On Monday, November 18, the Senate Homeland Security and Government Affairs Committee held its first hearing on the regulation of virtual currencies. Many analysts and pundits were surprised when top U.S. financial regulators had a generally positive view of Bitcoin. If you haven’t read up on or used Bitcoins yet, you may be asking yourself, “What’s Bitcoin?”
Introduced in 2008, Bitcoin is a popular, peer-to-peer digital currency. It has been called a “cryptocurrency” due to the fact that it is decentralized and uses cryptography as a measure against double spending. Though some of Bitcoin’s popularity can be attributed to “dodgy online markets,” Bitcoin is increasingly being used as payment for legitimate products and services, including notable online presences such as OKCupid, Reddit, and WordPress. However, the majority of current Bitcoin usage can be attributed to speculators.
As it stands today, each individual Bitcoin transaction that takes place is recorded in a public ledger, and a network of private computers performs payment processing. Those who operate these computers are rewarded with transaction fees and newly minted Bitcoins. Typically, the transaction fees are lower than transaction fees of traditional credit cards.
A main concern of the Senate Homeland Security and Government Affairs Committee is that of security, with justice department criminal chief Mythili Raman stating that virtual currency systems are legal, but that criminals will always seek to take advantage of new technologies.
This potential for security threats was expected to be covered by three experts from federal law enforcement agencies, but they instead focused mostly on the real benefits for the financial system these new financial networks could have.
Edward Lowery, special agent with the secret service, which is tasked with protecting the integrity of the dollar, even stated that opportunities exist for digital currencies to operate within existing laws and regulations. Existing avenues for money laundering and illegal activity that are opened up by new forms of digital money were still in discussion—as the government has been cracking down on criminal networks that use digital money. But it seems that the government will not stand in the way of Bitcoin development.
In addition to the secret service, Jennifer Shasky Calvery, the director of the Treasury Department’s Financial Crimes Enforcement Network, also testified to the innovation that Bitcoin provides and the benefits it might offer. Calvery also pointed out that the Internal Revenue Service is “actively working” on rules for Bitcoin.
Ernie Allen, president and CEO of the International Centre for Missing & Exploited Children, listed anonymity, lack of central-bank oversight, and the scarcity of laws monitoring digital currency exchanges as main reasons to oppose the adoption of Bitcoin. His testimony focused primarily on Bitcoin’s potential role in furthering the goals of sex traffickers and child pornographers. Allen has a point, as Bitcoin was used within the notorious Silk Road, an online black market dealing mostly in illegal drugs and other illicit activities.
On the other side, Patrick Murck, general counsel for the Bitcoin Foundation Inc., also testified, as well as Jeremy Allaire, chairman and CEO of Circle Internet Financial. Allaire spoke to the technical and innovative side of Bitcoin, arguing that it helps to advance the ease of electronic payments and money transfers, and benefits businesses by lowering costs. He also highlighted the decreasing risk of fraud, an increase in consumer privacy, and the currency’s potential to expand to consumer financial products.
Which agency will regulate Bitcoin will remain undecided until Washington settles upon a definition for the “cryptocurrency.” The overall takeaway was that there’s a willingness among federal authorities to accept Bitcoin as a legitimate payment alternative. The immediate spike in the value of a Bitcoin unit signals that investors are keen to take advantage.
Kristen Gramigna is Chief Marketing Officer for BluePay, a credit card processing firm that makes billing more efficient with automated invoicing. She has more than 15 years experience in the bankcard industry in direct sales, sales management & marketing and also serves on its Board of Directors.