Regulating Bitcion

If Bitcoin catches the attention of the Federal Authorities, the United States government has several courses of action against Bitcoin.

 

Enforce Licensing

One remedy may be to not shut down Bitcoin directly, but apply the legal code requiring all money transmitters to have licenses to Bitcoin. Since Bitcoin does not have any particular central authority, the government could just require every node that operates in the U.S. to have a license, effectively rendering the use of Bitcoin illegal since presumably most individuals would be incapable of going through such an arduous process. The government may also consider enforcing this law at the exchanges from U.S. dollars to Bitcoins, however this may raise legal challenges considering that the money transmission does not technically occur at the point of exchange.

 

Demand Tax Reports

The U.S. government may also decide to let Bitcoin continue its normal operations provided that it requires its users to report any Bitcoin exchanges for taxation purposes. This however, poses several problems. Due to the anonymity of Bitcoin and the fact that it can be operated out of any country, this may not be particularly feasible and would rest heavily on the compliance of the users. In addition, many people are drawn to Bitcoin precisely because it is outside the mainstream currency network and not under the control of the government. Finally, even if both the infrastructure existed to track taxation issues as well as the good will of the majority of the participants, the value of Bitcoins is known to change nontrivially even intraday, making the issue of fair taxation very difficult.

 

Forced Shut-Down

Lastly the U.S. government may just decide to take over the Bitcoin network and straight shut it down. This seems like the most likely action. Bitcoin is very secure since in order to hack Bitcoin, one requires more computing power than the entire network, which includes every users computer. However, at the moment it is probable that the government has such power at its disposal. If one has more computing power than the entire network, one can either create new Bitcoins or take back old payments. By saturating the market with freely made Bitcoins the currency would be extremely devalued thus destroying the economy. In the unlikely scenario that the government does not as much computing power as the entire network, law enforcement can still take down websites that host the software for Bitcoin exchanges as well as those that conduct transactions in Bitcoins. As with Liberty Dollars and e-gold, the U.S. government has not hesitated in the past to act against organizations it determines as a threat. Especially since there are already underground websites such as Silk Road, which sell illegal drugs in Bitcoins, it would not be difficult for the federal government to defend such action.

 

Gawker article talking about the Silk Road:
http://gawker.com/5805928/the-underground-website-where-you-can-buy-any-drug-imaginable