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POLITICS: PennAve

Feds put digital currency Bitcoin under scrutiny

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Congress,Crime,FBI,Finance and Banking,PennAve,Joseph Lawler,Economy,Bitcoin

When the FBI charged Ross William Ulbricht with running an illegal online drug marketplace, it waded into a nascent legal and regulatory struggle over the digital payment system called Bitcoin.

The government charged Ulbricht, a 29-year-old San Franciscan, with managing an online drug bazaar called the Silk Road under the pseudonym “the Dread Pirate Roberts” -- a character in the 1987 movie "The Princess Bride." Not only did the FBI say that Ulbricht profited from drug sales in his marketplace, but that he also twice tried to contract with Silk Road users to murder people he considered a threat to his anonymity.

By arresting Ulbricht and shutting down the Silk Road, the FBI sent a message to drug dealers and others avoiding the law online that the government is catching up. It also provided a test for the long-term viability of Bitcoin.

Bitcoin, a decentralized digital currency, was the only form of payment accepted on Silk Road. It was introduced as an idea in 2008 and has grown into a fully formed payment system, with the total value of Bitcoins now well over $1 billion. The Winklevoss twins, known for their role in the creation of Facebook, are among its major investors and publicists and plan to start a Bitcoin fund. The currency can be bought with dollars or euros, and vice versa, and only a finite number will be created.

The system uses peer-to-peer technology to enable users to exchange the currency, meaning there is no centralized authority or third party managing transactions. For that reason, many of its users value Bitcoin for anonymous online commerce.

Some support for Bitcoin is libertarian, driven by the belief that a successful cryptocurrency could sever the money supply from the influence of the government.

By all indications, the Dread Pirate Roberts' hopes for the disruptive power of Bitcoin were as lofty as anyone's. In an interview with Forbes this summer, he communicated a libertarian worldview and suggested that, with the use of Bitcoin and anonymous online marketplaces, he had “won the State's War on Drugs.”

His arrest shows that the state is not ready to surrender just yet.

Officials began focusing on the rise of cryptocurrencies earlier this year. Senators on the Homeland Security and Governmental Affairs Committee sent letters to major federal regulators in August asking them to look into cryptocurrencies. The same month, New York State financial regulators called Bitcoin “a virtual Wild West for narcotraffickers and other criminals” in subpoenaing companies that deal in Bitcoins. To the extent that regulators are able to assert control over digital currencies, they will be less appealing to the kinds of users who patronized the Silk Road.

The arrest of Ulbricht and seizure of Silk Road users’ Bitcoins at first spooked its holders — the currency's values, which are typically volatile, fell 20 percent or close to $500 million on the news, according to Wired magazine.

But Bitcoins have since appreciated in value, as more elements of the story have come to light. In particular, it appears that the FBI caught Ulbricht not because his Bitcoin account was compromised, but because of errors on his part, such as using his real name in Internet chat forums.

“They caught him the same way they would catch somebody using cash,” Bitcoin Foundation general counsel Patrick Murck wrote on the group’s website.

Ulbricht’s arrest is likely only the first episode in a lengthy contest between regulators and users to determine the fate of alternative currencies. While Bitcoin, the world’s most prominent cryptocurrency, has survived, questions about its viability and anonymity will become more pressing.

For their part, officials and lawmakers are not backing down.

Sen. Tom Carper, D-Del., chairman of the Homeland Security Committee, told the Washington Examiner that the panel will continue to examine the digital currencies.

A virtual currency’s “decentralized and pseudonymous nature,” Carper said, makes it “an attractive tool for illicit activity."

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