A system of well-reasoned and effectively administered regulation would allow the virtual currency to flourish... - David Deitch, Ifrah Law
Yesterday United States Sentaor Joe Manchin published a letter demanding, in his words, that financial regulators ban Bitcoin, a virtual currency that is “unregulated and unstable, and has been used in illicit activity, including drug trafficking and money laundering.”
Senator Manchin’s call is the latest and certainly not the last public statement calling for regulation of one kind or another of virtual currency. But, is an outright ban really what we need here?
No, says David Deitch, an attorney at DC-based law firm Ifrah Law. That would be the short-sighted equivalent of throwing out the baby with the bathwater:
“Senator Manchin’s proposal to ban Bitcoin may play well as political rhetoric, but in fact reflects short-sighted reasoning about the potential of this and other cryptographic currencies. While some have used BItcoin’s apparent (but not complete) anonymity to make illegal purchases, the burgeoning market of Bitcoin-accepting merchants who sell legitimate products and services hints at its potential as an efficient and effective medium of exchange. A system of well-reasoned and effectively administered regulation would allow the virtual currency to flourish. And wide-spread acceptance of Bitcoin, together with effective regulation, would provide stability in the form of efficient markets for its exchange, and would spark innovation to provide for its security. Senator Manchin is right that the United States should lead, rather than follow, in its response to Bitcoin. But the right path forward is to manage Bitcoin’s risks, rather than to throw out the baby with the bathwater.“
Noted venture capitalist and blogger Fred Wilson voiced his opposition to Manchin’s call for a ban thusly: “When something as new and as different as Bitcoin emerges, it is tempting to want to ‘put the Genie back into the bottle’ and protect ourselves from it. But thankfully the US did not do that with the Internet. The impact of the commercial Internet on the US economy and our society as a whole has been massive and overwhelmingly positive over the past twenty years. We should approach Bitcoin in exactly the same way and if we do, I expect the benefits we will see will be equally important, impactful, and beneficial to our economy and our society.” (Read Wilson’s entire response here.)
If an outright ban is not the correct approach, what is? More to the point, what does Bitcoin (and virtual currency in general) need to for legitimacy? We recently put that question to JD Supra authors. The gist of what we heard back echos Wilson's thinking and might well be summed up as “enlightened regulation on an international basis,” but clearly regulation is not the only thing need to make Bitcoin legitimate:
Needed: A Change in Perception
From Jeffrey D. Neuburger, partner and co-head of Proskauer’s Technology, Media & Communications Group: “At least five things are key to the widespread adoption of Bitcoins. People must feel secure in the way they store and use Bitcoins. There must be a greater understanding of how the Bitcoin system works. Regulation (on an international basis) needs to be enacted to provide a framework for Bitcoin use. And finally, the perception of bitcoins as something used primarily to commit crimes must change.”
Harley I. Lewin, partner at McCarter & English, offers his perspective on how to make this happen: “The tipping point towards legitimacy is when sufficient businesses rather than individuals or financial investors adopt the Bitcoin as a currency for the purposes of doing business. Right now, although there is considerable trading in Bitcoin the values are not stable enough for international trade. In the ordinary course this is why hard stable currency, the USDollar, Swiss Franc, etc. are used internationally. Both sides to the transaction know with a reasonable certainty that whatever is being made, sold, delivered, serviced and purchased will be done at a contract price that will be reasonably predictable and stable between the time of contract and the time of delivery. To my mind things will tip the other way if scandal continues to rock the Bitcoin world. Recent use of Bitcoin exchanges to finance money laundering increase the rather nefarious reputation of Bitcoin as a reliable currency. If there is more of this, Bitcoin will not be seen as credible.”
And from William E. Stern and Crystal N. Kaldjob of Goodwin Procter: “A principal appeal of virtual currencies is the anonymity they provide users, and early adopters of virtual currencies included individuals and groups involved in illegal activities. It is unlikely that the United States or other jurisdictions will adjust their legal regimes to accommodate use of virtual currencies without addressing the possibility that virtual currencies could be used to facilitate illegal activities by imposing some sort of customer identification, record keeping and reporting requirements on virtual currency exchanges and businesses involved in hosting virtual wallets. These rules are likely to detract to some extent from the appeal of virtual currencies to some users and add cost to the system. However, short of government authorities simply outlawing the use of virtual currencies, perhaps the greatest risk to widespread adoption and use of virtual currencies may be the perception among ordinary consumers that virtual currencies are speculative as well as concerns about risk of loss from theft or fraud.
Regulation Will Bring Legitimacy, Banning Will Encourage Speculation
From Alesya Tepikina, associate at Dorsey: “Perhaps, official recognition of virtual currencies and a minimum, as-required regulation aimed at ensuring their legitimate use and protection of users could strengthen their legitimacy, decrease volatility and make them a more stable medium of exchange between the users. Given a global nature of virtual currencies, such regulation has to be synchronized among different jurisdictions. Any permanent outright ban on virtual currencies in a given country or different approaches by different governments, on the other hand, may have a negative impact on this invention by encouraging speculation, increasing volatility and making it impossible for virtual currencies to become a stable form of payment.”
And from H. David Kotz, director at Berkeley Research Group: “Virtual currencies are at a crossroad between legitimacy and extinction. On the positive side, more companies are willing to accept virtual currencies, the U.S. and state governments are seeking to find ways to regulate them, and a U.S. federal court in August 2013 concluded that Bitcoin 'is a currency or form of money.' At the same time, there are warnings in America about online currency’s effect on the U.S. dollar, and other countries have deemed the currency illegal. There is also great concern about its use for illegal activities, such as drug trafficking. In some ways, regulation may be what saves online currencies. Concerns about them may be allayed if New York or another state can set forth a vision of governmental oversight that includes some type of licensing and procedures to deal with potential money laundering and tax evasion—then the currencies may be with us for a very long time.”
Regulation Goes Both Ways (aka it Requires Compliance to Work)
A final thought from John H. Friedhoff, a shareholder at Fowler White Burnett: “Assuming Bitcoin investors are made up of speculators and those who want their funds kept secret, the only way it will be legitimized is when the state and federal regulators get the Bitcoin dealers to comply with the law. State regulators would require dealers to comply with money transfer regulations (also meaning federal registration with the IRS) and Federal regulators will require dealers to comply with "know-your-customer" regulation, not to mention securities regulations. Both these regulatory schemes will extinguish the demand for Bitcoin by those desiring secrecy and drastically reduce those who speculate in the area. Ultimately, Bitcoin will be extinguished or become next to worthless.”