"Bitcoin is the world's greatest invention since the Internet." So says Roger Ver, a Bitcoin investor and entrepreneur. While those who heard him at the GigaOM Bitcoin Meetup in San Jose in May were inclined to agree, the decentralized, virtual currency presents new challenges to regulators, and to businesses that exchange Bitcoins for national currencies.
That became clear a few days before the meetup, when the U.S. Department of Homeland Security seized two U.S.-based accounts held by Mt. Gox, a Japanese company that handles approximately three-quarters of all institutional exchanges between Bitcoin and national currencies. At issue is the legal definition of Bitcoin: is it most like a currency, a commodity, a security, or a gift card? Or is it, as the U.S. government's Financial Crimes Enforcement Network (FinCEN) contended in March, a means of money transmission?
Whatever it is, no government has yet maintained that Bitcoin issuance, possession, or use per se is illegal, yet some jurists and policymakers have posited that it could be. In June 2011, New York Senator Charles Schumer said it was "an online form of money laundering" and called for its regulation. (That entreaty has since been removed from his website, and his office didn't respond to a request for comment.) An October 2012 report by the European Central Bank noted "serious concerns regarding the legal status and security of the [Bitcoin] system". And in May, Commissioner Bart Chilton of the U.S. Commodity Futures Trading Commission asserted that his department "could regulate [Bitcoin] if we wanted".
Bitcoin's past is as mysterious as its future. First described in a November 2008 paper published under the pseudonym "Satoshi Nakamoto," the system periodically releases virtual coins in decreasing quantities. There are currently about 11 million bitcoins in circulation; the last will appear in 2040, capping the total at 21 million. New coins go to those who validate others' transactions, a process known as "mining." Bitcoins can be anonymously transferred peer-to-peer or through institutional exchanges such as Mt. Gox, with all transactions becoming part of a worldwide ledger known as the "blockchain."
The value of one bitcoin ("BTC") stayed below US$20 until January 2013, when a frenzy in early April pushed the price over US$250. It rapidly dropped below $100 on April 13th, and has since settled at around $120, for a total market valuation of just under US$1.5 billion. According to BitPay CEO Tony Gallippi, Bitcoins can be spent at over 7,000 businesses through his company's service.
Aside from its value for purchases, advocates extol Bitcoin as a cheap way to transfer money between countries — an act that's comparatively expensive through traditional means. It was this function that caused the U.S. Department of Homeland Security to bring charges against Mt. Gox, primarily citing 18 U.S. Code Section 1960, "Prohibition of unlicensed money transmitting businesses." Although the case technically addressed filing discrepancies by Mt. Gox's U.S. subsidiary, it served as a wake-up call to the Bitcoin community as a whole.
Bitcoin exchanges as money transmitters
Money transmitters are a subclass of money services business (MSB) under the federal Bank Secrecy Act (BSA). In a written statement, attorney Ryan J. Straus of Graham & Dunn said that ongoing reporting requirements could "consume all of a [Bitcoin] money services business' available resources," as "it is not hard to imagine FinCEN taking the position that every transaction involving Bitcoin should trigger SAR [Suspicious Activity Report] filing."
State regulations could also be burdensome, said Patrick Murck, general counsel for the Bitcoin Foundation. "If you want to open a money services business in the United States, you need to do deals with 48 states and three territories, each with criminal background checks, fingerprints, minimum money requirements, and so on," said Murck. "You're looking at biting off about $5 million and a delay of at least a year and a half — all pre-revenue." He expected that FinCEN would define Bitcoin as a "prepaid service" much like a gift card, with exchanges being similar to stores where that gift card could be used. In calling exchanges MSBs, he said FinCEN's guidance was "really a rule-making in disguise."
FinCEN spokesperson Steve Hudak disagreed, saying the guidance letter contained "no new rules, no new regulations, and no legislation. It's only an interpretation of existing regulations." At the same time, Hudak emphasized that these regulations wouldn't apply to ordinary users. "Our concern is not with individuals who are using Bitcoin for routine purposes, for buying and selling goods online, or for paying their bills. We're concerned with people who are making a business."
"Regulation is the biggest opportunity"
Murck thinks the Bitcoin community realizes that some kind of regulation is inevitable — and, in most cases, welcomes it. "Certainly there are people in the community who'd prefer to live in a world of no regulation," he said. "But I think most people who are building Bitcoin businesses realize that having a fair, sane, and evenly applied regulatory environment is a positive thing. It allows for some stability; it allows investors to bring capital to the table." That view was echoed at the GigaOM event by Wences Casares, founder and CEO of the financial software company Lemon: "Regulation is the biggest opportunity. We need it. It's something we should all want."
What form will that regulation take? In the end, it could rest on governments' definiton of Bitcoin. And that, Murck believes, will be formed through cooperation among legislators, government agencies, and Bitcoin communities. "I don't think Bitcoin fits any definition that currently exists," he said. "I think we'll work toward a good solution. Sometimes it's just a matter of working with regulators to understand what their real needs are."
Tom Geller is an Oberlin, OH-based technology and business writer.
* Nakamoto, S. (pseudonym), "Bitcoin: A Peer-to-Peer Electronic Cash System", announced on the The Cryptography Mailing List at http://firstname.lastname@example.org/msg09959.html, 1 November 2008. Full paper at http://bitcoin.org/bitcoin.pdf.
* Straus, R.J., "The FinCEN Virtual Currency Guidance: Neutering Bitcoin?", E-Finance & Payments Law & Policy, April 2013. Available from http://www.grahamdunn.com/blog//post/the-fincen-virtual-currency-guidance-neutering-bitcoin
* "A Recap of Mega-Corporate and Government Attention on Bitcoin This Past Year" (September 25, 2012)
You said "the system slowly releases virtual coins with decreasing frequency". This isn't quite accurate. The system always has and always will (till year 2140) issue new coins every 10 minutes on average. The size of the new coins decrease by half every 4 years and the chance of any one mining operation getting a coin is dependant on the total amount of mining activity on the whole system.
Editor's note: This story was updated to correct the description of Bitcoin's release of virtual coins.
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