Digital Currency: Nearly Ready for Prime Time

November 25, 2013

Internet MoneyFor several years, digital currency (Bitcoin, for example) has provided an arcane form of electronic value exchange used by a fairly limited number of people and organizations.  That situation is rapidly changing, and digital or virtual currencies now seem to be on the verge of going mainstream.  An indication that digital currencies are nearly ready for prime time was provided by the recent U.S. Senate hearings examining the use of virtual currency.

Digital currencies provide electronic platforms that enable individuals to make payments and engage in other transfers of economic value without using traditional vehicles such as credit/debit cards or cash.  In many ways, virtual currencies provide an electronic equivalent of cash.  They enable, in some instances, essentially anonymous electronic payments and other digital value transfers.

The recent Senate hearings were conducted by the Homeland Security and Government Affairs Committee.  They were intended to help provide the public with a greater understanding of virtual currencies and their potential value and risks.

One of the issues examined by the hearings is the challenge of categorizing digital currency into the traditional classifications applied to financial instruments.  It is an open question as to whether virtual currencies are formal currencies, commodities or securities, for regulatory purposes.  Each of those financial classifications carries a different set of applicable rules.

It seems that the most accurate assessment of virtual currencies is that they are electronic platforms to support the exchange of economic value, and they can fit within each of the traditional categories, depending on their specific use in a given transaction.  Digital currency platforms can be used as currency-equivalents.  They can also be used in the same manner as conventional commodities or securities.

Another issue discussed in the hearings was concern that digital currencies are increasingly used for payments associated with illegal activities.  Some are troubled by the fact that virtual currencies are being used for payments related to criminal operations such as intellectual property piracy and illegal drug sales.  It is important to recognize, however, that digital currency is no different than traditional currency in its potential for use in conjunction with illegal conduct.

Testimony at the hearings suggested that the U.S. government recognizes the growing popularity of digital currencies and is acting to accommodate that popularity.  For example, the U.S. Treasury Department indicated that it is attempting to develop rules for virtual currencies that will help to make them safer for public use.  The Federal Election Commission indicated that it has recommended that U.S. election rules be modified to permit Bitcoins to be used for campaign contributions.

The Senate hearings signify an important step in the maturation process for virtual currencies.  Forums like this one help the public and policymakers to understand the current status of digital currency and its future potential.  Such understanding is critical to widespread acceptance.  Although digital currency may not yet be fully in the mainstream of public commerce, it is getting much closer to that position.  If not quite fully prepared for prime time, virtual currencies are at least on the brink of mainstream status.