Monday, February 23, 2015

John Burnett — How Do You Regulate Bitcoin? Very Carefully

John Burnett, the black, moderate-conservative writer for U.S. News & World Report opines about the future of virtual currency.

John Burnett is a financial services executive with over 20 years of experience in risk management, operations, governance and compliance at some of the world’s top financial services and business information companies, such as Citi, McGraw-Hill Financial, Merrill Lynch and Morgan Stanley. Follow him on Twitter: @IamJohnBurnett.

For all the extraordinary promise that virtual currency offers, there are many significant questions hanging over this nascent industry that should give consumers and investors pause, particularly as policymakers struggle to keep pace with this new technology.

Consider the fact that virtual currency, also known as bitcoin, is largely unregulated, with a Tokyo-based exchange known as Mt. Gox collapsing last year after it lost 850,000 Bitcoins valued at about a half billion dollars in a security breach. More than that, though, the value of an actual bitcoin has fallen sharply. In 2013, the value of bitcoin peaked at more than $1,200. Now, a bitcoin’s worth is down to $240 – a decline that has not, however, dampened overall enthusiasm for cybercash. Finally, and perhaps most important, policymakers and regulators seem unsure about how to deal with this emerging market, potentially exposing consumers and investors to a level of risk that might be avoidable with the proper regulatory precautions.

My concerns over the freewheeling nature of this industry were heightened last week when troubling questions surfaced over the launch of Coinbase Inc., a company that opened a Bitcoin trading system that reportedly has slightly more than $100 million in backing from significant investors, including the New York Stock Exchange. Just days after Coinbase opened for business, a top financial regulator in New York challenged what appeared to be the company's unfounded claim that it was under regulatory oversight in the state. A spokesman for the New York State Department of Finance issued a statement saying that the company did not have the licenses necessary to operate as a virtual currency exchange in the state.

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