Bitcoin What is it What should government do

Sen. Tom Carper D Del. chairman of the Homeland Security Committee(Photo AP)

Story HighlightsFederal agents say Bitcoin makes it easy for criminals to launder moneyAdvocates say it could be useful for people in developing countriesVirtual currency must follow same rules as other financial institutions Treasury Department says

Virtual currency Bitcoin is experimental and remains high risk for most consumers the Bitcoin Foundation's general counsel told a Senate committee in a hearing Monday on the emerging technology.

Lawmakers are bedeviled by a technology whose growing popularity has raised questions about whether or how it should be regulated said Homeland Security Committee Chairman Tom Carper D Del.

Virtual currencies perhaps most notably Bitcoin have captured the imagination of some struck fear among others and confused the heck out of many of us Carper said. Fundamental questions remain about what a virtual currency actually is how it should be treated and what the future holds.

Protecting consumers remains problematic for Bitcoin and other decentralized virtual currencies said Patrick Murck general counsel for the Bitcoin Foundation a non profit organization that promotes the virtual currency and its technology.

This is a high risk environment and potentially it's not quite ready for mass consumer adoption Murck said.

Officials at the Justice and Treasury departments have recognized Bitcoin and other virtual currencies as legitimate and financially viable. Bitcoin's popularity and value have soared topping $650 for a single Bitcoin on Monday.

A user scans a QR code on their smart phone allowing bitcoins to be transferred into their digital wallet while using the world's first bitcoin ATM at Waves Coffee House on Oct. 29 2013 in Vancouver.(Photo David Ryder Getty Images)

Bitcoin is digital cash for the Internet. It operates by person to person exchange without a bank or central monetary authority such as the Federal Reserve to regulate it or issue it. It can be used to purchase real goods and services.

Bitcoin can be purchased and exchanged for standard currency such as dollars euros and yen at Bitcoin exchanges but Bitcoins have fluctuated wildly in value. When Bitcoin first emerged in 2009 it sold for less than a dollar.

Bitcoin offers the advantages of low exchange fees no variance in value from country to country and near instantaneous transfer.

Advocates of virtual currencies say the digital cash could transform economies in developing countries where people have little access to banks and financial services. Anyone can use it. The software for creating a Bitcoin wallet allowing a user to send and receive Bitcoin is public and can be used on a mobile phone.

At the same time however virtual currencies can be an effective tool for those looking to launder money traffic illegal drugs and even further the exploitation of children around the world Carper said.

For virtual currencies to operate within the U.S. financial system and retain their legitimacy they must abide by the same regulations as other financial institutions including anti money laundering protections such as reporting suspicious transactions and maintaining records said Jennifer Shasky Calvery director of the Treasury Department's Financial Crimes Enforcement Network.

While innovation is a wonderful thing it does come with obligations Shasky said. We believe (regulation) is reasonable given that we have seen that virtual currency has been exploited by criminal actors.

Last month federal agents shut down the Silk Road a website on an underground network known as Tor that dealt in illegal drugs forged documents and illegal services such as computer hacking and hit men. The website conducted all business in Bitcoin. Federal agents valued the transactions at $1.2 billion.

Still Shasky said Cash is probably still the best medium for money laundering.

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