Bitcoin draws government scrutiny, Homeland Security urged to crackdown

Bitcoin, the virtual currency, has seen a few big moments in the last few weeks, not the least of which was a federal judge ruling that it is a currency and is subject to regulation. For all its upsides, there is a big downside, too – illicit use prompted by the privacy offered by the currency. As popularity grows, the government is becoming increasingly more agitated concerning it, and now the Department of Homeland Security has been asked how it will address the issues.

Specifically, a Senate Committe on Homeland Security sent the Department's Secretary Janet Napolitano a letter to inquire about how the agency plans to "crack down" on the use of Bitcoins for illegal reasons. This follows a slew of subpeonas that were fired off to 22 investors and companies related to Bitcoins by the New York State Department of Financial Services.

Said the department's superintendent Benjamin Lawsky in a statement to Forbes: "We believe that – for a number of reasons – putting in place appropriate regulatory safeguards for virtual currencies will be beneficial to the long-term strength of the virtual currency industry." Such an event took place last week, and came shortly after it was revealed that the currency now has a Bloomberg ticker.

While the use of Bitcoins to buy, for example, illicit substances online is one concern the government has, another is one all too familiar: taxation. The lack of depending on banks makes the virtual currency harder to pin down, and makes it a viable option to those looking to evade taxation. Such concerns have not only spurred the government into a form of action, but has also caused some Bitcoin-related businesses to adjust their requirements.

For example, in May the US seized the Liberty Reserve virtual currency website under claims that it facilitated crime. The currency's founder Arthur Budovsky was arrested in Spain shortly before the notification went up on the Liberty Reserve website, along with five "co-conspirators." A couple weeks after this – and perhaps as a preemptive strike against suffering the same fate – Mt. Gox added verification requirements for the withdraw and deposit of non-Bitcoin currencies.

As for the Department of Homeland Security's plans, the Senate Committee expects a response by the month's end.

SOURCE: Forbes and Senate Committee [PDF]