Bitcoin Regulation Is Coming – Here's What To Expect

We're on the verge of a defining moment in the drama-filled life of Bitcoin.

In light of all the troubling issues that have plagued the digital currency over the past year or so, some think Bitcoin regulation would help limit its use for illicit purposes while adding an air of legitimacy.

But others warn that too much Bitcoin regulation too soon could discourage startups and snuff out innovation.

What is not in question is that some level of Bitcoin regulation is very much on the radar of government, both in the United States as well as overseas.

Governments that fear and dislike the decentralized nature of Bitcoin have already taken drastic steps against the digital currency.

In China, it's been almost impossible to exchange yuan for Bitcoin since December, though it is still legal to trade it. In January, Canada ruled that Bitcoin "is not legal tender." And just this month, both Russia and Indonesia have banned Bitcoin outright, citing its use for illegal activities.

The United States, somewhat surprisingly, has so far taken a more measured approach to Bitcoin regulation. Top regulators at both the federal and state level do want to create safeguards, but haven't made any rash moves because even they recognize the powerful economic potential of the digital currency.

"Our objective is to provide appropriate guardrails to protect consumers and root out money laundering – without stifling beneficial innovation," Benjamin Lawsky, superintendent of New York's Department of Financial Services, said at a recent Washington conference on digital currencies.

That's much easier said than done, because writing Bitcoin regulations is in many ways new territory. Just as the Internet and e-commerce has posed many new challenges to lawmakers and regulators, so does digital currency.

While some Bitcoin regulation is clearly needed, a bunch of poorly conceived, ham-fisted rules would only make matters worse.

Here's where things stand now…