Supporters of Bitcoin and other virtual currencies will be
heartened by the generally positive discussions that took place at
two Senate committee hearings earlier this week, in which both
regulators and senators signaled that forthcoming regulation should
not aim to stifle this emerging technology. Rather, panelists from
government and industry generally, though not unanimously,
expressed a desire for targeted regulations that aim to combat only
the illicit uses of virtual currency, and senators seemed in no
rush to take legislative action.
The two hearings, by the Senate Homeland Security and Governmental
Affairs Committee on November 17 and the Senate Banking
Committee on November 18, each focused on various federal
regulators' planned response to the quick rise of virtual
currency, especially Bitcoin. US government officials dominated
several of the panels, including Financial Crimes Enforcement
Network (FinCEN) Director Jennifer Shasky Calvery (who appeared at
both hearings), along with representatives from the Department of
Justice, Secret Service, and state banking agencies. Their message
was mostly consistent: virtual currencies such as Bitcoin raise
concerns due to their somewhat anonymous nature, and they have been
and remain vulnerable to illicit activity, but they also have
legitimate, beneficial uses. Rather than call for additional
legislation, regulators stressed that they already had the tools to
regulate virtual currencies effectively, pointing to the successful
shutdowns of the online black market Silk Road, and illicit
centralized virtual payments system
Liberty Reserve.
Instead of additional legislative measures, regulators called for a
focus on international cooperation measures to eliminate any
loopholes or safe havens in the international market. For example,
one DOJ panelist noted that the UK's National Crime Agency had
recently joined the Virtual Currency Emerging Threats Working Group
(VCET), founded by the FBI in 2012.
Virtual currency industry representatives generally were eager to
comply with existing federal regulation, particularly those
instituted by FinCEN, in an effort to bring legitimacy and
stability to the virtual currency industry. They were less eager,
but still willing, to comply with state licensing requirements,
noting that differing standards were often burdensome. Industry
panelists even went so far as to request further guidance to help
"de-chill" the current relationship between virtual
businesses and brick-and-mortar banks. Together with the regulatory
panelists, industry representatives appeared to form a loose
consensus around limited, "smart" regulation, a view
summed up by Homeland Security and Governmental Affairs Committee
Chair Senator Tom Carper (D-Del.) as "Minimize the Bad,
Maximize the Good."
Despite generally positive treatment, this week's hearings
revealed some looming regulatory risks for Bitcoin and other
virtual currencies. First, FinCEN did not take a position
on the nature of virtual currency itself—observing that it
could be a commodity, a security, an Internet portal or simply a
value storage device. Classifying virtual currency as anything
other than currency might impose significant restrictions on how
these currencies are created and traded. Second, panelists
and senators noted that taxation of virtual currency remains an
unresolved issue that should be addressed promptly by the IRS, but
the timing of IRS guidance was uncertain. And third, one
panelist representing the larger financial services industry
called for more comprehensive regulation of virtual currency,
noting that regulators often actively involve themselves in
innovative financial products such as prepaid cards or electronic
payment systems, and virtual currency should be treated
similarly.
Much regulatory uncertainty remains for Bitcoin and other virtual
currencies, but this week's hearings went far in establishing a
federal government view that these technologies represent
innovation that should be given the opportunity to flourish, rather
than simply a threat. The challenge lies in finding a balance
between over-regulating and stifling business, and under-regulating
and allowing criminals to use virtual currency in illicit schemes.
As Director Shasky put it, "we need smart
regulation."
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