By Julian Hattem - 11/23/13 08:45 AM EST
Bitcoin survived its big debut in Washington last week, but positive early reviews from Congress doesn't mean the virtual currency is ready for prime time.
The money is still largely alien to many lawmakers and regulators, who have only started to wrap their heads around the concept. But high profile Senate hearings have helped to boost its perception and proponents hope that positive signs from Washington will make it easier for people trying to trade and buy bitcoins.
“If there was a moment in history where you could say that bitcoin has arrived in Washington, it was this week,” said Jinyoung Englund, a spokeswoman with the Bitcoin Foundation.
Users say they have more freedom with bitcoins than with traditional forms of money, since payments can be conducted with a smart phone or over the Internet, and that there are lower fees for transferring money than banks and payment processing companies charge.
However, the anonymous nature of bitcoins and other virtual currencies can make them appealing to criminals and money launderers. Last month, the FBI shut down Silk Road, an online marketplace that relied on bitcoins and sold illegal drugs and other illicit goods.
But last week, regulators and lawmakers indicated that the currency provided as much opportunity for good as for harm.
“They understand that bitcoin is not inherently something that is illicit,” said Jerry Brito, a senior research fellow at George Mason University’s Mercatus Center. “There can be illicit uses, but that in fact there are probably many more beneficial, innovative potential than there is illicit use.”
Two Senate committees held largely positive hearings on the currency, and senators noted that bitcoins offer new potential.
“With every new Internet-based technology, I believe that members of Congress should recognize that we often don't know what these new advancements will develop into,” Sen. Dean HellerDean HellerCarter pledges probe of sex assault testimony Democrats block energy spending bill over Iran amendment Senate votes to increase wind energy funding MORE (R-Nev.) told a joint panel of two Senate Banking subcommittee. “While we must ensure proper safeguards, it is my hope that… we can help maintain an environment that continues to promote new financial technologies and innovative growth.”
Banks have been skeptical of dealing with bitcoin businesses, but Brito said that that positive message from Washington should help convince them to change their tune.
“That’s something that hopefully banks will hear a message coming out of D.C. this week, saying ‘No, no, this is a legitimate thing. This is perfectly legal and has great uses,’” he said.
The currency is still new, though, and is far from mainstream acceptance.
“I'm only starting to wrap my head around the potential upside, downside, regulatory issues, monetary policy issues, taxation issues, consumer protection issues that this innovation represents,” Sen. Mark WarnerMark WarnerHousing groups argue Freddie Mac's loss should spur finance reform Week ahead: Rival encryption efforts clash on Capitol Hill Kaine, Brown, Perez on Clinton’s list of possible VPs: report MORE (D-Va.) said at the Tuesday hearing.
An aide with the Senate Homeland Security and Government Affairs Committee, which also held a hearing on bitcoins, said that staff are following up on the subject and plan to issue a comprehensive report.
Regulators have also shown that they’re not entirely ready to give the currency a pass.
On Thursday, the Federal Election Commission (FEC) deadlocked on a vote to allow bitcoins to be donated to political campaigns. The agency’s advisory opinions require support from a majority of its members for passage, but the commission hit a stalemate with a 3-3 vote.
“The FEC vote is sort of good analogy for how the government is looking at bitcoin,” Brito said. “They’re not saying no; they’re not saying yes either."
The Internal Revenue Service is working on guidance on how to treat bitcoin for tax purposes. Financial regulators like the Commodity Futures Trading Commission have also expressed an interest in the money.
One problem for bitcoin oversight is that it can be used to purchase goods like a currency, but it can also be used to send money around the world, like a security, or as an investment vehicle, like a stock.
That can pose a problem for financial regulators, Englund with the Bitcoin Foundation said.
“I think what Washington still has yet to wrap their head around is that bitcoin does not fit in one bucket. Depending on the context of the use, it fits in different buckets and therefore will have different regulatory guidelines apply,” she said.
For the most part, bitcoin watchers don’t expect there will be many new laws or regulations to increase the government’s oversight and crack down on fraud.
“I don’t think they’re going to be issuing regs,” said Timothy McTaggart, a partner at the Pepper Hamilton law office. “I think they have the power already.”
According to bitcoin backers, the biggest problems facing bitcoins in the U.S. is banks’ aversion to get involved with bitcoin firms and the difficulty for exchanges to register in each state in the country, which is necessary to get off the ground.
The largest bitcoin exchange is currently in China, and Englund said that time is running out for the U.S. to get ahead of the curve.
“We’re in a very limited window for the U.S. to lead in this innovation and that window’s not going to stay open for very long,” she said.