Bitcoin Regulation Answers Are Elusive

Bitcoin

The New York State Department of Financial Services Superintendent Benjamin Lawsky recently called hearings to determine whether the digital currency Bitcoin requires special regulation, but the answers, and even the right questions, were elusive.

When California decides to institute new regulations on automobiles, regulators across the nation take note and often follow suit. Californians understand cars. Regulations crafted in New York with regard to finance will likely set the precedent for law makers across the entire country. However, Lawsky and other regulators seemed in some ways only dimly aware of the challenges ahead, according to reports about the hearings.

To provide some background, a digital currency like Bitcoin differs from a fiat currency like the dollar or the euro in two ways that are of particular interest for regulators.

First, transactions with Bitcoin can be conducted anonymously and at a distance. The combination is important here.

True, transactions conducted with normal cash are anonymous (unless the bills are marked) but they must be conducted in person. Bitcoin transactions can be conducted between any two entities, anywhere, and with better portability than cash. A million dollars might fit in a briefcase but an unlimited number of Bitcoins will fit on a flash drive. The characteristics of portability and anonymity are advantageous for individual economic freedom, but transactions conducted instantaneously and across national borders are troublesome for the needs of regulators.

Second, and even more troublesome for regulators in the long-term, is that Bitcoin production is decentralized and its value is based only on marketplace activity. Bitcoin is not under the control of any single nation’s economic policies or political actions, and therefore methods of supply modification are elusive or non-existent and determinations of any single regulator’s jurisdiction are likely to raise more questions than answers.

Reports indicate that regulators now seem likely to focus on the transactions points where Bitcoin is converted into some other currency. Concerns about securing customer balances in dollar-denominated assets and filing requirements for movement of amounts exceeding certain thresholds were discussed.

Anyone who has seen Goodfellas, though, already knows that buying a lot of flashy expensive things all at once is big tip-off to the authorities that something is not quite square. Buying (or spending) a lot of Bitcoins all at once is flashy and, increasingly, expensive. After a dizzying peak of over $1,000 per Bitcoin in December of 2013, the exchange rate as of this writing is still $750 per Bitcoin.

Due to this exchange rate volatility and to its exotic history, Bitcoin was seen by many not as a currency at all but more as a speculative instrument. However, as it gains legitimacy by receiving the attention of more established financial institutions and governments, and gains acceptance by the public as just another convenient way to pay for a cup of coffee, and gains stability by an increasing market capitalization and market fluidity, Bitcoin could equal fiat currency in its most compelling and important feature for use: the expectation of reliable convertibility – not into other currencies – but for everything else.

Therein lies the real challenge for regulators. If the public demand to enjoy the benefits that the digitization of music, books, television, and film brought to them is any indiction of their likely reaction to the benefits that digital money could confer, then the answers to questions about the need for Bitcoin regulation, and how those regulations would be enforced once crafted, are perhaps not so elusive, but without timely insight and prudent action, they may be irrelevant.

By Brian Ryer

Sources

Wired
Payment Source
American Banker