Bitcoin, the virtual currency that governments love to hate, came under the spotlight this week at a United States Senate committee hearing on virtual currencies.
Government and law enforcement agencies and the International Center for Missing & Exploited Children emphasized the attractiveness of the virtual currency to cybercriminals, while the Bitcoin Foundation and its supporters touted its strengths and warned that the U.S. would be left behind as the virtual currency concept catches on.
Based on the arguments presented to the Senate Homeland Security and Government Affairs Committee, it appears that virtual currency is a disruptive technology that is here to stay, but some sort of regulation is needed.
“The virtual environment is real,” Jim McGregor, founder and principal analyst at Tirias Research, told the E-Commerce Times. “I like the idea, and I think things are going to go that way.”
Although Bitcoins are a universal currency, and “one world currency would break down so many borders and create so many opportunities,” McGregor continued, “we’ll still need governments or gold behind that to establish some faith and security.”
Fear, Loathing and Bitcoin
Virtual currencies attract illegal actors because they enable a degree of anonymity, are accessible worldwide, may have low fees, are generally secure, feature irrevocable transactions, and may facilitate money laundering, various U.S. government agency representatives told HSGAC.
Virtual currency systems typically lack transaction limits. Liberty Reserve and e-Gold have each moved the equivalent of $1 billion in illegal proceeds in a year’s time, testified Mythili Raman, acting assistant attorney general in the Department of Justice’s Criminal division.
A decentralized virtual currency such as Bitcoin has no administrator to maintain information on users and report suspicious activities to the authorities.
Child porn producers use Tor hidden services to create and disseminate their wares and accept payment in Bitcoins, testified Ernie Allen, president and CEO of ICMEC.
What’s Good About Bitcoin
The Bitcoin Foundation and the Tor Project have indicated they are willing to work with ICMEC, Allen also said.
Patrick Murck, general counsel for the Bitcoin Foundation, told HSGAC that digital currencies can provide a safe store of wealth and a global transaction network that cannot be corrupted or abused by people who prey on vulnerable populations.
The anonymity of Bitcoin transactions lets people fund controversial speech or causes that “governments and powerful private actors may seek to suppress using their control of conventional financial services,” Murck testified.
The Bitcoin system ensures a stable base money supply, because the way new Bitcoins are created — through solving very difficult math problems with a computer — controls the pace of production. The total number will be capped at just below 21 million in 2140, Murck said. That makes the currency inflation-proof.
“Who says you can’t have more Bitcoins?” asked Tirias’ McGregor, “and who’s controlling the supply? When somebody says you can’t do something, you know there’s got to be a way.”
Anything that’s data driven can be manipulated somehow, McGregor pointed out.
Leaving America Behind
Hostility in some states and in the banking industry might drive out U.S. investment and participation in the virtual currency, warned the Bitcoin Foundation’s Murck.
Promulgating special regulations for virtual currencies or otherwise making it more costly to operate legitimately in the U.S. could result in their increased use for illegal purposes, while costing the country a head start in what “may be the next disruptive industry,” Jerry Brito, senior research fellow at George Mason University’s Mercatus Center, told HSGAC.
Arguments based on the U.S. being left behind in the global markets are weak, however, “because the U.S. has the world’s largest and most innovative economy,” Peter Cohan of Peter S. Cohan & Associates told the E-Commerce Times.
“I don’t see the U.S. being left behind because some currency that is not controllable and is easily hacked into and is backed by various financiers that are not disclosing their interest is going to threaten the U.S. economy,” he said.