The markets have had time to digest the range of Bitcoin activities in New York last week. What happened? The marquee event was supposed to be the New York Department of Financial Services (NYDFS) hearing on crypto currencies. where the two-day regulatory hearing, and Bitcoin was expected to take center stage. Not twenty-four hours before the start of the hearings, the wires erupted with news of the arrest of Bitinstant CEO Charlie Shrem on money laundering charges.
Crime and Currency, Can Bitcoin Survive?
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So it appears that everyone from the FBI to the regulators at the NYDFS to the media has had their say. A lot of attention has been paid to the timing of the high profile arrest of Shrem at Kennedy Airport in NY. Whether or not the arrest was coordinated by law enforcement to send a message to regulators matters little in the longer-term, larger picture of virtual currency. If we were to judge an industry on the vice of the most unscrupulous participants, then the credit card industry would have about half a century (and hundreds of billions of dollars in fraud loss) lead in the vice column over Bitcoin. The arrest of Shrem while unfortunate is not an indictment of Bitcoin or crypto currencies. Crime is going to happen, that is almost a certainty, the question is will Bitcoin be a better currency alternative? Considering the track record for fiat currencies, traditional banking instruments and credit cards, it is hard to imagine it being worse.
Credit card, debit card and check fraud has already exceeded epidemic proportions worldwide. Not a week goes by without a major credit card security breach being announced by some major retailer and the trend is accelerating. Fraud and theft have been inextricably bound to money and currency since the beginning of their use. To suggest or imply that Bitcoin somehow exacerbates this behavior or is intrinsically bad is naive. Crypto and/or other virtual currencies are likely to be a major vehicle for the exchange of value between individuals and businesses, especially in view of the shortcomings of fiat currencies , credit cards and debit card biospheres. However, for the foreseeable future, fiat currencies will continue to serve a role. There are still billions without access to electronic wallets or computers.
Regulation will elevate Bitcoin
Reading some of the major digital press blogs this weekend there was a sense of contempt towards regulators after the NYDFS hearings. In one well-known technology blog, regulators were referred to as “clueless”. NY state regulators were lambasted over their technical ignorance, which they readily admitted to. Regulators in NY and indeed in the U.S. have been decidedly pro crypto currency with some of the highest ranking regulators suggesting that crypto and virtual currencies are the future of money. The condescending attitude of the digital media toward policy-makers is more harmful than any isolated illegal activities within the industry. NY state regulators were conducting hearings. Last time I checked, a hearing was a means by which experts on all sides gathered to debate and exchange information on a topic. The hearings were called by regulators to learn more about the subject. This is exactly where the virtual currency industry would hope to have regulators express their ignorance and receive the appropriate answers.
The digital media needs to grow up and stop acting like an arrogant bunch of elitists. There are 6 billion people on the planet. Most of them are familiar with some type of fiat currency. However, relatively few have any clue what crypto currencies are all about, and even more would have no access to a computer, an electronic wallet and would have no means of using a crypto currency. These are the people regulators are concerned about for the most part, not the condescending blogger sitting in his San Francisco or Tribeca office sipping a non-fat latte. For this industry to gain popular acceptance, early adopters must be patient and be prepared for a long arduous learning curve, let alone an adoption curve. Looking down your nose at those uncomfortable and unfamiliar with virtual currency will not accelerate adoption, it will confound it.
Role of Regulators
Regulators exist to evaluate the downside of financial instruments and to protect consumers against those downsides. Because they do not behave like cheerleaders is no surprise, that is not their job. Their job, among other things is to ask (sometimes) dumb questions. The notion that a regulator must have expert technical knowledge to make intelligent decisions is absurd. Do regulators who enforce traffic safety need to be experts on the inner workings of a combustion engine? Not at all! So why must financial regulators be cryptography experts or be technical engineers to regulate cryptocurrencies? That’s what the expert testimony is for. To suggest differently is arrogant and naive. The quicker we can foster an understanding on a layman’s level, the better it will be for the industry.
There are two major areas of concern for regulators. They are the safety of accounts and the role of a currency to conduct illegal activities. The safety issue needs no explanation, the industry must provide a certain threshold of safety to move forward. The second issue will likely require early proponents of cryptocurrencies to make a major, obvious concession in their idealistic view of cryptocurrencies; that is to relinquish the anonymity of transactions. The implications associated with money laundering are clear and present.
It stuns the senses that any rational human being, let alone any of the esteemed bloggers of the technorati, do not recognize the perils of money laundering. To name a few: drug trafficking, weapons trafficking, human slave trafficking, murder, extortion, child prostitution, and child pornography are just a few reasons we should demand full transparency in financial transactions.
Bitcoin is a serious proposition and deserves greater scrutiny, and press coverage than the world of apps, video games or social networks. If Facebook collapsed tomorrow, it would be inconvenient, but it would not result in the breakdown of global commerce, cause mass civil disruptions and bring the global distribution chain of human necessities to a halt. Bitcoin is the real deal and it will also have its shortcomings. What Bitcoin needs is to run the gauntlet of scrutiny and have the light of day shine on the soft underbelly where it’s worst participants lurk. Most leaders in the Bitcoin world are well aware of the virtues of regulation and welcome it. Regulation implies normalization and stabilization.
