculation and manipulation? If so the spectacle of watching ruthless well funded financial sharks running amok in a field filled with idealistic libertarians and techies could be… interesting.

  13. casino implosion

    As a non-lawyer NC regular, I’d never heard of the UCC, the NCCUSL or the ALI. These are obviously elements of the hidden-iceberg parts of the government/market state–the place where the rubber meets the road and the market is defined and controlled by government action. Yves or someone should do a book about this stuff, bringing it to light.

    1. MyLessThanPrimeBeef

      They speak of UCC1 and UCC2, or something like that, in reference to who gets which priority.

      It’s much neater than a squabble between, say, the Corleone family and the Tattaglia family.

  14. MyLessThanPrimeBeef

    What happens to the flour supplier who gave a bag in exchange for a bitcoin – if the bank wants the bitcoin back, does the flour supplier gets his/her flour back?

      1. Mark

        Yves has answered this question several times in the comment. The blanket lien applies to the rights of both parties in a barter transaction, so the bank gets the flour and the bitcoin.

  15. milesc

    Here’s a novel argument I read (credit user meanig at bitcointalk.org): bitcoins are not property, rather they’re cryptographically signed messages.

    So when the baker chooses to “pay” a supplier in bitcoins, he sends a message signed by his private key to the Bitcoin network. The Bitcoin network verifies the message and the “transaction” is confirmed.

    Nothing moves. The private key is still in the baker’s possession and the bank can make a lien on that if they want. They can’t, however, make a lien on the supplier’s “receiving” address or the corresponding private key because neither were ever the baker’s property.

    1. Peter

      Yves is a brilliant writer and thoughtful analyst, but she jumped the shark with her foray into bitcoin. This ridiculous post proves that she truly does not understand the power of bitcoin and its potential for personal and monetary freedom. She has become a dinosaur.

      1. alex morfesis

        yeah yeah, the “power of burpcoin2lips”

        a fully operational death star…

        computer screen capitalism…

        it says so right there in my hard drive so it must really
        be there…

        the same crowd that kept watching that same computer
        screen, insisting that no one really understood the
        power of AOL…

        dinosaurs have memories…

        1. milesc

          You sound a lot like someone who would have rubbished the idea of the internet and email back in the day. Plenty declared the internet to be a fad, used only by geeks in their bedrooms. How far we have come!

        2. Peter

          One becomes a dinosaur when their hard-wired brains no longer see it as possible for the status quo to ever *really* change.

          When Einstein published his ‘theory of relativity’ as a young man, it was met with much doubt and criticism by his seniors. But it wasn’t that these more experienced physicists eventually came to realize that he was right. No, these older physicists died off leaving behind the younger generation that was less blind to the truth.

          Einstein became a dinosaur too in his old age, doubting modern theories in quantum mechanics.

          We all eventually become dinosaurs, as the leadership in thought falls upon the younger generation who fight for truth and progress.

      2. vlade

        *sigh*
        Yves is pointing out that there are massive legal problems with use of bitcoin which everyone seems to ignore. The reality is though, that if someone wants to use them, they will – and there’s no incentive for (say) banks not to use it, as going after bitcoins of small businesses is no harder and can be easier than selling machinery or flour.

        And to “power of bitcoin” – very few people are disputing power of peer-to-peer payment systems. Lots of people are disputing bitcoin having any intrinsic value.

        1. milesc

          Not so much “massive legal problems” as legal hurdles. Certainly interesting questions that Yves is quite right to raise (even if disdain is her only motive).

          I don’t think “intrinsic value” is terribly important. Intrinsic value is surely the value you would assign to something if you could not exchange it. Gold is shiny and heavy, so for most it would have at least some intrinsic value (nowhere near it’s real world valuation, of course). Euro and bitcoins? Zero. However, both euro and bitcoins can be exchanged (for as long as they are accepted by someone, somewhere), so they have exchange (extrinsic) value.

        2. Peter

          @ vlade: “very few people are disputing power of peer-to-peer payment systems.”

