Bitcoin strives to be a secure online medium of exchange that provides anonymity and doesn’t require purchasers to surrender credit card information to sellers. While it is not currently a significant market mover, the virtual currency’s regulatory and legal issues are troubling policymakers.
Bitcoin is, ostensibly, free of government regulation; governments can influence but lack direct control of Bitcoin. China recently restricted banks from taking Bitcoin, but the extent of that setback may be negligible Notably, U.S. companies such as Overstock.com are now accepting Bitcoin and its acceptance is slowly becoming more widespread.
However, critics of Bitcoin emphasize its inherent shortcomings as well as significant undesirable consequences. To begin with, the process of securing (or “mining”) Bitcoins requires individual technical knowledge. Miners must utilize “application-specific integrated circuits,” which is specialized hardware optimized specifically to mine for Bitcoins. Also, the currency is inherently deflationary, since Bitcoins are maxed out at 21 million (so far over 12 million have been mined) whether or not they are lost or destroyed. As more Bitcoins are mined, the reward for successful mining decreases, encouraging people to hoard their Bitcoins and discouraging borrowing. Finally, Bitcoin is an unstable medium of exchange because its price fluctuates so wildly.
Nevertheless, commentators agree the virtual currency is widespread enough that Bitcoin cannot be ignored given the potential legal and regulatory implications. For example, buyers and sellers involved in Bitcoin transactions can effectively sidestep financial regulations and monitoring. The Congressional Research Service acknowledged in December the virtual currency’s “potential for facilitating money laundering.” Recently, federal authorities seized 29,655 Bitcoins – estimated to be worth around $27 million – from Silk Road, an online marketplace for illegal drugs.
Another concern is about whether Bitcoin should be taxed as a capital asset, subject to the capital gains rate (up to 24%), or as regular income (up to 43%), as fiat (government-backed) currencies normally are. One Forbes writer notes that treating Bitcoin as a capital asset makes theoretical sense, but might be impractical as it would confuse taxpayers that use Bitcoin like cash. Making purchases from companies such as Overstock, she notes, feels more like using currency than trading a capital asset.
The future success of Bitcoin depends primarily on whether the currency can gain stability and widespread use. Stabilization may require that a central institute buy and sell Bitcoin in such a way as to prevent major swings in value, but this cuts against the libertarian philosophy of Bitcoin enthusiasts.