Why Bitcoin Needs Washington to Go Mainstream

By sensibly modifying existing laws, the government can give open blockchains the same support it did the early internet.  This article originally appeared in Fortune

Digital currencies like Bitcoin are back in the news in a big way. Major influxes of investment, increased usage, and public votes confidence from influential financial industry players seem to be validating a technology once thought to be solely the realm of hobbyists and tinkerers.

During a speech last month, Fidelity CEO Abigail Johnson declared that she still believes in digital currencies and revealed the company’s forays into the technology. She went on to outline several hurdles that she sees the technology needing to clear before it reaches mainstream adoption, one of which she called “the policy challenge.” Johnson correctly pointed out that innovation in the space “is outpacing the regulator’s ability to keep up.”

It’s not hard to see why this technology is exciting the world of payments. Traditionally we’ve had to rely on intermediaries like PayPal to maintain a database of account balances and transactions in order to send money online. In Bitcoin that database is maintained by thousands of nodes in an open network and constantly validated by the work of countless miners. Suddenly you don’t need to trust PayPal anymore. Since there is no intermediary, Bitcoin works a lot like cash, but online.

Many applications of digital currencies like Bitcoin don’t fit into traditional legal buckets and some legal concepts may need to be rethought. If a regulator tries to apply old legal concepts to this new technology, companies that were never intended to be covered by existing laws could find themselves in a costly grey area. This undoubtedly chills innovation in the space and likely will drive it overseas.

Two decades ago, early Internet developers found themselves in a legal gray area. If old laws were strictly applied to them, they could be held responsible for the content that their users uploaded to their websites. In the 1990s, Congress passed the Communications Decency Act (CDA) and the Digital Millennium Copyright Act (DMCA). The laws protected Internet companies from liability for what their users did. Without these laws, the Internet would probably still exist today, but it would be a very different, and likely less useful, tool.

Regulators should be looking at Bitcoin in the same way. Bitcoin could become critical infrastructure that one day revolutionizes the online economy. Like the open Internet, support from government is key to fostering its growth. Fortunately, there are concrete steps that the U.S. government can take to ensure the country’s competitiveness in this booming sector.

There are three things the government can do to give Bitcoin this level of support. First, some Bitcoin businesses fall under the definition of money transmitters and rightly need to get money transmission licenses, which are handled by the states. The problem is that there are 47 different state money transmission licensing regimes and they all have their own rules. It’s a nightmare for a digital currency companies to navigate, with compliance costs easily reaching into the millions of dollars a year. If a federal alternative, like the Office of the Comptroller of the Currency’s proposed special purpose fintech charter, were adopted, then Bitcoin businesses would have a more streamlined alternative.

Another issue with money transmission licensing is that it shouldn’t apply to every application of Bitcoin. Some types of Bitcoin businesses never take custody of a customer’s funds, which means they can’t run away with or lose them. Those businesses should not need licenses. To protect those companies, Congress could create a federal safe harbor for non-custodial digital currency companies.

Finally, Bitcoin taxation is broken. Since it’s not technically a foreign currency, it is treated as property by the Internal Revenue Service (IRS) for tax purposes. This means a user needs to calculate capital gains tax every time they buy a cup of coffee. That’s pretty difficult to manage. If the IRS amended the tax code to treat online currencies like foreign currencies, they would become much easier to use day to day.Bitcoin and its fellow digital currencies will hit mainstream adoption based on the soundness of their technology, but there are common sense things the government can do to clear their path. Lack of understanding and ill-fitting laws should not be allowed to stand in their way.