Now, imagine if there was evidence Osama bin Laden had used bitcoin to finance the 9/11 attacks and that information came out in the first few days and weeks after those attacks. Remember the sense of urgency and even legal carelessness that characterized the drafting and bipartisan passing of the Patriot Act after 9/11?
How would the U.S. and other nations rein in bitcoin exactly? And who would do it? The simple answer is for the government to make sure bitcoin is forever treated like a commodity like gold, oil, or even fine art and collectible cars. Criminals and rogue states could still use bitcoin in many ways, but it would be much more cumbersome to use than physical or online cash.
For example, treating it as a commodity would mean that each bitcoin would have to be accounted for and taxed more accurately like gold bars. Those making the argument that bitcoin exchanges need a reserve requirement are also on the right track. That’s because by imposing that reserve requirement, shadier bitcoin markets and exchanges would be forced out of the business. That too would further discourage criminal involvement.
Another commodity-like aspect that should be introduced into the bitcoin world is insurance. Just like you can insure jewelry and valuable art, encouraging bitcoin owners to insure their property would add a level of private scrutiny to the market that should also make criminal use that much harder to achieve.
The U.S. Commodities Futures Trading Commission, (CFTC), would be the logical government agency to take on the job of enforcing these changes, but bitcoin is such a major entity now that nothing short of a White House decree with the full backing of the Justice Department and even the Department of Homeland Security could set this process in motion.
“I think digital currency can have a bright future,” former CFTC Commissioner Bart Chilton said in an email. “They just have not hit on the correct way to do it with various protections, portability of use, and of security in an underlying value (like commodities do provide).”
Making this change would also mean leaning on countries like Japan, that began accepting bitcoin as legal currency in April, to reverse or add new restrictions to that move. The fact that Japan is most squarely in Kim Jong Un’s missile cross hairs, should make that argument somewhat easier to make in Tokyo now that we now of Pyongyang’s bitcoin maneuvering.
But it would also mean focusing on the big fish first. A study issued in May by the Center for New American Security calls for law enforcement officials in all countries to prioritize their efforts on catching groups like ISIS, North Korea, and terrorists who are using bitcoin and other cryptocurrencies.
Doing these things could go a long way toward ensuring those innocent investors who are simply trading bitcoin as a commodity don’t lose everything overnight. But let’s face it, it could also be a huge disruption to bitcoin investors if the cryptocurrency suddenly ceased to be so accessible to criminal entities.
Some major bitcoin bears, like Intellyx president Jason Bloomberg, insist its entire value would be wiped out if criminals could no longer use it easily. This spring, Bloomberg wrote: “the only reason Bitcoin has value to anyone is because of the underlying value as a medium of exchange for lawbreakers. If we could flip a switch and eliminate all illegal uses of Bitcoin, there would be nothing left of the cybercurrency.”
Bloomberg may be exaggerating about that; he’s at least ignoring the non-criminal advantages of using bitcoin like its very low transaction fees and faster transaction speeds. LIU Post economics professor Panos Mourdoukoutas says the digital currency won’t disappear and bitcoin will simply return back to its, “old role: a collectible currency for tech savvy enthusiasts.”
The words “collectible” and “enthusiasts” sure sound like the terms we use for commodities like rare coins, fine art, and sports souvenirs, don’t they?
And that brings us back to protecting innocent investors. One could make similar arguments about gold coins or diamonds having a special allure for criminals trying to move their money out of the law’s reach. But the market has long put an inherent value on gold and diamonds that transcends whatever nefarious purposes they can sometimes serve.
That doesn’t mean bitcoin isn’t in a significant bubble right now. And the warnings made to bitcoin investors about the possibility of the bubble bursting have been loud and numerous for some time.
But that’s a far cry from saying it’s worthless as anything but a tool for crooks, terrorists, and rogue dictators. There will be a drop in the value of bitcoin if it were more properly regulated and thought of as commodity, but investors wouldn’t lose everything in that process. That seems like a win/win.
Commentary by Jake Novak, CNBC.com senior columnist. Follow him on Twitter @jakejakeny.
For more insight from CNBC contributors, follow @CNBCopinion on Twitter.