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2014 Bus. L. Today 1 (2014)
Bitcoin for Merchants: Legal Considerations for Businesses Wishing to Accept Bitcoin as a Form of Payment

handle is hein.journals/busiltom2014 and id is 378 raw text is: Bitcoin for Merchants: Legal Considerations for
Businesses Wishing to Accept Bitcoin as a
Form of Payment
By Stephen T Middlebrook

Bitcoin is a so-called cryptocurrency that
can be used as a medium of exchange to
make payments and facilitate consumer
and business transactions - primarily over
the Internet. It has garnered a lot of atten-
tion among technocrats and has also been
written about extensively in the popular
press. While its user base is still quite small
compared to that of checks, credit and
debit cards, and electronic funds transfers,
a growing number of businesses are adopt-
ing bitcoin as a payment option for those
customers who wish to use it. Nationally
known merchants such as Dell, Expedia,
and Overstock.com have jumped on the
bitcoin band wagon, along with a num-
ber of smaller companies such as the New
Mexico Tea Company and Grass Hill Al-
pacas. Even the United Way now accepts
donations in bitcoin.
This article examines the legal risks
and issues that a business should evalu-
ate before accepting bitcoin as a form of
payment. It provides a brief overview of
bitcoin, addresses potential registration
and licensing issues, and examines the tax
implications of accepting the virtual cur-
rency. This article also discusses the use of
bitcoin merchant service providers (BM-
SPs), which act as intermediaries between

a business and a customer wishing to pay
in bitcoin. The BMSPs provide a range of
services including accepting bitcoin and
paying the merchant in dollars, removing
many of the barriers to accepting this new
payment mechanism.
A Quick Overview of Bitcoin
Bitcoin is an Internet-based virtual cur-
rency which can be used to transfer value
between parties. It is often classified as a
cryptocurrency because it relies on cryp-
tography to authenticate transactions. A
bitcoin has no physical presence and no
central authority administers the currency.
It is not backed by any government and is
not legal tender in any jurisdiction. It is not
issued by or redeemable at any financial in-
stitution. A bitcoin only has value because
other participants in the ecosystem ascribe
value to it. The authenticity of any particu-
lar bitcoin may be verified by consulting
a master database of bitcoins (called the
block chain) which is maintained over a
peer-to-peer network on the Internet. The
entities which provide the hardware and
software to host the database and authen-
ticate transactions are called miners and
they are periodically rewarded for their
public service by being given a few bit-

coins. This is how new units of the virtual
currency come into existence.
Bitcoin users are identified by their pub-
lic key which is essentially a very large
number. The public key is cryptographi-
cally associated with another large num-
ber, the private key which the user keeps
confidential and uses to mathematically
sign transactions. Because keeping track of
these large numbers can be cumbersome,
users typically employ a special piece of
software called a wallet to manage their
public and private keys. That software
may be located on a personal computer or
smartphone or hosted in the cloud by a ser-
vice provider. While bitcoin is sometimes
described as an anonymous currency, every
transaction is recorded in the publicly ac-
cessible block chain and is associated with
a public key. Tying a particular public key
to an individual or company may be diffi-
cult, but it can be done. Bitcoin users, and
merchants in particular, should assume
that their bitcoin transactions are public
knowledge.
To make a payment, a person uses his
or her cryptographic credentials to sign a
transaction transferring some amount of
bitcoin to another person and submits it
to the block chain. The miners perform

1

Published in Business Law Today, November 2014. @ 2014 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any
portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written
consent of the American Bar Association.

i

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