Just a few kind words from a handful of federal officials about the positive aspects of the Bitcoin market Monday afternoon were all it took to send the digital currency rocketing from $675 to $900 in a matter of hours.
While Bitcoin prices settled back down into the $600s by Tuesday morning, the significance of the Bitcoin market's reaction should not be dismissed.
What was said at Monday's Congressional hearing before the Senate Homeland Security and Government Affairs Committee marked a turning point in how the U.S. government views Bitcoin.
Rather than being thought of as a rogue form of currency fit only for drug dealers, fraudsters, and other evildoers, speaker after speaker noted that Bitcoin can have a legitimate role to play.
"The Department of Justice recognizes that many virtual currency systems offer legitimate financial services and have the potential to promote more efficient global commerce," testified Mythili Raman, acting assistant attorney general for the DOJ's criminal division.
"Innovation is a very important part of our economy," Jennifer Calvery, director of the Treasury Department's Financial Crimes Enforcement Network (FinCEN), said of the Bitcoin market. "It's something for us to be proud of."
But perhaps the most remarkable statement came from U.S. Federal Reserve Chairman Ben Bernanke, who wrote a letter to the committee rather than appear in person.
Bernanke wrote that Bitcoin "may hold long-term promise, particularly if the innovations promote a faster, more secure, and more efficient payment system."
Bitcoin prices on the Japan-based exchange Mt. Gox immediately started to rise. By early Monday evening Bitcoin prices were more than $800, peaking briefly at $900 before beginning to slip back.Why the Bitcoin Market Went so High
The Bitcoin market reacted as dramatically as it did because until this week, most of the talk from government officials had been of concern about Bitcoin.
That had left the Bitcoin community uneasy about attempts by the U.S. government to restrict the online currency.
Two years ago, Sen. Charles Schumer, D-NY, and Sen. Joe Manchin, D-WV, wrote a letter to Attorney General Eric Holder urging that he take action against Bitcoin because of its use for transactions on Silk Road, an underground website where illegal drugs were sold.
"The only method of payment for these illegal purchases is an untraceable peer-to-peer currency known as Bitcoins," the senators wrote. "After purchasing Bitcoins through an exchange, a user can create an account on Silk Road and start purchasing illegal drugs from individuals around the world and have them delivered to their homes within days."
As recently as May of this year, the Department of Homeland Security froze the U.S assets of Mt. Gox because it had failed to register with FinCEN as a money-transmitting company. The move effectively prevented U.S. dollars from moving into or out of Mt. Gox accounts from U.S. financial entities.
Fears of an even more severe U.S. government crackdown on the Bitcoin markets greatly dissipated after Monday's hearing, with federal officials taking a far more pragmatic view of the currency's use by criminals who like the anonymity it provides.
The DOJ's Raman said the government has "been able to keep pace with that, and we've been able to develop protocols and strategies to address it."
"There is good reason for us to remain watchful," she added. "But we also intend to balance that against the need for legitimate users" to use the technology.
The chairman of the Senate committee, Sen. Tom Carper, D-DE, expressed concern about the darker uses of Bitcoin, but also said he is "encouraged that maybe it's possible to have the benefits of virtual currencies and to actually be able to not facilitate [criminal activity]."
Carper's open-minded attitude bodes well for the future of the Bitcoin market, as it hints at a U.S. government policy far friendlier to the digital currency than anyone suspected was possible.
It's now more likely that the United States will seek simply to regulate Bitcoin rather than ban it as some had feared.
"Whether or not virtual currencies prove to be a boom or a bust, I think it's clear that some folks just want a chance to try and play by the rules," Carper said. "That's difficult to do if the rules or proper authorities aren't clear or if the future is uncertain. It's also difficult if a large number of bad apples are allowed to spoil the bunch."
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- Money Morning: Why Bitcoin Prices Are Rising So Quickly - And Will Keep Going
- The Wall Street Journal: Authorities See Worth of Bitcoin
- The Washington Post: This Senate Hearing Is a Bitcoin Lovefest
- USA Today: Bitcoin: What Is It? What Should Government Do?