Bitcoin virtual money closer to legitimacy despite crime fears

The virtual currency Bitcoin took a big step toward the mainstream on Monday as US authorities signalled their willingness to accept it as a legitimate payment alternative.
By · 20 Nov 2013
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20 Nov 2013
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The virtual currency Bitcoin took a big step toward the mainstream on Monday as US authorities signalled their willingness to accept it as a legitimate payment alternative.

A number of federal officials told a US Senate hearing that such financial networks offered real benefits for the financial system, even as they acknowledged that new forms of digital money had provided avenues for money laundering and illegal activity.

"There are plenty of opportunities for digital currencies to operate within existing laws and regulations," said Edward Lowery, a special agent with the Secret Service, which is tasked with protecting the integrity of the dollar.

Signs that the government would not stand in the way of Bitcoin's development, even as it has been cracking down on criminal networks that use the digital money, stoked a strong rally in the price of the crypto-currency.

By Monday evening, the value of a Bitcoin unit soared past $US700 on some exchanges. The total outstanding pool of Bitcoin - which is created by a network of users who solve complex mathematical problems - is now worth more than $US7 billion.

The US Senate hearing was the clearest indication yet of the government's desire to grapple with the consequences of this growth, and the recognition that Bitcoin and other similar networks could become more lasting and significant parts of the financial landscape.

"The decision to bring virtual currency within the scope of our regulatory framework should be viewed by those who respect and obey the basic rule of law as a positive development for this sector," said Jennifer Shasky Calvery, director of the US Treasury Department's Financial Crimes Enforcement Network. "It recognises the innovation virtual currencies provide, and the benefits they might offer."

Ms Shasky Calvery and the other officials at the hearing did say that basic questions still had to be answered about virtual currencies, including whether they can actually be considered currencies or whether they are more properly categorised as commodities or securities. The distinction will determine which agencies regulate the networks and how they are treated under tax law.

New York state's top financial regulator, Benjamin Lawsky, said last week that he would hold a hearing to consider the creation of a BitLicence to provide more oversight for transactions. Earlier, the Federal Election Commission put out an advisory indicating Bitcoin could be legally accepted as political donations.

Patrick Murck, chief legal officer of the Bitcoin Foundation, a non-profit group advocating the currency, said in his testimony that he was receiving a much more friendly response from both government and the financial industry. "We have recently perceived a marked improvement in the tone and tenor taken by both state officials and bank executives," Mr Murck said.

Bitcoin has experienced a remarkable ascent since it was created in 2009 by an anonymous programmer or collective known as Satoshi Nakamoto. The money, which is not tied to any national currency, has been popular with technophiles who are sceptical of the world's central banks. Only a finite amount of Bitcoin will ever be created - 21 million units. Users have bid up the price on internet exchanges, betting that the currency will be more widely used in the future.

There are significant questions about the wisdom of the digital money as an investment, given that Bitcoin has no intrinsic value and has proved to be vulnerable to hackers. Many money managers have recommended that unsophisticated investors stay away.

The increasingly widespread ownership of Bitcoin has shifted attention away from the criminal enterprises that have used digital money, but it was a focus at the Senate hearing. Last month, the online marketplace Silk Road, where Bitcoin was the primary form of payment, was shut down and its founder arrested after authorities accused it of being used to buy and sell drugs, weapons and pornography.

It can be harder to track criminals who use Bitcoin, law enforcement officials have said, because they operate across international borders and often do not use established financial institutions. But Mythili Raman, assistant attorney general at the Justice Department, also said it was possible for investigators to trace the movement of money between accounts.New York Times
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