Today, Senator Joe Manchin (D-W.Va.) asked federal regulators to ban Bitcoin. His full remarks can be found here. This is a response to Senator Manchin and his staff.
Dear Senator Manchin,
I’m writing in response to your recent call to prohibit the use of the digital currency Bitcoin.
It’s understandable that you would be concerned about the impacts that this new technology would have. Since Bitcoin is so unlike existing monetary systems, it’s natural to focus on the threats it poses. However, doing so ignores the potential benefits of a decentralized digital currency.
How should policymakers such as yourself determine the best path to balancing the threats and benefits of Bitcoin? The first step is for you and your staff to learn as much as possible. I’m sure that you feel confident you’ve gathered the appropriate amount of knowledge before publicly calling for a prohibition on Bitcoin. I’m reaching out to you in order to challenge this belief, using your own letter as evidence that you don’t yet have the knowledge of Bitcoin necessary to craft public policy.
Inaccuracy No. 1
This virtual currency is currently unregulated and has allowed users to participate in illicit activity, while also being highly unstable and disruptive to our economy.
Bitcoin is not “currently unregulated.”
On March 18, 2013 the Financial Crimes Enforcement Network (FinCEN) issued guidance explaining that “an administrator or exchanger [of virtual currency] is an MSB under FinCEN’s regulations.” This regulation requires that American Bitcoin companies register with FinCEN as a money service business (MSB) and follow the rules laid out.
Additionally, Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations apply to these businesses as well. In fact, only in the past few weeks has a Bitcoin ATM been launched in the United States, lagging behind other countries because of our regulatory complexity.
Inaccuracy No. 2
Each Bitcoin is defined by a public address and a private key, thus Bitcoin is not only a token of value but also a method for transferring that value. It also means that Bitcoin provides a unique digital fingerprint, which allows for anonymous and irreversible transactions.
Bitcoin transactions aren’t anonymous.
Every single Bitcoin transaction ever made is recorded in a publicly accessibly ledger, called the blockchain. You make this point yourself by mentioning the “digital fingerprint,” it’s not often that fingerprints and anonymity are mentioned together. In fact, Bitcoin has been referred to as “prosecution futures” by law enforcement due to its lack of anonymity.
The assumption that digital currencies are necessarily anonymous was explicitly rejected by testimony from the Acting Assistant Attorney General of the Department of Justice, Mythili Raman, at a Senate hearing last November:
To be clear, virtual currency is not necessarily synonymous with anonymity. A convertible virtual currency with appropriate anti-money laundering and know-your-customer controls, as required by U.S. law, can safeguard its system from exploitation by criminals and terrorists in the same way any other money services business could.
American Bitcoin companies already adhere to the applicable regulations mentioned above.
Inaccuracy No. 3
Bitcoin has also become a haven for individuals to buy black market items. Individuals are able to anonymously purchase items such as drugs and weapons illegally. I have already written to regulators once on the now-closed Silkroad, which operated for years in supplying drugs and other black market items to criminals, thanks in large part to the creation of Bitcoin.
Bitcoin is not a haven for illegal activity.
It’s a shame that you were not in attendance at the Senate hearing last year, because the law enforcement experts testifying would have helped put your claims in context.
Edward Lowry of the Secret Service mentioned two digital currencies in his testimony, e-gold and Liberty Reserve. Bitcoin wasn’t mentioned at all, because in his words, criminals:
…have not by and large gravitated toward peer-to-peer cryptocurrencies…[they have] by and large gravitated toward centralized digital currencies that are based in a locale that may have less regulatory guidelines and less aggressive law enforcement.
Bitcoin is a peer to peer currency, not a centralized currency, thus merited no mention from Lowry.
Unlike your letter, which contained no data or references to support your claims, the experts at this hearing used data to put illicit Bitcoin activity in context. FinCEN director Jennifer Shasky Calvery stated the following:
In the case of Bitcoin, it has been publicly reported that its users processed transactions worth approximately $8 billion over the twelve-month period preceding October 2013; however, this measure may be artificially high due to the extensive use of automated layering in many Bitcoin transactions…
This relative volume of transactions becomes important when you consider that, according to the United Nations Office on Drugs and Crime (UNODC), the best estimate for the amount of all global criminal proceeds available for laundering through the financial system in 2009 was $1.6 trillion.
It’s clear when looking at the numbers that any illicit Bitcoin activity is nearly immeasurable when compared to illicit usage of traditional currencies, such as US dollars.
