Last month, the IRS declared that it would consider bitcoins as property and not currency for tax reasons. This came to the pleasant surprise of many Bitcoin proponents who have longed for more federal regulation and would like to see more of it. It is no secret that the lack of regulatory certainty is a crucial factor stifling Bitcoin. In most cases, entrepreneurs shy away from regulation, but Bitcoin is unusual in that regard. For Bitcoin, there is generally a recognition that a new form of digital money will need to conform to existing financial rules. Fed regulators, as well as state and federal agencies, are currently at work trying to do exactly that. As Jeremy Allaire, Circle founder, explained, regulators play an important part in ensuring consumer protection. For instance, when a company like Mt. Gox crumbles, customers lose their investment and the ecosystem suffers.
The urge for increased oversight is also fueled by a desire to see more banks get involved. As of now, it is quite difficult to create a banking relationship if you are creating a company that uses Bitcoin. Banks themselves are trying to figure out how to view Bitcoin, but to date they have been discouraged from participating in Bitcoin because of compliance with anti-money laundering and anti-terrorism laws. The idea is that with more regulation, banks will be more involved. Despite the fact that the IRS designated Bitcoin as property rather than currency, it accepted the Treasury's definition of a decentralized virtual currency, helping shape the framework of Bitcoin and how it is viewed.
Regulatory authority comes with the burden of higher costs, and much of the excitement surrounding Bitcoin has revolved around the possibility to offer transactions with vastly lower fees than credit cards. However, the cost of regulatory compliance by companies running Bitcoin exchanges or managing Bitcoin wallets will have to be passed on to the consumer, probably in the form of fees. Additionally, the idea behind Bitcoin is that it will be a global currency, which would run into issues with regulators at every level. But for now, regulation is welcomed, and the idea of a multinational digital currency lives on.
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