From: The Washington Post

By Timothy B. Lee

This has been a big year for Bitcoin. At the start of the year, interest in the virtual currency was largely limited to technology buffs. Then the price rose more than 10-fold, prompting regulators, investors and the general public to take a closer look.

To help policymakers get up to speed, the Mercatus Center, a libertarian think tank, has published a new primer on the technical, economic and legal issues raised by the currency. Here are five of the most interesting observations that the authors, Jerry Brito and Andrea Castillo, make about Bitcoin:

Bitcoin isn’t exactly anonymous

It’s common to describe Bitcoin as anonymous currency, but Brito and Castillo argue that this is a misunderstanding of how Bitcoin works. True, you don’t have to provide identifying information to participate in the Bitcoin network. But records of every Bitcoin transaction are stored permanently on the network’s shared public transaction register.

As a result, the researchers write, “it is very difficult to stay anonymous in the Bitcoin network.” Sophisticated analysis of past Bitcoin transactions could reveal patterns that unmask the identity of users. And, they say, “once Bitcoin intermediaries are fully compliant with the bank secrecy regulations required of traditional financial intermediaries, anonymity will be even less guaranteed, because Bitcoin intermediaries will be required to collect personal data on their customers.”

Bitcoin regulations are as clear as mud

Bitcoin is sometimes portrayed as a bit of an outlaw currency. But there’s a good reason that members of the Bitcoin community sometimes seem to be operating outside the law: Legislators never anticipated the possibility of a fully decentralized payment network like Bitcoin. The legal categories that govern conventional markets simply don’t make much sense for Bitcoin, making it difficult for Bitcoin users to figure out how the law applies to them.

For example, the anti-money-laundering agency FinCEN has issued guidelines for Bitcoin “users,” which it defines as those who acquire Bitcoins to purchase goods and services. But what if you acquire Bitcoins for some other purpose, like investment or to transfer cash overseas? None of FinCEN’s categories seems to fit these individuals. Similarly, Bitcoin miners, the people who process Bitcoin transactions and are rewarded with new bitcoins, do not fit into any of FinCEN’s regulatory categories. Without clear legal guidance, the Bitcoin community has been forced to wing it.

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