Bitcoin and Other Virtual Currencies Finally Get Some Regulation

Companies that distribute and exchange Bitcoin will now be subject to the same rules as Western Union. The hope is to crackdown on Bitcoin-related crime.

Regulating virtual currencies is tricky because it's hard to do it without admitting that they're legitimate in some way. But given the surge in Bitcoin's popularity—and its utility as the currency of choice for drug dealers, gun runners, and other baddies—the US government had to do something.

The new "guidance" issued by the US Treasury Department's Financial Crimes Enforcement Network is very careful to draw a line between real and virtual currency. The real stuff is official government tender:

FinCEN's regulations define currency (also referred to as "real" currency) as "the coin and paper money of the United States or of any other country that [i] is designated as legal tender and that [ii] circulates and [iii] is customarily used and accepted as a medium of exchange in the country of issuance."

Whereas virtual currency is something that sometimes acts like currency but isn't legally accepted:

In contrast to real currency, "virtual" currency is a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency. In particular, virtual currency does not have legal tender status in any jurisdiction. This guidance addresses "convertible" virtual currency. This type of virtual currency either has an equivalent value in real currency, or acts as a substitute for real currency.

Now that all makes sense but the distinction is very important to the government. The new rules basically make it clear that even though the government doesn't think that Bitcoin is the real thing, operators like BitPay, which exchange and administer Bitcoin will be treated like businesses who wire money and exchange foreign currency.

As the WSJ reports, that basically means that these companies will have some additional bookkeeping requirements, and that they'll have to report transactions of more than $10,000. Whether this new guidance will be enforceable given the untraceable nature of Bitcoin remains to be seen. [FinCEN via WSJ]