Bureaucrats Line Up to Regulate Bitcoin

The regulators are tasting blood around bitcoin, and like sharks they are positioning for the kill. The blood that they taste was not actually shed by bitcoin itself but by a bitcoin exchange, Mt.Gox, which filed for bankruptcy in a U.S. court on March 10. The troubles faced by the exchange have led to calls by legislators like Senator Joe Manchin (D.-WV) for regulators to act. It is a rare regulator that does not seek to expand his powers, so they are lining up for a piece of the regulatory action.

First up was FINRA, the Financial Industry Regulatory Authority, which issued a warning to investors about possible fraud in “bitcoin-related companies” on March 11. This warning is a bit of a stretch for FINRA, whose job is “efficient regulation of the securities industry.” Bitcoin is not in any way a security, it being primarily an electronic payment system, and so FINRA’s reach would seem to be limited.

Next up was the CFTC, the Commodities Futures Trading Commission, which announced it was looking internally at whether it could regulate bitcoin as a commodity or otherwise under its powers to regulate derivatives. Once again, this is a stretch. Bitcoin, as noted is a network for payments, which seems far away from the traditional definition of commodity – a basic good that can be exchanged for other goods. It is illuminating that some within the agency appear to be arguing that this definition extends to bitcoin.

It is not just Federal regulators, however. A Texas Securities Commissioner, also on March 11, directed an energy company to stop selling securities using bitcoin. The rationale was “investor protection,” but the Commissioner failed to realize that the energy company was the one bearing the risk of using bitcoin, not the investor. Again, bitcoin is primarily a payment system.

Thankfully, one regulator has decided to adopt much more of a wait-and-see approach. Ben Lawsky, New York’s superintendent of financial services, while asserting a right to regulate bitcoin services, has also decided to take a hands-off attitude for now:

The first challenge is to really understand what you’re regulating. I think we spent a lot of time and we, for regulators, have a pretty good handle on what we’re regulating. I’m well aware we don’t understand it like a computer scientist will understand it. That just makes us more careful because we want to always be aware of what we don’t know. We get that.

The bitcoin we know today is certainly not the end of the line for virtual currencies. It’s very much still in the early phase and it’s going to be developed more and there are going to be platforms built on platforms. The product or products or market we end up dealing with someday may be substantially different or improved. We don’t want to put regulations in place that will straightjacket the adaptation one would want to see.

We will see if Lawsky’s actions match his rhetoric, but it is clear that other regulators are not being so cautious. As Lawsky implies, regulators have the power to constrain or destroy promising innovations. For the moment, the fact that so many regulators are circling round bitcoin suggests that at least one of them might take the opportunity to do just that.