          I’m glad to hear this. Bitcoin is a peer-to-peer electronic cash system that allows users to store, transport and exchange value across the world without the assistance of a third party or the permission of an authority.

          This is why it is powerful, like you pointed out. The fact that the price tends to increase as more people understand its usefulness is a pleasant side benefit.

      3. OpenThePodBayDoorsHAL

        Agree with the Yves/brilliant comment. What’s less clear is why, after detailing the perfidy, massive inequity, and grotesquely criminal behavior of the ruling money system masters, she would choose to come down so hard on Bitcoin. Perhaps she still believes that redemption and working within the system has a chance to work. I do not. I believe that instead of sifting through for ways to make sure Bitcoin does NOT work, we should be pulling together for ways to make it work, even just as an experiment. And what an experiment it is: the people’s money. Not the violence-backed confetti hoarded so viciously and distributed so unequally by the 1%.
        Silicon Valley wants to lead the way OUT:
        https://www.youtube.com/watch?v=cOubCHLXT6A

        1. Yves Smith Post author

          I am coming down on this because I have spent a big chunk of my career looking at tech deals. I’ve got an enviable record on calling deals that either would not succeed or would take insanely longer and produce vastly less than the promoters believed.

          The reason was in almost all cases that the engineers/technologists had designed something they though was super cool, but hadn’t bothered to consider:

          1. What customer needs/interests were

          2. How much customers would have to change behavior to adopt their innovation.

          Bitcoin has all the marks of the tech duds I’ve seen over the years.

          Now it might be possible that Bitcoin has some narrow uses. Microwave ovens got adopted 20 years later than they should have because the promoters wanted them to serve as general purpose ovens, when microwaves don’t cook most things anywhere nears as well as a conventional oven. It was only when they figured out it was an ancillary heating device, and they started making small footprint ones, that sales took off.

          1. OpenThePodBayDoorsHAL

            Thanks. But recall there are lots of different potential customers bases and use cases here. A first world person waiting in line to pay simply and easily at Starbucks is just one, and Bitcoin may be a terrible choice. A small merchant sick of fees and chargebacks might be a better one. An online shopper sick of putting secret financial details and credentials into third-party websites might be another. A developing world person unable to get a bank account to buy something online. Anyone moving money cross-border. Someone wishing to time-lock funds so that cannot be spent absent certain conditions. An investor desperately seeking to avoid the loss of purchasing power from all-out global currency wars. A saver trying to avoid getting “bailed-in”.
            I have been in most of these situations. I had a check for $1000 from the US and rocked up to my local bank Westpac. They said the fee would be $65, the forex quote spread was 89/97, and they said it would take a month. That’s just outright theft and dinosaur-level service. My reply: “quick give me the check back, there’s a steamship leaving Sydney Harbor, I can save some time and money that way”. My wife made the terrible mistake of shopping at Target recently, and we got a 2AM text from Westpac saying we’d been hacked. The process to restart all of my automatic CC purchases is still not complete.
            Given this variety of glaring use cases, not to mention brand new ones (pay for your hotel bill with 1 1/2 shares of Google?) you might reconsider an early dismissal of this interesting development. Keep up the great work! Great site.

          2. Mark

            You’re looking at this from the wrong angle. Bitcoin is not consumer product. It’s a tool and a building block. It’s not like a microwave oven or cell phone. It’s more like an electric generator or like a transistor like the http protocol.

            Bitcoin doesn’t have “customers”. Bitcoin has an ecosystem of tinkerers and the consumer products are going to emerge from that eventually. What makes Bitcoin promising is that it is a very generic tool with a lot of potential uses.

  16. ArmchairRevolutionary

    While theoretically the lien holder might go after the bitcoin, I think in practice it would break down rather quickly. Imagine Party A accepts $10,000 worth of bitcoin from a customer with a lien. Party A then trades that bitcoin in exchange for the $10,000 to parties B, C and D. They purchase goods, etc., through other parties. Very quickly the effort to identify who has the bitcoin in question will outweigh the value of the bitcoin itself. By the time any lienholder is attempting to collect, it will be far out of reach.

