Will BitCoins Survive a Growing Crisis of Confidence?

We previously discussed brand owners' and law enforcement's collective concern that the virtual cryptocurrency known as the BitCoin could spur even more online lawlessness.

It would appear that those fears, at least for now, have been allayed by a number of developments.

First, in October 2013, the FBI shut down SilkRoad, one of the largest online marketplaces where narcotics, guns and counterfeit goods were openly traded using BitCoins.

Then, the People's Republic of China banned financial companies based there from handling any BitCoin-related transactions. Joining suit, Russia banned the currency, making it illegal to trade in any currency other than the official roble.

Both nations' decisions have led to a growing crisis of confidence in the realistic viability of the currency, even as ATM machines trading in BitCoins made their debut in Austin and Seattle.

Finally, Mt. Gox, the Tokyo-based exchange where millions of dollars of investors' BitCoins are ostensibly stored, announced a freeze on any withdrawals of the currency, spawning protests outside the company's headquarters.

As of today, the rights to a BitCoin held by Mt. Gox was only $118, whereas a BitCoin sold on another still-functioning exchange was selling for $570.  Both represent a stark drop from the currency's recent high of over $1,000 in November 2013.

Still, speculators are continuing to invest many millions of dollars in the virtual currency, banking on a rebound. Some are even accusing Mt. Gox insiders of buying up the currency at the deflated price and re-selling them on other exchanges for a premium.

One thing is certain, if Mt. Gox enters a "death spiral," making it unable to pay back its investors, there is a real concern about the currency itself collapsing under its own weight.

Will Bitcoins Spur Even More Online Lawlessness?

Much has already been written about the rise of a new digital currency, the Bitcoin. To some commentators, the Bitcoin is a new type of gold, representing the emergence of a borderless online world, free of annoying governmental interference and ridding the world of obsolete local currencies. To others, the Bitcoin represents just another bubble, or at worst, is the latest shift to a lawless, online "wild west."

But what is Bitcoin exactly? The Bitcoin is a digital currency based on an open source cryptographic protocol and not managed by any central governmental or financial authority. Bitcoins can be transferred through a computer or smartphone without any intermediate financial institution.

The value of a Bitcoin has fluctuated wildly, leading some to speculate that it is the conceptual equivalent of tulip bulbs in Holland in the seventeenth century, which witnessed the absurd valuation of the flowers' roots.

Apart from its sheer novelty, one part of the allure of the Bitcoin is that it can be used in transactions on the black market for all manner of contraband such as drugs and weapons. Another "benefit" to the Bitcoin is its ability to avoid governmental regulations. Consequently, it has become a hacker's dream come true.

Since each Bitcoin transaction is largely independent of any financial institution's intermediary involvement, it becomes difficult if not impossible for governments to restrict or regulate Bitcoin trade as they would traditional currency flow. 

Recently, the U.S. Financial Crimes Enforcement Network (FinCen) issued a formal statement clarifying the scope of various recordkeeping requirements in the Bank Secrecy Act to different types of Bitcoin transactions.

One relevant question raised by some Intellectual Property owners is to what extent an increase in online Bitcoin transactions will even further complicate current efforts to regulate online commerce.

The answer is uncertain. However, given the challenges already involved in ensuring international banking compliance comports with intellectual property rights, the Bitcoin promises only more headaches ahead.

Ironically, the Bitcoin itself is already reportedly being counterfeited, and hackers are stealing them from online "wallets," raising questions about how realistic expectations are that it could possibly function as an actual currency.