Walking around the Israel Bitcoin Conference last Thursday, when speaking about regulation with attendees as well as hearing opinions of speakers, there was clear sentiment for regulators to form an opinion about the legalities about digital currencies. So far, global central banks have had no problems issuing warnings about the risks of virtual currencies, such as price volatility and risks of fraud. However, in respect to forming clarification of the legalities of whether bitcoins and the like are an official currency, commodity, etc, as well as what types of business actions using them is legal or not, there has been little in concrete guidelines. Among effects of the lack of clarity are limitations of bitcoin firms creating relationships with banks.
Problems have been recorded around numerous jurisdictions. Among companies, exchanges have been the most vulnerable to banking snafus due to the high volume of transactions taking place within their accounts. Examples are BTC China, and their rotation of available funding options due to bank restrictions, as well as local Indian firms temporarily halting activities after warnings issued from the country’s central bank. But, it hasn’t only been exchanges as in Israel individuals reported that banks created caps on the amount of funds that could be transferred in and out of their accounts for bitcoin related transactions. Similarly, in the US, Bitspend, who provided services to allow users to buy online goods from any website using bitcoins claimed that they were halting operations due to their account being reviewed.
Returning back to Israel Bitcoin Conference, representatives from bank as well as law firms conveyed to DC Magnates that their opinion was that Israel’s central bank, the Bank of Israel (BoI), was awaiting to see what other countries, namely the US, do first. Similarly, reacting to the fall of MtGox, when addressing reporters last week, Japan’s Vice Finance Minister, Jiro Aichi, stated that he believed that bitcoin regulation should involve international cooperation and formation of laws aren’t limited to just the Ministry of Finance. In the EU, similar to other jurisdictions, when warning about virtual currencies the European Banking Association began is draft by stating that the “the EBA is currently assessing all relevant issues associated with virtual currencies, in order to identify whether virtual currencies can and should be regulated and supervised” but withheld from providing any explanation of what they are assessing of a time table.
Meanwhile, in the US there has been plenty of dialogs about bitcoins in both the national and state government level. However, the answer of just who is in charge to decide on the matter became less clear last Thursday when new Fed Chairwomen Janet Yellen was asked about bitcoin legislation. In her answer, Yellen stated bitcoins fell under the class of payment products and that “The Federal Reserve simply does not have authority to supervise or regulate bitcoin in any way.”
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Currency or New Technology?
Underlying Yellen’s comment is part of the ambiguity of bitcoins as both a currency and technology. On one hand is the bitcoin protocol that is composed of a decentralized public ledger system and peer to peer (P2P) payments. On the other hand are bitcoins which are the reward for miners maintaining the decentralized network and as such has become the nearly 100% used currency transferred using the P2P technology.
As such, calls for regulation are also ambiguous as they entail both a request for greater client protections as well as compliance of anti-money laundering. On the customer side is demand for ways to ensure another MtGox doesn’t occur and that client funds are safe. However, on a regulatory side, demands for client protection would first need a financial supervisory group to classify bitcoins as a security that falls under their jurisdiction and their current laws. In Japan, the lack of security or currency designation led to country’s financial regulators to state recently that they didn’t view it as under their jurisdiction; thereby putting MtGox out of their hands to regulate. However, from a judicial view is whether transfers can be traced and what bitcoins are being used for; thereby a question for groups like the Department of Financial Services and FinCEN.
In this regard the current state of affairs appears to be similar to a dog chasing its tail. Regulators around the world are watching each other for answers, while simultaneously power vacuums within governments are causing the question of digital currency regulation to be kicked around between departments. Ultimately, with many bitcoin firms unilaterally consulting between themselves to create post MtGox solutiuons, it may come down to the companies themselves agreeing to a regulatory framework that gets passed along to governments to ratify.
(Image courtesy of OpenClipart)