Senate grills Bitcoin and law enforcement experts as the currency hits a record high of $700 USD per Bitcoin

Given Bitcoin's pace of slow-and-steady gains in real world value, security/regulatory struggles of being a solely digital currency, and the inherent math of the seeding progress,  this digital cryptocurrency has behave very un-currency-like of late.  From a low of $8 USD in June 2011, the value of Bitcoins has increased nearly 87.5-times to reach $700 USD and has made some early adopters very wealthy.

I. Congress is Stumped by Bitcoins

The biggest damper on Bitcoin enthusiasm is not the volatility of the coins themselves; but rather the question of whether the U.S. and UK -- countries with the world's most powerful banking systems -- will allow a strong third party currency to be used as an alternative to a national currency.

Bitcoin experts were questioned by Congress on Monday in the first in a series of hearings designed to figure out what regulatory actions should be taken regarding Bitcoins.  The chairman of the Homeland Security and Governmental Affairs Committee, Sen. Tom Carper (D-Deleware), was candid in addressing the expert panel, stating:

Virtual currencies, perhaps most notably Bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of many of us.

Senate hearing

One widely held misunderstanding that members of the Senate struggled with is exactly what Bitcoins meant in terms of anonymity and purchases.  There is a wide-held belief that Bitcoins can be used to purchase offline goods -- e.g. a package of drugs -- entirely autonomously via Bitcoin transactions.

This misunderstanding has actually worked to law enforcement's benefit at times as they were able to make discrete purchases on sites like Silk Road to identify distributers/dealers of illegal drugs.  Once identified, Bitcoin transactions offered no anonymity to the dealers' clients, as the second the dealer responded to an order by shipping a package, the feds could track that package to its destination.

In some regards Bitcoins formed a bit of a honeypot of sorts for ferreting out real world crime.

Senate bitcoins
Senator Carper admits to being befuddled by Bitcoins.

The thornier issue regards crimes that are primarily digital in nature, such as the exchange of child pornography.  As no physical goods are delivered and the address is often more obfuscated, it's somewhat difficult to not only figure out who the clients are, but more importantly who is distributing this illegal material.

Ernie Allen, CEO of The International Centre for Missing & Exploited Children, discussed this issue in one of two panels that testified before Congress.

In terms of Bitcoins impact on real world crime, Jennifer Shasky Calvery, the director of the Financial Crimes Enforcement Network (FINCEN); Mythili Raman, an attorney with the U.S. Department of Justice (DOJ); and Secret Service agent Edward W. Lowery III also were part of the first panel that discussed the impact of Bitcoins on law enforcement tactics.

Many of these officials offered refreshingly knowledgeable opinions when it came to Bitcoins and illegality.  Mr. Raman, for example, pointed out that Bitcoins weren't the best idea for buying offline illegal goods as in many ways they were much more traceable than standard currency.  He comments, "Cash is still probably the best medium for laundering money."

Ms. Calvery was supportive of Bitcoins to an extent, but argued that businesses who accept Bitcoins should register with FINCEN so they can pursue complaints if the currency is abused.

II. To Ban or Not to Ban

Other invited panelists testified in support of bitcoins.  Jeremy Allaire, CEO of digital currency startup Circle, spoke to the growing importance of virtual currencies to the real world economy.  Jerry Brito, a fellow with the Mercatus Center at George Mason University and contributor to the libertarian blog Reason, suggested that Bitcoin did weaken the government's grip on the market, but was a great asset to producing the free market.  He suggested that if the U.S. stifled the bitcoin, it would suffer enconomically as other freer markets would benefit from adoption instead.

Overall the Democratic senate seemed to be open to the idea of bitcoins, but also leaning towards upping efforts to regulate this and other cryptocurrencies.

One major unspoken message that loomed large at the hearing was the issue of currency manipulation.  Since the U.S. and China regularly exchange accusations of currency manipulation with each other, it seems likely that at least one of these countries is right -- that the other is manipulating the currency to either control wealth internally and/or stifle international free trade.

Bitcoin smaller
Banks can't control Bitcoins -- which may put pressure on America's special-interests-funded politicians to ban them. [Image Source: Getty Images]

As Bitcoin is an international currency regulated not by government, but by rigid mathematical formulas, there's no real way of manipulating it.  And that has some financial institutions eyeing the Bitcoin warily.  Given the sway such institutions have on U.S. federal politicians, it's unclear whether politicians will stop at mere regulation.  Officials may look to merely make sure Bitcoin earnings are not used for criminal purposes and are taxed like standard earnings.  Or they may looked to outlaw the currency entirely.

Source: U.S. Senate

"There's no chance that the iPhone is going to get any significant market share. No chance." -- Microsoft CEO Steve Ballmer

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