The 21st century is truly the century of innovation. Computers and the internet which are marvels of this century have made the impossible possible. Courtesy of these two magnificent innovations we now have an invisible currency that exists only in a digital state. Such currency is referred to as Cryptocurrency for they use the cryptography system to regulate how new units are generated and record transactions. Bitcoin was the first Cryptocurrency that was developed in the year 2009. It uses a decentralized system that allows virtual peer to peer transactions. The system has grown phenomenally with its adoption extending to multinational companies such as Microsoft.
With the imminent security and consumer protection threats that glare at the Bitcoin, its widespread adoption has been a cause of concern globally. On this note, Russia completely outlawed Bitcoin while China prohibited all its financial institutions from handling Bitcoins. The United States and United Kingdom governments’ have also shown intentions of doing away with the system if they cannot regulate it. Was it not for the many benefits this system has for businesses and individuals who transact internationally it is apparent that by now Bitcoin would have been banned in these two nations as well. This raises the crucial question of whether Bitcoin can be regulated. Yes, it can, but it is not an easy thing to do. We first need to understand how the Bitcoin Cryptocurrency operates to know how and where we can impose regulations.
Inside the Bitcoin system
Bitcoin is a decentralized and virtual digital currency system. By decentralization, it means that there is no central monitoring authority for the system. Transactions occur on a peer-to-peer basis. It’s virtual in the essence that is internet based, and people transact remotely via computers. These two attributes of the Bitcoin system are the causes of all the panic for governments across the globe. Isn’t it difficult to control and regulate a financial system that you can’t see or detect? It is difficult, and a justified cause for alarm for governments. To be able to regulate this system governments need first to understand how this system operates.
Bitcoin uses a virtual system of transaction ledgers. It is this computerized system that all transactions are recorded and new Bitcoins generated. The system is transparent implying that all users get to see what happens on the system and how new coins are generated. Miners are crucial parties on who the system revolves. They compete to compiling and adding transactions to the transaction ledger per the given rules for the award of Bitcoins. This is how new coins are generated. A list of transactions for a given period recorded on a ledger in the appropriate way is referred to as a block. Once a miner successfully creates a block they get a reward of 25 Bitcoins. Miners just like parties in other competitive platforms have a mutually distrustful kind of relationship. To avoid mischief they use a computerized authentication system that uses a formula based on the final transaction code on a block to verify blocks created by counterparts. In case a miner decides to compromise the transaction sequence in a block to gain Bitcoins fellow miners would easily detect this and raise alarm. This way the Bitcoin transaction ledgers stay up to date and accurate. It is possible to identify easily who transacted with who at what time once a person is inside the system.
The need to control Bitcoin
Bitcoin has many loopholes that can facilitate criminality. Money laundering, cyber security crimes, and sale of counterfeit goods can thrive easily in Bitcoin or any other digital currency system. In these times when terrorism has forced international security systems to their knees, it is vital that such loopholes are checked. Otherwise, this Bitcoin system would be a time bomb waiting to explode. Terrorist organizations could exploit the lack of regulation in the system to wire funds to their affiliates in different parts of the globe; customers also risk having their accounts hacked by cyber criminals and get their funds stolen. All these would erode public trust in the system.
Targeting exchange points the best way to regulate Bitcoin
Bitcoins in their digital nature are useless. One time or another it will be necessary that Bitcoins are converted to solid cash such as dollars, pounds or Euros. This is the easiest way to regulate Bitcoin. Websites and Institutions where Bitcoins are converted into cash can be regulated. Through customer due diligence and reporting of suspicious activities, it is easy to minimize the risk of money laundering. Customer due diligence requires such websites and institutions that convert Bitcoins to cash to require and have proof of customer’s identity before transacting with them. It would thus be more difficult for unauthorized people to change Bitcoins to solid cash which is useful. Reporting of suspicious activities would entail such entities raising a red flag over any transaction that might be suspicious such as conversion of large amounts of Bitcoins. However for these regulations to work nations must cooperate and work together for there is the possibility of consumers moving to nations with fewer restrictions for such conversions.
Regulation of Bitcoin is difficult but not impossible. Such regulation may slow down the development and adoption of this system, but it is necessary to ensure safety and integrity of the system. Restricting and controlling the conversion of Bitcoins to solid currency is the easiest to do this.