[ExI] Bitcoin

[John Clark]

The following article was on the front page of the business section of
today's New York Times:

=============

The virtual currency bitcoin took a big step toward the mainstream on
Monday as federal authorities signaled their willingness to accept it as a
legitimate payment alternative.

A number of federal officials told a 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 $700 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 $7 billion.

The Senate hearing Monday afternoon 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, the director of the Treasury Department’s Financial Crimes
Enforcement Network. “It recognizes 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 categorized as commodities or securities. The
distinction will determine which agencies regulate the networks and how
they are treated under tax law.

Ms. Shasky Calvery said that the Internal Revenue Service was “actively
working” on its own rules for bitcoin.

The hearing followed other less visible steps taken by regulators and
lawmakers to bring digital money into the mainstream.

New York State’s top financial regulator, Benjamin M. Lawsky, said last
week that he would hold a hearing to consider the creation of a BitLicense
to provide more oversight for transactions. Earlier, the Federal Election
Commissionput out an advisory indicating that bitcoin could be legally
accepted as political donations.

The general counsel of the Bitcoin Foundation, a nonprofit advocating the
currency, said in his testimony on Monday 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,” the general counsel,
Patrick 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 skeptical 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.

Recently, though, bitcoin has been catching fire around the world, with
exchanges in China particularly active. A growing number of prominent
American investors have also bought stakes, including Michael Novogratz, a
principal at the private equityand hedge fund giantFortress Investment
Group, as well as the Winklevoss twins, Cameron and Tyler.

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.
The chairman of the Senate committee, Thomas R. Carper, Democrat of
Delaware, said that a few days after the arrest, a similar site sprang up.

It can be harder to track criminals who use bitcoin, law enforcement
officials said at the hearing, because they operate across international
borders and often do not use established financial institutions that report
transactions.

But Mythili Raman, an assistant attorney general at the Justice Department,
also said that because every bitcoin transaction was recorded on a public
ledger, it was possible for investigators to trace the movement of money
between accounts.

“It is not in fact anonymous. It is not immune from investigation,” Ms.
Raman said.

All the officials at the hearing said that crime had been an issue during
the early days of credit cards and online payment systems like PayPal, and
should not be a reason to limit innovation.

“It is our duty as law enforcement to stay vigilant while recognizing that
there are many legitimate users of those services,” Ms. Raman said.

The bitcoin supporters who testified at the hearing said bitcoin could
bring major changes to the financial system by cutting out the middle men
needed to move money around the world.

“I am here to testify because I believe that global digital currency
represents one of the most important technical and economic innovations of
our time,” said Jeremy Allaire, the chief executive of Circle Internet
Financial, which is seeking to promote more widespread use of the currency.

Given bitcoin’s appeal to skeptics of government, many aficionados have
been wary of involvement by Washington. But advocates at the hearing said
that the increasing cooperation with regulators could lay the groundwork
for further growth.

“As this technology moves from early adopters into mainstream acceptance,
it is critical in my view that federal and state governments establish
policies surrounding digital currency,” Mr. Allaire said.
A version of this article appears in print on 11/19/2013, on page B1 of the
NewYork edition with the headline: Regulators See Value in Bitcoin, And
Investors Hasten to Agree .
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