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The Government Wants to Regulate Bitcoin and Other Virtual Currencies

This article was written by in Economics. 6 comments.

Currencies work as a means of storing and trading value because the people who use them have faith in their value. Faith involves putting trust in an entity more powerful than oneself, whether that entity is a market or a government. Even when the value of money was based on a commodity like gold, its value required faith that everyone would value the commodity similarly. This is still a step removed from when money was based on something that had a value in its use to everyone in the community, like wheat.

Our willingness to put faith in almost any medium of exchange has led to interesting developments. The same concepts that allow us to use legal tender, dollars and cents in the United States, allow different communities to develop their own currencies. If you spend time in computer games — and many people spend a good portion of their lives socializing in virtual environments and “worlds” created just for entertainment — you might need to trade your “real” money for virtual currency that can be used in the game.

The developers who control the game also have control over the exchange rate — how much one unit of game currency costs in the “real world.” If the world is big enough, they can let the market determine the exchange rate. Virtual currencies are popping up everywhere, because from a commercial perspective, whoever controls the currency can pull profit from the exchange.

  • Facebook Credits operate in a manner similar to currency in virtual reality games. You can buy Credits to use in games and to trade for gifts online. Facebook determines the exchange rate and is also the “bank” where you store your Credits.
  • Bitcoin is likely the most popular virtual currency because it is invading on the territory of actual, legal tender. You can buy products and services in the real world using Bitcoins, often as a secondary option to cash and credit.

As long as everyone agrees on the value of a bitcoin or of any other manner of currency, does it make a difference whether people use a currency backed by the government or not for private transactions? Should anyone be concerned that transactions occur using a currency not produced and maintained by the government in power in the land or lands where the transactions take place? After all, if I wanted to buy, for example, a printer worth $100 from a friend, I could give him $100 in cash or I could trade with him using, for another example, a mobile phone we agree is worth about the same as the printer. Why not transfer $100 worth of bitcoins to him, as long as we agree on the amount?

Virtual currencies open the door for manipulation and money laundering, so the government wants to apply the same financial regulations to these virtual currencies. Traditional banks — entities that deal with the currency supported by the United States government — need to file financial reports to the government for transactions exceeding $10,000 or otherwise suspicious activity and keep accurate records of their business. So far, companies that buy and sell virtual currencies have no such regulations, and are thus more inviting towards criminals who would use such currencies for nefarious purposes.

In fact, transfers using virtual currencies can be anonymous, unlike large transfers of money using government-backed securities. You can “follow the money” to trace transactions back to a source, most of the time without difficulty, when dollars are in use; with currencies that allow anonymous transfers, it’s easier to hide the true source of the funds.

There’s no evidence of Bitcoin-funded terrorism or any large cases of money laundering that have been public so far, but the Treasury Department isn’t waiting around. They will start applying anti-money-laundering rules to virtual currencies and the companies that deal with them. The financial industry, through the American Bankers Association, is keen to ensure that regulations that restrict the free flow of money to and from all sources apply to all vehicles the same. That’s a concern that comes not out of overall security for the country and the well-being of innocent citizens who might be harmed by financial fraud, but for the sake of their own firms who don’t have to face competitors in an unregulated financial Wild West.

The Bitcoin Foundation is fighting the move by the Treasury Department to regulate virtual currency, citing the burden it would be for bitcoin merchants to comply with the new regulations.

My use of bitcoins extended to a few hours when the currency was gaining popularity. I tried using the service, which required running an application on my computer continuously. This seemed to be more that what would be necessary to use a currency, so I uninstalled the program and didn’t think much of it. Also, I haven’t played any games that required depositing “real” money to convert to credits to be used within the game — I always figured getting my money back would be more of a hassle than it’s worth to play the game. But “kids these days” are more apt than I to use their money — or their parents’ money — to advance their characters in these role-playing games that use virtual currency.

Should the government have the power to regulate virtual currencies? Are national security and the protection of citizens from financial scams good enough reasons to require the government’s involvement with these transactions? I see little functional difference between a transaction in dollars and a transaction in bitcoins, for example, so if we must abide by regulations for one, we should need to for the other.

Wall Street Journal

Published or updated March 22, 2013.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 6 comments… read them below or add one }

avatar 1 Anonymous

Wow, I’ve never heard of large transaction using these types of play money but I guess anything is possible. Way back, even before my time, banks and other entities produced their own money and depositors and users where left holding worthless paper if the bank failed. This could be similar so I guess government intervention could be necessary if there are consumer protection, money laundering or currency stability issues. I would hope the regulations would target reporting requirements for large real-world cash transactions and scams, but I would hate to see IRS involvement – could game-playing credits become reportable earned income? Good Grief!

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avatar 2 Anonymous

Depends on the currency and what the intent is. Bitcoins : yes. Wow gold : no.

Yes the government should absolutely be able to regulate a virtual currency. IF and only IF the currency in question is mean to be used as a real currency. Bitcoin is intended to be a currency. Its intended to be used to trade for goods / services. So yes it should be regulated. You can’t just setup up a currency and then ignore the laws and regulations about currencies. We should not be risking Bitcoins being used to fund terrorism or money laundering just because the Bitcoin people whine about regulation being ‘too hard’. You setup a currency and you get currency regulation. End of story.

Money exchanged in games is not really a currency. Its not supposed to be sold outside the game or used for things other than gameplay. That currency does not need any regulation.

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avatar 3 Luke Landes

See, I think the money used in games is a real currency. It can be bought and sold for and with dollars and cents, it can be used to pay for products services (although a very limited set of products and services without reconversion) and can be used, at least in theory, to mask the source of funds, if the games weren’t to require identifying information with their accounts. Besides, game accounts are more easily hacked than bank accounts, for the most part, making the security of those game-money accounts slightly at risk. I think there’s a solid argument for regulating in-game financial transactions.

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avatar 4 Anonymous

Usually the games I played in the maker of the game did not allow users to buy and sell the game currency in secondary markets. So that resale market was a ‘black market’ really. If theres no official means to exchange the currency for real world money then its not really currency. Just because someone can break the rules and use game currency for real money doesn’t mean it should be treated as real money. I see no point in regulating fake money in games if the money is solely meant for use in the game. The government shouldn’t care if I use 2000 pieces of gold to buy a +3 sword.

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avatar 5 Anonymous

With the development of internet and technology as well as the proliferation of scammers and illegal activities, it is always possible that virtual currencies will be used in money laundering. Hence, I agree that the government should regulate the use and flow of bitcoins and other virtual currencies before it is too late.

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avatar 6 qixx

There is one problem with “the government” regulating a virtual currency that is based solely online. What government? US, UK, Russia, Germany. Online entities can change their country of origin with relative ease. Even deciding these online entities should be regulated there is the question of what government is allowed to regulate them. If they setup shop in a location and do not like the regulations they can easily move shop to another country and then someone else is doing the regulating.

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