Substitutes for Legal Tender: Lessons from History for the Regulation of Virtual Currencies

Year 2015
Author Stephen T. Middlebrook and Sarah Jane Hughes
Publisher SSRN:Forthcoming in John A. Rothchild (ed.), Research Handbook on Electronic Commerce Law, Edward Elgar, 2016, Indiana Legal Studies Research Paper No. 316
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Cryptocurrencies / Regulation / Society

This chapter describes the legal history of objects that have been used as substitutes for legal tender in the United States and discusses the implications of that jurisprudence for modern virtual currencies. Beginning with wampum, which had a recognized exchange value as early as 1631, we examine Continental currency, fractional currency and shinplasters, Greenbacks and state bank notes and even “trading stamps” offered by S&H and other firms. We document that as these substitutes came into the market place, governments tended to view them with suspicion and often commenced criminal prosecutions to halt their issuance and use. Over time, however, certain substitutes for legal tender have gained acceptance from legal authorities, and in some cases, have even been adopted as forms of legal tender themselves. With this historical framework in place, this article looks at the incipient regulation of virtual currencies in the United States, focusing on early digital currencies, e-gold and bitcoin. We note parallels between how substitutes for legal tender have been treated historically and how regulators and law enforcement have reacted to virtual currency products. In particular, we document the growing use of 18 U.S.C. § 1960 to criminally prosecute virtual currency participants for operating as unlicensed “money transmitters.”