Nov 18 2013
By Brian Patrick Eha
“We do not think that it is in anyone’s best interest for digital currency to become an offshore industry or an industry dominated by China,” said Jeremy Allaire, the founder of a startup called Circle Internet Financial, in written testimony provided as part of his appearance, on Monday, at a hearing by the U.S. Senate Committee on Homeland Security and Governmental Affairs on the risks and benefits of digital currencies such as Bitcoin.
He and other U.S. entrepreneurs are right to be concerned about their role in the growing market for digital currency—that is, bits of code that function like cash and can be exchanged over the Internet. About a third of the world’s bitcoin transactions now flow through a single exchange, BTC China, which is open only to Chinese users, according to Bitcoin Charts, a Web site that provides bitcoin data. BTC China recently unseated the Tokyo-based Mt. Gox as the world’s largest exchange by trading volume.
Recently, the exchange value of the cryptocurrency has climbed, a trend that continued Monday after news broke that BTC China had raised five million dollars of investment capital. By one o’clock on Tuesday morning in Beijing, the value of a single bitcoin had hit a record of nearly four thousand three hundred yuan, or about seven hundred dollars.
“The main reason Bitcoin has become big in China is because Chinese people are savers, and more people are seeing Bitcoin as a way to store and invest their money,” Linke Yang, the vice-president of BTC China, told Agence France-Presse on Friday at Bitcoin Singapore, a conference on the cryptocurrency.
There are other reasons. Last month, Baidu, an Internet company that operates the most popular search engine in China, began accepting bitcoins for some services offered by its subsidiary Jiasule. Also, Chinese people who chafe at strict government control of the yuan may see bitcoins as a way to speculate on currencies.
It may come as a surprise, given China’s tight regulations on businesses and Bitcoin’s subversive potential, that the Chinese government has not stepped in to regulate it. Instead, the television station CCTV and the newspaper People’s Daily—both state-run media outlets—ran positive reports on Bitcoin this past summer. The Chinese enthusiasm for digital currency has continued despite a fraud case involving Global Bond Limited, a bitcoin-trading platform that shut its doors abruptly last month, allegedly taking more than four million dollars of investor money along with it.
It’s unclear how regulations for digital currencies might evolve in the U.S. Lawmakers haven’t been very specific, and a staffer for Senator Tom Carper, who is chairing the hearing, told me that the senator’s office is taking a neutral stance on virtual currency for the time being. One concern, she said, is that overzealous legislative action could drive innovation in financial services to other countries.
It’s worth pointing out that the U.S. hasn’t ever really been at the center of the Bitcoin world. It’s unclear who invented Bitcoin and where that person—or people—came from. It will surely move forward with or without American investment. None of the top three exchanges are based in the United States: along with BTC China and Mt. Gox, there is Bitstamp, which is located in Slovenia.
What’s more, many observers believe Bitcoin will prove to be most beneficial in the developing world, where it can provide a kind of currency immune to government manipulation and can bring billions of people without access to traditional financial services—the so-called unbanked—into the global economy. The proponents of digital currencies include Ernie Allen, the president and C.E.O. of the International Centre for Missing and Exploited Children, who said in his testimony, “We believe that the digital economy can achieve social good, particularly in bringing about real financial inclusion for the 2.5 billion adults on the planet today without access to banks, credit cards, or the mainstream financial system.”
Allen has another reason for wanting to see the U.S. take the lead in digital currency: he is worried about how digital currencies are used on the “dark web”—that is, the growing network of illicit Web sites, accessible only with software that masks user identities, used for commercial child pornography, sex trafficking, and other criminal enterprises. He indicated that a “draconian” federal response would make digital money the preserve of criminals, and will drive activity “outside the United States to countries where there is little or no regulation.”
There may, however, be good cause for regulation. There have been several high-profile thefts of bitcoins recently, including a hacker attack last week on a Czech exchange called Bitcash.cz that emptied four thousand digital wallets belonging to customers. Also this month, an eighteen-year-old man in Australia who was running a Bitcoin “bank” announced that more than four thousand bitcoins had been stolen from his Web site, most of them belonging to users. In any industry, one of the strongest arguments in favor of regulation is the need for consumer protection—something bitcoin currently lacks.
Monday’s hearing also included representatives of the U.S. Justice Department, the Secret Service, and the Treasury Department’s Financial Crimes Enforcement Network. They see cryptocurrencies as less of a miraculous technology than a twenty-first-century headache for law enforcement. Still, the application of existing laws to digital currencies may be enough to assuage their concerns. “Exploitation by malicious actors is a problem faced by all types of financial services, and is not unique to virtual currency systems,” Mythili Raman, the acting assistant attorney general of the Justice Department’s criminal division, said in her testimony. “A convertible virtual currency with appropriate anti-money-laundering and know-your-customer controls, as required by U.S. law, can safeguard its system from exploitation by criminals and terrorists in the same way any other money-services business could.”