Federal regulators are starting to make noise about Bitcoin, the digital currency that’s gained in recognition and value over the past few years. Unregulated by a central bank and distributed via a peer-to-peer network, Bitcoins currently trade for around $89 apiece, not bad for something that only a few years ago traded for mere cents.
Bitcoin is backed by code, not a central bank. That code generates a set number of Bitcoins every few minutes, a geometric progression designed to stop once the overall money supply reaches a certain value. Bitcoins are then sold and bought via exchanges, similar to “real” currency and other goods. Trust in its value and authenticity depends on the cryptography protecting the underlying protocol.
Given all those traits, Bitcoin enjoyed some initial popularity among those who, after setting up an online identity separate from their real identity, could rely on the decentralized currency to engage in nefarious and possibly illegal activity—buying drugs off Silk Road, for example.
In 2011, The New Yorker did its best to uncover the real identity of Satoshi Nakamoto, the pseudonymous coder who invented Bitcoin in 2009. That investigation circled a few possible candidates before grinding to a halt; but if Nakamoto remains a mystery—he disappeared from the Web after telling someone online that he’d “moved on to other things—Bitcoin’s momentum over the past few years has driven it in a more mainstream direction.
At first, only a few organizations accepted Bitcoin payments: WikiLeaks was an early adopter, along with the Internet Archive. Others soon followed, including WordPress and Reddit. Then came that ultimate sign of capitalist interest: Maltese investment firm Exante Ltd. opened a Bitcoin fund, allowing its investors to play in that market. The firm told Forbes that, thanks to regulatory concerns, U.S. investors wouldn’t have access to the fund; nonetheless, it already had the Bitcoin equivalent of $3.2 million under management.
By early 2013, Bitcoin (and virtual currencies in general) had reached the point where the U.S. government saw the need to step in, with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) offering up “guidance” for digital currency and those who use it as part of commerce. Simply put, those who act as an “administrator or exchanger” for virtual currencies are regarded in the eyes of FinCEN as an MSB, or Money Service Business—and thus subject to a degree of regulatory scrutiny.
And why not? More than $1 billion in Bitcoins are reportedly in circulation online, an amount that exceeds the currency stock of 20 small nations such as Liberia and Tonga. That kind of number makes Bitcoin more than an idiosyncratic Internet project—that’s real value.
But the Bitcoin Foundation, which is devoted to standardizing and promoting the currency, didn’t like FinCEN’s guidance. As Patric Murck, the organization’s general counsel, wrote in a March 19 blog posting:
“Simply put, under the Administrative Procedures Act (APA), FinCEN can’t promulgate new rules without going through a notice and comment proceeding whereby the public may have their voices heard. If FinCEN would like to expand its statutory authority over ‘money transmitters’ to include brand new categories such as ‘administrators’ and ‘exchangers’ of digital currency it must do so through proper rulemaking proceedings and not by fiat.”
“This framework would wildly expand the reach of FinCEN and the BSA, and would be infeasable for many, if not most, members of the bitcoin community to comply with. An individual or micro-business cannot be expected to create a robust AML/KYC program anytime they sell 1 or 100 bitcoin on an exchange or in-person. The BSA was never intended to apply this broadly and reach this far into people’s everyday lives. Perhaps a little more guidance is needed.”
Bitcoin isn’t the only virtual currency out there, of course. In February, Amazon launched “Amazon Coins,” which each unit worth one U.S. cent. The online retailer is restricting its use of virtual currency, which will roll out in May, to buying apps and games for the Kindle Fire, it’s Android-based tablet. If Amazon Coins prove a hit with users, and Bitcoin continues to gain in value, it could spark a rise in virtual currencies—and force some very interesting discussions over regulation.
Image: bitcoin charts