Very recently, it has become painfully clear that the US government wants a lot more information on decentralized virtual currencies like bitcoin. In an appropriations bill that went through the committee recently, the House of Representatives requested that the FBI provide a report to them. In the bill, under the heading “Money Laundering”:

The same week, the Senate Committee on Homeland Security sent a letter to Janet Napolitano, its secretary. It implores the need for strategies in order to provide a framework for working with bitcoins. Yet this letter was clearly looking for guidance in the matter as opposed to strict ideas of stifling regulation that some fear.

Finally, the state of New York’s Department of Financial Services issued a Notice of Inquiry into virtual currencies. They made it clear in the letter that the idea is to find a way to operate in the new financial environment, and the rules for normal, fiat money may not apply to currencies like bitcoin. This has, as reported by Forbes, resulted in subpoenas being sent to 22 bitcoin-related companies in New York so authorities there can understand more.

A recent legal ruling by the United States District Court in Texas has given precedent that bitcoin is indeed money. That court case was actually in connection with the alleged Ponzi scheme known as Bitcoin Savings & Trust. A ruling that clearly gives credence to the fact that bitcoin is indeed money is something that means it is front and center in the scope of law enforcement investigations.

Authorities already know it can be difficult to track down bitcoin transactions. This is a key reason why illegal drug marketplaces like Silk Road and Atlantis operate in bitcoins alone – according to recent reports, that website has in place a system that allows it to further anonymize bitcoins that flow to those selling drugs on its site.

That might make bitcoin a lot harder for the authorities to track than real dollars, although law enforcement has reportedly seized bitcoin in a drug-related case. It means that they’re not entirely out of the loop. Yet the feds are at a severe disadvantage when one considers that criminals often are able to stay one step ahead and adapt to the authorities catching on to their strategies.

There have been a few bitcoin startups that have received millions of dollars in venture capital money. The investigations being performed in New York cloud the bitcoin industry’s ability to continue to innovate in the United States.

Although bitcoin startups in the United States may feel threatened by the scepter of regulators, there may be relaxed regulations elsewhere. Even if that is true, the United States is the best place for a startup to receive venture capital. VCs like to invest in tech companies in the bay area because it is a hotbed of tech talent and money.

Can that be replicated elsewhere? It remains to be seen. Bitcoin has popularity in the San Francisco bay area as well as in the realm of finance in New York. It’s scary to think about how expensive it may become to fully regulate a bitcoin business, whether you operate a bitcoin exchange, a mobile wallet for BTC or a mining business. All of these types of operations are transmitting money, as has been ruled by the District Court. Any company that handles bitcoins for its customers would be transmitting money.

The balance for regulators is in boosting the economy with innovative financial tech like bitcoin while not overwhelming these companies with arcane fees and rules. The state of California has already done this, and created money transmittal rules for companies based there that are so complicated that huge tech companies like Facebook, which has had its own virtual currency, simply ignore the laws.

Federal regulators aren’t going to let any bitcoin run through the cracks; there’s too much at stake for the government to thwart criminal bitcoin activity for them to do that. What’s interesting to see is the list of companies that have been subpoenaed: most of them are well known and established businesses. There is an overwhelming amount of venture capital firms in this list.

Bitcoin isn’t like a bank. It doesn’t have to work directly with regulators in order to process money. There’s not a lot right now stopping a US-based bitcoin business from operating. As the International Monetary Fund recently wrote, “Bitcoin’s ability to serve as regulation-free virtual cash poses a number of difficult legal questions thanks to its transnational and decentralized nature."

Open sourcing of US dollars is an intriguing concept. Standard Treasury is a company that is working to build something akin to a US dollar application-programming interface. The idea is to make banking transactions easier for businesses, the organizations that pay the highest in banking fees.

Although that’s really more for show. No matter what Standard Treasury does, and as innovative an effort like this might be, the United States government will always have supreme authority over the dollar. It’s an economic weapon, the 61% reserve for the entire world. Protecting that is part of regulating bitcoin even if new money ideas like Standard Treasury actually make banking less opaque.

The U.S. government doesn’t want another Bitcoin Bank & Trust. Trendon Shavers, the proprietor of this allegedly phony bank, has made the government understand how easy it could be to bilk $60 million from regular people looking for an investment return.

And they don’t want mail-order drugs being sent anonymously to people using a medium of exchange like bitcoin. They may be able to control any sort of bitcoin-based business in the US, but bitcoin isn’t like Liberty Reserve, for example. It’s decentralized. There is no central operator that federal authorities can speak to.

Bottom line: can the United States government control bitcoin? They recognize it as an advanced form of money that could be too powerful in criminal hands. But it is doubtful they can control it like fiat.

However, the government needs to start thinking about what to do before virtual currencies proliferate into everyday life. What do you think that governments, and particularly the United States, will do to try to regulate bitcoin?

Featured image: TaxCredits.net