By India McGee
Can you guess what frequent flyer miles and hotel reward points have in common? They are both examples of bitcoin and reflect the move towards financial services being based on technology. Bitcoin is a virtual currency that is not controlled by traditional financial institutions.[1] Bitcoin is unique because it is solely tied to the internet and it has the ability to evade government control. It is created based on a mathematical algorithm, which makes it accessible to anyone who is willing to “mine” for bitcoins.[2] The benefit of bitcoin is that it is less burdensome than dealing with traditional banks. For instance, it is easy to create a bitcoin account by simply using an address unlike establishing an account with a traditional bank, which requires providing identification, personal details for verification, and initial funds for the account.[3] Additional positive qualities of bitcoin is that it can tremendously reduce transaction fees because it eliminates the processing fees charged by banks. This aspect of bitcoin could be beneficial for securities transactions because it promotes the ability to buy and sale securities within minutes. Furthermore, bitcoin could eliminate the need for foreign currency exchange.
Despite there being several benefits to using bitcoin, there are several warnings that users should be aware of before abandoning their bank accounts. With bitcoin, buyers are not protected and are not guaranteed their money back if anything were to go awry.[4] This is important for consumers to know because the consumer operates independently and any misconduct that occurs cannot be directly redressed since the government does not insure stolen bitcoins nor are bitcoins deemed to be legal tender in any jurisdiction .[5] Furthermore, there is no clearly defined regulator for bitcoin. With bitcoin lying in the shadows of government regulation, it can be used for illegal activities such as money-laundering. [6] However, there have been efforts to eliminate these concerns.[7]
Because bitcoin is relatively new, there is a need to strike a balance between spurring innovation and regulating the virtual currency to promote accountability and transparency.[8] For example, the Netherland authorities arrested ten people who were exposed as participants in a bitcoin money-laundering scheme.[9] To address the illegal activity surrounded by the bitcoin industry, Russia has resorted to banning bitcoin, meanwhile, the U.S. has imposed regulations on the industry.[10] In 2015, New York’s former financial regulator, Benjamin Lewsky, implemented rules for the bitcoin industry to protect consumers and decrease illegal activity.[11] The rules require that bitcoin firms acquire a BitLicense to hold customer funds and exchange virtual coins for actual currency.[12] However, the question that remains is whether regulation of the bitcoin industry will hinder its ability to flourish?
Evidence suggests regulation is stymieing bitcoin’s ability to grow.[13] The biggest constraint of regulation on the bitcoin industry is the impact it has on its development. With the daunting process of acquiring a BitLicense with requirements such as a $5,000 application fee, the bitcoin company providing exact details regarding the business organization, and providing ownership information, many bitcoin companies are leaving the market.[14] Regulation has the ability to cause virtual currency to come to a halt. However, regulation of the industry is needed because the threats of the industry far outweigh the benefits. Through the use of bitcoin, various types of illegal activity such as money-laundering can occur without detection. Regulation of the bitcoin industry is also needed to protect consumers who chose to use virtual currency. Yet, there should be a balance and financial regulators should take a “light-touch” approach to foster innovation and growth within the bitcoin industry.
Overall, if traditional financial banks were to move towards use of bitcoin, this could be groundbreaking. This move towards bitcoin seems to one day become a reality with the Depository Trust and Clearing Corporation along side Wall Street replacing a central database, which is used to record every credit default swap that occurs on the market, with a software inspired by bitcoin.[15] Use of a bitcoin inspired databases will foster a more streamlined and reliable source of trading information for banks.[16] Once the financial services industry completely moves to virtual currency, it is important that the industry fix and implement mechanisms to decrease the negative effects mentioned above, since the currency will be available to all consumers. If the proper mechanisms are not in place, then the move to virtual currency could be a failure. Because of this new development, regulation of the bitcoin industry is especially needed to protect consumers considering that traditional financial banks are known to overreach.
[1] See What is Bitcoin?, Coindesk, (Mar. 20, 2015), https://www.coindesk.com/information/what-is-bitcoin/.
[2] See id.
[3] See id.; see also Melissa Lambarena, How to Open a Bank Account and What You’ll Need, Jun. 13, 2016, https://www.nerdwallet.com/blog/banking/how-to-open-a-bank-account-what-you-need/
[4] Consumer Financial Protection Bureau, Risks to consumers posed by virtual currencies, Aug. 2014, https://files.consumerfinance.gov/f/201408_cfpb_consumer-advisory_virtual-currencies.pdf
[5] Id.
[6] See Bitcoin, Decentralized, Peer-to-Peer, Cryptocurrency, https://cs.stanford.edu/people/eroberts/courses/cs181/projects/2010-11/DigitalCurrencies/disadvantages/index.html; see also The Guardian, Ten arrested in Netherlands over bitcoin money-laundering allegations, Jan. 20, 2016, https://www.theguardian.com/technology/2016/jan/20/bitcoin-netherlands-arrests-cars-cash-ecstasy.
[7] See id.
[8] See Michael J. de la Merced, Bitcoin Rules Completed by New York Regulator, New York Times (June 3, 2015), https://www.nytimes.com/2015/06/04/business/dealbook/new-york-regulator-announces-final-rules-on-bitcoin.html.
[9] See The Guardian, supra note 5.
[10] See Stan Higgins, Russia’s ‘Bitcoin Ban’ Faces Uncertain Future After Draft Bill Withdrawn, Coindesk, (May 19, 2016), https://www.coindesk.com/russias-bitcoin-ban-draft-bill-withdrawn/.
[11] See The Guardian, supra note 5. has a citationmes.com/20k/new-yovation withing regulation of the bitcoin industry is needed to decrease illegal activity and pr
[12] See Suzanne Barlyn, New York’s Bitcoin Hub Dreams Fade with Licensing Backlog, Reuters, (Oct 31, 2016, 4:40am), https://www.reuters.com/article/us-bitcoin-regulations-dfs-idUSKBN12V0CM
[13] See id.
[14] See id.
[15] Nathaniel Popper, Wall Street Clearinghouse to Adopt Bitcoin Technology, Jan. 9, 2017, https://www.nytimes.com/2017/01/09/business/dealbook/wall-street-clearing-house-to-adopt-bitcoin-technology.html?smid=fb-share&_r=0
[16] See id.
