Regulators See Value in Bitcoin and Other Digital Currencies
At a Senate hearing, financial regulators, law enforcement, and even the chairman of the Federal Reserve show support for digital currencies.
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 notorious online market that accepted bitcoins for guns, drugs, and other illicit goods. Though the hearing was nominally about digital currencies in general, the focus was really on Bitcoin, a currency that uses cryptographic techniques to allow money transfers directly between 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 move toward the mainstream. It was likely also a relief for the growing number of entrepreneurs and venture capitalists looking to Bitcoin for a new 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 easy to navigate, has no or low transaction fees, is generally secure, is accessible across the globe with a simple Internet connection, and lets users remain “relatively” anonymous.
Shasky’s main concern was that digital currencies could be used for money laundering, but she added that this is no different from other financial instruments. “Any financial system can be exploited,” Shasky said. “Cash is probably still the best medium for laundering money.”
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 controlled, such as Liberty Reserve.
Bitcoin entrepreneurs were represented at the hearing by Jeremy Allaire, CEO of Circle Internet Financial, a company that wants to provide tools for retailers using Bitcoin. If more companies and consumers are going to use bitcoins, Allaire said, they’ll have to trust that it’s a legitimate and safe medium of exchange. One positive step in that direction was last week’s announcement that Raj Date, the former deputy director of the Consumer Financial Protection Bureau, was joining Circle’s board.
Allaire said an even more important 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, saying 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 allow 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 opportunity 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 shared 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, saying 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 saw this jump as proof of the currency’s inevitable rise, it could just as well be cause for concern: can a currency that fluctuates in value by 45 percent in a single day be considered safe? And if you really 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 double in a few weeks?
Such questions represent the next obstacles for Bitcoin to overcome.