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Bitcoin Value at All-Time High; Should the Government Start Regulating It?

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Bitcoin, the encrypted online currency that raises a few eyebrows at political soirees, just passed the $700 threshold. Four years ago, you could buy a Bitcoin for less than $50. Just do the math.

On Monday, government experts and Bitcoin representatives appeared before the Senate Homeland Security and Governmental Affairs Committee to discuss the potential risks, threats, and promises of virtual currencies.

The hearing came a month after federal authorities shut down the underground website Silk Road, also known as the "Amazon for drugs," which used Bitcoins for payments.

Don't do anything bad, but, if you do, do it anonymously

Anonymity and crime go hand in hand. At least, that's what Brian de Vallance, acting assistant secretary for legislative affairs, suggests.

"Anonymity in cyberspace creates a unique opportunity for criminal organizations to launder huge sum of money undetected," he wrote in a letter to the Senate Homeland Security Committee.

On the other hand, "cash is still probably the best medium for laundering money," stressed Jennifer Shasky Calvery, director of the Financial Crimes Enforcement Network.

They are both right. Bitcoin, as all things new, has its weak spots. Enabling illegal activity is one of them since linking Bitcoin transactions to real-life identities, though possible, is definitely a hard nut to crack.

But drug dealers, money launderers, and "deep web" criminals existed long before Bitcoin was even invented. And a new pileup of legal papers and regulatory constraints might not be the answer to the Bitcoin problem.

Mythili Raman, acting assistant attorney general for the criminal division of the U.S. Department of Justice, mentioned that existing statutory tools seem to be sufficient to counter the threats posed by virtual currencies. "As our track record shows, we are up to the challenge, and we are innovating as the criminals are innovating," she said at the hearing.

Is Bitcoin real money?

If you happen to stumble upon a study on money (and more specifically international money) theory, you'll realize that Bitcoin is not "real money." For instance, can you measure its purchasing power? How many apples can you buy with one Bitcoin today or in 10 years from now? Bitcoin is functional because we can exchange it for old-fashioned cash whenever we like. To top it all, the constant ups and downs of its value take you on a roller coaster ride and make greedy speculators rub their hands in glee.

However, the volatility will eventually wear off once all the hype around Bitcoin starts to cool down. And all the stumbling blocks on the road to evolving from a questionable technology breakthrough into "real money" will be torn down as more and more businesses embrace it, and, slowly but steadily, Bitcoin leaves its own mark in the monetary arena.

The benefits of a decentralized currency

Looking to the future, Bitcoin offers decentralization. It's free of central bank control and immune to economic decision makers' and bankers' shenanigans. It facilitates trade and, at the same time, it narrows transaction costs down. Imagine how much online retailers will be able to save by eliminating debit and credit card transaction fees or how easy it will be to pay for a beer at a bar anywhere in the world.

And the trend is starting to gain business legitimacy. Last month, Chinese Internet behemoth Baidu  (NASDAQ: BIDU  )  followed in the footsteps of popular vendors such as OkCupid, Reddit, and WordPress, and started accepting Bitcoins in exchange for Jiasule, its online security and firewall services. Baidu's move paved the way for Bitcoin to tap into China – a country synonymous with global trade.

In other words, the Asian Tiger's trading partners, as well as the countless foreign companies that operate in this huge market, could, over the long term, cash in on the high-speed, low-fee money transfers Bitcoin has to offer.

Final thoughts

We read books on digital devices, we replace workers with machines, we worship all things electronic. Why drag our feet on changing our wallets to e-wallets?

Bitcoin can make our lives much easier, but can it serve as a generally accepted medium of exchange or store of value? Locking it behind regulatory bars will not allow for it to flourish and unfold its potential benefits.

Ben Bernanke cautiously gave his blessing to Bitcoin, signaling the beginning of a new era for this peer-to-peer digital currency. In a letter to the Senate, he wrote, "Virtual currencies may hold long-term promise, particularly if the innovations promote a faster, more secure, and more efficient payment system."

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