The cryptocurrency Bitcoin is trading at about 8000USD per Bitcoin as of late November 2017 and its value has been rising consistently for the past few years since it was first introduced in 2009. There are now many different kinds of cryptocurrencies - Ethereum, Ripple, Litecoin, and more - and all are highly volatile investments that sell themselves as a decentralized system for exchanging money without needing to go through a financial institution like a traditional bank. Bitcoin is still the most well-known type being traded, but is often used by unsavory parties as a tool to fund their illegal activities, like the online black market, the Silk Road. Thinking about Bitcoin and cryptocurrency holistically, how should the U.S. and other countries respond? How does cryptocurrency fit into the rules and regulations governing our central banks and financial institutions?
There was a report published in 2014 by the Law Library of Congress that delved into the existing legislation regarding cryptocurrencies like Bitcoin in about 40 different countries and jurisdictions, including Brazil, China, the EU, Japan, and Russia. The general consensus, with a few exceptions, was that cryptocurrency is not a legitimate unit of account (something that can be used to value goods and services) and thus, regulation of it as such would be meaningless. Notably, Germany did classify cryptocurrency as a unit of account and as such could be taxed, but it is not recognized as a foreign currency or legal tender (something that can be used to pay back a debt). In most cases, cryptocurrency is not considered legitimate and is rather viewed as a speculative investment for the average consumer.
The U.S. has largely followed in the steps of its peers and does not have a lot of legislature regarding this form of currency. Congress likely has cryptocurrency pretty low on its priority list, approached the issue in a reactive fashion. The problems with establishing any sort of precedent on Bitcoin and Ethereum is that these markets operate internationally making it extremely difficult for each country to have independent policies regarding the exchange and regulation of the same currency. Bitcoin markets allow for supposedly anonymous exchange of money through trading these digitally-created and stored Bitcoins. You can create your own Bitcoin address that is not associated with your identity to use to get and give Bitcoin. The safety of this exchange is guaranteed by the cryptographic part of cryptocurrency. The Washington Post describes the value of Bitcoin in four parts: it is digital, it is decentralized, it charges high transaction fees, and it is legal in the U.S. to buy and trade. Where does the U.S. fit into regulating this black-box of a currency? Lawmakers need to get up to speed on the core of the cryptocurrency issue so that they can tackle it before it becomes a critical one.
At the state level, states like Washington and New York have begun to enact regulations to try and shed some light on the murky role of cryptocurrency. A recent bill passed this year in Washington specified that exchanges that trade virtual currencies like Bitcoin must be held to the same standards as other businesses that exchange money, namely that they would have to hold reserves of virtual currencies that match the amount they hold for customers and post surety bonds to guarantee payment to customers if compensation was demanded. Geekwire reported that the response from the cryptocurrency community was dissatisfaction and general vitriol towards the state legislature. If cryptocurrency is going to be successful, both parties must work to craft careful, well-informed regulations as a means of inspiring consumer confidence and continued growth of the industry.
In a scathing report lambasting Bitcoin, written by one of the former head developers of the entire system itself, Mike Hearn notes that the technology is highly oligarchical after its anonymous founder Satoshi Nakamoto left the development to five other players in the system. Five people, give or take a few, are responsible for updating the code for generating, storing, hashing, and distributing Bitcoin. Many countries in the report mentioned above emphasized that they considered virtual currencies to be highly speculative and strongly discouraged consumers from buying cryptocurrency for use. The industry needs more legitimacy and part of that legitimacy is being recognized by major players and governments as a real measure of value. For that reason, despite the catch-phrase of cryptocurrency being its decentralization and disassociation with governments and politics, there is a balance to be had. If cryptocurrency wants to be more ubiquitous they should be more comfortable with talking to legislating bodies.
For the purposes of legislation at the federal level, the U.S. should not waste the chance to take the lead in bringing countries together on regulating cryptocurrencies, which, instead of deflating in popularity in the past five years, has splintered into many different kinds of currency with a variety of ways of generating virtual currency. The important thing to tackle is ensuring the value of cryptocurrency. As it stands, the value of a Bitcoin can swing from a low of $5500 per Bitcoin to $6400 per Bitcoin in the span of a single day. With new technologies comes new challenges and the old rules will not always apply in these new cases. It will be a long time before cryptocurrency can become mainstream, but it is a new way for people to exchange money without having to deal with the politics and corruption of big banks.
The issue is cyclical: cryptocurrency will not become popular if governments do not recognize it, and this de-legitimization will make cryptocurrency even less popular. However, cryptocurrencies have the advantage of globalizing transactions, reducing costs to generate paper currency, and make steps towards a global currency that is hosted virtually instead. Lawmakers should get ahead on defining what cryptocurrency should look like for a consumer so that they can be part of shaping cryptocurrency for the better, rather than allowing it to go unregulated and implode, harming consumers. If we do not tread carefully cryptocurrency will just become a failed experiment, but if we get it right it could be the next efficient upgrade to an outmoded financial system.