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Does Bitcoin promote illicit e-commerce?

Kenneth Corbin | Aug. 22, 2013
The much buzzed-about digital currency has aroused concern for its use in illicit activity, but George Mason University researchers urge a cautious regulatory approach.

As the tech industry grapples with the potential benefits and risks of the digital currency Bitcoin, policymakers should take care not to impose heavy-handed restrictions on an innovative platform that could transform global commerce, a pair of researchers at George Mason University's Mercatus Center argue in a new policy paper.

As a starting point, the researchers suggest that the proper way to evaluate Bitcoin is "not necessarily as a replacement for traditional currencies, but rather as a new payments system," and acknowledge that it "exists in something of a legal gray area."

"This is largely the case because Bitcoin does not exactly fit existing statutory definitions of currency or other financial instruments or institutions, making it difficult to know which laws apply and how," write Mercatus Center researchers Jerry Brito and Andrea Castillo.

The researchers credit Bitcoin for achieving, at a large scale, what no other payments system has been able to do: provide direct, trusted exchanges of currency over a distributed peer-to-peer network that keeps track of debits and credits.

That network, they note, serves the same function of trusted third-parties like PayPal or MasterCard that act as ledger keepers, ensuring through a form of public-key cryptography that the value of an electronic payment is deducted from the payer's account and transferred to the payee's.

Bitcoin's bright and dark sides
That absence of an intermediary to verify and process transactions could make Bitcoin a far more economical platform for global payments, the researchers suggest, imagining the currency put to use for micropayments, improving access to capital and other innovative applications.

"On the other hand, Bitcoin's decentralized nature also presents opportunities for crime," they write. "The same qualities that make Bitcoin attractive as a payment system could also allow users to evade taxes, launder money and trade illicit goods."

"The challenge, then," they add, "is to develop processes that diminish opportunities criminality while maintaining the benefits that Bitcoin can provide."

On the most fundamental question -- whether Bitcoin is even legal -- the researchers conclude that it probably is, given the U.S. Constitution's ban on states issuing their own currency does not extend to private currencies.

Brito and Castillo explore a variety of avenues where U.S. regulators could establish oversight over Bitcoin, including through anti-money laundering laws administered by the Treasury Department, at the Commodities Futures Trading Commission or under the laws that govern money transmitters like PayPal.

Avoid kneejerk reactions
Ultimately, Brito and Castillo conclude with a series of recommendations for policymakers outlining a cautious approach that would seek to curb the malicious use of the service without overly restricting the development of "a revolutionary technical achievement." That includes a warning against the kneejerk reaction to crack down on the Bitcoin in response to media reports that have linked it to online criminal activity.


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