The digital currency Bitcoin gained a measure of legitimacy this week when a federal judge ruled in a fraud case that Bitcoins are "a currency or form of money" and are therefore subject to U.S. laws.
The virtual currency has gained traction with investors during recent economic uncertainty in Europe. But frequent outages of Bitcoin exchanges -- blamed on hackers -- and volatile market trading have led some to declare the currency unstable.
Those investor concerns aside, U.S. District Court Judge Amos L. Mazzant ruled Monday that the virtual currency constituted a real-life form of currency in the case against Trendon T. Shavers, whom the SEC accuses of running a Bitcoin-inspired Ponzi scheme. Shavers, the founder and operator of Bitcoin Savings and Trust, raised at least 700,000 Bitcoin in investments, with promises of 7 percent weekly interest in 2011 and 2012, according to the SEC.
However, according to the SEC, Shaver was running a Ponzi scheme in which he used Bitcoin from his new investors to cover interest payments and withdrawals on outstanding investments, to trade in his own personal account, and to pay off his own personal expenses. At that time, his Bitcoin investments were worth $4.5 million. Today, they're worth more than $60 million.
In his four-page opinion (PDF), Mazzant ruled that Bitcoin constituted a valid currency because it could be traded against various government-backed currencies and used to conduct financial transactions:
It is clear that Bitcoin can be used as money. It can be used to purchase goods or services, and as Shavers stated, used to pay for individual living expenses. The only limitation of Bitcoin is that it is limited to those places that accept it as currency. However, it can also be exchanged for conventional currencies, such as the U.S. dollar, Euro, Yen, and Yuan. Therefore, Bitcoin is a currency or form of money, and investors wishing to invest in BTCST provided an investment of money.
The virtual currency, which sprang up in 2009 to intentionally avoid the prying eyes of law enforcement and government officials, rocketed from the teens to more than $280 against the U.S. dollar in just a few weeks, before quickly returning to below $100. In 2011, the currency attracted the attention of Sens. Charles Schumer of New York and Joe Manchin of West Virginia, who wrote a letter to Attorney General Eric Holder, highlighting the role Bitcoin plays in an online marketplace known as "Silk Road," which allows customers to buy illegal drugs.
While the virtual currency has gained traction with investors, it hasn't curried the favor of government agencies. The Bitcoin Foundation, a nonprofit devoted to promoting best practices for the virtual currency, was recently ordered to cease operations in California.