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Can the Government Regulate Bitcoins?

Bitcoins themselves cannot be regulated under current law, at least not directly. But certain activities involving bitcoins can be regulated. This came out in a recent hearing held by the Senate Committee on Homeland Security and Governmental Affairs focused on the necessity and ability for the federal government to regulate virtual currencies, such as bitcoin. The first panel repeatedly claimed that under current law virtual currencies were already sufficiently regulated.

Under Article 1, Section 8 of the U.S. Constitution, Congress is granted the power “[to] coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures.” Bitcoins are not created by the federal government but through data processing within a network of computers. Thus, bitcoins are very much like a foreign currency and remain outside of U.S. jurisdiction as far as valuation or creation. This sentiment was echoed in a letter by current Federal Reserve Chairman Ben Bernanke on the virtual currency.

However, when recognized as a currency, there are conditions under which bitcoins, and other digital currencies can find themselves subject to regulation.

One circumstance is when digital currencies are converted to dollars and vice versa. Back in March 2013, the bitcoin exchange Mt. Gox was charged for failure to register as a currency exchange by the Financial Crimes Enforcement Network. This registration is part of the government’s anti-money-laundering laws. Registration as an exchange requires a business to track the identities of its customers and to identify activities related to money laundering.

Another example was a case in August 2013 in which a man was charged with running a Ponzi scheme involving bitcoins. The defendant argued that his business was not within the jurisdiction of the Securities and Exchange Committee because bitcoins were not money. The judge in the case ruled that bitcoin was indeed a currency and was therefore subject to Securities and Exchange Committee regulations.

Therefore, it is not only possible for bitcoins to be regulated by the United States government, but it has already become a reality for bitcoin users and businesses alike.