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Mt. Gox, the best-known Bitcoin exchange, is making an effort to go respectable. On Thursday the Tokyo-based exchange announced the introduction of user verification for currency deposits and withdrawals – that excludes deposits and withdrawals of Bitcoin itself, but it does mean those spending dollars or euros or whatever to buy Bitcoin or sell it may now be logged.

Now, is this a bad thing? Some Bitcoin fans would argue it is – much of the attraction of the crypto-currency is its anonymity of use. That’s not gone in the case of Mt. Gox (the nature of the Bitcoin system precludes such a possibility anyway), but the anonymity of ownership has now been diminished for many if not most users buying into the system or cashing out from this point on.

For those planning to build a legitimate, profitable ecosystem around Bitcoin, this is a completely necessary development.

Unsettling times

Look at it from Mt. Gox’s perspective. This last week saw the Liberty Reserve shut down because it was a money-laundering hub. Of course, that operation was allegedly set up for that very purpose and was definitely used as such by criminals, while nobody has levelled such accusations at Mt. Gox (as far as I’m aware), but it would have certainly given the Mt. Gox proprietors pause for thought.

And then there was Homeland Security’s seizure of some Mt. Gox funds earlier this month. This wasn’t an anti-Bitcoin move, as it had to do with Mt. Gox owner Mark Karpeles’s alleged misrepresentation when opening a bank account (he apparently promised he wasn’t going to engage in a currency business), but again the reasonable reaction would be to stress how legit the operation is trying to be.

As the U.S. financial crimes authority Fincen has recently clarified, it’s the exchanges that need regulation, not digital currencies themselves. That stands to reason: Bitcoin transactions simply can’t be monitored due to the inherent anonymity in the system, but the exchanges are businesses that will benefit from not getting raided – it’s ultimately in their interests to play by the rules.

Bitcoin enthusiasts may view these developments with suspicion – many approach Bitcoin with a libertarian zeal that involves massive mistrust of official currency control – but really, they should welcome it. Anyone who thought Bitcoin’s use could remain entirely free of regulation was either kidding themselves, or would rather have seen the currency stay small and out of the limelight.

Avoiding criminal associations

In any case, as security expert Brian Krebs points out, money launderers and other criminals looking for a stealthy transaction system have plenty of other digital currencies to use – ones that aren’t trying to go legit, and that also don’t fluctuate wildly in value.

Here’s a salient quote from a “member of an exclusive crime forum” that Krebs says he saw:

“Say I pay you $1k today for a project, and it’s late, and you decide to withdraw tomorrow. You wake up and the $1k I just sent you in Bitcoins is now worth just $600. It’s not yet stable to be used in such a way.”

If I were a criminal looking to use a virtual currency, I think I’d opt for one that might not lead to my legs getting broken.

The joys of legitimacy

People will always be able to do dodgy things with Bitcoin, much as they can always do dodgy things with fiat currency. But if the Bitcoin ecosystem is to grow, it will need to play by at least some of the rules that apply to dollars and euros. That’s nothing to fear, and if anyone in the community thinks it is, then perhaps they should apply their minds to creating an innovative self-regulatory system around the currency.

Sometimes it’s useful to pull back a little, and this is one of those cases. Bitcoin and its exchanges should be viewed in the wider context of interesting new financial services operations that can take the friction and unnecessary cost out of payments, particularly international money transfers.

It’s still possible to stick it to the man (well, the banks at least) without inviting criminal use. Disruptive potential can coexist with legitimacy.

PS – Want to see an interesting alternative use for the Bitcoin system? Check out this post from Errata Security’s Robert Graham, who notes that the Bitcoin block chain mechanism – usually used to negate the possibility of double-spending – could also be employed as a public ledger for other information. Clever stuff.