What U.S. Regulations Will Mean for the Bitcoin Economy

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Many Bitcoin enthusiasts expect the U.S. government will take steps towards regulating the digital currency. Whether this regulation will threaten or legitimize the currency is still an open question.

Bitcoin presents a unique challenge to regulation because, like cash, the so-called cryptocurrency is used for anonymous and irreversible payments.  There isn't an overarching group that runs the system, so the clearest targets for regulation are companies that are active in the Bitcoin economy. Companies like BitPay, Coinbase and BitInstant could be targets.

"It's not whether but when will there be some action from the government," says Juan Llanos, executive vice president of operations and compliance officer at Unidos Financial Services Inc. "In the next two years there is going to be some regulatory action, either federal or state, that will identify any of these Bitcoin players as being in violation [of regulation] and there will be indictments."

Erik Voorhees, director of marketing and communication at the payment processor BitInstant, says the U.S. government will most likely make laws addressing digital currency in general and try not to specifically mention Bitcoin.

Government agencies have already caught criminal activity within the Bitcoin marketplace.  In February, the first conviction was made of a drug dealer using Silk Road, a black marketplace that uses Bitcoin to transact and the Tor system (which masks Web traffic) to anonymize purchases.

Despite some concerns that the government will take an extreme stance, "it's highly unlikely the U.S. government will move to outright ban [Bitcoin]," Voorhees says.

But there's no denying that the U.S. government is keeping an eye on the Bitcoin marketplace, especially after the Federal Bureau of Investigation published a report on the cryptocurrency in April 2012. 

"Everything that has to do with the movement of funds is of great concern to the U. S. government … because of terrorist and financial crime," says Llanos, who spoke at a Bitcoin Meetup in New York City this month. These "are good values that the U.S. government as the national power is trying to protect."

Llanos moved from Argentina to New York in 2002 to work on the first compliance program for money services businesses (MSBs). Since the Bitcoin system facilitates the transmission of funds, it will eventually have to abide by federal and state money transmitter regulations and licensing, he says.

Money transmitters need to be able to handle a return or reversal. They must also meet the Know Your Customer (KYC) federal regulations and transparency of fees state regulations.

Bitcoin enthusiasts "say this is a totally anonymous mode of payment — and the government is totally, in financial standards, against anonymity," Llanos says. Especially after the terrorist attacks in 2001, the U.S. government has tightened security measures relating to money transfers, he says.

Some companies are already registered with the Financial Crimes Enforcement Network (FinCEN). For instance, Coinlab Inc. works with Silicon Valley Bank and is registered with FinCEN as an MSB, meaning the company already abides by regulations.

As more Bitcoin companies start doing business with traditional banks and adopting FinCEN's rules, the currency begins losing its cash-like properties.

"It's important for people to realize Bitcoin is already [indirectly] regulated," says Voorhees. He gets some of his paycheck in Bitcoins and he has to pay taxes on that income, plus money laundering and drug trafficking is illegal even in the Bitcoin community.

But if the transactions remain anonymous, illegal activities would be difficult to catch and reprimand.

"I'm hoping that if [the U.S. government] does decide to regulate Bitcoin, they talk to people who actually know what they're talking about … or silly mistakes could be made," says Voorhees.

If the government regulates Bitcoin companies exactly like it regulates other money transmitters, the Bitcoin system would lose part of its appeal.

Some companies are working to explain why the Bitcoin system should get different treatment from conventional payment systems.

The video training company CBT Nuggets created a 13-part series, Bitcoin Basics, to break down how Bitcoin works. The series, which is hosted by Keith Barker, a trainer and consultant that specializes in cryptocurrencies, also includes three "chats" about the philosophical questions surrounding Bitcoin.

"We're trying to ease the pain and get Bitcoin to the masses," says Dan Charbonneau, CEO of CBT Nuggets.

"Bitcoin is the sexiest technology ever," he says. "But it's a scary-looking technology from the outside … but transactions become so incredibly easy to do." 

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