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Bitcoin goes to Washington, and Brooklyn

Monday, 18 Nov 2013 | 11:44 AM ET
Bitcoin heads to Capitol Hill
Monday, 18 Nov 2013 | 10:20 AM ET
Lawmakers will be looking for answers about how they might regulate a virtual currency. CNBC's Mary Thompson reports bitcoins are not accepted as payments at a growing number of big firms.

On Capitol Hill Monday, it will be a dose of reality for virtual currencies.

With growing investor and consumer interest in bitcoin—the best known of these so-called cryptocurrencies—lawmakers are holding a hearing to find out more about them.

Called "Beyond Silk Road: Potential Risks, Threats and Promises of Virtual Currencies" the hearing by the Senate Committee on Homeland Security and Governmental Affairs is expected to be more educational than confrontational in nature.

A 25-bitcoin piece
Tomohiro Ohsumi | Bloomberg | Getty Images
A 25-bitcoin piece

(Read more: Somebody tell Jared: This Subway takes bitcoins)

With more investors putting money into virtual currencies, and more retailers accepting Bitcoin as a form of payment, lawmakers want to know how safe they are, and how they might be regulated.

One of those retailers is Daniel Lee. Lee and his family own five stores, including a nail salon and two organic produce stores, in Brooklyn. They began accepting Bitcoins recently, seeing it as a marketing tool to attract new customers.

"We heard about a couple of places in the city that were doing it and after looking into it, we found it was very easy to set up," said Lee. "And so we felt there was very little risk on our and, so we thought, why not?"

Lee manages his family's Green Avenue Market, where he said about five to 10 customers a week pay with Bitcoin.

(Read more: Bitcoin surges above $600 ahead of key week)

It's also been used at the family's pizza parlor and restaurant, but not yet at the nail salon. this is not a surprise to Lee, as he said the typical bitcoin user is a young male.

Beyond attracting new clients, Lee also sees a benefit for his own business because it costs less to process a bitcoin payment, than a typical credit card payment.

"With credit card fees and merchant processing fees, chargebacks and things like that, those all kind of hit the bottom line for every small business owner," he said. "Most generally, credit card transaction fees are going to average 2 percent to 3 percent, with some as high as 5 percent. So with bitcoin you pay less than 1 percent."

Banks and credit card companies will argue what you save in transaction costs you lose in safety and security.

Customers' bitcoin wallets, which are stored on their phones or computers, can be hacked, and if the price of bitcoin falls suddenly, a merchant would have no way to recoup the money lost by the fluctuations in bitcoin's price.

These are some of the issues lawmakers are likely to explore in today's hearing. And while bitcoin is not the only virtual currency out there, it is likely to be the focus of the senators' questions.

Created four years ago by an unidentified Japanese programmer, bitcoins are not backed by any government or commodity, and the price is set solely by the supply and demand on a wide number of online exchanges that trade bitcoin.

(Read more: Could China make or break bitcoin?)

Bitcoins gained popularity during the crisis in the Eurozone. Last April, when Cyprus teetered on the brink of financial collapse, Europeans bought up the virtual currency, looking for a place to stash their money.

As recently as October, bitcoins were in the news again, when federal law enforcement agents shut down Silk Road, an online marketplace for drugs and other illicit goods and services.

Since bitcoin's inception, it was thought that the primary demand for the virtual currency came from Silk Road customers, who craved the anonymity provided by a virtual currency.

As it turned out though, shutting down Silk Road failed to shut off demand for Bitcoins.

They have been hitting record highs recently, fueled by growing investor demand for SecondMarkets Bitcoin Investors Trust, and growing consumer demand from China, where big Internet companies like Baidu.com now accept Bitcoins as a form of payment.

(Read more: Bitcoin is tulip mania 2.0-not gold 2.0: Schiff)

In Germany, bitcoin is accepted as a private currency while in the U.S. the Federal Election Commission is considering allowing bitcoins be accepted as in-kind campaign contributions, as stock, cars or other goods might be. The Commodities Futures Trading Commission is also looking at regulating it as a commodity.

All small steps into a world that is virtually unknown to lawmakers, but one they are not willing to brush off as being too far-fetched to ignore.

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