State banking and securities regulators say Bitcoins touted as the Internet age replacement for dubloons, pieces of eight, or other coins of the realm, may be ripe for government oversight.
Bitcoin is a virtual currency, existing as computer bits and bytes, stored on computer disks. Bitcoins cannot be held, are not backed by gold, silver or the credit of a sovereign nation and are created as a reward for developing the solution to advanced math problems.
But much recent attention given to Bitcoins has been to the practice of speculating in the virtual currency. New Bitcoins are created by solving complicated math problems. It is called mining, but no pencil and paper, and no pick and shovel, are required, only a computer program that painstakingly churns through potential answers to the math quiz.
The lucky owners of the computer that stumbles on the winning answer are rewarded with a quantity of Bitcoins that may then be sold on Bitcoin exchanges at prices known to fluctuate with a vigor capable of quickly separating a person from a fortune.
Banking and securities regulators are keeping an eye on Bitcoins in commerce and Bitcoins as investments.
“We have not really seen this emerge in New Hampshire and have received no complaints,” said Barry Glennon of the state Securities Bureau. “To those who are promoting the Bitcoins and the trading of Bitcoins, it is not money and therefore it does not meet the investment contract analysis.”
But a court ruling this week in Texas could provide a framework for changing that.
The magistrate hearing a case involving the transactions of the virtual currency says Bitcoins are securities since they are an “investment of money, in a common enterprise, with the expectation that profits will be derived from the efforts of the promoter or a third party.”
Glennon said the logic behind the Texas ruling, if followed by other courts, would pave the way for regulation of Bitcoins as a security.
“Central to the point is ’are you making profit based on the efforts of others — that’s where you get to the investment contract analysis,” Glennon said. “If it is deemed a security, it would trigger regulation.”
State banking regulators also have an interest in where the Internet Bitcoin economy is headed, since Bitcoins are bought, sold and stored.
“It might run into money transmitter regulations,” said Glenn Perlow, state bank commissioner.
Sending money through wire transfer systems such as Western Union are regulated by the banking division, and Bitcoin transfers by Internet may have enough similarity to be considered a money transfer, requiring state licensing.
“Probably the biggest concern at the state or federal level it whether it could be a haven for money laundering and other illicit use,” Perlow said.
Federal currency regulation designed to prevent money-laundering require the reporting of large cash deposits at financial institutions.
Converting money into Bitcoins carries the potential for avoiding those regulations, Perlow said.
Zach Harvey, CEO of Manchester-based Lamassu, which has developed a Bitcoin machine that accepts currency in exchange for Bitcoins deposited into “virtual” wallets on mobile devices, said the company has yet to be contacted by regulators.
“I think it’s a good idea for the regulators to speak with Bitcoin businesses, and I’m quite certain at least 25 Bitcoin businesses would be happy to show up voluntarily, without subpoenas,” he said Wednesday via email. “That being said, I do think the U.S. is facing the risk of overregulating the Bitcoin market and limiting competition and growth in an emerging sector that is perceived by many to be the Silicon Valley of finance.
He said the recurring theme of illegal uses of Bitcoin misses the point.
“The Internet, one-hundred dollar bills and even books could be used to promote malignant activity,” he said. “Bitcoin has the potential to replace or enhance an aging financial system, and great care should be taken before taking steps that can drive this innovation outside the U.S.”
Both Glenning and Perlow say their respective agencies are looking to what other jurisdictions are doing when it comes to regulating Bitcoins. The securities division to the emerging view from the federal Securities and Exchange Committee and the Banking Department, with its responsibility to protect consumers in banking transactions, to activist consumer protection states such as New York.
“I would call it the early days, but like any responsible regulator, we have to look at it,” Perlow said.