The problem is our financial regulators don’t understand bitcoin well enough to regulate it. That became increasingly obvious during the hearings, and it’s not at all surprising. The five-year-old cryptocurrency is an unprecedented experiment in the power of peer-to-peer networking, open source software, and a certain kind of financial anarchy.
The crystallizing moment came Wednesday when Richard Zabel, a seemingly well-informed deputy U.S. attorney, testified before the New York Department of Financial Services, which has been looking into regulating bitcoin businesses. At one point, the Manhattan prosecutor started talking about bitcoin-mixing services, called tumblers. Bitcoin includes a public ledger that openly displays all financial transactions on its vast computer network; tumblers provide a means of hiding your transactions from the rest of the world — something Zabel doesn’t like.
“There may be, out there, legitimate uses for those, but in the cases that I’ve seen, they serve no other purpose to be automated money laundering and identity concealers,” said Zabel, whose office has brought money laundering charges against bitcoin advocate and Bitinstant CEO Charles Shrem — charges filed the day before New York’s hearings began.
The man holding the hearings, New York State’s Superintendent of Financial Services Benjamin Lawsky, seemed intrigued. “If it turns out that technologies like tumblers are being used for no other purpose than to enhance anonymity and to thwart law enforcement, that may be something as we do our regulatory work we want to make sure the companies that we’re reviewing aren’t using those kinds of things.”
You could almost hear a collective groan from the bitcoin community. If services that merely “enhance anonymity” are banned by New York financial regulators, then it will actually scare away legitimate businesses, and maybe an entire industry.[...]Some bitcoin true believers think any government regulation is an intrusion and a mistake, but others simply hope the government doesn’t make a huge error in judgment. “A misunderstanding by policymakers today could be a major setback to U.S.-led innovation in digital currency,” said Nicholas Carey, CEO of bitcoin wallet-maker Blockchain.info.
McMillan also comments about tumblers and anonymity:
As we reported in June, there are indeed legitimate reasons why companies, or even individuals, might want to obscure the flow of money. For example, a company using bitcoin may not want its competitors tracking its sales growth via the public ledger. Make it impossible to hide this information with a tumbler and many legitimate businesses simply won’t use bitcoin.What McMillan doesn't seem to understand is that government regulators are concerned about the anonymity feature, which would make it difficult for them to track whatever transactions they want to track. Regulators don't care about other "legitimate" uses for tumblers. They know that transactions can be tracked via debit cards, credit cards and bank statements, there is no chance they are going to allow a move back,for individuals, into a world where they can conduct financial transactions with greater anonymity. As warned here at EPJ long ago, heavy regulations, if not an outright ban on tumblers is coming.
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