Governments will struggle to put Bitcoin under lock and key

By Jonathan Levin, University of Oxford

The hearings in the US senate last week were the most high profile public discussions that have taken place on the subject of virtual currencies. The US showed its openness by broadcasting the hearing, and it was watched by many Bitcoin enthusiasts around the world.

The discussion looked at the potential risks and opportunities Bitcoin and other virtual currencies pose for society, without going into any of the technical details. Senators made analogies with previous technologies and offered personal anecdotes, placing Bitcoin among inventions such as the internet and mobile phones.

Positive comments from senators, the judiciary and US financial authorities sent the price soaring to its highest price yet, reaching US$900 at one point. At the start of this year, a single coin cost less than US$15.

Bitcoin price and google trends indexed at 100 on 19/11/13. Google Trends, Bitstamp.

But the knowledge gap between legislators, law enforcement and Bitcoin developers is still vast. Coalitions of government agencies across borders are beginning to collaborate on addressing the gap. In 2012, the FBI founded the Virtual Currency Emerging Threats Working Group (VCET), which alongside the US department of justice and financial crime agency also collaborates with the UK’s National Crime Agency. However, at times these bodies seem to lack an understanding of the basic principles behind cryptographic currencies.

In coins we don’t trust

Bitcoin was conceived as a currency that did not require any trust between its users. As a result there is no room for a central authority able to resolve disputes and enforce laws.

Our traditional financial system has intermediaries that sit on top of the narrow supply of coins and notes in the economy, creating layers of credit services and other financial products. In these account-based systems, individuals trust these institutions – banks, building societies, pension funds, and so on – to keep their wealth safe. But, it is these same trust lines that also facilitate government tax collection and legal enforcement.

At the moment, Bitcoin’s equivalent financial intermediaries are the exchanges used to move money between digital and government-issued currencies. These centralised services use accounts to store users’ Bitcoin and government currencies and hence can be regulated like other forms of money transmission.

Since Bitcoin cannot be policed as effectively as normal money, most regulatory work is directed at exchanges. Enforcement within a peer-to-peer, distributed network is difficult. Take cash, for example. There is a reason why it is still the medium of exchange favoured by criminals across the world – without a centralised store and written records, it is harder for authorities to keep track. Likewise, in peer-to-peer file sharing networks, download portals and broadband providers are both subject to regulation and have the responsibility to manage content and user behaviour respectively.

If you’re not on the list…

This does not mean enforcement is not possible; there are considerable efforts to ensure self-regulation within the Bitcoin economy. One example is the suggestion that stolen coins should be blacklisted to prevent them from re-entering the money supply. As every Bitcoin transaction is publicly announced this is entirely feasible if the network could find a way of coming to consensus on whether the coins were actually stolen.

With the operational failures of so many exchanges and continued problems ensuring funds in online wallets are kept safe, this seems an attractive option to increase adoption of the currency. However, such moves inevitably come at the expense of true decentralisation and blacklisting is controversial among current Bitcoin users.

Without a greater appreciation of the technical details behind virtual currencies, regulation will still be limited to the exchanges that sit on top of the Bitcoin protocol. While they serve as the bottleneck between government currencies, the possibility of consumer protection or detection of illicit uses will elude the regulators.

Depending on existing legislation, countries will also vary in the ease by which they are able to adapt definitions of the currency and ownership. These details are absent from the current policy debate and actually mark the distinctive features and possible future uses of these promising currencies.

Jonathan Levin owns 0.39 bitcoin, which he uses for research.

The Conversation

This article was originally published at The Conversation.
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Bitcoin interest: International Comparison

Google trends provides historical data on the amount of searches conducted in specific countries. With Bitcoin being a global phenomenon, I was interested if all the countries followed the same news stories. Are the hearings in the Senate in the US attracting as much interest in the rest of the world? Does the opening of a Bitcoin ATM machine in Canada get picked up in internet traffic in Brazil. The data provided by google is useful to compare within countries rather than between countries, however, we are able to see whether the growth in search terms is similar across countries and whether they occur at the same time.

Google trends firstly normalise the search results and then scale them so that the highest point on their graphs equals 100. I took the date that had the highest value of search terms across all the countries considered (19/11/2013) and scaled the price so that it equaled 100 on that day. The price data comes from Bitstamp.

The graph shows that the closure of the silk road, the opening of the Bitcoin ATM machine in Canada and the senate hearings in the USA have marked the three largest events in the Bitcoin space in the past 90 day. The coverage of the Silk road was the largest in the UK in comparison to other countries. The USA coverage of the Canadian exchange is much lower than countries outside USA in comparison to their interest in the senate hearings. It also seems like the story reached Brazil with a one or two day lag. The spikes in India and France that are outside of the general trends probably indicate a large national news story introducing the public to the virtual currency.

The graph also shows how difficult it is to do historical comparisons when the amount of interest is growing rapidly. The silk road, once meant a lot about the price and possibly about the future of Bitcoin has paled into insignificance in the graph. Clearly Bitcoin awareness has dramatically increased since this date.

Google Trends