The Risk Of Bitcoins

 
Cross-posted at ThatsNotMarket.com.

We have been getting our share of Bitcoin-related inquiries lately.  Here are our thoughts regarding the risk of engaging in Bitcoin-denominated transactions.

In our view, the biggest risk of Bitcoins is the regulatory issue.  This risk exist whether you conduct Bitcoin-denominated business or trade Bitcoins like you would with any other currency.

There has been a lot of news lately about the efforts of a variety of U.S. regulators to understand Bitcoin, and these regulators are not in the business of exempting financial products that compete with government issued currencies or act outside of the established financial regulatory environment.

Governments in general, the U.S. government in particular and state governments particularly are wary of alternative financial vehicles.  The U.S. government does not have a particularly good track record even where the law would seem to be on the side of the financing vehicle.  For example, the U.S. and state governments went after Paypal while it was in its IPO process.  In addition, there have been several “e-gold” currencies in the past that have failed for a number of reasons, from criminal behavior on the part of the principals to allegations of the currencies being used for fraud or money laundering.  There has also been a crackdown on activities of banks and financial institutions that attempt to evade U.S. laws by locating offshore or on Indian reservations.

In addition, there are the governmental concerns with tracking financial transactions for purposes of combating money laundering, drug trafficking and terrorism, and we cannot imagine that the government would exempt Bitcoin from these extensive regulatory obligations.  However, we are not sure Bitcoin would be in a position to comply with them.  This would make Bitcoin difficult to use in the U.S. or by U.S. persons and subject the creator(s) of Bitcoin to substantial risk, even as secretive as they are, as the head of founders of PokerStars, Full Tilt Poker and Absolute Poker could tell you.

As a result of all of the above, there is substantial expense and risk in using and accepting Bitcoins, as there should be a risk premium attached due to the very real possibility that the U.S. and other governments could shut them down.

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