Also, your mention of the Silk Road doesn’t work in your favor. Law enforcement was able to take down the Silk Road, seize the Bitcoin, and arrest many of the dealers and buyers. This is a law enforcement success story, and doesn’t show a necessity for any further restrictions.
Inaccuracy No. 4
That is why more than a handful of countries, and their banking systems, have cautioned against the use of Bitcoin. Indeed, it has been banned in two different countries— Thailand and China —and South Korea stated that it will not recognize Bitcoin as a legitimate currency.
Bitcoin is not illegal in Thailand or China.
It’s true that Thailand did originally reject Bitcoin usage, but they have recently reversed course and are allowing it. China has restrictions in place, but it has not been banned and several Chinese Bitcoin exchanges are functioning right now.
Aside from being inaccurate, it’s unclear why you would use the example of authoritarian foreign governments restricting their citizens’ use of digital currency as models to emulate. I trust there are no other economy policies that you would like to replicate from these countries.
Inaccuracy No. 5
Our foreign counterparts have already understood the wide range of problems even with Bitcoin’s legitimate uses - from its significant price fluctuations to its deflationary nature. Just last week, Bitcoin prices plunged after the currency’s major exchange, Mt. Gox, experienced technical issues. Two days ago, this exchange took its website down and is no longer even accessible. This was not a unique event; news of plummeting or skyrocketing Bitcoin prices is almost a weekly occurrence .
Bitcoin’s volatility has been decreasing over time.
Yes, Bitcoin prices have been volatile, though considering the fixed supply and fluctuating demand this is to be expected. However, your comments ignore the fact that as Bitcoin grows, it becomes less volatile, and the data supports this. Eli Dourado, research fellow at the Mercatus Center at George Mason University, has charted this:
Inaccuracy No. 6
In addition, its deflationary trends ensure that only speculators, such as so-called “Bitcoin miners,” will benefit from possessing the virtual currency. There is no doubt average American consumers stand to lose by transacting in Bitcoin . As of December 2013, the Consumer Price Index (CPI) shows 1.3% inflation, while a recent media report indicated Bitcoin CPI has 98% deflation. In other words, spending Bitcoin now will cost you many orders of wealth in the future. This flaw makes Bitcoin’s value to the U.S. economy suspect, if not outright detrimental.
The rapid increase in the number of American consumers and merchants using Bitcoin for transactions contradicts this theoretical, and somewhat nonsensical, objection to Bitcoin.
As an example, San Francisco company Coinbase just reached 1,000,000 consumer Bitcoin wallets and 25,000 merchants using their system. Atlanta company Bitpay has more than 20,000 merchants accepting Bitcoin with their system. It’s difficult to believe that so many Americans would voluntarily choose to use a system if it were so flawed as you claim.
Indeed, the increase in the value of Bitcoin is attractive to many of its users, and it’s unclear how this harms anyone. No one is forced to use Bitcoin, and if they prefer their currency to slowly lose its value they can use US dollars instead.
Inaccuracy No. 7
The clear ends of Bitcoin for either transacting in illegal goods and services or speculative gambling make me weary of its use.
“The clear ends of Bitcoin” are not for illicit uses for the vast majority of users.
Bitcoin is digital money that was created specifically for the internet, and it offers significant benefits over traditional systems. It allows for fast and secure digital payments at a lower cost than credit cards and other systems. Your letter doesn’t mention any of these benefits, nor give any evidence that the vast majority of users aren’t using the currency legally and because of those benefits.
(As an aside, I believe you meant wary, not weary.)
Before the U.S. gets too far behind the curve on this important topic, I urge the regulators to work together, act quickly, and prohibit this dangerous currency from harming hard-working Americans.
Regulators in the US have already been weighing in on Bitcoin for months, and none of them have come to the draconian conclusion that you have. Regulators at the state level, particularly New York state, are looking at alternative licensing schemes, but have never even hinted at banning Bitcoin outright. Neither have the experts who testified in multiple hearings on the topic.
Hard-working Americans should be able to decide how they prefer to save, spend, and manage their own money. Bitcoin gives them an alternative to existing systems, and its rapid growth shows that many Americans find it valuable.
I hope this letter has shown that you and your staff should take a step back and learn more about Bitcoin before making any more policy claims. If acted upon, your recommendations would destroy hundreds of American tech start-ups and restrict hundreds of thousands of Americans from handling their own money as they see fit. Policies with such drastic impacts should only be proposed by well-informed policymakers.