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In theory, it almost sounds too good to be true: A virtual currency that isn't beholden to the whims of federal and global regulatory authorities. One that uses a complex formula to control its management and distribution. And one that is the dream of libertarians and conservatives for its lack of government oversight. That is until floor drops beneath its feet.
The Senate Banking Committee had Federal Reserve Chairperson Janet Yellen in for her semi-annual testimony yesterday and it shouldn't be a surprise that the topic of Bitcoin's recent troubles came up. Ms. Yellen was asked what the Federal Reserve was doing to regulate the troubled currency and Senator Manchin even called on the Fed to ban the currency entirely. Ms. Yellen had to give the Senator's a lesson in the Fed's oversight abilities:
“Bitcoin is a payment innovation that’s taking place outside the banking industry. To the best of my knowledge there’s no intersection at all, in any way, between Bitcoin and banks that the Federal Reserve has the ability to supervise and regulate. So the Fed doesn’t have authority to supervise or regulate Bitcoin in anyway.
The fact that a Senator on the Banking Committee didn't understand this is a topic for another discussion, but what Bitcoin's current troubles show us is that there is a reason we have Federal oversight of our monetary system. The idea of having a lawless monetary system based on trust has been tried time and again before. The results are always the same.
The five year period between the First and Second Bank of the United States was one of hyperinflation and countless state and individual bank currencies. The period after the Second Bank's charter ceased and the Federal Reserve came about was one of constant rises and crashes, with three major crashes in 1873, 1893, 1907. So it is of no surprise that the Federal Government finally got around to creating a Federal system that monitored and regulated a single national currency. While it is not perfect, as 1929 and 2008 have shown us, it is far better than the constant rises and falls of the 1800 and early 1900's.
Bitcoin is no different. There is very little chance of a world currency prospering when there is no legal entity monitoring it. How will investors feel confident investing in something that can crash on the drop of a dime because of a hacker? If investors don't feel confident, how could it ever thrive? The theory behind Bitcoin is ingenious, but as always, the devil is in the details. And right now, the details just aren't there to show that this is a viable alternative at the present time.