Government Attacks Bitcoin

Regulation Begins

Written by Brittany Stepniak
Posted May 16, 2013

Well, the party for Bitcoin users may be coming to an end. In a move that really should not be seen as much of a surprise, the U.S. Department of Homeland Security swooped in and shut down all Bitcoin business between Dwolla and the Mt. Gox exchange.

This action was reportedly undertaken in the form of court order. Additionally, a number of other Bitcoin service providers and users have indicated they have received similar orders the government.

Since most of these businesses are now having difficulty even accessing the funds which were transferred to Mt. Gox from Dwolla in the last day or so, they are effectively shut down.

What Is Dwolla? 

Dwolla is an online payment system operating in the U.S. The idea behind the service is to offer users nearly instant payment transfers and charge very low fees for the service. 

Most credit card processors and other online payment systems can charge as much as 3.5 percent in transaction fees; Dwolla fees are just 25 cents per transaction. Transactions under $10 are free.

The main draw to Dwolla in this case, however, is the fact that they also are known for accepting Bitcoin, an alternative digital currency. In addition to the low fees and ease of access, the appeal was that these transactions are essentially anonymous. The key idea is privacy.

Most people feel that their online activities, especially financial activities, should remain private. Yet this is certainly not the case when using most of the major online payment systems (or a credit card).

Since Bitcoin is a digital currency, it is also unregulated. Bitcoin is traded just like a commodity, and it is engineered in such a way that fraud is simply not possible. Of course, the one downside to this is that it is not possible to receive (or issue) refunds when using this payment method.

But most users consider this a small price to pay for the ability to keep their transactions and affairs free from the watching eye of the government. 

In order to have a successful online payment system that accepts Bitcoin, it is necessary to use a Bitcoin exchange. This is where Mt. Gox comes into the picture, facilitating the exchange and transfer of Bitcoin transactions. 

It is helpful to think of an exchange as a type of financial clearinghouse for an unregulated currency. Mt. Gox is based in Japan, and it is the largest such exchange, currently processing more than 60 percent of all Bitcoin transactions (as of April 2013).

Government Regulation Ahead 

Many Bitcoin users were fearful of government regulation. Now that it is starting to actually happen, many think full government regulation of Bitcoin is not far off. 

The fact is that there is over $1 billion in unregulated Bitcoin currency in circulation at this point. The best way for the government to shut this movement down would obviously not be to go to each individual merchant or company that accepts the currency, but rather to go after the major players. 

With over 60 percent of all Bitcoin transaction running through its exchange, Mt. Gox is certainly one of the major players in this space. While it is still difficult to determine exactly what is happening and why, it is likely that this is only the first in a series of attacks on Bitcoin exchanges.

Of course, the Department of Homeland Security could simply be investigating a single organization that used Bitcoins through the Dwolla and Mt. Gox systems. After all, there has been a recent lawsuit filed by another U.S. Bitcoin operator (CoinLab) against the Mt. Gox exchange. 

The U.S. government has shown time and again that it is willing and able to “protect” the dollar against all attacks. There have been others who attempted to create alternative currencies. The ones who are successful at actually injecting a decent amount of ‘their’ money into circulation are routinely shut down by the government, sometimes even labeled as domestic terrorists.

The Concept of Money

Ultimately, this all comes back to the question of what is money. Money could be anything that people assign some sort of value. We are all familiar with the dollars or euros in our pockets as ‘money.’

Yet even primitive societies had something that was considered valuable, whether it was stones, livestock, or pieces of gold, silver, or other precious metals/materials.

The idea of an alternate currency that remains outside of the control of any government has a strong appeal to many. Governments have routinely shown that they are incapable of maintaining a monetary supply that accurately reflects value. They hold control over the printing press and are able to simply create more paper money whenever they like.

If the U.S. government decides to operate at a multi-billion dollar deficit every year, they can simply turn on the printing press and make more paper dollars. This, in turn, makes the dollars you hold in your pocket worth less since there are now more of them in circulation. This is simple economics – the law of supply and demand at work.

With Bitcoin, there was a controlled limit. The creator put hard controls to limit the supply of Bitcoins that could ever be created, or minted. The injection of Bitcoins into circulation is being done gradually so as to cause limited disruption.

Apparently, the government has now declared that Bitcoin is a threat.

Governmental Currency Control

Some of the strongest powers of any government are to tax, regulate, and control the supply of money. Did you know that when the United States was under the Articles of Confederation, each state was free to handle its own money supply? Indeed, there were many different competing forms of currency. Later, the Federal government forbade the minting of any form of currency other than the U.S. dollar. 

Currently, any exchange or Bitcoin miner must register as a money services business and comply with all anti-money laundering regulations. Of course, individual Bitcoin users do not.

The government does not like the fact that these transactions cannot be tracked or taxed. So, they are doing what they can to exert their muscle, regulating these exchanges out of business. 

The next step may indeed be limitations and controls on the individual purchase, sale, or exchange of Bitcoin and possibly other ‘alternative’ currencies.

As the value of the dollar (and every other fiat currency throughout the world) continues to fall, the U.S. government has once again shown that it will not sit idly by and watch as its financial serfs abandon the sinking ship known as the U.S. dollar-based economic system. 

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