  17. Robert Dudek

    So bitcoin is property like baseball cards are. Can you show me how to divide a baseball card into tiny little pieces and exchange each of them for other property?

    1. Mark

      I advise that you Google this little known device, with roots stretching back to ancient Mesopotamia and Egypt known as scissors, with which thin, weak objects such as baseball cards may be subdivided.

  18. Ted Rogers

    I am a former lawyer turned entrepreneur and I’d like to respectfully interject a viewpoint from the business side. To wit: as more and more merchants begin accepting bitcoin, and more and more users begin spending bitcoin, the likelihood of Banks claiming an interest under Article 9 goes down exponentially.
    Why? The bank that goes after bitcoins that pass through its clients’ stores under such an arcane, specious (at least to the general public) justification will suffer a PR crisis that would blacken the bank’s brand for years.
    Will the first lawyer on this site who recommends to the bank’s board that they should go after the bitcoins spent at the small bakery please raise their hand? You are not just going after the poor bankrupt bakery’s old bitcoins, you would be disrupting an entire chain of businesses that held/hold those coins. The monstrous legal costs would be dwarfed by the PR damage.
    This may seem like a small issue now but the Bitcoin “network” is expanding exponentially. In a year it would be a very big deal to pursue this path.

    1. Yves Smith Post author

      Please let me know what you are smoking. I’d like some.

      Banks have foreclosed on homes that had no mortgage, broken into homes and removed goods, illegally foreclosed on homes for active duty service members, engaged in all sorts of debt collection abuses. Jamie Dimon gets up and lies to shareholders and Congress an no one cares. Jon Corzine stole from customer accounts and perilous little happened.

      If there was one lesson of the aftermath of the crisis, it is that banks don’t give a rat’s ass about what the public at large thinks of them. And they happen to be right, their abuses of the public haven’t hurt their profits. On top of that, small business people (the ones who’d get blanket liens) are not a powerful group, they don’t have good access to media and don’t have an influential lobby.

  19. Peter

    Yves, so you’re telling me that bitcoin won’t work because banking regulations are too archaic?

    Hey, I just thought of another reason that bitcoin will work: legacy banking regulations are too archaic.

  20. BittBurger

    To answer the question posed in the title, No. This law will not kill Bitcoin for businesses. Why? Because the United States is not the only friggen country in the world. I meannn I realize we are the most arrogant country in the world, and we actually believe our UCC codes amount to a hill of beans outside of our borders, but Bitcoin is an international “thing”. It has already gone viral. If you stifle innovation in the USA, innovation and commerce in Bitcoin will simply go elsewhere. Lawmakers are fully aware of this, and are drafting *new* rules the help encourage and foster innovation so that it *doesn’t* leave our country. Period.

  21. Nahtanoj

    Yves – I was a bit surprised to see you so strong on the conclusion that bitcoins are property.
    In the US, at least, money in the form of currency (coins and dead presidents) is property, but money in the bank is not (at least, in the form of a balance at a deposit account, such as a conventional checking account).

    When you deposit currency in your account at a US bank, most people would say you have “money in the bank,” as if the bank had custody of your money and was holding your money for you. But from a legal perspective, once you deposit the currency in the bank, you no longer have a property interest in it. Instead, you have a right to cause the bank to make payments of money to you or as you direct, and that right is a contractual right against the bank, and not a property right.

    Why would a depositor’s relationship with a bitcoin exchange or bitcoin depositary be any different? After all, if I rent a safe deposit box at a bank, and put currency into the safe deposit box, the currency is still mine — I have a property interest in it, unlike the case where I deposit the currency into a checking account. Couldn’t my account with the bitcoin exchange or bitcoin depositary work the same way?

    Well, it could — if a full legal infrastructure had been developed to define and enforce the relationship that way — but that full legal infrastructure doesn’t exist at the moment (which is kind of the point of your post).

