For those unfamiliar with Bitcoin, it is a digital medium of exchange that was introduced to the cyber world in 2009 through open source software created by an unknown developer who goes by the pseudonym Satoshi Nakamoto. Bitcoin payment transactions are processed within minutes but are irreversible and lack the full faith and credit of any government authority.
This is usually the point where those who have not heard of Bitcoin or similar crypto-currencies expect to hear the phrase “Now playing at a theater near you.” Not only is Bitcoin real, but the Financial Crimes Enforcement Network, the U.S. government agency charged with collecting, analyzing and disseminating financial intelligence, has suggested its users have processed transactions worth about $8 billion in the past year.
While that amount is minuscule in comparison to the other amounts processed in U.S. dollars by banks and other financial institutions in the U.S. payment system, it is substantial enough to garner the attention of federal and state regulators. Many federal regulatory agencies have suggested that they will eventually take a formal stance on regulating the various uses of Bitcoin, but the Financial Crimes Enforcement Network, or FinCEN, was the first federal regulator to issue formal, interpretative guidance regarding Bitcoin and similar crypto-currencies within the existing regulatory framework for money services businesses.
In its March 2013 guidance, FinCEN compared real currency to virtual currency and concluded that administrators and exchangers of virtual currencies are money transmitters subject to registration and many of the reporting and recordkeeping regulations traditionally reserved for banks and other financial institutions. While FinCEN did not mention Bitcoin by name in its guidance, it did refer to certain types of decentralized virtual currencies that have similar attributes to Bitcoin. This, coupled with various letters issued by FinCEN to certain types of Bitcoin-focused businesses, make it clear that Bitcoin is one of the many virtual currencies that the guidance intended to address.
Other countries, by comparison, have taken very different approaches. Some, like China, have provisionally banned or effectively banned Bitcoin’s use. Others, like Norway, have determined that Bitcoin does not meet the traditional definition of currency.
With every financial innovation comes risk. The main risks highlighted by various international governmental authorities include the potential uses of Bitcoin and similar crypto-currencies for illicit activity, including narcotics, illegal weapons, terrorist financing, Ponzi schemes and money laundering, and the unknown or potentially negative effects on the stability of existing financial markets should mass adoption take effect.
Additionally, the irreversibility of Bitcoin transactions may be very attractive to merchants that elect to accept Bitcoin as a source of payment, particularly given the significant level of fraud that occurs in relation to credit card chargebacks. But consumers may find it difficult to get refunds should they not be happy with the product or services they receive or fail to receive at all.
Lastly, the extreme volatility associated with Bitcoin’s value—in some cases, hundreds of dollars within a given day—may make certain users of Bitcoin that treat it like an investment susceptible to substantial losses.
After FinCEN issued its guidance, many thought that would effectively diminish the demand for Bitcoin and other virtual currencies. Instead, at one point last year, the U.S. dollar value of Bitcoin rose above $1,000 per Bitcoin. Bitcoin’s value has since come down and remains wildly volatile. But this month, Overtsock.com and TigerDirect announced plans to begin accepting Bitcoin.
As the numbers of retailers that accept Bitcoin continue to increase, so does the curiosity of enthusiasts, speculators, startups, venture capitalists and regulators. This curiosity was well on display at the North American Bitcoin Conference held last weekend at the Miami Beach Convention Center. At the conference, many pontificated on the future of Bitcoin and the viability of its mass acceptance.
The New York Department of Financial Services held a public hearing this week on the regulation of virtual currencies. Large banks and other financial institutions are actively exploring the development of their own, proprietary virtual currencies and related payment networks. Even countries, like Canada with its experimental MintChip, have dipped their toes into the digital currency waters.
While there is little clarity on what the long-term prospect of Bitcoin will ultimately be, it is clear that it and similar digital currencies have left an indelible mark on the financial services system as we know it.