This article was first published at the McAlvany Intelligence Advisor on Wednesday, November 20th, 2013:
Six federal agencies were invited to a Senate committee hearing on Monday to explain why each should be granted the privilege of regulating the Bitcoin. Four showed up: the SEC, the DHS (Department of Homeland Security), the Treasury Department, and the Justice Department. The IRS didn’t, apparently because they haven’t yet been able to figure out how to tax a transaction between two willing characters on different continents doing business in hyperspace. And the Commodity Futures Trading Commission (CFTC) didn’t show up either, probably because they hadn’t determined yet whether the Bitcoin was a commodity, or not.
It was a real spectacle. Entitled “Beyond Silk Road: Potential Risks, Threats, and Promises of Virtual Currencies,” the hearing was sponsored by the Senate Homeland Security and Governmental Affairs Committee. It referenced the recent shutdown of the Silk Road website demanded by Senator Charles Schumer for dealing in illicit drugs and other nasty stuff frowned upon by the Senate’s chief nanny. As NBC noted, the Silk Road website “uses a complex internet configuration that allows users to remain anonymous and untraceable by downloading the program TOR. Users then can log onto the site and hide their IP addresses so that neither the buyer nor the seller knows who they’re dealing with.”
Schumer, of course, was outraged at such an egregious exploitation of freedom:
It’s an online form of money laundering used to disguise the source of money and to disguise who’s both selling and buying….
Immediately after Silk Road was shut down, Silk Road 2.0 popped up and continues to do business, providing its customers with anonymity and security. All of which is just too much for government regulators.
The SEC claimed that the Bitcoin is actually a security, and so it should be regulated by them. The DHS gleefully announced that it had already taken an “aggressive posture” to address the “emerging threat and criminal exploitation of virtual currency systems” like the Bitcoin, while the Treasury Department reminded the Senators that it had already written two rules on how Bitcoin exchanges should handle those transactions. And Mythili Raman, a Department of Justice spokesman, told the Senators that growth in the use of the Bitcoin “inevitably will be accompanied by an increase in illicit transactions, which make it critical that virtual currency [exchanges] understand their legal obligations and requirements.”
Rent seekers were there, too, including Jeremy Allaire, the founder and CEO of Circle Internet Financial, thirsting after more government regulations so that his company, designed to help facilitate Bitcoin transactions, could provide all the security and identity and transactional data they would need to enforce their rules. Allaire sang the same tune as the regulators:
Criminals and terrorists will seek to employ digital currency if it remains unregulated, leaving Bitcoin operators to operate without stringent controls and effective systems to verify identities, monitor transactions, and report suspicious activity.
The only problem is that they are thirsting after a mirage, a ghost, a shadow, a mist that can’t be regulated. Jerry Britto, a senior research fellow at George Mason University, spelled out how their efforts to regulate the Bitcoin are going to come to nothing:
At its core, Bitcoin is a completely decentralized ledger system. It can be thought of as a massive online version of an accountant’s book….
Because Bitcoin is decentralized, these applications … exist largely outside regulators’ reach.
Those applications not only assure anonymity, if a customer so desires, but also limit the number of Bitcoins that will eventually circulate. This provides at least three major advantages for libertarians rejoicing in the Bitcoin revolution: privacy, freedom from central bank manipulation, and no risk of inflation. Here’s Britto:
This design has two important ramifications: First, because the ledger is decentralized, the Bitcoin protocol leaves governments with no intermediary to shut down. Second, the technology is potentially useful for many other types of transactions….
There is no Bitcoin company to subpoena, no headquarters to raid, not even a server to shut down. Add to that its pseudonymous nature and Bitcoin becomes a real challenge to the state’s ability to restrain or keep track of financial transactions….
While the state may be able to uncover the identity and punish the parties to a Bitcoin transaction … it will no longer be able to prevent those transactions from happening in the first place….
Regulators and law enforcement will have to come to terms with the fact that the Bitcoin protocol is beyond their reach, and while they may be able to spy on the vast majority of consumer transactions by regulating third-party Bitcoin businesses, they will not be able to stop individuals from transacting [business] with each other directly on the network….
That genie is out of the bottle.
Federal Court Rules That the Bitcoin Is Money
Bitcoin Goes to Washington: Monday’s Hearing Is Just the Beginning
Bloomberg: U.S. Agencies to Say Bitcoins Offer Legitimate Benefits
Pretty good summary of the Bitcoin
The New American: Digital Bitcoin Gains Prominence as Alternative to Fiat Currency
Bitcoin Economics: A Primer on a Volatile Currency
USA Today: Bitcoin: What is it? What should government do?
NBC: Schumer Pushes to Shut Down Online Drug Marketplace
Jerry Britto: Bitcoin: More than Money