Bitcoin and other digital currencies are picking up steam worldwide, and in late June California attempted to legalize the use of digital currencies through Assembly Bill 129. The bill also was designed to make legal the use of so-called “community currencies,” the alternative currencies issued and circulated by a small but increasing number of local communities looking to, among other things, foster local businesses and community cohesion.
Laws prohibiting the use of anything other than lawful money of the United States (or gold and silver coin) as currency have been on the books in California since 1849, 12 years after the invention of the telegraph and 27 years before the invention of the telephone. Even though lawmakers in the 19th century could not have anticipated the creation of digital currencies, the laws they wrote nonetheless prohibit their use, simply because they are alternatives to the approved form of currency.
The prohibition was first found in two separate sections of California’s original Constitution of 1849. Through a series of moves, one of the constitutional sections was moved into Corporations Code Section 107. The other was embodied in Penal Code Section 648.
Although AB 129 was supposed to abolish all California laws against alternative currencies, it only repealed Corporations Code Section 107. This law says, “No corporation, association, or individual shall issue or put in circulation, as money, anything but the lawful money of the United States.”
In what appears to have been an oversight, the new California bill left intact Penal Code Section 648. It says, “Every person who makes, issues, or puts in circulation any bill, check, ticket, certificate, promissory note, or the paper of any bank, to circulate as money, except as authorized by the United States, for the first offense, is guilty of a misdemeanor, and for each and every subsequent offense is guilty of felony.”
The failure to repeal Section 648 leaves alternative paper community currencies just as illegal today as they were before the enactment of AB 129. Whether or not Section 648 covers digital currencies is at least open to debate.
Digital currencies are created as electronic blockchain entries in a shared public transaction database. A blockchain entry could constitute a ticket or certificate within the spirit, if not the literal meaning, of the statute.
California’s original prohibition of alternative currencies was adopted as a strong reaction against the virtual currency of the day in the 1840s -- banknotes. Banknotes were the paper receipts issued by banks that memorialized the deposit of physical gold or silver in a stated amount by a customer of the bank. Because they were redeemable by the bearer of the receipt, they circulated as money.
In the first half of the 19th century, more than half of the thousand or so banks in the United States failed, leaving workers and businesses alike holding valueless paper. The delegates to California’s first constitutional convention sought to protect Californians from “this monster serpent, paper money.”
The recent failure of Mt. Gox, a Bitcoin exchange, may not be the harbinger of a modern “monster serpent.” It does, however, focus attention on whether and to what extent governments ought to regulate online crypto-currencies.
Ironically, the real money of today is the paper money issued by governments, not the gold and silver coins of old. But now, new virtual currencies have emerged to challenge policymakers. It seems unlikely that they will pose the same threat to economic stability as did the banknotes of the 19th century, given the relatively small volume of transactions completed using digital and community currencies, but we are in the very early stages of the development of these alternative currencies.
California has adopted -- or has at least attempted to adopt -- a neutral stance, leaving it to federal regulators and legislators to decide whether and to what extent digital currencies should be regulated. This deference seems wise, given the global scope and complexity of modern e-commerce and financial markets transactions, but it begs the question of whether even the federal government has the capacity to make and implement wise policy choices in this ever-changing environment.
— Kenneth N. Russak is a partner with Frandzel Robins Bloom & Csato who practices in the area of financial restructuring, insolvency, commercial finance law, and other finance-related litigation.