This afternoon, the Senate held a hearing about the online currency known as Bitcoin. Bitcoin is a type of digital currency, sometimes called cryptocurrency for its strong encryption, used for online transactions. Unlike virtually every other type of currency, Bitcoin does not use a central authority to manage the money supply or transactions; there is no mint or central bank, just an open pool of users whose computers “mine” Bitcoins by solving math problems. Whether this anarchic monetary system is economically viable remains to be seen, as does Bitcoin’s future in the very not-anarchic world of financial regulation. The results of today’s Senate hearing will likely help shape the latter.
Bitcoin gained recent notoriety when the feds seized the website Silk Road and charged its alleged founder, Ross “Dread Pirate Roberts” Ulbricht, with a variety of charges, including conspiracy to distribute controlled substances, computer hacking, money laundering, and murder-for-hire. The Silk Road is a front-end for the internet’s black market, a sort of eBay for the illegal, primarily used to sell drugs of every variety. The Silk Road can only be accessed through the Tor network, which uses a convoluted method of routing internet traffic to give its users anonymity online. Bitcoin, which is not entirely anonymous, is the currency used on the Silk Road.
While Bitcoin is not totally anonymous, it is much more difficult to track than any other form of online currency, and Bitcoin developers and users are constantly looking for new ways to better protect their privacy. The potential to make anonymous transactions is problematic for law enforcement, and will likely be one issue the Senate seeks to address.
Personally, I say laissez-faire when it comes to Bitcoin. Yes, it can be used to fund illegal activities; so can every form of currency, including barter. Yes, it may one day be completely anonymous; so is cash, and yet police were somehow able to solve crimes when anonymous cash transactions were the norm.