Upfront: A Little Bit on Bitcoin

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Recently, it was reported that a trade group representing the four-year-old virtual currency Bitcoin met with an array of financial market regulators, including the Federal Reserve. Meetings between financial market participants and regulators are commonplace, but it is safe to say that this particular meeting was one of a kind.

Bitcoin is the first digital currency to successfully simulate cash. And to date, it has bypassed trusted and customary third parties like banks to monitor its transactions.

By way of background, a bitcoin is a basic unit of currency, but it’s different from what you’re used to in many ways. First, it’s a digital currency, no paper or metal here. Second, the supply of coins is limited by design. Third, it’s not backed by any of what most consider real value – like gold, silver, or the promise of the government.

It works like this: You buy some bitcoins on any number of websites and immediately become part of the peer-to-peer network. As such, you – and every other Bitcoin member - are responsible for monitoring the Bitcoin economy and effectively replace that trusted third party mentioned earlier. From there, you can exchange, buy, or sell your bitcoins, while the entire transaction and verification process is carried out collectively by the network between computers. Safeguards such as public and private keys, block chains, and cryptographic “hashes” (which function like fingerprints) work together to make sure your transactions are secure.

There’s the rub. Some believe the way Bitcoin works may encourage, or at least may not discourage, illegal or illicit activities such as tax evasion and narcotics trafficking. The Senate’s Homeland Security and Government Affairs Committee has already launched a review of how the government regulates virtual currencies such as Bitcoin, and in mid-August sent a letter to several federal agencies, including the Federal Reserve, asking for information on how they oversee virtual currencies. And on August 26, 2013, Bitcoin leaders met with US administration officials – again, including the Fed – to discuss Bitcoin protocol and regulatory concerns.

It is part of the Federal Reserve’s job to ensure the safety and security of the US payments system. That is why it attended the informational session with Bitcoin representatives. According to Federal Reserve Vice Chair Janet Yellen, the Federal Reserve has been in communication with banking organizations for many years, trying to understand concerns with online banking mechanisms. And while some believe online banking mechanisms are not regulated, Yellen reassures the public that the United States has regulations that apply to online payment providers. Stay tuned.

-- Forefront Staff

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