Law-enforcement officials aired their concerns Monday about the ease of money laundering and drug trafficking using virtual currencies like Bitcoin, but said ultimately virtual currencies were a legal means of exchange that could be a source of innovation in payment systems.
A hearing of the Senate Committee on Homeland Security and Government Affairs, led by Sen. Tom Carper (D., Del.), committee chair, was a fact-finding mission to understand the potential promises and risks related to virtual currencies.
The focus of the hearing was Bitcoin, the peer-to-peer digital currency introduced in 2008 by a developer (or group of developers) known by the pseudonym “Satoshi Nakamoto.” With approximately 12 million Bitcoins in circulation today, the so-called “cryptocurrency” can be traded on private exchanges and used to buy a variety of consumer goods. Bitcoin also allows users to send money out of the country quickly and economically, an advantage for companies pursuing growth in a global context. Users processed transactions worth approximately $8 billion over the 12-month period ending October 2013, according to one regulator. After the hearing, boosted by the positive remarks of some U.S. officials, the price of Bitcoin topped $700 on the Tokyo-based Mt. Gox exchange.
However, Bitcoin has a checkered (albeit brief) history. The shutdown of the Internet’s Silk Road, an online black-market which acted as an eBay for illicit services and illegal products and used Bitcoin for transactions, has caused anxiety about the future of virtual currencies.
In a letter to the Senate hearing, Securities and Exchange Commission Chairman Mary Jo White said Bitcoins would likely be securities and therefore should be regulated. In addition, Federal Reserve Chairman Ben Bernanke wrote that a virtual currency may pose risks in law-enforcement matters, but it also “may hold long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system.”
The Senate hearing witnesses, including representatives from the Financial Crimes Enforcement Network, the U.S. Department of Justice and the U.S. Secret Service, agreed that virtual currencies offer an opportunity for illegal activity but can be regulated and controlled using existing laws and government agencies. The FBI and the U.S. Attorneys’ Office have been able to regulate virtual currencies thus far, using laws like the Patriot Act and the Bank Secrecy Act, said Mythili Raman, acting assistant attorney general for the criminal division of the Justice Department. Additionally, the IRS is working with FinCEN on how to treat virtual currency for taxing purposes.
A complication to the regulation of virtual currencies like Bitcoin is that they don’t belong to any nation or central bank and most countries have no applied law or regulation for digital money.
Ernie Allen, president and CEO of the International Centre for Missing & Exploited Children, said that as legislation around virtual currencies forms, the United States should avoid imposing draconian laws that push businesses outside the country to geogrpahies with little to no regulation. Virtual currencies can do a social good, giving access to the 2.5 billion adults globally who don’t have access to banks, credit cards and mainstream financial institutions, he explained.
Jennifer Shasky Calvery, director of FinCEN, said business wouldn’t leave the U.S. for countries with less restrictive frameworks. “Every country has an interest in protecting financial services from illicit actors,” she said. As virtual currency evolves, regulation at home and abroad will catch up “because it will have to.” The goal is to mitigate anti-money laundering and risks of illicit activity while minimizing burdens, she added.
But Jerry Brito, senior research fellow of the Mercatus Center, disagreed. “Entrepreneurs looking to comply won’t find a regularly environment that is amenable [in the U.S.],” he said.
Bitcoins can be a catalyst for job creation and economic growth as long as there are clear rules to follow, said Patrick Murck, general counsel of the Bitcoin Foundation. Yet, at the end of the day, Bitcoin is experimental, and it’s a high-risk environment for consumers and investors. “For now, it’s not quite ready for mass-consumer adoption,” he said. “The time is coming, but it’s not here yet.”
Monday’s hearing was the first of two being held on digital currencies; the Senate Banking Committee will hold a hearing on Tuesday.