Bitcoin Users Under Investigation by New York State Regulators

Bitcoin, the hot new untraceable, anonymous, and uncontrollable cryptocurrency, has predictably and recently sustained harsh criticism by statist government officials from around the world. Meanwhile, its undeniable success as a financial product has thrust it into the mainstream, as non-ideological investors like Google Ventures and Winklevoss Capital Management have been getting in on the action. This explosion in interest caught the attention of the New York State Department of Financial Services.

Forbes is reporting that New York’s state-level financial regulator has issued a round of subpoenas to a “who’s who” of high-profile Bitcoin professionals and supporters, citing the need to begin regulating the untraceable digital cryptocurrency in the face of obvious technological roadblocks. State employees allege that Bitcoin could be used by “criminals” to engage in black market transactions, despite the fact that there is no real way to prevent Federal Reserve Notes from being used to purchase contraband. Why are Bitcoin professionals being subpoenaed in the absence of any specific accusations of wrongdoing?

Flawed Premise: Preventing Black Market Activity

It is virtually impossible for governments to prevent black market activity. This has been proven time and time again. America’s War on Drugs is a typical example of what happens when governments attempt to interfere with voluntary exchanges by free people. Ultimately, the transactions occur anyway, and, as a result of the prohibition, violent criminal gangs emerge to enact street justice, as courts refuse to protect the contract rights of individuals buying and selling the prohibited materials.

As such, New York’s financial regulatory body is basing its authority to regulate Bitcoin on a flawed premise — that financial firms have some responsibility to regulate the behavior of clients. In fact, many Americans believe that the War on Drugs is itself unconstitutional and immoral, since such alleged “crimes” lack a victim. Public opinion is moving towards the abandonment of prohibition laws, which were left over from a failed early 20th century policy experiment that led to the rise of gangsters like Al Capone. Without the War on Drugs, there wouldn’t be much of a black market to regulate.

The Existing Court System Can Handle Disputes over Bitcoin

Bitcoin’s inability to be traced doesn’t specifically differentiate it from cash when it comes to dealing with scams, paying taxes, and resolving contract disputes. In cases in which two parties have made a transaction based in the Bitcoin system, those parties can provide courts with the paper trail necessary to prove who owes what and why. As such, in cases in which there is a victim, such as a ponzi scheme or other financial scam, Bitcoin’s anonymity is no issue — the victim has a vested interest to open up the books to the court.

Bitcoin transactions are no easier or harder to report to the IRS than any other financial exchange. When cash transactions happen in the black market, no one takes down any records. Ultimately, the rationale behind developing special regulations to deal with Bitcoin stems from fear-mongering, the assumption that the government simply must have its hands on everything, and the flawed notion that all Bitcoin firms are guilty until proven innocent.

Even sillier, Benjamin Lawsky, the superintendent of New York’s Department of Financial Services, pulled the overused national security card in his argument to regulate the cryptocurrency, “If virtual currencies remain a virtual Wild West for narco-traffickers and other criminals, that would not only threaten our country’s national security, but also the very existence of the virtual currency industry as a legitimate business enterprise.” Benjamin Lawsky needs a reminder that national security falls under the authority of the federal government, not the states. Also, there is no real evidence that Bitcoin is being used in a significant percentage of black market transactions when compared to cash.

Most high-profile Bitcoin firms have indicated that they will cooperate with regulators. Will government spoil one of the hottest new financial trends during the worst economic crisis since the Great Depression? Time will tell.

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