It started late in the first week of February, when MtGox, one of the largest Bitcoin exchanges in the world, had to put a halt on Bitcoin withdrawals. It turned out there was a good reason for this, but they didn’t explain it to customers until Monday, February 10th. That gave the Bitcoin market a three-day weekend to wallow in confusion, and Bitcoin prices tanked.
Early the next week, MtGox explained that Bitcoin withdrawals were put on hold because of a bug in the Bitcoin network software, which allowed malicious messages that make it seem like a Bitcoin transfer didn’t happen when, in fact, it had already gone through, prompting the original sender to make another payment. The bug only impacted Bitcoin transfers, and MtGox continued to allow people to withdraw currency from their account; no one had cash frozen. Eventually Bitstamp, the largest Bitcoin exchange, was also forced to suspend Bitcoin transfers temporarily for the same reason. A fix for the Bitcoin network software is already in the works.
Digital currency is too good of a deal for governments to pass up — unfortunately.
Meanwhile in Russia, the Prosecutor General’s office labeled any Bitcoin use “potentially suspicious” — in Russia that means they can send someone to the gulag if they feel like it. It’s a bit ironic that the Russian government is using the same excuse to crack down on Bitcoin exchanges as the US government, concern about money laundering and terrorism. It seems unlikely that terrorism will be thwarted by cracking down on Bitcoin use by honest traders. It’s good to remember the 9/11 hijackers used credit cards. Any form of exchange can be abused by people of ill intent.
The government doing the best job of regulating Bitcoin transactions is Canada. Instead of threatening letters and haphazard enforcement, the Canadian government is taking time to understand the issue, and then develop comprehensive regulations that address the legal issues — without sending honest users to the Canadian tar sands gulag.
Overall, the issues with Bitcoin this week fall into what might be considered normal growing pains. It’s a new technology, one that’s being met with suspicion by regulators, and seen as a potential new market for hackers. It is very much like the early days of the Internet itself. The world adapted to the Internet and email, and it will adapt to Bitcoin and digital currency.
The next evolution, and you can count on this happening, will be some type of government-issued digital currency. The model is just too good for a government not to consider, and here’s why I think the Treasury will get behind digital currency. Imagine being able to take the government-issued digital currency in your smartphone to a bank, and draw out cash in exchange. It’s not that you’d need to, maybe you just like the feel of paper. The bank could easily verify your tokens, and tag the cash they give you with your personal encryption key. With the addition of a simple microchip, it would then be possible for the government to track the path of every single bill in circulation, or at least account for who withdrew that money from the bank.
I think anyone can see how law enforcement would love that, and the way the government would sell it to us is by suggesting that if someone stole your cash or you lost it, the bank would be able to cancel the missing cash and issue new tokens, almost like traveler’s checks. Or the government could just do away with bills and coins, and save the production costs.
Unfortunately digital currency is too good of a deal for governments to pass up. It would be possible to craft a currency that you couldn’t accept or exchange without a valid ID. Today a $100 bill is good anywhere, and it’s anonymous, but not digital currency. Any digital currency ending up in the wrong hands could simply be canceled, and every transaction traced back to the point of origin.
So what the government views with suspicion today is what they could end up embracing tomorrow. The time to get suspicious is when the Treasury feels inclined to sell you on the idea.