US Regulators Eye Bitcoin Supervision

Published Mon, May 6 2013 5:21 PM EDTUpdated Fri, Sep 13 2013 4:33 PM EDT

Financial Times

By Tracy Alloway, Gregory Meyer and Stephen Foley in New York

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Senior officials at a top U.S. financial regulator are discussing whether Bitcoin, the controversial cybercurrency, might fall under their regulatory remit.

Bitcoin "is for sure something we need to explore," Bart Chilton, one of the five commissioners at the Commodity Futures Trading Commission told the Financial Times. A person familiar with the CFTC's thinking said that the regulator is "seriously" examining the issue.

Said Mr. Chilton: "It's not monopoly money we're talking about here—real people can have real risk in these instruments, and we need to ensure that we protect markets and consumers, even in what at first blush appear to be 'out there' transactions."

Four-year-old Bitcoin is attracting the interest of regulators amid volatile booms and busts in the value of the cybercurrency and fresh media interest. Intensified regulatory scrutiny could pose challenges for proponents of Bitcoin, who have praised the currency for its independence from traditional authorities.

In March, a branch of the US Treasury department said that all firms that exchange or transfer the virtual currency will be considered "money services businesses."

That means they must provide information to the government and introduce policies to prevent money laundering. It could also make it risky for other financial institutions to do business with firms that are not in compliance.

Since the ruling, at least three companies in North America have reported having their business accounts closed by their banks. Bitfloor, a New York-based Bitcoin exchange, said it was shutting down entirely, and it has not yet been able to return funds to customers.

Roger Ver, founder of Bitcoinstore.com and an angel investor in Bitcoin start-ups, said that he knew of some entrepreneurs who had moved to Panama to explore setting up operations outside of the U.S.

"Even if U.S. regulations make it hard for Bitcoin businesses to operate in the US, that doesn't mean it will make it difficult for people to use Bitcoin as a currency in the U.S. Bitcoin is a world currency," he said.

The CFTC regulates derivatives contracts and, under Dodd-Frank financial reform, has sweeping authority to oversee retail foreign exchange dealers.

CFTC jurisdiction generally does not extend to cash markets unless exchanges list derivatives contracts based on them. For example, the agency monitors physical oil transactions insofar as they influence crude futures traded on the New York Mercantile Exchange.

One person familiar with the discussions said Bitcoin would not become subject to CFTC jurisdiction unless it becomes the basis for a derivatives contract. The use of Bitcoin to pay for ordinary goods is outside the commission's bailiwick.

Leveraged Bitcoin transactions that settled in more than two days—so-called "rolling spot" transactions—would also fall under CFTC jurisdiction, the person said.

Said Mr. Chilton, the commissioner: "In essence, we're talking about a type of shadow currency, and there is more than a colorable argument to be made that derivative products relating to Bitcoin falls squarely in our jurisdiction."

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