Bitcoin is all the buzz right now.
Last week, Bitcoin buffs were glued to their screens, as the United States Senate Committee on Homeland Security and Governmental Affairs called on state and federal regulators, financial services professionals and law enforcement, for a hearing to determine what, exactly, it should do about Bitcoin.
Massachusetts Banking Commissioner David Cotney, speaking in his capacity as the vice chairman of the Conference of State Bank Supervisors, told senators that state regulators already have an established structure for regulating and overseeing money transmitters and money services businesses that could serve as a framework for supervising alternative currencies.
Jeremy Allaire, chairman and CEO of Boston-based Circle Internet Financial, stressed the need for regulatory intervention so that Bitcoin could not act as a vehicle for tax cheats and other illicit uses.
He said his company had registered with FinCEN as a money transmitter and is currently seeking licenses from state financial authorities so it could operate within the bounds of the law.
And Patrick Murck, general counsel for the Bitcoin Foundation, suggested banks could even get into the Bitcoin business, telling the Senate committee, “Indeed, banks could brand and offer Bitcoin exchange services themselves, quickly becoming the de facto leaders because of their regulatory status and supreme customer identity procedures.”
Shrouded In Mystery
If you’re still wrapping your head around the concept of Bitcoin (for which you could hardly be blamed), here’s the quick and dirty explanation: Bitcoin is a peer-to-peer digital currency that was invented in 2009 by a programmer or group of programmers – that’s up for debate – going by the pseudonym Satoshi Nakamoto.
You can buy Bitcoin or you can “mine” Bitcoin through a series of complex mathematical and computer calculations, but the latter can be prohibitive if you’re not willing to sink the time, electricity and computer hardware into the endeavor.
Bitcoin also relies on a public ledger – known as the block chain – that records every Bitcoin transaction ever made, so you can’t spend the same Bitcoin twice.
Bitcoin is big with some Libertarian types, who like its decentralized nature. Many advocates tout frictionless, feeless, cross-border payments and an enhanced level of privacy using the currency.
That privacy is naturally attractive to nefarious types, too. The FBI’s recent shutdown of Silk Road, an eBay of illicit drugs where buyers and sellers traded exclusively in Bitcoins, dealt the digital currency a dose of bad PR. More recently, hackers who locked up computer files at the Swansea Police Department demanded their ransom in Bitcoin – and the cops paid up.
But Bitcoin has plenty of legal, legitimate uses, as its fans are eager to point out. You can use Bitcoin to purchase a WordPress blog or an online dating account or a pizza. If you’re in Vancouver, you can exchange cash for Bitcoin at the world’s first Bitcoin ATM, and in Montreal, you can use it to pay for accounting services at a particular accounting firm that announced earlier this month it would accept the digital currency as payment for services.
Speculator interest in Bitcoin has fueled volatile price swings, and increasing consumer interest ultimately fueled this latest Senate hearing.
Regulating Wild West-Style Currency
“What’s going on now is you’re seeing that being clarified and honed in on by the government. To the extent that you’re in the U.S. and operating within the regulatory framework, it’s just a matter of clarifying which regulations you have to follow and who’s going to make sure you follow them,” said Ryan Straus, a virtual currencies lawyer and principal at Riddell Williams in Seattle.
Meanwhile, Bitcoin exchanges and payment processors have found little luck depositing their funds (cash, that is) in traditional banks.
There are two main reasons banks are hesitant to do business with Bitcoin, said Steve Kenneally, vice president of regulatory compliance at the American Bankers Association.
The first is FinCEN’s recent guidance mandating that virtual currency exchanges register as money service businesses, which require additional scrutiny by banks that take them on as customers.
And last month the FDIC issued guidance on higher-risk merchants, which includes virtual currency exchanges and payment processors alongside online lenders, marijuana boutiques in Colorado, and companies that sell tobacco or pornography, Kenneally said.
“They’re all legal to some degree, but the banking regulations make it difficult for banks to actually have them as clients,” he said.
After all, what banker would take on increased regulatory burden right now if they didn’t have to? And for a client who more or less amounts to a competitor?
As Kenneally noted of Bitcoin exchanges, “They’re offering a product that competes with a lot of banks that offer check, ACH, wire and card products, so there’s a natural tension there.”
But right now, it’s too soon to say what regulations will result from the Senate hearings. Kenneally didn’t want to speculate, but he said, “We’re right at the beginning of a lot of changes in the payment system.”
Email: lalix@thewarrengroup.com