    More threatening to bitcoin movement, however, is the possibility that bitcoins are neither property nor contract rights. What they don’t exist at all, from a legal perspective? If my bitcoins disappear from my bitcoin account — or if they fail to function as I thought they would — where is the piece of paper that defines my legal claim? Did someone give me a deed or a contract when I paid good, hard cash for my bitcoins? If so, is that deed or contract legally enforceable? And, if I do have some sort of a legal right in these circumstances, who do I sue to collect on it? Satoshi Nakamoto?

    1. Yves Smith Post author

      You really seem to have lost the plot here. The issue is how money is defined for the purposes of money laundering, taxation and secured transactions (the UCC). These are all extremely significant issues where, as we have articulated, the officials and current legal regime either already have (in the case of FinCEN, who is authoritative in the US regarding money laundering and has significant influence abroad) or are very likely to deem Bitcoin not to be money, which means it is tradeable property. Those issues, in turn, are highly detrimental and likely fatal to any meaningful use of Bitcoin in the US for commercial transactions.

      The issues you raise are simply not related to the points we’ve made.

      1. Nahtanoj

        FINCEN and comparable AML agencies outside the US are all over bitcoin by now — as they should be.

        The only discernible advantage of bitcoin over conventional money is that it can be used to make anonymous, non-traceable payments, which is handy if you are a drug dealer, terrorist, or state subject to international sanctions, but otherwise not so important. Given the overwhelming worldwide emphasis on AML regulation these days, that bitcoin advantage is going to be substantially shut down in the near future.

        But even if that weren’t the case, the ambiguity about what if anything a bitcoin owner owns is a real obstacle to any widespread use of bitcoins in commerce. At least with Mr. Charles Ponzi you knew where you stood — he promised you a return of x% in exchange for your cash. You walked away from the transaction with either a contractual claim for the promised investment return or (as it turned out) a fraud claim for your losses.

        In the case of bitcoin, the position is not as clear. You still hand over your cash — but in exchange for what? What bundle of legal rights are you buying, and against whom can you enforce them? If the answers are “none” and “nobody,” you don’t really have the basis for a payment system — although willful suspension of disbelief can carry people along for quite a while (especially if greater fools keep showing up to join the party).

        1. milesc

          “The only discernible advantage of bitcoin over conventional money is that it can be used to make anonymous, non-traceable payments… ”

          Bitcoin is, in fact, a form of programmable money. Read about multi-signature transactions, smart contracts, etc. There’s so much more to Bitcoin than the seemingly simple currency application we have right now.

  22. Carl Darby

    18c6V91g2J6kuTtfrR7EkE9UQqK4vZ9SKJ

    There is a way around everything. If traceability becomes a significant issue (it won’t), there is zerocoin and dark wallet.
    The bottom line is that there no enforcement tools, and this is what drives the regulators crazy.

    As others have pointed out these regulations come from another era and have evolved to protect the interests of bankers and their choke points of control. As people walk
    away from our current dystopian system predicated on coercion things like the UCC will recede like waking up from a bad dream.

  23. aandrews

    “Critically, there doesn’t seem to be any particular social good from Bitcoin. I don’t see why I would want to use Bitcoins over dollars.”

    I think what got the attention of a lot of people (me, anyway!), concerning Bitcoin, was the financial meltdown in Cyprus, where bank account withdrawals were frozen or drastically limited and a forced “bail-in” was rumored in the offing. If one decided to leave for an economically sunnier destination and naturally take one’s money with one, Bitcoin was described as the only effective method for the unsophisticated hoi polloi to do so. Cash money may be largely anonymous, but it does have a physical presence and it’s difficult and risky to move a significant amount of it when there’s an effective clamp-down by the state. The social good to be considered in such a situation would be your personal financial well-being.

  24. Carl Mullan

    Seems to me that this issue is easily bypassed with the Bitcoin payment being accepted by a “merchant type service” that delivers dollars to the business. Such as BitPay, Coinbase, Circle etc. In the long run I don’t see any U.S. merchants directly accepting coins, I see them using a merchant service. BTCs are to become a “method of payment” or a “platform”. Just as no merchant accepts credit cards directly, they are processed through a service or bank and cleared $$ delivered to the merchant account. [$$ in a merchant bank account fit nicely into UCC equation] There are many other issues for merchants, the UCC thing being just one of them. So, take the coins out of the merchant’s hands, give them only the $$ cash value and the merchant service company can accommodate all these other issues such as the delay in verification on POS transactions, taxes on gains (or losses) when the BTC price changes, sales tax, refunds, consumer protection and more. In the U.S. at least, you may have to stop looking at BTC as a currency and see it more as a platform for merchants to access.
    http://ow.ly/uCUdD

  25. Nathanael

    This is a nothingburger. Why? The bona fide purchaser for value doctrine.

