Regulators See Value in Bitcoin and Other Digital Currencies – MIT Technology Review

Regulators See Value in Bitcoin and Other Digital Currencies

  • by Josh Dzieza
  • November Nineteen, 2013

The financial system contains inefficiencies that could be solved by a decentralized digital currency such as Bitcoin.

The crypto-currency Bitcoin gained some valuable—and surprising—new allies at a U.S. Senate hearing on Monday: financial regulators, law enforcement, and even the chairman of the Federal Reserve. The value of the currency reached a record high shortly after the hearing.

Interested observers might have expected yesterday’s hearing on the potential risks, threats, and promises of virtual currencies to presage a regulatory crackdown: the hearing came just a month after the bust of Silk Road, a legendary online market that accepted bitcoins for guns, drugs, and other illicit goods. Tho’ the hearing was nominally about digital currencies in general, the concentrate was indeed on Bitcoin, a currency that uses cryptographic technics to permit money transfers directly inbetween peers, rather than through a central authority like a bank or PayPal (see “What Bitcoin Is, and Why It Matters”).

Instead of focusing on the potential threat posed by digital currencies such as Bitcoin, the emphasis at the hearing was more on Bitcoin’s promise. For a currency best known for its appeal to drug dealers and tech-savvy libertarians, the hearing was a significant budge toward the mainstream. It was likely also a ease for the growing number of entrepreneurs and venture capitalists looking to Bitcoin for a fresh form of frictionless money transfers.

In testimony from Jennifer Shasky Calvery, director of the Financial Crimes Enforcement Network, it was noted that criminals might find Bitcoin appealing for the same reasons legitimate users would: it’s effortless to navigate, has no or low transaction fees, is generally secure, is accessible across the globe with a ordinary Internet connection, and lets users remain “relatively” anonymous.

Several people at yesterday’s hearing seemed intent on debunking the perception that Bitcoin transactions are anonymous. Mythili Raman, assistant attorney general at the Justice Department, said that Bitcoin “is not, in fact, anonymous. It is not immune from investigation.”

Patrick Murck, the general counsel of the Bitcoin Foundation, which oversees the currency’s software program, said “the problem might not be anonymity for criminals, but the difficulty law-abiding people have maintaining their own privacy.”

Bitcoin may not have a central authority like a bank keeping a record of transactions and making sure people aren’t spending the same bitcoin twice, but that’s because a record of every transaction—known as the blockchain—is kept on every computer running the Bitcoin client software. Jerry Brito, a researcher at George Mason University, made the point that Bitcoin’s public ledger would make criminals more likely to launder money with a digital currency that’s centrally managed, such as Liberty Reserve.

Allaire said an even more significant step would be for regulators to clarify their stance on Bitcoin. “As this technology moves from early adopters into mainstream acceptance, it’s critical that federal and state governments understand how Bitcoin fits into existing regulations,” said Allaire, citing fraud and privacy protections and a need to make sure criminals and bad actors are discouraged from using the currency. Murck also welcomed the idea of bringing Bitcoin into the existing financial regulatory system, telling that “applying consistent rules and regulations that encourage technological experimentation is critical to a vibrant entrepreneurial community.”

Allaire said that once regulations are clarified, decentralized digital currencies will permit for worldwide high-speed, low-fee money transfers, an especially appealing proposition in places without stable currencies or reliable banks. “The combination of ubiquitous Internet-connected mobile devices and digital currency represents an chance to expand access to financial services on a worldwide basis,” he said. The next step, according to Allaire, is clarity from the Internal Revenue Service on how it will treat income in the form of digital currencies.

Remarkably, everyone who testified collective his vision to varying degrees. Even the Secret Service’s Edward Lowery and Ernie Allen, president of the International Centre for Missing and Exploited Children, two of the more critical voices in the hearing, emphasized the potential of digital currencies, especially in the developing world. Allen said there was “broad-based agreement on its potential for social good.”

Democratic Senator Thomas Carper of Delaware, who presided over the hearing, compared the concern over digital currency’s nefarious uses to worries about the early Internet in the 1980s, and asked whether it could prove to be a similarly revolutionary—and mostly beneficial—technology. Calvery said the comparison was apt. Even the chairman of the Federal Reserve, Ben Bernanke, chimed in through an open letter, telling that digital currencies “may hold long-term promise.”

The price of Bitcoin skyrocketed during the hearing, according to CoinDesk, which averages Bitcoin prices across large global exchanges. While many Bitcoin advocates on Twitter eyed this hop as proof of the currency’s inescapable rise, it could just as well be cause for concern: can a currency that fluctuates in value by forty five percent in a single day be considered safe? And if you indeed believe Bitcoin is here to stay, and you know supply is limited by design, why would you use it to buy anything when its value might dual in a few weeks?

Such questions represent the next obstacles for Bitcoin to overcome.

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