Senate Hearing Recognizes Bitcoin’s Strengthening Toehold in Electronic Payments

Might the Bitcoin digital currency be heading toward legitimacy among skeptical regulators and law-enforcement officials? Testimony at a U.S. Senate committee hearing Monday indicated that government may be ready to make peace with Bitcoin and, by extension, other new digital forms of payment, though if and when these new systems gain full acceptance is still very much unknown.

“Virtual currencies have captured the imagination of some, struck fear among others, and confused the heck out of many of us,” Sen. Tom Carper, D-Del., chairman of the Senate’s Homeland Security and Governmental Affairs Committee, said in a statement after the hearing. “Fundamental questions remain about what a virtual currency actually is, how it should be treated, and what the future holds. It’s clear that this technology presents some new and unique risks, but with it, there are clearly some who believe it has great potential. The federal government and society as a whole need to come together to figure out how to effectively deal with it, and this hearing was the first step.”

The hearing came only four days after the Federal Election Commission debated a proposal to let candidates and political action committees (PACs) accept Bitcoin contributions as in-kind donations, according to The Washington Post.

Until recently, politicians, central bankers and other regulators, and police have viewed Bitcoin and other virtual currencies with deep skepticism, noting their non-traditional structures and that drug dealers, money launderers, and other criminals use such payment forms to avoid detection. But as virtual currencies continue to evolve, attract investors, and find legitimate users such as merchants looking for cheaper alternatives to existing payment systems, officialdom may be on its way to accommodation.

“Bitcoin is an exciting innovation that has the potential to greatly improve human welfare and jump-start beneficial and potentially revolutionary developments in payments, communications, and business,” testified an academic witness at the hearing, Jerry Brito, a senior research fellow at the Mercatus Center at George Mason University in Arlington, Va. “Banning Bitcoin is not the solution to ending money laundering and illicit trade, just as banning cash is not a solution to these same ills,” Brito’s written testimony says.

Bitcoin, a decentralized digital-payment system based on mathematically derived new Bitcoins coming into circulation by so-called “miners” using computers, has confounded officials since it first appeared four years ago. While it’s called a virtual currency, some observers consider Bitcoin a commodity to be saved or traded like stocks or gold. And while much harder to trace than a credit card payment, it’s not completely anonymous.

Not surprisingly, Bitcoin doesn’t quite fit into existing regulatory frameworks, even though the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCen) issued its first guidance about it to the banking industry last March, noted Brito. FinCen now seems to view virtual currency as a permanent addition to the financial landscape.

“The decision to bring virtual currency within the scope of our regulatory framework should be viewed by those who respect and obey the basic rule of law as a positive development for this sector,” testified FinCen director Jennifer Shasky Calvery. “It recognizes the innovation virtual currencies provide, and the benefits they might offer society.”

Bitcoin got a black eye Oct. 1 when authorities arrested the operator of Silk Road, a prominent online market in illegal drugs and other criminal activity that only accepted Bitcoin for payment. Despite criminal uses and Bitcoin’s non-traditional structure, Brito urged government to take a hands-off approach and let the virtual-currency market develop on its own. He noted that “as a technology, Bitcoin is neither good nor bad, it is neutral.” If the United States tried to ban it, other countries won’t, putting the U.S. at a competitive disadvantage, he said.

Brito noted that conventional remittances through established brick-and-mortar market players such as Western Union and MoneyGram cost 9% of the transaction value, but a Bitcoin remittance costs only about 1%. “Any attempt to restrict Bitcoin technology will only harm legitimate uses while leaving illicit uses largely unaffected,” he said. “Because it is a decentralized global network, Bitcoin is virtually impossible to shut down.”

Brito later added that if Bitcoin were prohibited, “the government would forgo the opportunity to regulate intermediaries in the Bitcoin economy, such as exchangers and money transmitters.”

Statements from witnesses at the hearing can be accessed here.