    If the bakery sells personal (as opposed to real) property to someone else, without specifically informing the buyer of the lien, there is then no lien on it. The *bona fide purchaser for value* of the property cannot be bothered in any way, as they are an innocent purchaser. They must be made whole.

    This doctrine also applies to swaps and trades and barter, as long as they are for fair value. So it would apply to receipt of bitcoins in exchange for actual goods or services at going prices.

    The only exceptions to this rule which I’ve ever seen are for “contraband goods” which are illegal for anyone to possess without a license, and the infamous “forfeiture” cases, and in the forfeiture cases judges are actually saying that the police have gone too far.

    To understand this, Yves, a real example. Please remember that Treasury bills are NOT money. And yet liens on T-bills vanish the moment the T-bill is sold or bartered away to a bona fide third party purchaser for value. Same with common stock. Bitcoin would have the same treatment.

    (Real property — land — is different, for many, many reasons, and liens can always run with the land. But not so with alienable personal property. Once alienated, personal property is alienated; the liens do not run with the property, they run with the person.)

    1. Nathanael

      Bitcoin is of course doomed because the designers made it deflationary, and deflationary currencies don’t work. But that’s another matter. Other non-deflationary private currencies, even “computational” ones like Bitcoin would be treated like T-bills or corporate stock for UCC purposes.

  26. Jerome

    I generally like your views and opinions because they are usually very well thought out but I cannot understand your contempt for bitcoin.
    In theory, a government could authorize Bitcoin as a medium of exchange in such a manner that the UCC will regard it as money. But that is utterly at odds with the pet idea of Bitcoin promoters that it is free of and needs no official supervision, backing, or control.
    What is the point of this comment? I agree with almost all of the articles I’ve read by you regarding banking regulation and banking fraud, but I also think bitcoin may offer some relief from the fraudulent system that exists today. I think any official recognition of it would be a positive step for its success.

    It’s ironic because your blog is a major contributor to my appeal to bitcoins. After reading you for the last few years I’ve been looking for ways to not contribute to the banking cartel and bitcoin is the best thing I see out there right now.

    1. Lambert Strether

      I can’t speak for Yves on this, but for me the spectacle of tech dude glibertarians calling for greater regulation to prevent themselves from ripping each other off provokes a sensation of schadenfreude so intense it’s probably illegal in some states.

      1. milesc

        The reaction of the community was not to call for greater regulation. It was to call for better services — e.g. exchanges that implement multi-signature wallets, contingent transactions, readily verifiable holdings and even fully distributed exchanges etc.

        Separately, Bitcoin supporters – particularly the VCs pouring millions into Bitcoin – want high quality exchanges that bring liquidity to the market. In the fiat exchange space, that necessarily means working with banks and regulators. Recognising as much is not at odds with anything.

        Bitcoin will almost certainly outlive all of us. That gives you plenty of time to learn about it and consider its impact on the financial infrastructure of the global economy.

  27. JayTe

    I concur that this will encumber bitcoin adoption while people continue to view the dollar as a viable currency. What happens after the dollar blows up is another story. Most banks will go into administration since we know that once there is a credit event, the TBTF banks and those who are dependent on them will fail as they cannot pay off the swaps they have on their books. At that point, it won’t matter what is on the books as what’s considered “legal”, people and what organisations that want to survive will use bitcoin (most likely) or another virtual currency that they trust. It might be gold and silver, but they can be confiscated by government alot easier than bitcoins. This was to some extent inevitable as the elite know that they need to try to undermine bitcoin in order to save themselves. There is no way the banking system can continue for the short period that it going to continue if bitcoin is adopted quickly.

