FinCEN Weighs in on Bitcoin

Screen Shot 2013-03-22 at 8.39.48 AMWell, it was bound to happen. FinCEN, the money laundering enforcement arm of the U.S. Treasury, has weighed in the subject of Bitcoin here. Surprisingly, some people in the Bitcoin world welcome this because it recognizes the reality of BTC and helps to legitimize its use.

Timothy Lee of Cato says that the statement “sends a clear sign that America’s anti-money laundering regulators do not consider the currency a threat and isn’t going to try to force it to change or shut down.”

Actually, as much as I would like to believe that, I’m more persuaded by Eli Dourado’s contrary view on this. He sees this as a potential threat to a main merit of the payment system.

What concerns me is that this language sweeps in—and reveals as the real target of the guidance—Bitcoin mixing services. Contrary to some popular accounts, Bitcoin is not completely anonymous, but pseudonymous. The entire Bitcoin ledger is publicly shared so that the same coins can’t be spent twice. Bitcoin “mixers” take coins from multiple pseudonymous actors, shuffle them around, and return them to their original users under new pseudonyms. In other words, mixers help anonymize a system that is not truly anonymous.

If the government were to succeed in regulating mixers, it would not destroy Bitcoin as a payment mechanism or even hurt Bitcoin’s price, which has now reached an all-time high of $60, but it would ruin one of the chief advantages of using it—the quasi-anonymity that it affords. The destruction of anonymity in payments has important free speech consequences. For example, in response to pressure from the US government, Bank of America, Visa, MasterCard, PayPal, and Western Union blocked payment to WikiLeaks on December 7, 2010. However, WikiLeaks remains able to this day to receive donations via Bitcoin—in large part because anonymous donors do not fear government reprisals.

It’s highly improbable of course that such a crackdown could ever really be effective. If FinCEN hasn’t been able to control dollar cash flows, it can’t come anywhere near controlling much less stopping BTC.

What’s most intriguing is what this debate implies for the theory of money itself. Government wasn’t needed to give rise to BTC. It is not needed to make it flourish. Indeed the experience so far suggests that the entire apparatus of government money intervention is pointless — something Carl Menger argued in the 1870s. The BTC monetary world — like the gold standard of past ages — manages itself. There is no need for a political push to audit the code, as there must be for the Fed. There is no need for board meetings to plan policy. There is no dictator at the top.

As with so much of government activity today, this intervention by FinCEN is an example of how the veneer that government is doing good or somehow making the system work better is being stripped away. The purpose of this intervention is to stop people from doing what they want to do. It is unhelpful, unnecessary, and violates human rights.

Here is a more detailed legal analysis from the Bitcoin Foundation.

Finally, the American Banker points out that the sudden FinCEN shot has already inspired new code hacks to get around possible regulations. I especially like this paragraph: “Money was never meant to be a method of supranational identity tracking. Its use in that way could signal some level of law enforcement desperation. When all other enforcement tactics fail, surveil the finances.”