A Wary State Gives Bitcoin and Other Virtual Currencies a Boost

Monday, July 07, 2014

Assembly Bill 129 does not mention bitcoin. In fact, it doesn’t mention much of anything and looks to be about 34 words long:

“Existing law prohibits a corporation, flexible purpose corporation, association, or individual from issuing or putting in circulation, as money, anything but the lawful money of the United States. This bill would repeal that provision.”

The Senate and the Assembly both overwhelmingly passed the legislation, and Governor Jerry Brown signed it, smoothing the way for expansion of an alternative form of money just barely making inroads at Starbucks and in developing nations. 

Bitcoin is called “the currency of the future” by virtual money enthusiasts. They are electronic creations, generated by a mathematical algorithm and traded on open exchanges that have been around since 2008. They are alternatives to currency issued by sovereign states, offering safety from the fluctuations and uncertainty of those instruments, while introducing a whole new set of their own unknowns.

California law essentially banned them and last June the state Department of Financial Institutions (DFI) called their use an illegal money transaction and issued a cease and desist order to the Bitcoin Foundation.

But times have changed. The anonymous nature of bitcoin raises concerns about illicit activity in an underground economy operating out of the purview, much less control, of government regulators. But bitcoin, and other virtual currencies, are quickly growing worldwide. Besides currencies, such as Ripple, Peercoin, Primecoin, community currencies like Davis Dollars and Sonoma County Community Cash are used as vouchers and cash equivalents for transactions. 

The state acknowledged that its law was outdated, but has not walked away from regulatory oversight of virtual currencies. The Department of Business Oversight (DBO) issued an advisory (pdf) in April that the government was still trying to figure out how they fit into a regulatory framework, and warned that the “crypto currencies,” “digital cash” or whatever they are called, are “high-risk,” vulnerable to cyber attacks, sometimes “associated with criminal enterprises” and have a “significant” potential for loss.

The “high-risk” warning came two months after Mt. Gox, an exchange handling 70% of bitcoin transactions in the world, abruptly announced that 850,000 bitcoins valued at $450 million were “gone,” closed up shop and filed for bankruptcy. Subsequently, 200,000 bitcoins were “found,” but no there are still no definitive answers about what happened.

A week later another bitcoin exchange, FlexCoin, lost $600,000 after being hacked and folded.  

Last week, the U.S. Marshals Service auctioned off 30,000 bitcoins it had seized from the infamous underground Silk Road online market that hid its transactions behind the Tor network. The winner was Silicon Valley entrepreneur Tim Draper, who said he planned to use the coins to seed virtual markets in developing countries, where fluctuations in traditional currency wreak havoc.

The value of a bitcoin, according to CoinDesk’s Bitcoin Index, rose from $570 to $655 during the course of the auction. That would put Draper’s stake at somewhere around $19 million.  

Draper, a fourth-generation venture capitalist who made a lot of his own money backing tech startups, runs Boost, a program for training tech-oriented entrepreneurs. But he soon may be better known as the man who destroyed California.

Draper is the author of a state proposition now being circulated for signatures that would chop California up into six states. Silicon Valley would probably become the wealthiest state per capita in the nation. The deadline for signature gathering is July 18.

–Ken Broder


To Learn More:

California Lawmakers Nudge Bitcoin Further into the Mainstream (by Michael Bobelian, Forbes)

Winner of Bitcoin Auction, Tim Draper, Plans to Expand Currency’s Use (by Sydney Ember, New York Times)          

California Legalizes Bitcoin (by Steven E.F. Brown, San Francisco Business Times)

California Lifts Ban on Bitcoin (by Jack Linshi, Time)

San Francisco Doctor Accepts Bitcoin to Protect Patient Privacy (by Kadhim Shubber, CoinDesk)

California Takes Dim View of Digital Currency and Tells Bitcoin Foundation to Shut it Down (by Ken Broder, AllGov California)

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