The virtual-currency hasn’t had the smoothest of journeys. Here’s why 2014 might be its make or break year…
A cloud of unlawful activities continues to hang over the head of the world’s most popular cryptocurrency that’s looking to give the global banking system the proverbial finger.
Most recently was Mt. Gox fiasco.
Tokyo-based Mt. Gox recently filed for bankruptcy after revealing approximately $500 million in bitcoins stored by the exchange had been stolen.
In the bankruptcy filing, the exchange reported that it doesn’t know what method attackers used to steal the bitcoins, exactly how many were stolen, or when the thefts occurred.
But aside from hacker theft risk, other serious issues face the digital currency as well…
Governments are on edge, fearing that the floodgates for drug trafficking, political corruption, and terrorism funding, could be blown wide open if nothing is done to control Bitcoin’s proliferation.
To date, Russia and China are the first countries trying to nip Bitcoin’s explosive growth in the bud by officially banning its use.
Russia’s decision further states that the official currency of their country is and always will be the ruble. Therefore, the use of other forms of money is strictly prohibited.
In China, the central bank took a hard line against Bitcoin by forbidding the country’s financial institutions and third-party payment systems from handling the currency, seeing as it would also avoid China’s capital controls.
For both countries, there is currently no direct law to prosecute Bitcoin users, so individuals are still able to trade amongst themselves for now.
However, the bans make it virtually impossible to acquire new Bitcoins without the risk of getting into trouble with the law.
Other nations, including the US, have expressed similar concerns over the future of Bitcoin and cryptocurrencies as a whole.
Canada’s finance minister, Jim Flaherty recently stated how important it was “…to continually improve Canada’s regime to address emerging risks, including virtual currencies…that threaten Canada’s international leadership in the fight against money laundering and terrorist financing.”
The Bank of Israel warned the public that cryptocurrencies are not backed by any central bank or government, and therefore do not constitute legal tender. In turn, the bank says, users are susceptible to fraud and deceit.
Germany, Korea, and Norway share the same sentiments as Israel, while the central banks of France, Denmark, the EU, Switzerland, and Thailand continue to warn of the currency’s price volatility.
In the US, there is slightly more optimism…although last month’s indictment of a notable Bitcoin startup’s vice chairman for his connection to the Silk Road black market gave opponents more ammunition to work with.
Still, despite the risks associated with using Bitcoin, American lawmakers believe more good than bad can come out of the currency — as long as regulations are imposed.
Taming The Wild West
According to the New York Department of Financial Services (NYDFS), if they are forced to choose between stopping virtual money laundering and revolutionizing the financial system — money laundering will take the cake every time.
However, the NYDFS is also fully aware of the plus side to innovation and therefore, would very much like to see a regulatory framework in place.
The idea of regulation may very well go against what Bitcoin stands for, but for some of its most influential supporters, having some level of governance might not be a bad idea.
Cameron and Tyler Winklevoss, the infamous twins that are slowly emerging from the Facebook shadow, allegedly own around 1% of all the Bitcoins mined to date and recently launched Winkdex, an index for Bitcoin price information.
They were early adopters of Bitcoin, and have made angel investments in various Bitcoin startups. The brothers liken the current Bitcoin market to the Wild West and feel that regulation would actually be beneficial.
“The Wild West attracts cowboys,” says Cameron. “A sheriff is a good thing.”
Among other proposals, a special BitLicense, could be issued to approved businesses, which gives consumers a measure of protection from fraudulent merchants or criminal organizations.
In the end, lawmakers need to become more familiar with the way the system runs and how users interact with it before any guardrails are erected.
One Bitcoin advocate summed it up best when he said, ” We’re trying to create a world where money can flow globally for free. You’re talking about putting back into the system all the costs we’re trying to take out of it.”
A sensible regulatory solution could work, but I believe it’s still way too early to tell if Bitcoin will have any staying power or not.