The Case for Regulating BitcoinOctober 11, 2012
Wednesday, October 10, 2012, by Eli Timberg
Bitcoin is the most unique, and arguably the most important, of new online currencies that are growing in popularity. The fast ascension of Bitcoin, a currency unregulated by either a government or corporation, brings with it a new frontier for online consumers; a world free from credit card fees, central banks, and government regulation. It also brings with it a slew of legal questions. One of the most vexing of these questions is how to curb the criminal activity that will be facilitated by Bitcoin. Unlike traditional online payments facilitated by banks and credit cards, Bitcoin offers a high degree of anonymity to sellers and purchasers. The anonymity provided by Bitcoin has led some people to dismiss Bitcoin as merely a currency for criminal usage which will ultimately be unacceptable to law enforcement and the majority of law-abiding Americans.
There is no doubt that Bitcoin is used for both illegal and legal transactions, as well as transactions that fall somewhere in between. It is hard to get accurate numbers, but those who claim that Bitcoin is merely a tool for criminals, will point to the fact that total sales on Silk Road was over 22 million dollars in the past year. With only 110 million dollars worth of Bitcoin in circulation (assuming the roughly ten million coins in existence are trading at approximately eleven dollars per coin), that seems like a significant portion of Bitcoin usage, but these figures fail to account for the activity level of Bitcoin users. On a high volume day, 144 million dollars worth of Bitcoin is transacted, which pales in comparison to Silk Road’s 22 million dollars per year. Money laundering is another oft-cited illegal use of Bitcoin, but actual instances of money laundering using Bitcoin are probably quite low. In a recently leaked report, the FBI assessed with “low confidence” the likelihood that actors would use Bitcoin to launder money due to the relatively low level of use and vendor acceptance.
The constitutionality and effect of making Bitcoin transactions illegal is a topic for another post (or dissertation, rather), but it is undeniable that governments will be hesitant to conduct an all-out war on Bitcoin if the vast majority of users are conducting legal transactions.
Bitcoin is exciting to many people for reasons besides purchasing drugs and laundering money. For instance, in 2001, Santa Clara law professor, Kerry Lynn Macintosh wrote about the potential benefits of (the not-yet-invented) “global electronic currencies.” MacIntosh correctly anticipated that such a currency would eradicate exchange fees (between currencies), credit card fees, and provide a standard worldwide measurement “enabling buyers and seller all over the world to understand what goods and services are worth without calculation.” The elimination of credit card fees is especially important for online transactions involving small, discrete sums since the two or three percent fee often makes these transactions prohibitively expensive. Bitcoin transactions are instantaneous while credit card transactions can take multiple days to process. Moreover, there are various services and goods that are legal, which many people would prefer to purchase anonymously—pornography, for instance. More recently, Bitcoin has emerged as the preferred method of donating to politically unpopular organizations like Wikileaks.
The extent that Bitcoin is being used for legal purposes is important because this factor may dictate whether Bitcoin is able to survive future government intervention. If Bitcoin continues to grow, governments will be forced to decide whether to outlaw Bitcoin or regulate it.