As state and federal officials tackle the challenge of regulating bitcoin, they’re finding surprising allies among backers of the cryptocurrency — and new dilemmas when informing and protecting the public about the dangers of the distributed, digital ledger.
“The fact that even within the same department there is disagreement shows how far we still have to go,” said Dan Elitzer, MIT’s Bitcoin Club president.
It’s just one instance where, despite growing interest in bitcoin, clear, understandable regulations are missing. Agencies are looking, cautiously, to close the gap.
In Massachusetts, Commissioner of Banks David Cotney is leading a task force on emerging payment methods including bitcoin. He says he expects the group to conclude whether or not bitcoin should be regulated on a state level, and if so, how current rules could be applied.
“Regulation is a likely outcome if we assume the market [for virtual currency] continues to grow,” said Cotney. “And in that case, it really can only succeed if regulation gives consumers the confidence to use it.”
Cotney says right now, bitcoin lacks consumer trust, and that’s something it will to need develop as it gains wider use. Regulation could lend it a greater level of legitimacy in the eyes of consumers.
“It’s about striking the right balance between making sure consumers are protected but also getting the benefits of new options,” said Cotney.
Still, some government regulators don’t want to oversee bitcoin at all.
In February, Federal Reserve Chairwoman Janet Yellen said the central bank “simply does not have authority to supervise or regulate bitcoin in any way.”
Barbara Anthony, undersecretary for the Massachusetts Office of Consumer Affairs and Business Regulation, echoed that sentiment in a recent interview, saying disclosure, not regulation, should be the government’s priority.
“It’s a computer program – it’s not a currency,” she said. “And for that reason, issues of regulation are going under disclosure. Consumers need to be aware that the bitcoin they buy today could drop or spike in value at any time. They need to be aware of the risks.”
Earlier this month Consumer Affairs issued an alert on bitcoin, warning consumers that its value can fluctuate wildly, it’s vulnerable to hackers, and it has no FDIC insurance.
But many in the bitcoin industry agree that consumer awareness of risks is key to building public understanding and confidence.
Boston-based Circle Internet Financial is one such company, developing products for consumers and merchants that offer “a secure environment for users to store bitcoins, while enabling easy, consumer-friendly experiences,” said John Beccia, Circle’s chief compliance officer.
He says good regulations could make bitcoin more accessible to the public.
“If people didn’t feel banks were regulated they wouldn’t use them,” he said. “This is a natural evolution of the technology. There are such great benefits to bitcoin, and for those to be realized, we need smart, risk-based regulations to form around it.”
Beccia says benefits include low or no processing fees, fast transactions, and the ability to transfer money seamlessly across the world. As people start to understand that, he says, bitcoin will go mainstream, and issues of volatility and security will be smoothed out.
After the fall last month of one of the largest bitcoin exchanges, Mt. Gox, industry urgency for regulation grew stronger.
Mt. Gox filed for bankruptcy in the U.S. and Japan, leaving users with little options to recover the money they had with the exchange. The company said it lost nearly all of the 850,000 coins in its care, though it announced last week that it found around 200,000 of those.
Despite loads of bad press around the issue, some say the collapse is a positive for the industry as a whole.
“The fall of Mt. Gox is really for the better,” said Beccia. “We’re weeding out the bad actors and making room for the credible players who really want to do things the right way.”
When bitcoin started, it was the favored currency on the now-defunct website Silk Road, which served as an online black market for drug trafficking, money laundering, and other illegal activities.
Libertarians were also early adopters, eager to use money outside government regulation. But as authorities start to take notice, those days may be over.
“There are lot of people very skeptical of government regulation, and rightly so,” said Elitzer. “But it’s unrealistic to expect bitcoin to grow into a global economic force without some degree of regulation. People coming into the space now are still believers in what bitcoin can do for the world, but they are also pragmatic about what its going to take to get there.”
But Elitzer says that doesn’t mean that all regulation will be good regulation. It’s possible new rules on the state or federal level could make spending or accepting bitcoins more difficult.
“The question is, will regulations will be designed in a way that is onerous for individuals and companies, or will regulations help foster innovation?” he said.
In New York, regulators plan to issue BitLicenses to companies dealing with bitcoins. The licenses will allow virtual currency companies to do business in New York on the condition that they comply with anti-money laundering and consumer protection requirements.
Massachusetts could see similar requirements come from Cotney’s Emerging Payments Task Force.
“What we do as regulators when legislators give a mandate to regulate an industry, is to make sure those businesses within the industry are operating in a legitimate way.” said Cotney. “It’s a high bar, and to grant a license to someone, they need to have sound financials, strong management, and engage fairly with consumers.”
How bitcoin will be regulated is still anyone’s guess, but one thing is clear: The government is interested, they will take action, and local users like Alec Petro are hungry for it.
“Because with regulation comes recognition,” said Petro. “Bitcoin isn’t going away anytime soon. The genie is out of the bottle.”