Bitcoin Regulation: Lifeline or Kiss of Death?

Ethan Mobley, MJLST Articles Editor

Bitcoin’s ever-increasing popularity has sparked fierce debate over the extent to which the alternative currency should be regulated, if at all. Bitcoin, a “cryptocurrency,” is the leading digital currency used today. The cryptocurrency can be used to buy and sell goods online or in traditional brick-and-mortar stores but is also used for speculative currency trading. As Bitcoin is adopted by more and more users, numerous businesses have sprouted geared toward facilitating Bitcoin transactions. One such company is Coinbase, which serves as a currency exchange allowing users to buy and sell Bitcoin (XBT) for USD and other currencies. Coinbase also acts as a “wallet” for Bitcoin, allowing users purchase Bitcoin at the market exchange rate, store that Bitcoin on their phone, and then pay for items using their phone’s “wallet.”

Bitcoin proponents claim the cryptocurrency is superior to traditional fiat for several reasons: 1) Bitcoin supply is self-regulating, and hence not susceptible to changes in government policy; 2) Bitcoin eliminates transaction costs between the buyer and seller of goods, which is especially helpful for small merchants; and 3) buyers using Bitcoin are not vulnerable to identity theft if the merchant incurs a security breach. Bitcoin opponents argue the cryptocurrency is problematic because it can be used for illicit purposes (e.g. transactions on Silk Road) while protecting its users due to relative transaction anonymity. Whatever the advantages and disadvantages, Bitcoin’s success is ultimately dependent upon wide-spread use by buyers and sellers and government regulation that permits free-use of the currency.

Recently, California legislators introduced a bill to regulate digital currencies. California isn’t the first state to consider such legislation, but it is arguably the most important considering California is home to more Bitcoin users than any other US state. Specifically, California AB-1326 would establish a regulatory framework for entities engaged in the “virtual currency business,” which would impose licensure and fee requirements on those entities. As defined, a “virtual currency business” is one that maintains “full custody or control of virtual currency in this state on behalf of others.” Specifically excluded from the bill are entities primarily engaged in buying and selling goods or services. Thus AB-1236 would not impose any burden on retailers–only quasi-banking entities like Coinbase would be subject to the regulation. Such regulation would ideally reduce Bitcoin market risk and volatility, thereby making the cryptocurrency a more viable alternative to traditional fiat. Nevertheless, Bitcoin advocacy groups disagree over whether the bill will ultimately encourage or inhibit widespread adoption of Bitcoin. After all, Bitcoin’s government-independence is one of its most beloved features. Agree or disagree with policies advanced by AB-1236, but one thing is clear—Bitcoin’s ubiquitous influence makes widespread regulation inevitable, and early legislation such as AB-1236 will serve as a model for other states to follow.

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