A week ago U.S. Senator Joe Manchin from West Virginia sent a letter to currency regulators such as the Treasury Department and Federal Reserve protesting the legitimacy of Bitcoin. He encouraged them to prohibit Bitcoin like Thailand, China, and South Korea. Some shrug this off as a political ploy of one of the Senate’s most junior to gain publicity. Others find this to be the rise of American government regulation.
But who can regulate it? The next day US Federal Reserve chairwoman Janet Yellen testified before the Senate Banking committee that, “The Federal Reserve Simply does not have the authority to supervise or regulate bitcoin in any way.” She explained that Bitcoin was a “payment innovation” that did not interact with banks that neither it nor the Federal Reserve had “the ability to supervise and regulate” it.
And she’s fair in her analysis. Both the Treasury and Reserve’s power to regulate Bitcoin contends upon Congressional statute. Early in February the Treasury explained how the mining process in Bitcoin was not a money transmitter and thus not under Treasury regulation. But, through FinCen they did say Bitcoin is subject to money-laundering and know-your-client rules. In Yellen’s case, Regulation E gives the Reserve jurisdiction over accounts that are held with a financial institution. Because Bitcoin is peer-to-peer and without a central bank, the Reserve has no standing.
Are there other government departments that can have a say? Some think the Security and Exchange Commission has a shot. But, this all depends Bitcoin being found to be a security. Bitcoin is a virtual currency where its value is determined by the parties in the contract. A security is an ownership right that represents a financial value that decreases or increases based on company performance. Bitcoin on its own holds no assurance of value because no bank or government funds them. But, because Bitcoin represents some sort of financial value to its users, Congress may have a chance to expand the scope of the law to Bitcoin. Clearly, this is a stretch. It would require the American government to name bitcoin a foreign currency, which would be silly.
The Eastern District of Texas found that Bitcoin could be an investment contract in Security Exchange Commission v. Shavers. But, no other state has held this way. The SEC best argument for jurisdiction is that their laws should apply to Bitcoin exchanges that covert bitcoins into physical currency like all other US exchanges. And based on the disaster at Mt. Gox, regulation in this sector might not be a bad thing.
The same concept goes for the Federal Trade Commission. The Federal Trade Commission has jurisdiction over the people and businesses using Bitcoin, but not over Bitcoin itself. But, unless the users are conducting deceptive or unfair activity so shocking that it universally resonates as wrong, it will be hard for the FTC to control it. Bitcoin is a new business practice. How can the FTC decide what is deceptive in a business that champions confidentiality and freedom of contract?The Financial Consumer Protection Bureau has proclaimed they’re “looking into” Bitcoin as well. That’s probably because their former deputy director Rajeev Date joined an organization advocating for Bitcoin after leaving the FCPB. Even the US Commodity Future Trading Commission has expressed an ability to regulate. But, they’ve yet to make true on that threat.
So as it stands today, Bitcoin is security, commodity and a currency wrapped up into one regulatory headache. The problem for American financial agencies is that their power extend as far as Congress wrote them to be. And, unfortunately, Congress wrote these laws with financial institutions in mind.
So, then who in the government has dominion over Bitcoin? President Obama will most likely stay out of it. Then there’s Congress. But, how do they make laws on something they never saw coming? If they were to act, it would not be the first time Congress has attempted to pass legislation on something they don’t understand. All these government agencies are panicking to find a way to preserve the benefits of Bitcoin while at the same time ridding it of the risk. It’s a challenging proposition.
Ultimately, I think Bitcoin will find regulation in two ways: by the individual states or by the courts. The Constitution makes it clear that where its silent on an issue, the states have the authority to act. New York has proposed a “BitLicense” which will establish a specific license for virtual currency. But, because Bitcoin is impossible to tax now, I’m not convinced all states will be interested in regulating it. So, it comes down to the courts. Like the case in Texas, so long as agencies feel unsettled, they will ask the courts to tell them. And, if states do not regulate, it will be federal courts deciding. But, this may be the best solution because modern courts flow where culture flows. This also gives lawyers the opportunity to promote their client’s interests before an unbiased figure, unlike making a case before the SEC or Treasury. But, only time will tell.