Bitcoin Investment Threat

Brian Hicks

Posted August 13, 2013

In a major move, New York’s Department of Financial Services has issued subpoenas to twenty-two digital currency companies. The subpoenas not only hit companies like BitInstant LLC and Dwolla Corp. but also investors in the Bitcoin sector, like Winklevoss Capital Management and Andreessen Horowitz.

casascius bitcoin sidebarThe rationale for this significant step is fairly simple. Bloomberg quotes:

“If virtual currencies remain a virtual Wild West for narco-traffickers and other criminals, that would not only threaten our country’s national security, but also the very existence of the virtual currency industry as a legitimate business enterprise,” said Benjamin Lawsky, superintendent of the state’s Department of Financial Services, in a statement. DFS is “considering whether it should issue new regulatory guidelines specific to virtual currencies.”

Clearly, the U.S. government—at both the federal and state levels—is taking Bitcoins very seriously. The DFS saga started earlier in 2013, when letters from Lawsky’s office went out to BitInstant and Dwolla in a fact-finding effort.

The subpoenas are a clear step up and suggest that the government is getting ready to craft far-reaching regulatory frameworks that will bring Bitcoins under more granular control.

There is definitely vast potential for misuse of Bitcoin, which is a virtual currency. What’s striking about Bitcoin is that its entire existence is predicated upon open-source software programs that can be run by anybody (provided, that is, they have the requisite technical knowhow and the computing power).

No single body governs the currency, although some exchanges, like Mt. Gox, are more prominent than others. These exchanges allow users to purchase Bitcoins that can be converted back and forth between real-world currency equivalents.

But it’s precisely those frame-less conditions that has won Bitcoin a strong support base in Silicon Valley, famed for its “rebellious” ethos.

The subpoenas appear to be fairly standard at this point. The Wall Street Journal notes that they ask for information pertaining to anti-money laundering programs, consumer-protection measures, and general investment strategies.

However, in a sign that the government is in fact concerned about the “lawless” land of Bitcoins, a separate memo indicates that virtual currency companies aren’t quite in compliance with New York’s money-transmission laws, which is why the state would like to set in place guidelines and regulations specifically addressing virtual currencies.

Bitcoin: Pros and Cons

Today, one Bitcoin was equivalent to about $108. The real-world value of Bitcoins has varied wildly in the past few months. Clearly, what’s worrying the government is that Bitcoins are not backed by any central body or government. As a result, it’s easy to misuse them for nefarious purposes.

Earlier this year, for example, federal regulators came up with fresh guidelines grouping virtual currency exchanges under existing anti-money laundering requirements that cover more conventional money transmission organizations (such as Western Union).

Of course, it’s not as though the companies subpoenaed are necessarily against the notion. For example, Jaron Lukasiewicz of Coinsetter is quite alright with it. According to him, this is an opportunity for “…companies in our space to open up a much needed dialogue with regulators.”

It’s hard to see any scenario in which the U.S. is going to simply allow a virtual currency network to operate free of regulations, especially after the financial fiascoes of just a few years past. But hard lessons or not, it’s still quite dangerous—politically, economically, and otherwise—to allow a widespread virtual currency network to operate outside the jurisdiction of state or federal governments.

The recent Cyprus bailout presents a great example of its pros and cons. The Cypriot bailout was funded in part by the government seizure of percentages from the accounts of all bank depositors. Clearly, the people were not happy—and it resulted in widespread consternation. The policy didn’t pass in the end and turned into a collection of levies, limits, and controls.

But that was enough to spur the proselytizers of Bitcoin. After all, this is precisely the sort of situation in which a virtual currency offers the power to bypass the machinations of a government. At the same time, it’s clear that that same freedom heightens the potential for misuse and rampant speculation.

And that’s why it’s more than likely that we’ll see regulation pass soon enough that will impose more controls on Bitcoin usage and traffic. Will that put a dent in the attraction of Bitcoin? Almost certainly. Will it be a fatal move? That remains to be seen.

 

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