The bitcoin logo

The bitcoin logo (Photo credit: Wikipedia)

Wasn’t bitcoin a media darling? Just before the holidays investors were slapping themselves on the back for their foresight and the media and latecomers were lamenting lost millions. Then, after January 1, the stories just stopped. Cold.

This afternoon there’s news that two of the biggest players in the bitcoin universe have been arrested on drug charges relating to Silk Road, the online bitcoin bazaar for illegal drugs. In case you don’t remember, it was this past October when Silk Road was shut down and it’s founder arrested. The new indictment alleges that Charles Shrem and Robert Faiella helped people who wanted to buy drugs on Silk Road to convert their cash into bitcoin. Shrem was also charged with buying drugs on the site. Shrem was arrested at John F. Kennedy airport in New York.

Shrem was the founder and CEO of Bitinstant, a website company through which users could trade dollars for bitcoin. Bitinstant stopped operations last summer, but Shrem had indicated that he was about to restart it. Bitinstant was one of the early bitcoin players and an investment for the Winkelvoss Capital, the firm started by the Winkelvoss twins who tangled with Mark Zuckerberg over the ownership of Facebook.

It has been a PR nightmare and a sudden crash in the fortunes of bitcoin. First there was the late 2013 news that China would not treat it as a currency. Being rejected by China is a big blow for any product or commodity hoping to establish itself on the world stage. The stories about bitcoin money laundering and drug transactions were initially dismissed sour grapes from those who missed out on the early run up.

The credibility of currencies is established by confidence in the market and in the very nature of the currency. When industry pioneers are arrested on drug and money laundering charges, that poses a huge if not insurmountable challenge to its acceptance and ultimate success.

Numerous questions remain unanswered about how bitcoin is produced and how it can be regulated to protect investors and consumers. Those questions were initially brushed aside (and not, I might add answered) by early adopters and investors who assured questioners that they didn’t possess the requisite technical sophistication to understand crypto-secrecy and virtual currencies.

It really boils down to this: national currencies enjoy public confidence when they are backed by the full faith and credit of the governments who produce and distribute them. They are successful because they are regulated not in spite of their regulation.

 

Enhanced by Zemanta