It seems governments are finally coming around to the idea that virtual currencies are here to stay. Backed by a business community eager to utilise innovations like Bitcoin, California and New York are quietly considering ways to regulate the trading of these currencies.
Without this regulation, Bitcoin will never gain full traction as a viable and accepted currency. Unfortunately for those proposing the currency as the payment mechanism of choice on the internet, Bitcoin is never far from media controversy.
Pick any month and you’ll find stories of using infected computers to “mine” Bitcoin, selling weapons, drugs and other illegal merchandise for Bitcoin, scamming Bitcoin customers, or just stealing Bitcoin.
And so it was that this week brought news of the arrest of Charlie Shrem, a prominent Bitcoin advocate and CEO of the Bitcoin company BitInstant. Shrem and another man Robert Faiella are charged with money-laundering, operating an unlicensed money-transmitting business and failing to file a suspicious activity report.
The charges relate to Faiella’s Bitcoin business he had been operating on the dark web marketplace the Silk Road under the name BTCKing. Faiella would sell Bitcoin which were procured by Shrem through BitInstant despite both knowing that the currency was used to purchase drugs and other contraband on the Silk Road.
Interestingly, the federal regulations that were used to charge Shrem were only put in place last year and for some, it is the lack of overall regulation that is inhibiting the use of Bitcoin for legitimate purposes and consequently it is the absence of regulation that is making it a favourite currency of the underworld.
Between New York and Silicon Valley
Now two states in the US, California and New York, are moving to put in place regulations that will, they hope, bring some normalcy to virtual currencies and allow companies to incorporate them safely into their products.
The New York Department of Financial Services yesterday started public hearings about virtual currencies that will include the discussion of the potential for the issuing of a “BitLicense” for businesses wanting to use a virtual currency.
The hearings will feature testimony from Bitcoin venture capitalists, law enforcement, Bitcoin companies and the academics Susan Athey, Professor of Economics at Stanford University and Ed Felten, Professor of Computer Science and Public Affairs at Princeton University.
Possibly the biggest irony however is the fact that Cameron and Tyler Winklevoss are also presenting. In 2012, the Winklevoss twins led an investment round that resulted in US$1.5 million in seed funding for BitInstant, Shrem’s company.
At the same time that New York is holding public hearings, financial regulators in California are taking a more discrete approach in privately consulting with lawyers and compliance experts as to whether companies transmitting Bitcoin require a license from the Department of Business Oversight and what other regulations need to be put in place for virtual currencies.
Commentary from the first panel in New York yesterday suggests that nothing particularly surprising will eventuate from the discussions. All of the commentators including the Winklevoss brothers have agreed that there needs to be some, but not too much, regulation.
Damned if you do, damned if you don’t
The US is not alone in considering regulating virtual currencies. Most governments are delaying the issue by just staying clear of any decisions and warning financial institutions of the risks associated with currencies like Bitcoin as a potential money laundering device.
The Swedish bank SEB AB has this week been reported as rejecting requests from customers to set up foreign exchange accounts to manage Bitcoin.
Amongst those calling for regulation of Bitcoin, Georges Ugeux has claimed that Bitcoin is essentially a Ponzi scheme that only works if buyers continue to be willing to believe that it has intrinsic value.
Of course, Bitcoin has no economic, social or financial value and so if people decided to sell one day, the theory is that the entire Bitcoin market would collapse. Uguex believes that the price of Bitcoin is being manipulated by those with an interest in preserving its value and because of the lack of regulation, there is no one that is interested in investigating this possible manipulation.
This is a view shared in part by the US Treasury secretary Jack Lew and Jamie Dimon, CEO of JPMorgan. At the World Economic Forum last week, Jamie Dimon warned that Bitcoin could be used to fund terrorism and that regulation would essentially shut it down. Lew commented that having talked to Jamie Dimon, “he and I both share a certain incredulity about the whole phenomenon”.
Bitcoin needs to be regulated by governments to realise its potential as being a more efficient means of conducting Internet commerce. But this regulation will come at the risk of severely dampening the enthusiasm behind virtual currencies in general. For Bitcoin it remains a question of damned if you do and damned if you don’t.