Some Experts Optimistic on Bitcoin; Others Skeptical on Safety
Digital currency experts were divided in interviews last week over the market potential for currencies like Bitcoin. One said that digital currencies demand government regulation and expressed skepticism over the question of Bitcoin’s alleged progenitor. Others said that digital currencies could prove to be an innovative tool for economics, particularly in the developing world, and expressed doubt over whether Bitcoin’s supposed founder has much bearing on the program. Federal agencies are in “education mode” on digital currencies, except for the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), said Jerry Brito, director of the Mercatus Center’s Technology Policy Program at George Mason University. FinCEN issues “guidance on how the Bank Secrecy Act applies” to those who use digital currencies, he said. FinCEN’s guidance is “good” and provides “clarity,” but not on all sides of the digital currency issue, said Brito.
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The Winklevoss twins of Facebook fame are investing other people’s money in digital currencies, which is not the same as investing one’s own money, said Garth Bruen, a Digital Citizens Alliance fellow who wrote a report on Bitcoin’s influence on Internet safety (http://bit.ly/1kGSEJ7). The alliance is an Internet consumer protection group that isn’t opposed to Bitcoin, but advises consumers to proceed wisely, said a spokesman. “The risks are fairly serious,” Bruen said. “How do you keep track of that, how do you validate” an electronic record with no backing? he asked. “Any government should be considering” regulation for digital currencies.
Bruen described instances of individuals losing millions of dollars worth of Bitcoins, in the case of the closing of Silk Road, a black market website that allegedly used Bitcoin as its currency, and an individual who accidentally threw away a hard drive with millions of dollars worth of Bitcoins. Other risks include digital currency marketplaces that have been set up with the express purpose of stealing other Bitcoins, said Bruen. Because there’s no central repository, when one loses Bitcoins or has them stolen, “they're gone,” he said.
The “mystery” behind the creator of Bitcoin has made Bruen “suspicious of the entire system,” he said. Bruen described the original Bitcoin research paper as “borderline genius,” which was attributed to a writer using the Japanese pseudonym “Satoshi Nakamoto.” A “serious researcher in Japan isn’t going to put out a pseudonym,” said Bruen.
"There’s something very funny going on in terms of the creation of this system that has always left me very, very suspicious."
"More than half” of the Bitcoin code has been written by people other than “Satoshi,” said Brito. Whoever wrote the paper deserves the “Nobel Prize,” he said.
Digital currencies will “continue to grow,” and though Bitcoin could be “replaced,” if a superior digital currency is created, the “idea is here to stay,” said Daniel Castro, Information Technology and Innovation Foundation senior analyst. Digital currency regulation isn’t an “either/or” issue of whether to issue rules or not, he said. Government-backed currencies can exist alongside digital currencies, and governments can choose to regulate their own digital currencies while leaving others unregulated, he said.
States are the “biggest interface between the Bitcoin community, Bitcoin businesses, and government,” Brito said. At the state level, there’s “a lot of action,” because that’s where they “consider you to be a money transmitter business,” which requires state licensing, he said. States need to require “clear and uniform requirements” for digital currencies across the country, he said.
The Internal Revenue Service hasn’t issued guidance on digital currencies, although the agency has said it will, Brito said. Digital currencies aren’t a “big priority” to the IRS because of their relative size, he said. The Federal Election Commission recently voted on whether campaigns can take contributions in the form of digital currencies, and voted in a tie, he said. There were “questions about making sure they could track” the origin of donations, but once the FEC figures that out, its commissioners will probably vote “yes,” he said. Brito hasn’t “seen anything” from the SEC, except that some on Wall Street, like the Winklevoss twins, have applied for “Bitcoin funds” to get investments, he said.
It would be “great” to see the U.S. and EU in an “innovation race” to create a regulated digital currency, Castro said. Hard currencies haven’t undergone substantial innovation, except for printing technology, he said. Developing countries that feel “marginalized” in their roles within Internet governance could have a “serious impact” if they decided to recognize a particular digital currency, which could set off a “revolution in economics,” he said. Bitcoin could “fundamentally challenge” the “monopoly” over financial transactions among certain industrialized countries because it “circumvents all the controls they have in place,” said Castro.
Brito described digital currencies as a possible “boon” for developing nations. They could start using digital currencies first, because they don’t have great payment systems, he said.
Digital currencies present a “huge opportunity” for cost savings, Castro said. By using digital currencies, companies would avoid having to count and store cash, he said. Brito said the absence of merchant fees through digital currencies would be a value to U.S. companies, but added that merchant fees offer the insurance Bitcoin lacks. For U.S. consumers to use Bitcoin on a commercial scale, it would take “consumer grade software,” said Brito, although none of the current software is any simpler than PayPal.