Government // Leadership
News
7/2/2014
09:06 AM
Connect Directly
RSS
E-Mail
50%
50%

Virtual Currencies Draw Fresh Regulator Scrutiny

Federal regulators are paying more attention to the growing use of bitcoin and other virtual online currencies. The GAO calls for more consumer protections.

White House Maker Faire: 10 Cool Inventions
White House Maker Faire: 10 Cool Inventions
(Click image for larger view and slideshow.)

The growing popularity of virtual currencies in online transactions is forcing the government to turn its attention to regulating a new breed of digital money. But the Government Accountability Office said agencies still need to pay more attention to consumer protection.

Virtual currencies, such as bitcoin, use digital wallets and peer-to-peer Internet connectivity, rather than bank accounts and traditional wire transfer networks, which puts them largely outside the view of law enforcement and beyond the scope of current regulation.

"While these virtual currency systems offer some benefits, they also pose risks," the GAO said in a recent report.

[Money on the move. Read: Mobile Commerce Success Depends On Mobile Currencies.]

The GAO report identified at last nine interagency working groups addressing the challenges of virtual currencies, as well as additional information collaborations between agencies. "Thus far, interagency efforts have had a law enforcement focus, reflecting the attractiveness of virtual currencies to those who may want to launder money or purchase black market items. If virtual currencies become more widely used, other types of regulatory and enforcement issues may come to the forefront. For example, recent events suggest that consumer protection is an emerging risk."

While federal regulators are beginning to turn their attention to online money, California recently became the first state to explicitly allow the use of alternative currencies, including digital, although the step does not include any additional regulation.

The California law, signed in June, addresses the fact that modern payment has moved beyond cash and credit cards by eliminating legal restrictions limiting money to the "lawful currency of the United States." The new law addresses not just digital currency, but also alternatives including community-issued money, such as Davis Dollars and Bay Bucks, and corporate customer rewards such as Starbucks Stars and Amazon Coins. Though it was not enforced, until last month California law made use of these methods illegal for payments and purchases.

"This bill is intended to fine-tune current law to address Californians' payment habits in the mobile and digital fields," Assemblyman Roger Dickinson (D-Sacramento), who introduced the bill, said in a press release.

The growing popularity of bitcoin has highlighted the need to address this new type of tender. The GAO called bitcoin the most widely used virtual currency. It estimated that, as of March 31, there were about 12.6 million bitcoins in circulation, worth about $5.6 billion at that day's exchange rate of $458 per bitcoin. Other common currencies, such as Litecoin, Auroracoin Peercoin, and Dogecoin, have a total value in circulation of about $400 million.

The benefits of these digital alternatives to national currencies include low-cost, high-speed transactions; privacy; and easy access through the Internet. Bitcoin transactions are conducted using unique value addresses and private key cryptography, providing a high degree of anonymity. Because transactions are registered in public leger, it is possible to associate the currency with a user and track some transactions, but this requires combining information from a variety of sources.

Consumer risks from digital currency include high volatility values and the risk of theft. The price of a bitcoin was about $13 in early January 2013 and rose to more than $1,100 by early December. Prices subsequently fell to about $522 in mid-December 2013 and have fluctuated between $450 and $950 since then. Hundreds of millions of dollars' worth of bitcoins have been lost to hackers in several high-profile cases in the last year. And the same factors that make virtual currencies attractive to consumers -- privacy and confidentiality -- can make them attractive to criminals.

Digital currencies are not completely outside the law. In March 2013, the Treasury Department's Financial Crimes Enforcement Network (FinCEN) said virtual currency exchanges must register with the agency under current anti-money-laundering requirements. Forty exchanges had registered as of December 2013. In July 2013, the Securities and Exchange Commission brought charges of defrauding investors against an individual and a company in a bitcoin-based investment scheme.

But the current regulatory structure does not fully address legal and consumer challenges of the emerging economic ecosystem. To ensure that consumers are protected, the Consumer Financial Protection Bureau (CFPB) said it is working with other regulators, including the Reserve Bank of San Francisco, the Federal Trade Commission, and the Treasury Department, as well as state and foreign regulators. Because most work so far has focused on law enforcement, CFPB's participation has been limited and informal. In response to the GAO report, Acting Assistant William Wade-Gery said regulators would benefit from a more collaborative approach and CFPB would work toward that goal.

New standards, new security, new architectures. The Cloud First stars are finally aligning for government IT. Read the Cloud Hits Inflection Point issue of InformationWeek Government Tech Digest today (registration required).

William Jackson is a technology writer based in Washington, D.C. He has been a journalist for more than 35 years, most recently covering the $80 billion federal government IT sector for Government Computer News. His coverage has ranged from architecture to international ... View Full Bio

Comment  | 
Print  | 
More Insights
Comments
Newest First  |  Oldest First  |  Threaded View
greglab
50%
50%
greglab,
User Rank: Apprentice
7/27/2014 | 1:00:05 PM
A new way into Crypto Coins like Auroracoin.
We did something similar to Auroracoin at www.gcoin.us except we're distributing the crypto coins to users of our games instead of persons of a county. We felt there would be too many people in a country that would hold no interest. We also thought that if people had to earn the crypto coins instead of getting them they would have a direct relationship and an interest. It is still similar in so far as it's an extra way in to crypto coins for those without tech know how and money.
danielcawrey
50%
50%
danielcawrey,
User Rank: Ninja
7/2/2014 | 2:44:33 PM
Money as software
I think that it is difficult for regulators to fully understand the long-term implications of programmable money. As such, a wait-and-see type of approach to this is needed.

Regulators are paying attention to the positives and the negatives. While virtual currencies offer enormous upside, there are consumer protections to keep in mind with this new technology. 
2014 US Salary Survey: 10 Stats
2014 US Salary Survey: 10 Stats
InformationWeek surveyed 11,662 IT pros across 30 industries about their pay, benefits, job satisfaction, outsourcing, and more. Some of the results will surprise you.
Register for InformationWeek Newsletters
White Papers
Current Issue
InformationWeek - September 2, 2014
Avoiding audits and vendor fines isn't enough. Take control of licensing to exact deeper software discounts and match purchasing to actual employee needs.
Flash Poll
Video
Slideshows
Twitter Feed
InformationWeek Radio
Archived InformationWeek Radio
In in-depth look at InformationWeek's top stories for the preceding week.
Sponsored Live Streaming Video
Everything You've Been Told About Mobility Is Wrong
Attend this video symposium with Sean Wisdom, Global Director of Mobility Solutions, and learn about how you can harness powerful new products to mobilize your business potential.