Bitcoin is the name of a group of peer-to-peer payment networks that serve as an open-source form of digital currency that was originally introduced in 2009 by a software developer with the alias of “Satoshi Nakamoto.” Bitcoin currency is created as rewards to “miners” for providing the computing power to solve difficult math problems to maintain the “blockchain” of internet transactions in the currency. Unlike online credit cards and PayPal systems that allow buyers to claim their money back, bitcoin permanently transfers value.
The bitcoin cyber-economy composed of merchants, users, service providers, and start-up enterprises has flourished for the past three years. The value of Bitcoins has appreciated by 6,000% and the capitalization of the bitcoins in circulation has ballooned to over $8 billion. Since there is a limit of 21 million that may ever be “mined” by the year 2140, Bitcoins are rare units of exchange. The emergence of Bitcoin virtual currency has created a powerful competitor to the dollar that will limit Congress and the Federal Reserve’s effectiveness in fostering inflation as a way to tax away American’s wealth. This is why the tech savvy refers to the Bitcoin as Gold 2.0.
Since the beginning of human history, only about 5.6 billion troy ounces of gold have ever been mined. The value of gold is rooted in its medium rarity, easy handling, and other qualities most other metals lack. These properties are the basis of gold serving as money. Bitcoin has a strong resemblance to gold: “Both are backed by no one. Both are, relative to fiat currency, inconvenient for day to day use.” Bitcoins will remain rare like gold; by 2040 when the world population reaches 10 billion there will only be 1 Bitcoin for every 500 people on the earth. Gold and Bitcoins are similar in lacking intrinsic value unless members of society have confidence they will maintain their value over time.
Better than gold, no United States regulatory authority has yet to determined that bitcoin is a currency, commodity or security. President Franklin D. Roosevelt signed Executive Order 6102 on April 5, 1933 to “forbid the hoarding of gold coin, gold bullion, and gold certificates within the continental United States.” The public was forced to exchange all their gold with the U.S. Federal Reserve at a rate of $20.67 per ounce in paper dollars by May 1, 1933 or face punishment of up to a $10,000 fine and 10 years in prison. Following the turnover, FDR then taxed away 41% of the former gold holders wealth by inflating the exchange rate of gold by 41% to $35 dollars a troy ounce. It was not until December 31, 1974 that Congress decriminalized American’s right to hold gold.
Bitcoins and other digital assets are now providing powerful financial tools for the transmission of small to large amounts of money with real-time confirmations and at modest fees. All the transactions on the “Bitcoin Network” are transparently recorded on a public ledger known as “Blockchain.” Users of bitcoins are identified on the blockchain by their “alias” and are located on the internet by their “digital addresses.”
A General Accounting Office report in March did not formally “classify bitcoins,” only describing them as the equivalent of “virtual property.” This has left Congress with the obligation to make the classification of what Bitcoin is for regulatory purposes.
Recent legal and regulatory opinions regarding bitcoins differ on their treatment. The FEC earlier this month proposed the use of Bitcoins for in-kind contributions under the regulatory category of “anything of value,” which includes commodities, stock and equipment. Despite the absence of a formal classification of Bitcoin as an asset class, US federal regulators have initiated prosecutions for crimes in which bitcoins constituted a monetary denomination or a payment of money, including SEC v. Trendon T. Shavers, et al. in the operation of a Ponzi scheme denominated in bitcoins and U.S. v. Ross William Ulbricht for operation of an online black market using bitcoins for payment.
Due to the rapid growth of the Bitcoin market, the U.S. Senate’s Homeland Security and Governmental Affairs Committee and the Senate Banking Committee met jointly on November 18 and 19, 2013 to discuss risks and potential benefits of Bitcoin and other “virtual currencies.” Federal Reserve Chairman Ben Bernanke informed the Hearings the Fed “would only have authority to regulate any virtual currency product if it is issued by, or cleared or settled through, a banking organization that we supervise.”
The Treasury Department added that its U.S. Financial Crimes Enforcement Network (FinCEN) that is responsible for the federal regulation of currency market participants also does not have authority to regulate individual Bitcoin holders. But Treasury has mandated that administrators and exchangers associated with all convertible digital asset networks, including Bitcoin, must register with FinCEN as money services businesses (MSBs) and comply with the requirements of both the Bank Secrecy Act of 1970 and the USA PATRIOT Act of 2001 for registry and record-keeping of money transmission. These businesses are also required to implement anti-money laundering, know-your-customer and financial information reporting policies and procedures; plus comply with any applicable state law and regulatory agencies.
The hearing concluded with Senators and panelists voicing mutual support for digital assets as having legitimate and beneficial uses that can foster innovation in micro-payments, enhanced security for retailers, and increasing speed and cost efficiency in domestic and international payment systems. They agreed there eventually there will be federal regulation of Bitcoin and other digital asset exchanges and service providers. But since current laws are seen as capable of addressing money laundering and criminal uses involving digital assets, Senators made clear their desire to avoid discouraging Bitcoin entrepreneurship with onerous regulation that would drive exchanges to countries with less strict compliance standards.
The value of Bitcoins and gold are rooted in their rarity, ease of handling, and inability of government to destroy its store of wealth. All paper currencies have lost a percentage of purchasing power each year, because government printing of more money acts as a tax on accumulated wealth. The emergence of Bitcoin virtual currency has created a powerful competitor to the dollar that will limit Congress and the Federal Reserve’s effectiveness in fostering inflation to tax away wealth. Welcome to the real full-faith of Gold 2.0.