Financial Regulators May Oversee Bitcoin

Two Facebook millionaires want US officials to regulate an exchange for buying and selling the controversial "cryptocurrency" Bitcoin. The move follows a scandal when the largest such exchange in Japan went out of business.

The Bitcoin currency isn't issued by any government or backed by any assets. Instead, each new unit of the currency is created when a computer successfully solves what's effectively a puzzle designed to slowly increase the amount of Bitcoins in circulation.

Every time one user pays a Bitcoin to another, a publicly available ledger of transactions is updated. There are no middlemen such as banks or credit card firms, meaning no transaction charges. Users have an access key for making transactions, which can be stored on their computer, equivalent to keeping cash in a wallet.

Bitcoin Exchanges Have Similar, Bank-Like Roles

Unless a computer solves the problem and creates a Bitcoin (known as "mining"), the only other way to obtain a Bitcoin is to purchase it using a regulated currency, roughly equivalent to a foreign currency exchange. These exchanges can also store access keys for users, which is equivalent to keeping money in a bank.

Such exchanges are unregulated, however. The high-profile Mt Gox exchange, based in Japan, went bankrupt last year after a hacking attack that created the technical equivalent of a $500 million bank heist. That led to a complex court procedure that is likely to mean customers lose out financially, as there's no equivalent to the various programs that protect bank deposits even if the bank fails.

Financial regulators in New York state have argued that they should regulate Bitcoin exchanges in the same way as what happens with banks or stock markets. They've encouraged entrepreneurs to apply for formal recognition as a virtual currency exchange, the first step towards regulation.

Facebook Twins Ready for Bitcoin Regulation

That call is being answered by Cameron and Tyler Winklevoss, best known for claiming to have come up with the idea of Facebook. They won $65 million in compensation from founder Mark Zuckerberg after a bitter legal battle. (Source: bbc.co.uk)

The twins have reportedly reached a deal with a US bank to create an account that would hold the US dollars paid by customers in return for Bitcoin, with this account also paying out when customers want to "cash in" the virtual currency. (Source: nytimes.com)

Regulation is still a long way off, however. Regulators will need to come up with a series of rules covering both the technical and financial guidelines than any authorized exchange would follow.

What's Your Opinion?

Should regulators get involved with virtual currencies? Would this help reduce the risk of customers getting ripped off or losing out to technical failings? Or does government regulation risk giving currencies such as Bitcoin undue credibility?