Bitcoin, the leading virtual currency in the world, moved another step towards gaining legitimacy and widespread usage when the California government legalized virtual currencies last week. The move helps position the state with the largest, most established technology sector in the nation, on the forefront of a technology its backers consider the biggest innovation since the adoption of the world wide web two decades ago.
Its origins shrouded in mystery, Bitcoin began as an alternative to the dollars, euros, and other government-backed currencies that dominated the global marketplace. Managed by a decentralized network of programmers and enthusiasts from around the world, it obviated the mints and central banks that managed fiat currencies. It also allowed for nearly anonymous transactions, further circumventing government oversight and the regulations that went with it.
Backed by privacy advocates and early adopters suspicious of governments, the virtual currency maintained a strong libertarian streak. That ethos began to change in early 2013 as leading venture capitalists like Netscape founder Marc Andreessen and Facebook’s Winklevoss twins began to gobble up bitcoins and fund start-ups in the field. These investors realized that for Bitcoin to thrive economically, it needed wider adoption among consumers, businesses, and the financial sector.
Yet, few people were willing to adopt a currency that was both widely misunderstood and considered a tool of an underground internet economy. Negative remarks by leading financial oracles like former Fed chairman Alan Greenspan and JPMorgan Chase CEO Jamie Dimon further eroded confidence in the new technology. It didn’t help Bitcoin’s cause that law enforcement personnel were wary of a tool that could offer criminals the anonymity of cash with the convenience of digital transactions.
These suspicions were not universally held, however. FinCEN, the unit within the Treasury Department responsible for overseeing financial crimes, was the first major government entity to take action. In March, 2013, it issued guidelines that treated virtual currencies like their fiat alternatives. At the time, many Bitcoin supporters feared an outright ban. Instead, FinCEN granted the currency legitimacy by incorporating it within current money transmitter and anti-money laundering laws.
Following in FinCEN’s footsteps, Congressional lawmakers decided to take a wait-and-see approach after a lengthy review of virtual currencies. The Securities and Exchange Commission and the IRS also issued guidance, further granting Bitcoin legitimacy while making it more complicated to use, trade, and profit from the currency from a legal and tax standpoint.
Of the state actors, New York’s Department of Financial Services headed by Benjamin Lawsky led the way. California’s various agencies along with lawmakers remained quiet in comparison to Lawsky’s highly-publicized hearings held in January and his frequent media appearances on CNBC and elsewhere.
The passage of California’s new law, which carried with many votes to spare, helps bring the state home to Silicon Valley back to the forefront of what has been an incremental and haphazard adoption of the virtual currency by lawmakers and regulators.
