Homeland Security and other agencies are considering banning or putting new constraints on digital currencies

Bitcoin -- a cryptography based digital currency, or "cryptocurrency" for short -- has had its fair share of ups and downs, but today is the most used digital currency.  A Bitcoin trades for around $120 USD at current rates and offers secure, nation-agnostic purchasing worldwide in a $1.4B USD world Bitcoin economy [source].

I. Feds Wary of Bitcoin Compromising Bank Controlled Currency Manipulation

As more and more people use Bitcoin, U.S. politicians are growing nervous that their grip on public taxation and currency manipulation is loosening.  Taxation is a solvable problem -- you're supposed to report your Bitcoin income like any monetary gains -- but can prove tougher for the feds to track down given the encrypted nature of transactions.  

On the other hand there's no way that the U.S. or other nations can recoup their ability to manipulate currency (short of indirectly by participating in the economy) as Bitcoins are governed by mathematical formulas, not a private board of government-selected banking executives like the U.S. Federal Reserve System.

For these reasons Bitcoin is in danger of losing legality with federal regulators in Washington D.C. considering chopping the young currency's legs out by considering efforts to outlaw Bitcoin trading in the U.S.

Federal Reserve
Controlled by top U.S. corporate banks, the U.S. Federal Reserve can effectively manipulate currency to benefit special interests.  The Bitcoin represents a threat to this self-appointed financial rulership over the U.S. proletariat. [Image Source: Getty Images]

The Bitcoin industry's largest advocacy/trade group, the Bitcoin Federation this week met with federal regulators from the U.S. Department of Homeland Security (DHS), Federal Reserve, Department of TreasuryFederal Deposit Insurance Corp.Office of the Comptroller of the Currency (OCC), Internal Revenue Service (IRS), Federal Bureau of Investigation (FBI), and Secret Service (SS).

The feds have already shown their willingness to shut down digital currency exchanges, having killed Liberty Reserve -- a digital currency that is accused of enabling child pornographers and money launders.

The Bitcoin Foundation's general counsel, Patrick Murck, tried to settle the waters, remarking, "[We look forward to providing information] so we can both move forward to the same safe regulatory environment.  We understand there are specific challenges that go along with Bitcoin and there is a lot of potential and we want to work with them to chart a safe course"

Large currency exchanges like Mt. Gox, along with evangelists groups like the Bitcoin Foundation have been making efforts to cooperate with the feds to stop out money laundering and Bitcoin use for illegal purposes on their networks.  They're also willing to pay to register as currency exchanges, and keep records of their transactions, just like money order entities based on the U.S. dollar -- e.g. The Western Union Comp. (WU).

II. States Try to Squeeze More Blood Out of Bitcoin

But it remains unclear if these gestures of good will shall suffice.

Heartland Institute director Peter Ferrara in a Forbes op-ed argued the federal efforts to stifle private currencies reflect a weakening dollar, writing:

[The Bitcoin] is the real threat to the global reign of the dollar.  And the reaction of the U.S. government to Bitcoin shows that the U.S. government itself sees that dollar vulnerability.

The feds could easily seize on some elements of the Bitcoin implementation to try to take down the currency.  Transactions in Bitcoin are "irreversible", meaning that the feds can't technically undo transactions they believe are illegal.  And the Bitcoin founders are loathe to relinquish their user-defined privacy controls.

And even if the Bitcoin Foundation can assuage federal taxation concerns and convince federal authorities to allow it self-regulate, it may face varying legality on a state-by-state basis.

Bitcoin smaller
States want Bitcoin exchanges to pay each state separate fees. [Image Source: Getty Images]

Thus far New York and California are among the states where regulators are bearing down on the Bitcoin.  New York has sent subpoenas to top Bitcoin exchanges asking for more information.  California has taken things a step further sending a cease and desist letter to the Bitcoin Foundation seeking to stifle a local conference to be held in the state in June.  Californian authorities justified their action arguing the Bitcoin Foundation "may be" engaged in unlicensed money exchange business.  

California is not alone; many states require exchange operators to pay for individual licenses on a per-state basis.  Illinois has been firing a scattershot at all manner of digital payments companies ranging from Square (a mobile phone payments firm) to prepaid card provider NetSpend (NTSP) (along with six other firms).

Some fear that Bitcoin exchanges will be unable to make enough money to operate legally due to the overlapping costs of federal and state licensing.

Bitcoin advocates are looking ahead, though.  They point to regions like Germany that have adopted a more libertarian approach to the popular private currency.  Thus even as Bitcoins hang in the balance in the U.S. they're a secure and booming business in other regions.

Sources: WSJ, Forbes

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