Bitcoin – A Primer for Policymakers

Bitcoin is the world’s first completely decentralized digital currency. Four short years ago, knowledge of it was confined to a handful of hobbyists on Internet forums.

Today, the bitcoin economy is larger than the economies of some of the world’s smaller nations. The value of a bitcoin (or BTC) has grown and fluctuated greatly, from pennies in its early days to more than $260 at its peak in April 2013. The current market capitalization of the bitcoin economy is estimated to be more than $1 billion. Businesses big and small have shown interest in integrating the Bitcoin platform into their operations and providing new services within the bitcoin economy. Venture capitalists, too, are eager to put their money behind this growing industry. The development of Bitcoin and its early successes are an exciting testament to the ingenuity of the modern entrepreneur. Because Bitcoin is decentralized, it can be used pseudonymously, and this has attracted the attention of regulators. The same qualities that make Bitcoin attractive as a payment system could also allow users to evade taxes, launder money, and trade illicit goods. Both the Financial Crimes Enforcement Network (FinCEN) of the US Department of the Treasury and the Department of Justice have released official statements regarding the regulation of virtual currencies, including Bitcoin. A Government Accountability Office report on virtual currencies urged the IRS to reduce tax-compliance risks by issuing a guidance. The appendix of that report contains a letter from IRS Deputy Commissioner Steven T. Miller, who assured the office that the IRS is “working to address these risks.” Additionally, a commissioner of the Commodities Futures Trading Commission recently expressed interest in exploring whether Bitcoin falls within the commission’s jurisdiction. In considering how to best oversee this still-nascent technology, government regulators
should take care that their overlapping directives do not hinder the promising growth potential of this innovative financial platform.

This paper will provide a short introduction to the Bitcoin network, including its properties, operations, and pseudonymous character. It will describe the benefits of allowing the Bitcoin network to develop and innovate, while highlighting issues of concern for consumers, policymakers, and regulators. It will describe the current regulatory landscape and explore other potential regulations that could be promulgated. The paper will conclude by providing policy recommendations that will assuage policymakers’ common concerns while allowing for innovation within the Bitcoin network.

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