Bitcoin Goes to Washington: Monday’s Hearing Is Just the Beginning

A Senate panel looks at the risks and benefits of the cryptocurrency

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TIME Magazine Cover, November 11, 2013
Illustration by Justin Metz for TIME

The first congressional hearing on how to regulate virtual currencies will take place on Monday afternoon before the Senate Homeland Security and Governmental Affairs Committee. Called “Beyond Silk Road: Potential Risks, Threats and Promises of Virtual Currencies,” the hearing comes six weeks after federal authorities took down the Silk Road, known as the “Amazon for drugs,” and arrested its alleged founder, 29-year-old Ross Ulbricht. (It also comes less than a month after TIME’s cover story, “The Secret Web,” which explored these issues.) Though the session promises to look at all virtual currencies, it will primarily focus on bitcoin, the cryptocurrency used by the Silk Web, according to advance testimony given to TIME.

Pages and pages of explanations and definitions mark the testimony. What are bitcoins? How are they made? How do they differ from centralized virtual currencies? It is clear Washington has a ways to go in understanding, let alone regulating, cryptocurrencies. The hearing is a first step in what will likely be a long process toward any kind of lawmaking. “Honestly, the environment seems to be a game of hot potato where no politician wants to be caught being pro or anti bitcoin,” says Charles Hoskinson, director of the Bitcoin Education Project. “Once the market cap gets to around $10 billion or so [it’s currently just over $2 billion], then expect real hearings and a lot of lobbying.”

(MORE: 3 Reasons Why the Price of Bitcoin is Surging)

Over the summer committee chairman Tom Carper, a Delaware Democrat, and ranking member Tom Coburn, an Oklahoma Republican, sent letters to nine U.S. agencies asking for guidance on what is already being done to deal with cryptocurrencies. Ahead of the hearing, the panel released five of the responses. The Securities and Exchange Commission reviewed whether bitcoin should be treated as a security, and the Department of Homeland Security has adopted an “aggressive posture” to address the “emerging threat and criminal exploitation of virtual currency systems.” The Treasury’s Financial Crimes Enforcement Network has gone the furthest, producing two rules that define how exchanges should handle bitcoin and other virtual currencies. The Bitcoin Foundation protests these rules as too onerous as they force bitcoin exchangers to register state by state as wire services.

If anything, the letters and other testimony highlight Washington’s challenge in dealing with bitcoin. While the Treasury refuses to define bitcoin as a currency, a federal judge hearing a case about a Ponzi scheme recently ruled bitcoin was indeed currency. And noticeably absent from the agency responses were those from the Internal Revenue Service, which has been looking into virtual-currency tax shelters, and the Commodity Futures Trading Commission, which has said it is looking into regulating bitcoin as a commodity. The question of jurisdiction will remain up in the air until Washington can settle on a definition for bitcoin. Is it a security? A currency? A commodity?

The first panel, which includes testimony from the Justice Department, the Secret Service and the Treasury, while all noting the potential benefits of online cash, spent much of its time warning of the dangers the currency embodies: money laundering, tax shelters, virtually anonymous markets for illicit items such as drugs, kiddie porn, stolen credit-card information and hacking software. “The department anticipates that virtual currency will continue to evolve and grow in popularity,” Mythili Raman, acting assistant attorney general for the Justice Department’s Criminal Division, says in her prepared testimony given to TIME. “That growth inevitably will be accompanied by an increase in illicit transactions, which makes it critical that virtual currency services understand their legal obligations and requirements.”

The second panel includes a mix of critics and advocates. Ernie Allen, president and chief executive of the International Centre for Missing and Exploited Children, says the main way law enforcement takes down illicit sites — infiltration — is “expensive, time-consuming and often ineffective.” He notes that the Silk Road is already back up and running. Allen goes so far as to say an anonymous Internet is too dangerous. “You can help us address the core challenge, Internet anonymity,” he tells the panel in his prepared remarks. “For all of its importance, we simply cannot create an environment in which child exploiters, traffickers and other organized criminals can operate on the Internet with a complete veil of anonymity and no risk of being identified unless they make a mistake.”

(MORE: The Real Significance of the Bitcoin Boom (and Bust))

Advocates of bitcoin will testify to the potential power the currency has in helping the world’s poor by giving them the ability to bank and transfer money across the globe with relatively little fees. “Whether it brings people into existing financial-services systems, or if it secures people’s wealth better outside of formal systems, we believe bitcoin has tremendous potential to improve the capacity of people around the world to build and store wealth,” Patrick Murck, general counsel for the Bitcoin Foundation, says in his prepared testimony. “If these efforts and the underlying genius of the bitcoin protocol improve the financial situation and wherewithal of millions, hundreds of millions, or perhaps billions of people by even a small fraction, the total quantum of good done by bitcoin will be quite large.”

Jeremy Allaire, CEO of Circle Internet Financial, a group that launched in October seeking to make bitcoin payments more broadly accepted online, went so far as to ask the government to be much more explicit in regulating bitcoin, because it is only with market certainty that the currency will truly be able to flourish. “Criminals and terrorists will seek to employ digital currency if it remains unregulated, leaving bitcoin operators to operate without stringent controls and effective systems to verify identities, monitor transactions and report suspicious activity,” he says in his prepared remarks, adding that uncertainty and abuse in the market will only drive innovation overseas.

Allaire’s and Murck’s presence on the panel show how the bitcoin industry has upped its lobbying in Washington. According to Politico, Allaire recently hired Consumer Financial Protection Bureau deputy director Raj Date, and in October the Bitcoin Foundation hired Jinyoung Lee Englund, a former aide to Republican Representative Cathy McMorris Rodgers, as well as law firm Perkins Coie. Perkins Coie has already earned its keep: the Federal Election Commission last week released a draft decision allowing candidates to accept, but not spend, bitcoin.