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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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Most scary scentence in this article
By CosmoJoe on 8/27/2013 10:03:02 AM , Rating: 5
"Feds Wary of Bitcoin Compromising Bank Controlled Currency Manipulation"

Read this again and again. We have a monster in this country called the Federal Reserve Bank. The Fed has been routinely destroying our currency and causing untold suffering through inflation and debasement of our currency. It does not surprise me that they see Bitcoin to be a threat.

We should do everything in our power as citizens to embrace and support such an alternative to the dollar and say "F*CK YOU" to Bernanke and his ilk.

RE: Most scary scentence in this article
By techxx on 8/27/2013 10:36:38 AM , Rating: 2
Agreed. That's what I love so much about BTC, the government can't mint it. Though I'm sure they can finance some wicked mining equipment.

BTC sounds like it could become a commodity even more valuable than gold.

RE: Most scary scentence in this article
By Jaybus on 8/27/2013 12:26:16 PM , Rating: 3
I doubt the US is alone in the distrust. Quite frankly, I doubt its supposed fairness very much. If the governments of Germany, US, and China, etc. bring their supercomputers to bear and mine all of the BCs, then what? Besides, on 10 Apr 2013 the exchange rate went from $266 US to $76 and back to $160 within 6 hours for a net 40% loss, and today it is only $133.

Then there is the geometric increase in value since the founders paid 10,000 BC for a pizza. In a very few years the value of a BC has gone from 0.001 US dollars to 133, a 130,000 times increase. If the seller of the pizza held those BCs and exchanged them today he would net $1.3 million for selling a pizza. Please! It is a glorified pyramid scheme designed for early adopters to get rich in the money laundering business. It is far more unstable than any national currency in the world, and given that large nations will certainly protect their own currencies, it is far more at risk than any penny stock.

Then I notice that the exchange rate of BC to any given national currency exactly follows the exchange rates of those national currencies at any bank. If the national currencies are so highly manipulated, and the assumption is that BCs are not, then how can that be? Shouldn't the BC-to-US dollar exchange rate also be independent of the BC-to-Euro exchange rate? Or are all of the World's national currency manipulated to the same exact extent. I call BS.

As always, be careful what you wish for.

By futrtrubl on 8/27/2013 4:48:10 PM , Rating: 2
Then I notice that the exchange rate of BC to any given national currency exactly follows the exchange rates of those national currencies at any bank. If the national currencies are so highly manipulated, and the assumption is that BCs are not, then how can that be? Shouldn't the BC-to-US dollar exchange rate also be independent of the BC-to-Euro exchange rate? Or are all of the World's national currency manipulated to the same exact extent. I call BS.

Why wouldn't it follow exchange rates? If us$1 got you BC1 or 0.9EU, and BC1 got you 1EU, then instantly there will be people buying BC with US$, then EU with BC, followed by US$ with EU and then doing the cycle all over again (making 10% each cycle) until the exchanges even out. Hell that's exactly what people do with current currency exchanges, if you can get more of X by going through Z then people will do that until the system gets into equilibrium.

RE: Most scary scentence in this article
By AlfB on 8/27/2013 12:32:09 PM , Rating: 1
Do you truly understand what one of the primary purposes of the FED is? It is to CONTROL inflation, not create it. Inflation is a natural part of the system. Any system. The key is to keep it as low as possible which is generally what the FED tries to do. Unfortunately there are conflicting issues such as depressions and recessions. Controlling one too much can create the other.

By niva on 8/27/2013 4:13:18 PM , Rating: 3
Uh that is NOT the purpose of the Fed. They do manipulate the inflation though with their actions. They usually aim to keep inflation within a tolerable threshold but certainly not as low as possible. It is actually possible to have deflation where the worth of money increases over time. The Fed certainly doesn't want that to happen!

The fed tries to be the softener during market crisis like a depression. Originally it was created t provide some security for investors. These days it's really amusing to see the actual owners of the Fed, let me tell you something, there's nothing "federal" about it.

RE: Most scary scentence in this article
By PontiusP on 8/27/2013 4:27:53 PM , Rating: 2

I see the Fed has its paid shills out in force today. How much do they pay you per post?

Inflation is most certainly not a natural part of the system. Rather, it comes about when the money supply increases faster than the amount of economic activity does. The dollar today is worth 4 cents compared to what it was in 1913 when the Federal Reserve Note was invented. Creating money doesn't give you prosperity, all it does is make the people who get the money last become poorer and poorer. Look around you and stop shilling for your paymasters.

