In late August 2013, members of Bitcoin Foundation, an organization seeking to standardize the crypto-currency bitcoin, met with federal regulators, policymakers, law enforcement officials and congressional staffers. The ensuing discussion focused on the future of digital currencies, which are increasingly under scrutiny by state and federal authorities.
In a statement to digital currency news outlet CoinDesk prior to meeting with officials in Washington, Patrick Murck, General Counsel for Bitcoin Foundation, and founder and Principal of Engage Legal PLC, said, "Our hope is that this is the beginning of an open and transparent dialogue between good-faith stakeholders to find common ground and develop public-private partnerships."
An early signal that further federal regulatory action could be imminent came from the Financial Crimes Enforcement Network, which introduced a preliminary set of guidelines in March 2013 that would regulate virtual currencies, including a provision for certain bitcoin businesses to register with the U.S. government.
Payment attorney Paul Rianda believes federal regulation of new currency schemes is only a matter of time. "I think they're going to come in and regulate this sooner or later," he said. "Some of the states have been doing it. Now the feds are looking to do it." California and New York both issued subpoenas and cease-and-desist letters to bitcoin exchanges, claiming that such businesses may be engaged in unlicensed money exchange operations.
However, too much regulation could jeopardize digital currencies, restricting them to "darker parts of the Internet," said Joseph Arthur, Vice President, Operations at RocketPay LLC. "Bitcoin/digital currencies, while a concern, are no threat to the Federal Reserve System from a destabilization perspective. Bitcoin can be viewed as a complementary currency to the United States dollar or the European euro, not the next step in the evolutionary process."
Arthur added that bitcoin is a potentially dynamic currency, as it is open source, person-to-person, mathematically predictable and autonomous, but that those attributes also make it prone to money laundering and other illegal schemes.
With the future of digital currencies at stake, there is much speculation about future integration of bitcoin with the existing payments industry infrastructure. "If merchants adopt a holistic approach to network security, there is no reason why alternative currency transactions could not be conducted," said Simon Gamble, President North America for Mako Networks Ltd. He added that a properly configured and secured network should permit any type of payment device or method to be used.
"Once payments enter a network - whether credit, debit or bitcoins - it's just 'data' composed of the same fundamental ones and zeros as any other digital information," Gamble noted. "Granted, transaction data has a higher value, but the fundamental principles are the same."
There are also other hurdles to overcome. "The difficulty in implementing alternative currencies lies not in securing these transactions types, but in assigning them real value with merchants, banks and financial institutions," Gamble said.
And without stability, there is instability. "Bitcoin is still too volatile for the public to embrace it in their everyday lives," Arthur said. "However, its potential as a new payment offering for acquirers, banks or processors should be considered. Once these parties start thinking of bitcoin as a new transaction processing network, the ideas and uses are limitless."
Rianda suggested that in the end there will likely be consolidation of virtual currency players as additional layers of bureaucracy and regulation become evident at both the state and federal level. For more information on bitcoins, see "Bitcoin - viable currency or flash in the pan? The Green Sheet, by Patti Murphy, Aug. 26, 2013, issue 13:08:02.
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