What’s even dicier than planning months in advance to teach an entire course about a young, wildly fluctuating digital currency? If you asked Geoffrey Miller, Stuyvesant P. Comfort Professor of Law, and David Yermack, Albert Fingerhut Professor of Finance and Business Transformation at NYU’s Stern School of Business, they might answer: not teaching that course.

Geoffrey Miller“We at NYU Law are and ought to be at the cutting edge of new developments,” says Miller. “Being first in an evolving field is always good, and, in this case, we are also responding to very strong interest by a group of students who are passionate about the topic.”

Yermack concurs. “I think there is a risk of becoming intellectually obsolete if you don't stay up to date with developments in the real world,” he says. “Students who get professional degrees expect their courses to be relevant. We took a risk by offering an entire course on electronic currencies, but it would have seemed riskier to me to dismiss the topic and not try to understand it.”

The primary currency discussed in the class, Bitcoin, involves an online payment system based on open-source software and introduced in 2009. Bitcoin uses monetary units, also called bitcoins, that have alternately soared and plunged in value during their brief history. Bitcoins were worth less than one cent at the time of the first real-world bitcoin transaction in February 2010. Finally achieving parity with the US dollar in February 2011, bitcoins reached their highest value to date on November 17, 2013, at a price of $1,216.73 per bitcoin. That surprising apex earned the currency universal attention in the financial press, though the four-figure exchange rate did not last. In September 2014, the price of bitcoins ranged from $360.75 to $494.50.

Miller encountered Bitcoin in its first year of existence, and incorporated the currency into his course on the regulation of financial institutions as early as 2010. He has also included Bitcoin in classes he has taught in Europe and Asia. But not until Yermack approached Miller last spring about joining forces did they propose to teach a course about Bitcoin.

Since Bitcoin is only one of more than 500 virtual currencies—with such colorful names as Feathercoin, BBQCoin, and Cryptogenic Bullion—how did Miller pick Bitcoin as “the only thing that had potential to really become a serious alternative currency” all the way back in 2010?

“You can hack people who have wallets or exchanges, but Bitcoin itself is very difficult to hack and destroy because it requires the consensus of the computers that are participating in the network,” says Miller. “It has a very clever algorithm about its supply that is intended to limit the possibility that it will inflate and lose all its value. So it seemed to me that it was viable. It doesn’t have any need to rely on international borders, so it’s a desirable payment mechanism for international transactions. And it has appeal as a payment mechanism in countries where the domestic currency is not trusted.” He added wryly, “But I didn’t have the wisdom to buy any of it.”

David YermackYermack, also an early Bitcoin observer, was likewise struck by the technological elegance of the currency. Every bitcoin transaction appears in a permanent public ledger called the block chain, published to all nodes in the Bitcoin network as a novel solution to prevent fraudulent double-spending of the same bitcoin.

“I was intrigued by the logic behind it and the ambition of the creator,” he says, referring to Satoshi Nakamoto, the mysterious—and likely pseudonymous—inventor of Bitcoin, whose mystique only adds to its appeal. “It’s a very ambitious project, and it’s probably been more successful than anyone might have imagined.”

Yermack’s serious scholarly focus on a new and volatile digital currency is hardly unusual; in past research he’s examined CEOs’ mansions, the “suspicious” timing and location of shareholder meetings, and the positive “Michelle Obama effect” on the revenues of clothing brands worn by the First Lady.

“I’m drawn to offbeat topics that have underneath them a rigorous financial aspect,” says Yermack, “and I think in that sense Bitcoin is a perfect topic for me because it combines the legal and financial issues and a very unique set of research questions.”

Miller and Yermack have long been acquainted through the NYU Pollack Center for Law & Business (of which Yermack is co-director) as well as teaching in the same law and economics summer program at the University of Basel in Switzerland. The two had discussed Bitcoin casually for some time before its high price in late 2013, coupled with high-profile regulatory developments as the government considered how to deal with Bitcoin, cemented Bitcoin’s dominance as the largest digital currency.

“I approached Geoff and said, ‘Why don’t we offer a course on this, plant a flag for the university, and learn something ourselves?’” Yermack recalls. “He was enthusiastic. From the start we both saw this as an opportunity.”

Launching The Law and Business of Bitcoin and Other Cryptocurrencies, the first-ever graduate-level class in the US focused on Bitcoin—Duke University will follow suit next spring—was far from a sure thing. (Their bold excursion garnered a headline last spring in a Wall Street Journal blog.) Hedging their bets, both professors overloaded their fall teaching schedules, and were not certain until August whether the class—composed of students from the Law School, Stern, and a smattering of other NYU departments—would really happen.

“We still joke about this,” says Yermack. “We told the students last week that if Bitcoin goes to zero we’re just going to stop the course. But despite a lot of headwinds, it’s still retaining its value. There are certainly problems with Bitcoin, but also interesting signs of growth.”

Miller and Yermack each took on seven of the 14 weekly lectures. Miller led off with the fundamental question “What is money?,” a consideration readily evoked by digital currencies. In the second session, Yermack delved into the origins and logistics of Bitcoin. Other sessions cover topics such as the instability of bank-created money, whether Bitcoin is actually a currency, potential regulation of Bitcoin trading, and the seizure of Bitcoin assets.

For Naveen Jayaraman ’16, enrolling in the class was a given. This past summer he worked as a legal intern in the Banking Division of the New York Department of Financial Services, which was busy formulating proposed virtual currency regulations; New York is the first state to do so.

“If New York decides that they want to have a broad regulatory framework, and then you compare that to what people have been contemplating elsewhere in the United States and around the world, you’re going to start to see a kind of patchwork regulatory framework,” Jayaraman explains. “I think it’s important for people who want to go into this space—or are at least thinking about this space as being at the margins of financial services law and regulation—to contemplate these issues.”

With considerations such as taxation, the potential for illegal transactions, regulation of money transfer agents, and the question of whether bitcoins are money for the purposes of various criminal and civil statutes, says Miller, the virtual currency has prompted many legal questions. Such quandaries arise, of course, with many new technologies. But virtual currencies present a special taxation dilemma: a March 2014 IRS notice defining Bitcoin and its brethren as property rather than currency has significant tax rate implications and uncertain ripple effects, ensuring that Miller and Yermack will have more to teach on the topic.

“If there’s a long-range future for Bitcoin, I think it’s probably going to be in the technology as opposed to the payment mechanism,” says Miller. “This block-chain technology and the security that it provides are not limited to a payment instrument. People are already working in various industries to try to utilize that technology.”

Whatever the ultimate fate of Bitcoin as a currency, it has already made its mark. “Every time I think this thing’s going to fall over a cliff, some big innovation occurs—a merchant like Dell Computer or eBay decides to accept Bitcoin,” says Yermack. “It has been way more resilient than anyone might have guessed. Many people wrote this off and were dismissive of it from the start, but there’s clearly a lot of worldwide interest in it and a technology that, one way or another, is probably going to be with us for quite some time, whether it’s with Bitcoin or with a successor currency.”

Posted October 14, 2014