  28. Corporate lawyer

    This post would have more value if the blogger actually consulted a finance attorney.

    As noted above, the BFP doctrine will generally prevent the above scenario, such that a third party bond fide purchaser would take the bitcoins free of the lien.

    But in the real world, that isn’t the actual answer. Nobody loans in a vacuum. You have a credit agreement, whether a term loan, revolver, or something else. In all of those cases, it is an industry standard for the agreement to allow for the dealing or transfer of personal property in the ordinary course, and for similar transfers up to agreed dollar amounts, so long as the agreed financial covenants remain complied with. So this is much ado about nothing.

    1. Yves Smith Post author

      There is not such thing as a “finance attorney,” which suggests you are not an attorney despite your handle. Their are attorneys who specialize in secured lending and bankruptcies.

      In case you missed it, the two parties who raised this issue are authorities on secured lending. The other source I cited, Adam Levitin, practiced law at Weil Gotschal, a white shoe firm that has the top bankruptcy practice in the US, before becoming a professor at Georgetown Law School. All of them are capable of analyzing how the various legal issues intersect, and all three agree the UCC issue is fatal in the case of blanket liens.

      The issues you raise regarding term loans and revolvers are spurious. First, revolvers are almost never secured. Second, the issue arises in default, so by definition the terms have been breached.

      Lordie.

  29. BitDigiNet

    Bitcoins are a Digital Currency where the BTC or Bitcoin it self is worth the money. The fact that it is based around a currency, means it can be used in the same way to send receive money for goods and services. When an artist paints a picture that painting one day may be worth over a million Dollars. Now most of us got are money to buy or buy BTC mining hardware to get or earn Bitcoins from the US Dollar. I Believe over 90% of USD money is a digital, when a “hacker” takes money from a bank account there is not much to trace where the money went unless you have an account number. When a BTC is sent it is always one way & always tracked, there is software to make your actions online secret, as we know where is the proof you paid your bill if you paid in cash? RE. @BitDigiNet #BitDiginet Bitcoin Digital Network “Bringing You over 20,000 products you can buy online direct with Bitcoin Paypal, or most major creditors. Live store launch Q.2 2014 http://instagram.com/p/lMOABvMY3E/

    1. Yves Smith Post author

      With all due respect, you clearly either did not read or did not comprehend this post and the one we linked to.

      You can call Bitcoin a currency all day, but that is irrelevant under the law. The anti-money-laundering branch of the Treasury (FinCEN) says it is not a currency and the IRS is just about certain to follow. Japan has said it is not a currency. The fact that it is not a currency under the law, but instead tradeable property, had large negative consequences that you need to wrap your mind around rather than living in denial.

      1. milesc

        The question is not settled though – and the fact it is being asked in nearly every country on the planet greatly complicates things (insofar as one would hope for a consensus among regulators worldwide). Will the US really act in such a way that Bitcoin businesses are forced out of the US altogether? I honestly don’t think so (but you’re right, something has to give).

        HMRC in the UK recently reversed its view, after much careful consideration, taking a pragmatic approach and effectively taxing bitcoin as a currency (without calling it as much – http://www.hmrc.gov.uk/briefs/vat/brief0914.htm). Similarly, Germany declared Bitcoin a unit of account. These seem eminently sensible to me, given Bitcoin’s unique properties and its useage globally, even if conceptually it shares some commodity traits.

        I guess we wait and see. I wonder what will come first, further official guidance or the determination of a bankruptcy judge (most of whom are generally pragmatic, I might add)?

  30. Mike Lorrey

    The problem with the authors claim that the bank has a blanket lien over bitcoins is that banking laws limit what sort of securities and other assets the bank can hold. Cryptocurrencies, like gold and silver, are not on that statutory list, therefore cannot be seized by the bank that a business owner owes money to.

    1. Yves Smith Post author

      Huh? Your response makes no sense.

      Banks can hire and do regularly hire liquidators to dispose of physical assets when needed. They can engage a liquidator to sell the bitcoins and take the proceeds.

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