"[A]s a technology, Bitcoin is neither good nor bad; it is neutral. Paper dollar bills, like bitcoins, can be used in illicit transactions, yet we do not consider outlawing paper bills. We only prohibit their illicit use. Furthermore, there is only anecdotal evidence about the extent to which bitcoins are utilized in criminal transactions. It would be wise to put the criminal use of the technology in perspective alongside its legitimate uses. As the bitcoin economy grows, legitimate uses of bitcoins will likely dwarf criminal transactions, just as we see with paper dollar bills."
Further, because Bitcoin, like BitTorrent, is a distributed peer-to-peer network, rather than a single company, Brito and Castillo argue that it "is virtually impossible to shut down," and that a blanket prohibition on the service would foreclose on productive, legitimate uses of the service, while ensuring "that criminals alone will use the technology."
Instead, they advise that regulators at the Financial Crimes Enforcement Network work with white-hat developers and other Bitcoin users to clarify the agency's guidance on the service.
More broadly, they suggest that regulators should develop a new classification for Bitcoin that would dispel the confusion surrounding a platform that "does not comfortably fit any existing classification or legal definition."
Does bitcoin ease illicit commerce?
The report comes amid growing concern among some lawmakers that the virtual currency operates outside of the scope of conventional regulations, and that it is used to facilitate the flow of illicit commerce on the Web.
Two years ago, Sens. Chuck Schumer (D-N.Y.) and Joe Manchin (D-W.V.) wrote to Attorney General Eric Holder and Michele Leonhart, the administrator of the Drug Enforcement Administration, asking them to take action against the online drug marketplace Silk Road, which uses Bitcoin as a currency along with the anonymizing software Tor.>
Then last week, the chairman and ranking member of the Senate Homeland Security and Governmental Affairs Committee wrote to DHS Secretary Janet Napolitano expressing concern about the rise of digital currencies that operate without and backing from a central bank or government entity.
"They can be sent nearly anonymously, leaving little or no trail for regulators and enforcement agencies," Tom Carper (D-Del.) and Tom Coburn (R-Okla.) wrote.
"The speed at which they can be sent globally and the potentially profitable investments that can be made trading virtual currency have made them attractive to entrepreneurs and investors alike. However, their near anonymous and decentralized nature has also attracted criminals who value few things more than being allowed to operate in the shadows," they added.
Carper and Coburn cite a case that the Securities and Exchange Commission brought last month against a Texas man who was charged with operating a Ponzi scheme based on Bitcoin, as well as the Government Accountability Office's call for the IRS to expand its tax guidance on virtual currencies, along with other government activity in the space.
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