After the Mt. Gox fiasco, calls for regulating bitcoin

By Adam L. Penenberg , written on March 3, 2014

From The News Desk

For hundreds of years, bank failures were common. In 1792, the United States had its first financial crisis, when an expansion of credit brought rampant speculation. Boom meet bust, and when speculators defaulted on loans, prices fell and customers raced to withdraw their money from banks teetering on the edge.

Twenty seven years later, there was another banking crisis. Then there was the Panic of 1837, with still more bank failures and which set off a five-year depression. Every couple of decades came more banking crises -- 1857, 1873, and 1893, all of which led to steep recessions. The dawn of a new century did little to bring stability. The panic of 1907 resulted in numerous bank failures. Two decades later you had the start of the Great Depression. More recently there was the Savings & Loan crisis of the 1980s and fresh on our minds is the Lehman Collapse in 2008.

Remember all this the next time someone claims that Mt. Gox's recent, humbling failure is the end of bitcoin. The crypto-currency is new and bound to have its ups and downs. The shuttering of one bitcoin exchange doesn't mean that a new virtual currency can't take root just like multiple bank failures over hundreds of years didn't result in the death of the U.S. dollar or American banking system.

I don't know if bitcoin will persist over time, be supplanted by another virtual currency, or even banned. But what is clear is there's a thirst for a new truly global currency and there's an increasing likelihood that governments will start regulating it.

Until now, government's interest in bitcoin has been relegated to making sure it isn't used for money laundering or to avoid taxation. But as more people buy bitcoins, more regulation is coming, despite how rabid regulation-averse libertarians may feel about it. The U.S. government has already weakened bitcoin's anonymity by bearing down on the exchanges and I suspect it's only a matter of time before it steps in to take a more active role.

As The New York Times reported:

New York State’s top financial regulator, Benjamin M. Lawsky, has...signaled an interest in regulating the virtual currency. And the Commodity Futures Trading Commission is examining its potential authority over Bitcoin exchanges that have a United States presence, a person briefed on the matter said, as is the F.B.I. in New York.
Lawsky is pushing for "Bit Licenses" to any companies that deal with bitcoins and wants them to beef up disclosures so that all customers are informed that virtual transactions are irreversible, the currency's values can fluctuate, and they are responsible for protecting their digital wallet keys. These are superficial suggestions, and he hasn't said how he would better protect bitcoin users.

Meanwhile, Japanese vice-finance minister, Jiro Aichi, said any bitcoin regulation would need to involve international cooperation to plug any loopholes.

One idea bandied about is some sort of FDIC-like insurance. In fact, Elliptic, a bitcoin wallet service, offers bitcoin account holders insurance from Lloyd's of London, which protects against a failure in a business' storage methods, with customers opting for a "liability limit" for how much they want covered. Another company in beta called Inscrypto, which is located in Boston, claims it will be a "privately funded, decentralized version of the FDIC," to help you "reduce or completely eliminate the risks of owning bitcoin."

But don't expect the Federal Reserve to step in. Federal Reserve Chair Janet Yellen testified before the senate that the central bank can't regulate bitcoin because it is" taking place entirely outside the banking industry. The Federal Reserve simply does not have the authority to supervise or regulate bitcoin in any way," she said.

Image via Bank Run Report