Bitcoin requires wider use without regulation
In December, China clamped down on the Bitcoin movement, prompting many Chinese financial institutions and websites to stop using the currency as payment. Bitcoins are a great idea — an international e-currency that cuts out middlemen, protects consumers and benefits producers. The only problem is that some governments believe they are perfect for criminal activity and provide a whole new landscape to criminals interested in money laundering or fraud. If Bitcoins are ever embraced on a larger scale, governments need to provide the right amount of regulation to catch crime, while also encouraging the use of Bitcoins to reap the benefits of the currency.
Bitcoins have been quite the craze lately, as they have many attractive and often lucrative aspects. First, there’s the secretive, anonymous coder who uses the pseudonym Satoshi Nakamoto, whose idea for virtual currency stemmed from a distrust of monetary systems in the 2008 economic crisis. No one really knows Nakamoto, and the coins’ creator has only communicated with certain members of the Bitcoin community. Slowly but surely, Bitcoin has gained prominence and its value has since skyrocketed.
A second attractive aspect of Bitcoin is that users can cut out greedy middlemen in transactions, allowing consumers to directly transact with producers. Third, and quite bluntly, the value of Bitcoins have slingshotted into space, with some worth more than $800 each as of Jan. 16, according to Bitcoin Charts, depending on which exchange is used.
Finally, many see Bitcoin as the future’s currency and, perhaps, as the criminal’s dream. The Bitcoin’s anonymity and lack of regulation give money launderers the perfect vehicle to shuffle large amounts of money around, in theory.
This final characteristic of Bitcoin was one of the main concerns that lawmakers and enforcers had when Bitcoin became a trending topic online. Theoretically, money can be stored by buying Bitcoins with cash, and storing Bitcoins in virtual wallets gives criminals increased mobility to move their funds and use them cleanly. On the other hand, Bitcoins aren’t private; transactions can be traced via the Bitcoin peer-to-peer network and, although it is possible to see where Bitcoins change hands, it is not possible to concretely find an individual behind a transaction.
However, in order to liquidate the Bitcoin, most exchanges require some sort of identification. This caveat creates just as much hassle for any money launderer using cash in an attempt to escape taxation or the authorities. In fact, according to Jennifer Shasky Calvery, director of the Treasury Department’s Financial Crimes Enforcement Network, in an interview with The New York Times, cash is still preferable to Bitcoins for criminals. Bitcoins don’t have a high enough transaction volume to act as a camouflage for money launderers using the currency to store their money. Also, considering the amount of volatility in large amounts of Bitcoin, criminals have a lot to lose if they try to money launder with Bitcoins.
China, the world’s second largest economy, is trying to cut its losses in the case that Bitcoin’s fortunes deteriorate. According to Forbes Magazine, the Bitcoin’s rise in value can be traced, to an extent, back to China’s rising use of the currency. Additionally, according to The New York Times, Bitcoin is “essentially a kind of special virtual commodity.” The fact that Bitcoin has no intrinsic value like gold or silver, and no government to back it up, makes it a currency based on speculation from users.
China is perhaps making a move to stop Bitcoin from being used in ordinary places like restaurants or even online stores, and by extension, trying to stop any financial dependence on a potential Bitcoin bubble. The Bitcoin will be hard to stabilize, especially considering how decentralized it is without a controlling body.
Even though operating without a controlling body is perhaps the entire point of the Bitcoin, inflation of the currency is not controlled in the same way U.S. dollars are. Steady prices are a driving factor for consumers to consume. If Bitcoins become more popular and their prices swing radically up and down during short periods of time, as they are prone to do, small businesses, like restaurants, won’t be able to cope.
In the end, the Bitcoin remains a new idea and a symbol that our financial systems need a revamp, but it is nowhere near flawless. If people were to use it widely, they would provide criminals with the perfect circumstances to launder money and commit fraud. However, if Bitcoin is over-regulated, its entire purpose as a perfect floating currency will be for nothing as consumer use diminishes.