Bitcoin has taken a beating as of late in the press as it has endured a number of growing pains.  Among other widely publicized events, the Tokyo-based Bitcoin exchange, Mt. Gox is apparently defunct, leaving the holders of an untold amount of bitcoins in an uncertain and unenviable financial limbo. Also, the January arrest of BitInstant CEO, Charlie Shrem, on money laundering charges, did little to help the image of the digital currency in the public’s mind.  Several other issues also surfaced that the press deemed a threat to the bitcoin community, such as the Hungarian Central Bank’s warnings about the risks of digital currency.

In reality, none of these events pose a credible threat to the long-term success of bitcoin or to crypto currencies in general.  Many stories in the press seem to paint bitcoin with a broad brush as being nothing more than an easy mechanism to launder illicitly obtained funds, and as a system rife with the opportunity to defraud honest actors who legitimately use bitcoin.

Sometimes the press even behaves as if governmental overtures to regulate bitcoin are tantamount to an assault on the viability of the bitcoin system and; therefore, any hint of regulation spells the beginning of the end of bitcoin.  Nothing could be further from the truth.  The opposite, in fact, is true.  Regulation of bitcoin is actually the beginning of the digital currency being recognized as a valuable and indispensable part of the global payment system for goods and services.  This is true for a number of reasons that rarely are addressed adequately in the media.  First, bitcoin’s flexible protocol allows for safeguards against fraud.  The foundational safeguard against fraud already exists within the bitcoin protocol, the blockchain, which provides a roadmap of all transactions ever conducted on the bitcoin system. Even more effective anti-fraud protections could be layered on top of the existing protocol.

Second, with regard to money laundering, the bitcoin protocol is flexible enough to allow for regulatory safeguards to be incorporated as part of the system.  Here is where regulations tailored to the digital currency environment come into play.  New York State is currently looking into digital currency regulation and the possibility of “BitLicenses” as a method of fashioning a workable regulatory scheme to apply to bitcoin.  Under current regulatory standards, many legitimate Bitcoin exchange operators find it unduly burdensome and expensive to comply with the various state money transmission laws after the Financial Crimes Enforcement Network (FinCEN) issued guidance early last year which classified them as “money services businesses.”  Nevertheless, unregulated bitcoin poses a money laundering risk due to its pseudonymous nature and the ingenuity of those actors actively seeking to disguise the source of their funds.

While acknowledging the risks, let’s not rush to “throw the baby out with the bath water.”  Let’s allow New York State’s Department of Financial Services (NYSDFS), led by Superintendent Benjamin Lawsky, to carefully consider how bitcoin might most effectively be regulated.  Hopefully, the NYSDFS will tailor regulations that are crafted with the realities of bitcoin in mind.  So far, his office gives every indication of doing so.  To apply anti-money laundering rules and protocols in the same fashion as they are currently applied to traditional “brick and mortar” financial entities would make little sense in controlling the threat of money laundering and other criminal abuses in the digital currency environment.  At best, a “one-size fits all” regulatory scheme could only serve to stifle innovation in this developing payments system.  At worst, it could drive the legitimate actors out of the bitcoin environment altogether, leaving only a shadow world of bad actors laying largely beyond the reach of meaningful law enforcement.

The key point we would well remember in fashioning bitcoin regulation is the fundamental understanding that digital currency is here to stay.  The only remaining question is whether the digital currency environment is to be populated by responsible, legitimate actors operating within a meaningful and workable regulatory framework, or whether bitcoin will exist in the shadowy world of the Deep Web, an area stubbornly outside the reach of most law enforcement and regulatory control?  Hopefully, common sense and the courage to confront a road untraveled will guide us towards the former rather than the latter.