By AlfB on 8/28/2013 6:05:33 PM , Rating: 2
Thanks for making my day bright. I had a long laugh when I read this. You must be one the of those that keep their money in a mason jar in the back yard. Inflation is not by definition part of every system but is invariably a part of every system. Try not adding money to the overall supply and you will stiffle growth. Try that and see how you like it. The job of the Fed is to balance things as much as possible but there are conflicting issues in their job. But totally eliminating inflation is simply not attainable in a form that is not more problematical than living with the inflation. As to the dollar being worth $0.04. That is not necessarily a problem. You also don't make $1000 per year either.

And I do look around me and I am better off than my parents who were better off than theirs. This is in general true for most families. And in the end, simple comparisons like that are simply more effective and correct than thowing out stupid statements such as what the dollar was worth 100 years ago.

Crawl back into your hole and leave the real world to those who know something about it.

By vol7ron on 8/28/2013 8:40:52 PM , Rating: 2
Having studied this in school, actually it is part of the system. A system that is designed to support loan and credit risk. The same credit that is used to purchase car loans and homes.

You don't think the Fed is necessary? Take a look what happened after the most recent recession. A result of deregulation caused by the Clinton Administration, which enabled more unqualified loans to go out and then unethical practices led to poor credit default swaps (CDS) being improperly rated and bought by more innocent institutions. That deregulation encouraged banks to loan money - people didn't need any sort of credit or proven responsibility to get a loan, so creditors were issuing loans to anyone, even if a person had bad credit.

That recessions came right back to the banks and then do you know what happened? No one got loans. Everyone was failing and the safest bet was not to issue out any loans. It didn't really matter how good your credit was, every bank was afraid to lend to anyone. All because of the de-regulation caused by the Clinton Administration (and opportune corrupt individuals).

Without the Fed we would definitely be in a huge depression -- far worse than the 30s. That's why we have the system that we do in place. The Fed had limited power at first (who wants regulators), then there was a catastrophe and it was determined how to help avoid it. The Fed saved us from the recession in the 70s and the early 90s.

And to answer you both, yes inflation is built into the system. Fed loans to banks which pay back the Fed [with interest]. Banks loan to individuals (you and I), which pay back the banks [with interest]. Inflation is built into the system but it is minimal and variate. The system/economy is organic and cannot really be controlled by any single entity, but it can be influenced, which is what the Fed does.

RE: Most scary scentence in this article
By gamerk2 on 8/27/2013 12:34:37 PM , Rating: 2
You WANT governments to control their money supply; look at what's happened in Europe, or what happened to the US when it lost control of the gold markets in the 70's.

If the Bitcoin remains unregulated as currency, the end result will be rampant inflation, due to too much money in the money supply.

RE: Most scary scentence in this article
By Heizo on 8/27/2013 1:45:58 PM , Rating: 2
I don't think you have to worry about inflation, as there is a finite amount of bitcoins out there. After all bitcoins are found, you can't "print" anymore according to the current system. Bitcoin can really only get more valuable, or lose its value - but I don't think it suffers inflation.

By niva on 8/27/2013 4:17:31 PM , Rating: 2
It most certainly can suffer inflation, look at the wild fluctuations of bitcoin worth.

The fact there's a "finite" number of bitcoins is a bit concerning because bitcoins can become lost over time due to a variety of reasons. The lost bitcoins are most frequently unrecoverable...

If we really cannot find anymore bitcoins through mining it will cause permanent and constant deflation of whatever is left in the system. As more of the system drains out inflation will become rampant until the system suddenly dies because there aren't enough players interested in sustaining it.

By PontiusP on 8/27/2013 4:31:23 PM , Rating: 2

"what happened to the US when it lost control of the gold markets in the 70's"

Terrible, terrible example. You couldn't have disproved your point better. What happened in the 70s was that the government and Federal Reserve were claiming our money was backed in some part by gold. They were caught creating more money than there was gold (cheating) to finance welfare and warfare, and had to break the quasi gold standard we were on.

You give a great example of why governments shouldn't be in control of the money supply, because they lie and eventually lose control of it.

RE: Most scary scentence in this article
By FaaR on 8/27/2013 3:29:04 PM , Rating: 2
The Fed has been routinely destroying our currency and causing untold suffering through inflation and debasement of our currency.

What a ludicrous, nonsensical statement. Inflation is necessary in an economy to promote investment, and thus, growth. Otherwise the safest thing you could do would be to stuff your cash in the mattress and watch how you'd get richer without doing ANYTHING through deflation instead now that the central bank is no longer printing any new currency. This is what would happen. People not investing drains the economy of capital, and is generally quite a poison to a nation's economic health; just look at Japan for an example of what happens after a decade or two.

