Beyond Silk Road: Potential Risks, Threats, and Promises of Virtual Currencies

Testimony Before the Senate Committee on Homeland Security and Governmental Affairs
Jerry Brito | Nov 18, 2013

Mr. Chairman and members of the Committee, thank you for inviting me here today to comment on the risks and promises of virtual currencies. My name is Jerry Brito and I am a senior research fellow at the Mercatus Center at George Mason University, where I study the regulation of emerging technologies in the Mercatus Center’s Technology Policy Program.

We’re here today to discuss virtual currencies in general, but it is Bitcoin in particular that has so many interested in this topic.

Online virtual currencies are nothing new. They have existed for decades. From World of Warcraft Gold to Facebook Credits to e-gold. Neither are online payments systems new. PayPal, Visa, and Western Union Pay are all examples. So what is it about Bitcoin and similar cryptocurrencies that makes them unique?

Whatever one may think about Bitcoin’s prospects for enduring value, it is safe to say that it is a remarkable technical achievement.1 Bitcoin is the world’s first completely decentralized digital currency, and it’s the decentralized part that makes it unique. Prior to Bitcoin’s invention in 2009, online currencies or payments systems had to be managed by a central authority, whether it was Facebook issuing Facebook Credits or PayPal ensuring that transactions between its customers were reconciled. However, by solving a longstanding conundrum in computer science known as the “double spend” problem, Bitcoin for the first time makes possible transactions online that are person to person, without the need for an intermediary between them, just like cash.

This technical breakthrough presents both potential benefits for consumers and the economy and challenges to law enforcement. For example, because there is no central intermediary in Bitcoin transactions, there are little to no fees associated with those transactions, which especially benefits small businesses and price-sensitive consumers. And because Bitcoin is not a proprietary platform run by a single company but an open network, entrepreneurs need no permission to experiment and innovate new products and services.

On the flip side, law enforcement has long relied on financial intermediaries to help them detect, prevent, and investigate illegal transactions. Because bitcoin transactions can have no intermediaries, and because bitcoin transactions are not necessarily tied to identities, it is not surprising that we have seen Bitcoin employed in criminal transactions. In particular, Bitcoin has been used for the sale of drugs and in malware that holds one’s data hostage. It’s also not difficult to imagine how the technology could be employed in money laundering.

Emerging technologies often present both great potential benefits as well as real risks. For example, 3D printing can be used to cheaply make prostheses and life-saving medical devices, but also undetectable firearms. Domestic commercial drones have the potential to revolutionize agriculture and shipping, but could also be used for stalking. The challenge for policymakers is to address the risks posed by emerging technologies while doing no harm to the innovative potential of that technology.

In many cases where emerging technologies pose risks, there will already be laws and regulations of general applicability that address many of those risks without the need for new laws targeted at the specific technology. This is the case with Bitcoin. While bitcoin transactions do not require intermediaries, one must still acquire bitcoins by exchanging dollars, and merchants that accept bitcoins will very often use Bitcoin payment processors. Indeed, there is a fast-growing ecosystem of start-up exchanges, payment processors, and wallet and escrow services that make up Bitcoin’s burgeoning infrastructure. Each of these are already subject to regulation as money transmitters, including state licensing and FinCEN registration, as well as “know your customer” and “suspicious activity report” requirements.

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