Science and Technology Law Review Symposium

By Bruce Tomaso

Tsai CenterYou can spend Bitcoin. You can invest in Bitcoin. And you can use Bitcoin to borrow cash.

That third option was the topic of the April 9th Science & Technology Law Review Symposium, “Cryptocurrency Collateralization,” hosted by the Tsai Center for Law,Science and Innovation at SMU Dedman School of Law.

The discussion was moderated by Peter Winship, the James Cleo Thompson, Sr., Trustee Professor of Law at SMU, who teaches domestic and international commercial law.

Presenters included law professors who are experts in the fields of commercial and banking law and regulation of financial markets:

Xuan-Thao Nguyen, Indiana University’s Robert H. McKinney School of Law;
Ronald Mann, Columbia Law School;
Kristin Johnson, Seton Hall University School of Law; and
Kevin Tu, University of Maryland Francis King Carey School of Law.

They agreed that the use of Bitcoin as collateral—like many other aspects of the emerging cryptocurrency industry—is something consumers, lenders, and government regulators are still sorting out.

A key factor that’s given rise to borrowing against Bitcoin and other cryptocurrencies, the panelists said, is the desire of holders to monetize those digital assets without selling them.

“Many people would like to be able to leverage the coins they have,” Nguyen said.

Already, several startup lenders have set up shop online. But it’s a form of finance still in its nascent stages, the panelists said, and neither the rules nor the risks have been fully enunciated.

“This market has limited regulatory oversight,” Johnson said.

One drawback to lending against Bitcoin involves keeping an eye on the collateral: When a cryptocurrency is transferred from one owner to another, the transaction is anonymous—and irreversible.

Mann suggested that one solution might be a digital “lien” of some sort that would transfer with the cryptocurrency and be registered, along with the transaction itself, in the “blockchain” of digital records that sustain cyber-payment systems.

But how—or how well—such safeguards might work is a question yet to be fully answered, the panelists said.

A fundamental challenge in trying to regulate Bitcoin lending—or any other aspect of cryptocurrency technology—is determining what Bitcoin is, legally speaking.

The statutes, regulations, and case law governing our financial markets were mostly written decades ago. Cryptocurrency presents challenges (and opportunities) that those old laws couldn’t possibly have contemplated.

Bitcoin was created as a digital form of money—a secure, reliable, accessible means to effect financial transactions between any two parties anywhere in the world. But it isn’t money, according to the Uniform Commercial Code, because it isn’t “authorized or adopted by a domestic or foreign government.”

For tax purposes, Internal Revenue Service rules treat cybercurrencies as property. And in December, the Chicago Board Options Exchange and the Chicago Mercantile Exchange began futures trading in Bitcoin—essentially treating the cyber-whatever as a commodity.

Meanwhile, a few Wall Street traders have asked the Securities and Exchange Commission to authorize exchange-traded funds (ETFs) with Bitcoin as their underlying asset. ETFs, under SEC rules, are securities.

“Is cryptocurrency money?” Tu said. “Is it a security? Is it property? Or does it defy categorization?”

“I’m afraid the answer sounds like what you hear from your law professors sometimes: It depends.”

Johnson said the present, “balkanized” regulatory framework is inadequate to deal with cryptocurrency. She recounted the Gospel parable in which Jesus cautions against pouring new wine into old wineskins: “The wine will burst the skins, and both the wine and the skins are ruined.”

One way or another, Nguyen said, regulators will have to come up with sensible, practical rules to govern cryptocurrencies. “Regulation of these markets is inevitable,” she said.

Johnson agreed.

“Cryptocurrency is the future. That’s the economic reality,” she said. “This is not just something that happened that will disappear.”
The panelists’ papers will appear in an upcoming issue of the SMU Science and Technology Law Review.