Congress asks: Is bitcoin a threat or a revolution?

Bitcoin is a snappy moniker for the fast-evolving phenomenon known as virtual currency. Apparently, Congress doesn't want to be left behind.

On Monday, the Senate convened its first round of hearings on cryptocurrencies, as they are also known – yet another title that doesn’t help the average person understand the idea one, er, bit better.

Bitcoin represents a new kind of digital cash that can be used virtually anywhere money of any sort is taken. BTC, as it is also called, is based on  mathematical codes written by the pseudonymous Satoshi Nakamoto back in 2008. As people crack the codes, more bitcoins are released into public use.

To this day, nobody knows who Satoshi Nakamoto really is – but the creation is beginning to take off, especially among the tech-savvy younger crowd. You can buy bitcoins on online marketplaces, get them sent to your digital wallet in exchange for goods and services, or use them to buy salmon in San Diego or rent cottages in Ireland.

That said, it remains little understood by the mainstream. This fuzziness is what prompted Sen. Tom Carper (D) of Delaware to convene a hearing – a BTC primer – for the Committee on Homeland Security and Governmental Affairs.

As Senator Carper said, quoting the comment attributed to Albert Einstein's second wife, Elsa, with respect to her husband’s theory on relativity: “I understand the words, but not the sentences.”

The two-hour hearing began with a heavy emphasis on law-enforcement concerns.

Virtual currency has been in the news most recently after the FBI busted the Silk Road website in early October. The site, which functioned exclusively on bitcoin payments, had become infamous for its alleged trafficking in everything from illegal drugs and arms to child porn and murder-for-hire. 

The key elements of the currency that make it so attractive to those who live outside the law: anonymity and lack of a central governing authority.

Many of the issues raised by illicit uses of virtual currency are already addressed within existing regulations, said Jennifer Shasky Calvery, director of the Financial Crimes Enforcement Network at the US Department of Treasury. For instance, those who transmit money commercially must apply for a license, she noted.

Her agency recognizes the emergence of new payment methods brought on by new technologies and says it is important to keep pace. The department issued guidelines for virtual currency operators in March. “It is in the best interest for virtual currency operators to comply,” said Ms.Calvery.

Other testimony implored Congress to watch virtual currencies carefully. 

Anonymity is the key to pedophile activity around the globe, said Ernie Allen, president of the International Centre for Missing and Exploited Children. He noted that a particularly dramatic reduction in the use of credit cards for child pornography coincided with the rise of virtual currencies. And law enforcement's inability to “follow the money” is enabling the worst kind of online activities, he said. 

Panelists all acknowledged the daunting challenges facing law enforcement, but they also pointed to successes such as the Silk Road takedown. The key was infiltration of the network, relying on those inside to make a mistake. 

But Bitcoin Foundation general counsel Patrick Murck cautioned against taking an antagonistic approach to virtual currencies. He noted that the industry is still new and evolving rapidly. More than half the original code has already been rewritten and updated, he added.

He urged any consideration of additional regulation to be weighed against the importance of the US remaining a leader in innovative technology. “Experiments are underway” in many important arenas such as identity verification, he said.     

Experts wonder how much common ground governments and bitcoin users can find. "The problem is that virtual currencies may be sufficiently different by design that they do not really fit in the existing legal model," says Daniel Castro, an analyst at the Information Technology & Innovation Foundation in Washington, in an e-mail. "It’s kind of a game of chicken. Who will blink first, the government or the users?"

A second hearing on virtual currency is scheduled for Nov. 19 by the Senate Committee on Banking, Housing, and Urban Affairs.