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Bitcoin laws are coming: US Senate launches virty currency probe

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The heat is on for Bitcoin and other virtual currencies in the US, with lawmakers at the highest levels of government now actively investigating how to regulate the upstart digital monies.

On Tuesday, the Senate Committee on Homeland Security and Governmental Affairs sent letters to a number of prominent federal regulatory bodies, asking them what policies or procedures they had in place to prevent criminals from using virtual currencies for nefarious ends.

The Washington Post reports that identical letters were sent to the Commodities Futures Trading Commission, the Department of Homeland Security, the Department of Justice, the Department of Treasury, the Federal Reserve, the Office of Management and Budget, and the Securities and Exchange Commission.

"[Virtual currencies] can be sent nearly anonymously, leaving little or no trail for regulators or enforcement agencies," the committee's letter reads in part. "Their near anonymous and decentralized nature has also attracted criminals who value few things more than being allowed to operate in the shadows."

The senators' comments echoed a memo issued on Tuesday by Benjamin Lawsky, superintendent of the New York Department of Financial Services, that state's top banking regulator.

Lawsky's memo, which was addressed to a variety of companies and investors involved in the Bitcoin business, described virtual currencies as "a virtual Wild West for narcotraffickers and other criminals," and suggested that without regulatory oversight they could become a threat to US national security.

With policymakers at both the state and federal levels now scrutinizing Bitcoin, it seems inevitable that virtual currencies will come under some kind of formal regulation eventually. To what extent regulators and law enforcement will actually be able to police their rules, however, remains unclear.

Bitcoin and other digital currencies were designed to be anonymous and for their markets to operate outside of governmental interference. And users of Silk Road and other Bitcoin-based underground economies routinely employ additional encryption and obfuscation measures to make tracing the flow of funds extremely difficult, if not impossible.

Criminals or revolutionaries – or both?

In a rare interview with Forbes magazine published on Wednesday, the current operator of Silk Road – who goes only by the handle "The Dread Pirate Roberts" and says he isn't actually the service's founder – said Silk Road and the underground Bitcoin economy are as much about disrupting the global status quo as they are about illicit trade.

"What we're doing isn't about scoring drugs or 'sticking it to the man.' It's about standing up for our rights as human beings and refusing to submit when we've done no wrong," Roberts told the magazine. "Silk Road is a vehicle for that message. All else is secondary."

But not every Bitcoin trader sympathizes with Roberts's lofty political ideals, and US law enforcement definitely does not agree that participants in the Bitcoin economy have done no wrong.

It's been reported that as many as three quarters of all transactions on Silk Road are for illegal drugs, including cocaine and heroin. And competing services don't share Silk Road's qualms about offering listings for other types of illicit goods, such as guns, malware kits, stolen goods, cloned credit cards, or child pornography.

Meanwhile, the US Securities and Exchange Commission has charged a Texas man with securities fraud after he allegedly bilked gullible investors out of millions of dollars' worth of Bitcoin, and cops reportedly seized a South Carolina man's Bitcoin wallet during a drug raid in April.

Nonetheless, Silk Road's Dread Pirate Roberts insists that the government's present focus on criminal activities associated with virtual currencies is really just a distraction from the real elephant in the room.

"We're talking about the potential for a monumental shift in the power structure of the world," Roberts told Forbes. "The people now can control the flow and distribution of information and the flow of money. Sector by sector the State is being cut out of the equation and power is being returned to the individual."

If those truly are the stakes, however, all the more reason to ask not whether the US government plans to bring the hammer down on Bitcoin, but when. ®

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