Bitcoin: Virtual Currency Enters Real World

The U.S. government has officially legitimized Bitcoin and other "virtual currencies" by attempting to regulate them. 

Welcome to the real world, Bitcoin. The U.S. government has officially legitimized the popular crypto-currency and other "virtual currencies" by attempting to regulate them.

The U.S. Treasury's Financial Crimes Enforcement Network published a list of guidelines Monday applying money-laundering and record-keeping rules to companies that issue or exchange these currencies. This won't affect people using Bitcoins to purchase goods or services.

The guidelines reflect rising concerns about virtual currencies' use in illegal activities, and risks associated with hacking, account thefts and software glitches, as seen in a Federal Bureau of Investigation report last year.

They also are a testament to Bitcoin's growing popularity. Bitcoins reached an all-time-high valuation of $74 yesterday. The surge in the exchange rate this week coincided with concerns that the Cyprus government would take euros from saving accounts to pay its bailout bill. Bitcoin is increasingly seen as an alternative to traditional currencies.

Created by mysterious programmer Satoshi Nakamoto in 2009, Bitcoin removes the reliance on financial institutions from transactions. The currency, which offers users privacy and anonymity, is often celebrated as "democratic" money because exchanges can occur directly between individuals. The network is a decentralized system of tens of thousands of personal computers.

The Bitcoin Foundation responded to the new guidelines in a statement Tuesday, saying the new rules could be infeasible "for many, if not most, members of the bitcoin community to comply with." The change could affect people who "mine," or create, new Bitcoins (and are rewarded with Bitcoins as payment) by making them register with the government if they transmit Bitcoins into another currency.

Some companies anticipated the rules. BitInstant, a payment processor that exchanges dollars into Bitcoins at more than 700,000 locations, is already compliant, the Wall Street Journal reports. And there are plenty of legitimate uses for Bitcoins that could benefit from government oversight. People can use them to make purchases on the websites Reddit and WordPress, for example. One guy even listed his Canadian bungalow for sale in Bitcoins.

For Bitcoin to attract new users and larger sums of money, identification and accountability are necessary. The next step may be to increase the ease of use and integration into existing banking structures. The Bitcoin-Central currency exchange partnership with French financial firm Aqoba in December offers a model for what that might look like. The partnership allows Bitcoin-Central to issue debit cards that can convert holder's Bitcoin balance to euros, and the euro balances of the accounts can be government insured.

The buzz about Bitcoin in the euro area and the U.S.'s new guidelines are a sign: Governments can't ignore Bitcoin anymore.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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    Kirsten Salyer

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