Someone just took a huge byte out of bitcoins

opinion February 28, 2014 00:00

By Bart Chilton

Many people have no clue about this thing called Bitcoin. This week's collapse of the Mt Gox Bitcoin exchange demonstrates it's time they did.

Bitcoins are virtual currency. Like gold and corn, prices vary daily. Unlike gold and corn, there’s no “there” there – no physical stuff, or even made-up stuff backed by anyone or anything. Bitcoins are bought online and used in an unregulated bitcoin electronic financial currency system. Some purchase bitcoins hoping their value changes. Others use them for online payments. No traditional financial institution (like a bank) is used, and payments are made directly, without intermediaries such as PayPal. Thousands of companies around the globe now accept bitcoins.
Millions of user computers hold bitcoins in “digital wallets” or investors use online “wallet services”. The bitcoin system is decentralised by design, operating in international cyberspace, hence subject to cyber theft. To secure anonymity, user identities are encrypted. It’s all very cloak-and-dagger. That provides appeal for people who distrust governments and large multinational banks. Bitcoins, temporarily, offer an alternative to both.
However, criminals conducting clandestine transactions may use bitcoins for dealing in illegal drugs, weapons, slave labour or gambling. Forget the quintessential stand-off where brief-cased Benjamins are exchanged for illicit goods or services. “First, show me the money.” Nah. With bitcoins the payment is made online; the illegal matter is simply conveyed. Easy breezy. Bitcoins have the potential to make narcotics and weapons trading, human trafficking and money laundering creepily corporate ... and eerily efficient.
This week, alleged technology and security issues shuttered the portals of Mt Gox, the world’s largest bitcoin exchange. Millions of customer funds vanished into the thin air in which they were invested – poof! Furthermore, without a pittance of regulation, the value of bitcoins is exceedingly susceptible to manipulation, and an open range for fraud and abuse. Buyer beware? You betcha.
The question for those involved in this pioneering endeavour is: How can bitcoins enjoy a vibrant expansion of legitimate commerce while ensuring fundamental consumer protections? The answer requires leadership, vision and acceptance of a basic, balanced, harmonised regulatory regimen. Voluntarily establishing global, industry-wide parameters will prove a formidable challenge given the inherent nature of a cryptocurrency system and stakeholders who seek to operate in an entrepreneurial, innovative netherworld without physical constraints. “We aren’t part of the stinkin’ system and we la-la-like it,” will be a difficult ethos to rein in.
Meanwhile, the overall Bitcoin experiment is fast-forwarding at breakneck speed. Absent an industry led effort to address intrinsic pitfalls and liabilities through enhanced self-regulation, it’s simply a matter of time before Bitcoin’s bite draws enough blood to compel policymakers and regulators to action.
Bart Chilton is a commissioner on the US Commodity Futures Trading Commission and the author of “Ponzimonium: How Scam Artists Are Ripping Off America”.