Bitcoin Needs Better Oversight, But No One Agrees On The Details

The implosion of Mt. Gox, the world’s largest Bitcoin exchange, has many cryptocurrency believers and government entities alike agreeing on one thing: The Bitcoin economy needs some kind of regulation to prevent fraud and rebuild trust with users.

That’s the easy part. Exactly what kind of regulation? That’s the hard part. Don’t expect an answer soon.

Bitcoin’s inventor (or inventors), known only by the pseudonym Satoshi Nakamoto, envisioned it as a purely peer-to-peer transactional currency. Instead of clearing transactions through banks, governments or other institutions, Bitcoin employed a technological innovation in ledger keeping, the blockchain, that would allow individuals to exchange bitcoins directly with one another while preventing double spending or fraud.

But as the Bitcoin economy grew, such peer-to-peer transactions weren’t enough to make bitcoins useful in the real world. Exchanges sprang up to let people convert dollars and other currency into and out of bitcoin. One of the first was Mt. Gox, which explains why a disproportionate number of early adopters may have lost everything when it crashed. The Tokyo-based Bitcoin exchange is rumored to have lost some $380 million of its customers’ money.

Setting aside the question of whether it’s wise to convert your life savings into a volatile cryptocurrency (short answer: it’s not, though some of the stories are heartrending), it’s pretty clear that whatever Mt. Gox has done with its customers’ money is not OK. And that has people both inside and outside the Bitcoin economy thinking more seriously about adopting some sort of oversight—exactly what Bitcoin was designed not to need.

Here are some proposals for what regulation of the Bitcoin economy might look like. 

World Governments Weigh In

In the U.S., the feds aren’t taking any chances. Late Tuesday night, Mt. Gox received a subpoena from New York prosecutors, indicating that the U.S. government is beginning an investigation into goings-on at the exchange. This is only the latest in federal actions against Mt. Gox; in May and June of 2013, the Department of Homeland Security seized Mt. Gox accounts holding $5.5 million on suspicion that the exchange was operating an “unlicensed money transmitting business.”

In other respects, though, federal and state authorities have been slow to  Bitcoin regulation—at least outside of enforcing existing money-handling laws and prosecuting alleged bitcoin-related money laundering. In November, a Senate hearing on Bitcoin apparently left lawmakers charmed. Bitcoin ATMs courtesy of Robocoin have also just begun to appear in the country, now that their makers have proven they’re ready and able to navigate an unwieldy regulatory-approval process. 

But the Mt. Gox crisis could sour things. The debacle has made it clear that at least one exchange hasn’t been treating its customers fairly, raising questions as to whether others might be doing the same—not to mention how anyone would know short of a spectacular implosion a la Mt. Gox.

Meanwhile, Japanese authorities are also investigating the matter. Japan currently has no laws that specifically address Bitcoin, and until now, Japanese financial investors thought of Bitcoin more as a traded product than a currency.

One option is to expand Japan’s Payment Services Act so that Bitcoin fits under its scope. The act already covers electronic money, shopping points and escrow transactions, the New York Times reports. Bitcoin might fit in seamlessly. 

Bitcoin’s legal status varies widely around the globe. But it’s likely that after Mt. Gox, it won’t just be Japan and the U.S. taking a renewed interest in Bitcoin regulation, predicts Richard Weston, organizer of the DC Bitcoin Users Group.

“Going forward, there has to be a shakeup,” he said. “It’s going to get regulators and governments worldwide weighing in, not only on Mt. Gox but on so-called virtual currencies. There may be a call for more regulations. We’re in the eye of the hurricane, that’s my opinion.”

Bitcoin Takes A Stand

Leaders from inside the Bitcoin economy have their own ideas about what regulation might look like. Coinbase, a digital wallet that also allows exchanges, published a joint statement regarding Mt. Gox along with the CEOs of BTC China, Blockchain.info, Circle, Kraken, and Bitstamp.net—arguably some of the largest and most influential companies Bitcoin.

According to the statement, any regulation of Bitcoin needs to begin with Bitcoin’s major exchanges themselves:

Bitcoin operators, whether they be exchanges, wallet services or payment providers, play a critical custodial role over the bitcoin they hold as assets for their customers. Acting as a custodian should require a high-bar, including appropriate security safeguards that are independently audited and tested on a regular basis, adequate balance sheets and reserves as commercial entities, transparent and accountable customer disclosures, and clear policies to not use customer assets for proprietary trading or for margin loans in leveraged trading.

The joint statement notes that the companies will band together to publicly reassure customers that their funds are safe to recover the trust “squandered by the failings of Mt. Gox.”

The statement, of course, closely echoes the bland reassurances governments and banks issue whenever the financial system starts to look shaky. It doesn’t come close to addressing whether users will be comfortable putting their money into a cryptocurrency that regulates itself, no matter how seriously its key players take their roles as one another’s watchdogs. 

In a post Mt. Gox world, Bitcoin customers may no longer be satisfied with the system’s pre-existing failsafes, given that they’ve already apparently failed Mt. Gox’s customers. The next question is whether users are willing to take the new reassurances from Bitcoin companies at face value, or whether they’ll need more—maybe even governmental oversight—before they’re willing to trust for anything beyond speculation.

Photo by btckeychain

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