RE: Most scary scentence in this article
By PontiusP on 8/27/2013 4:33:23 PM , Rating: 2
"Inflation is necessary in an economy to promote investment"

Where did you learn that? So you are saying that unless our money continually loses value year after year, nobody wouldn't invest?

Now that is a ludicrous, nonsensical statement.

By PontiusP on 8/27/2013 5:36:03 PM , Rating: 2

By NellyFromMA on 8/27/2013 3:52:21 PM , Rating: 2
As opposed to the absence of currency altogether? Let's face it, our currency system doesn't really make any practical sense. It's an evolution of an even less sensible currency system backed by gold, which frankly is useful to no one but looks pretty so had a perceived value.

But that's the thing, its about perception of value.

Why would or should anyone support Bit Coin over any other derived-value currency? And what happens when an unregulated currency system collapsed altogether such as the US dollar? Frankly, THAT would cause untold suffering, not the other way around.

Bitcoin is an intriguing concept, but legitimizing its use without a level of regulation in place ISNT a solution for an arguably unsolvable problem.

By vol7ron on 8/28/2013 8:46:02 PM , Rating: 2
lol do I sense a troll

By Moishe on 8/29/2013 2:36:33 PM , Rating: 2

They're attacking a legitimate currency not because it's bad but because it threatens their monopoly and stranglehold.

By Middleman on 8/27/2013 9:47:33 AM , Rating: 3
"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."

This can also be read as, "People are not able to make enough money to operate legally due to the overexcess taxation of the individual and business person"

RE: Economics
By Flunk on 8/27/2013 11:33:26 AM , Rating: 2
If you don't like the system, work to change it. Complaining here isn't going to go anywhere.

RE: Economics
By ClownPuncher on 8/27/2013 1:17:46 PM , Rating: 2
Actually, the exchange of ideas and opinions is a very good starting place for getting things changed.

Good luck
By FITCamaro on 8/27/2013 9:17:36 AM , Rating: 3
By its very nature it isn't able to be regulated. At least unless they want to try and ban VPN connections going out of the US to other countries.

RE: Good luck
By sorry dog on 8/27/2013 11:50:20 AM , Rating: 2
...or maybe let the NSA have the key so they can track it.

Looking at it from a governmental point of view, it's hard to see Bit Coin as anything but a threat.

Bitcoins hardly the answer to the $
By bsim50 on 8/28/2013 3:06:12 PM , Rating: 2
"The Bitcoin represents a threat to this self-appointed financial rulership over the U.S. proletariat"

Um, not really. Regardless of long-term debasement (Fed printing too much money, weakening a currency's value, etc), currencies in general need two other things to actually be taken seriously for trade:-

1. Liquidity (too much money may debase a currency, but too little will just end up being rejected for day for day trade, and treated as a "novelty currency"). During the Russian Ruble crisis, people didn't use platinum / gold coins, they bartered with Vodka, cigarettes, clothes & food (because too few people had gold bullion to make it a serious Ruble replacement).

Bitcoins also have the opposite problem of "the evil Fed" by having a large deflationary bias which, unlike a regular currency, encourages hoarding. They end up being treated more like rare postage stamps than a serious $ replacement, further exacerbating the problem.

2. Relative price stability. This year alone, bitcoins have wildly swung from a $13 low to a $230 high, then fell to $50, then rose to $100. If bread sold in stores was dual-priced at say $1.50 / 0.115BC's (13:1) in Jan, $1.53 / 0.0066BC's (230:1) in April, $1.49 / 0.0298BC's (50:1) in July, $1.54 / 0.0154BC's, etc, in August retailers are far more likely to just ditch the secondary Bitcoin pricing simply because it isn't stable enough in the short term to reflect the relatively stable price of a loaf of bread. It's almost like Zimbabwe or 1990's Iran where if the price of food appears to double in a week in one currency but not others because of wild currency jumps, people buy it in another currency (Euro's, Swiss Francs, etc).

Ron Paul may talk a lot of sense over the Fed, warning over debasement of the USD, etc, as a long-term issue (loss of purchasing power from one decade to the next), but bitcoins are hardly the answer. They're so volatile they do not even behave like a currency / commodity at all - more like an ultra-high-risk penny stock that's stuck between being the victim of a "pump and dump" scam one minute and aggressive short-selling the next...

"Mac OS X is like living in a farmhouse in the country with no locks, and Windows is living in a house with bars on the windows in the bad part of town." -- Charlie Miller

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