Archive for Monday, November 25, 2013

Kansas: U.S. senator grapples with Bitcoins

November 25, 2013

Before going into politics, U.S. Sen. Jerry Moran studied economics at Kansas University and worked briefly in the banking industry before going to law school.

And since being elected to the Senate in 2010, he has served on the Banking Committee, as well as a subcommittee that deals with the banking aspects of national security and international trade and finance.

But he freely admits that nothing in that background prepared him to deal with "Bitcoin," a new form of currency that exists only on the Internet and which is neither minted nor controlled by any government or central banking system.

"It's a difficult subject to get your arms around and understand," Moran said during an interview Friday after speaking at a Lawrence Chamber of Commerce breakfast.

Last week, the subcommittee held its first hearing on the subject, mainly to educate members about what the currency is and and what some of the concerns are surrounding it.

Bitcoin is not the first "virtual currency" to appear on the Internet, but it's the one currently grabbing most of the attention from currency regulators in the United States and elsewhere. That's mainly because of its rapid growth in recent months and its potential for being used as a medium for illicit transactions like drug trafficking and money laundering.

According to BitPay, a payment service provider, there are now about 10,000 merchants worldwide who accept bitcoin for payment. Many of those are eCommerce retailers such as BitcoinShop that offer a wide variety of consumer products.

Traditional currencies like the U.S. dollar are minted by national governments and their supplies are controlled by some kind of central bank like the Federal Reserve.

But the origin of Bitcoin is much more mysterious. It is widely believed that Bitcoin was invented by someone identifying himself, or herself, as "Satoshi Nakamoto," but no one can be sure if that is a real person.

The currency is also traded on a peer-to-peer network, similar to the way Napster and other networks used to swap music and video files, which means transactions can easily avoid detection from law enforcement and taxing authorities.

New bitcoins are "minted" periodically and awarded to individuals through a contest that involves solving complex computer algorithms. But supposedly the total number of bitcoins in circulation can never exceed about 25 million.

And while that may seem small, other Internet-based services and technologies have been known to grow rapidly in very short periods of time. As recently as 2004, for example, Facebook reported signing up its 1 millionth member. Today it has more than 1.1 billion.

That may be reason enough for national governments to get concerned about the impact Bitcoin could have on their own currencies.

"Particularly as I learned about how the value fluctuates so radically, there is great harm that can be had to a consumer in this virtual currency," Moran said.

The anonymous nature of Bitcoin and the people who control is also cause for concern, Moran said, because ultimately nobody who can be held accountable for its management.

It also has implications for the nation's monetary policy, he said, because "in a broad sense, currency has an effect upon interest rates. Outside the Fed, there's no ability to control the volume of our currency."

At the same time, however, Moran raised concerns during the subcommittee hearing last week that if the United States acts alone in regulating Bitcoin, or any other virtual currency, it could inadvertently drive a new and potentially beneficial economic system offshore, depriving Americans of its benefits.

"I don't know what happens next," Moran said. "The Banking Committee is going to continue to pursue this. We're just getting started on trying to understand the topic."

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