POSTED BY Allison Kearns

As investors swoon over the digital currency Bitcoin, regulators deal with questions of whether or how it should be regulated.   The Bitcoin is a decentralized virtual currency that is designed to mimic the mining of a commodity.  Except mining in the online arena consists of clients competing to solve cryptographic puzzles.  Clients that reach certain metrics are awarded Bitcoins, which are added to the network and substantiated by other Bitcoing users.

Currently, Bitcoin operates in person-to-person exchanges without regulatory oversight, and it can be purchased and exchanged for traditional currency, such as Euros or US Dollars.  Advocates for the Bitcoin argue that the virtual currency could spawn economic growth in developing countries where individuals have limited access to financial services.  Transfers of Bitcoins are practically instantaneous; value does not vary among countries; and the Bitcoin offers competitively low exchange fees.

Consumer protection advocates, on the other hand, are grappling with the Internet’s new digital cash with responses ranging from fear to quasi-endorsements.   In 2011, Senator Chuck Schumer called the Bitcoin a form of money laundering.  Ben Bernanke stated that the Federal Reserve has no plans to regulate or supervise “these innovations or the entities that provide them to the market.”  More recently, officials at the Department of Justice and the Treasury Department have recognized the Bitcoin has legitimate and financially viable.

Last August, when someone allegedly used the currency to run a Ponzi scam, the Securities and Exchange Commission (the “SEC”) successfully argued that Bitcoins are money.  This ruling confirms that the Bitcoin may be deemed a viable currency, and thus subject to the regulations it has largely avoided.  The SEC, however, regulates transactions in securities and not currencies.  Therefore, the future of regulatory oversight is likely in the hands of the Commodity Futures Trading Commission (the “CFTC”) — a separate agency that governs futures contracts.