Regulators and lawmakers say they need to better understand how Bitcoin works. Bitcoin gets ready for the government

As Bitcoin gets an increasing amount of attention from the government, the entrepreneurs and advocates behind the digital currency are getting ready for their close-up.

They are hiring lawyers skilled in navigating the regulatory gauntlet, political operatives who can deal with the curiosities and concerns of Congress, and former government officials who can give the fledgling industry a good housekeeping seal of approval.


“It is still very much the early days here,” said Jeremy Allaire, chief executive of Bitcoin startup Circle. “There’s just got to be a lot more education and understanding among policymakers and regulators.”

On Thursday, Allaire announced former CFPB Deputy Director Raj Date has joined Circle’s board. With state and federal officials already expressing concerns that Bitcoin could be used to scam consumers, snagging Date — the first person Elizabeth Warren hired when starting up CFPB — is a coup.

( Also on POLITICO: FEC poised to allow Bitcoin campaign donations)

Bitcoin has moved from a head-scratching curiosity in Washington to an issue both regulators and lawmakers say they need to better understand and decide how to handle. Evangelists for the digital currency and those hoping to turn it into a moneymaking enterprise are bringing on help in D.C. and elsewhere to convince officials they can adapt to existing consumer-protection and money-laundering rules and don’t need a new set of standards.

Next week, the first of a series of hearings on digital currencies gets under way. Allaire will testify at a hearing Monday at the Senate Homeland Security and Governmental Affairs Committee, and the Senate Banking panel has scheduled a hearing for Tuesday.

The first question for many lawmakers is: What is Bitcoin?

Bitcoin is a digital form of money that, like cash, can be used to pay for goods and services or send funds to someone online, but it is not controlled by the government. Bitcoin is one of a number of digital currencies. Unlike using a bank account or a credit card, Bitcoin moves on a decentralized network and is subject to lower fees.

( Also on POLITICO: First ATM turns bitcoins into cash)

It offers users discretion in how much identifying information they want to attach to a transaction, but all transactions are publicly recorded in a so-called block chain.

The semi-anonymity offered by the digital currency opens the door to concerns about whether it can be used to illegally launder money and buy drugs. At the same time, the protocol offers a new way to move money around the world without traditional financial institutions.

Interest in Bitcoin has exploded this year. The value of a bitcoin on the Mt.Gox exchange has risen from around $12 a year ago to above $400 Thursday.

With that explosion in interest has come increased government scrutiny.

In March, Treasury’s Financial Crimes Enforcement Network released guidance outlining which digital currency firms would need to register with the federal government. In August, New York Financial Services Superintendent Benjamin Lawsky subpoenaed a number of Bitcoin businesses and investors. Lawsky announced on Thursday that his office is considering a “BitLicense” for digital currency transactions that would include anti-money laundering and consumer protection requirements.

This summer, Senate Homeland Security and Governmental Affairs Committee Chairman Tom Carper (D-Del.) and ranking member Tom Coburn (R-Okla.) asked several federal agencies and departments to explain how they are policing digital currencies.

The committee’s hearing Monday has become a milestone for the Bitcoin community’s growing Washington efforts. Carper, in a letter to the Government Accountability Office last week, said the technology was attractive to entrepreneurs and investors but posed some “serious concerns and risks.”

Officials from the Treasury, Justice Department and the Secret Service are scheduled to testify at Monday’s hearing.

Amid the flurry of activity, the nonprofit Bitcoin Foundation has taken on a lead role as the technology’s champion before the federal government.

In October the group hired Jinyoung Lee Englund, a former aide to Rep. Cathy McMorris Rodgers (R-Wash.) who has also worked at The Heritage Foundation, to direct its public affairs efforts in Washington.

“I’ve been volunteering with the foundation since January, helping them here and there, but in January no one in D.C. paid attention to Bitcoin,” she said. “It wasn’t until the government started paying attention that the foundation decided it would be helpful to be a resource to these legislators and regulators as they’re trying to understand Bitcoin. There really was no one for them to go to.”

The foundation also tapped law firm Perkins Coie to help with an effort to convince the Federal Election Commission to allow the use of digital currency for federal political contributions. The FEC has proposed that campaigns will be allowed to accept, but not spend, bitcoins.

Perkins Coie this year organized a team of more than 20 lawyers across the country to work on digital currencies, with expertise ranging from regulations to litigation and taxes.

“The dialogue really is to figure out how do the existing laws apply and help regulators and lawmakers and law enforcement figure out if there’s a gap,” said J. Dax Hansen, a Perkins Coie partner who leads the group.

Individual Bitcoin firms are taking action, too.

Circle, a startup that’s focused on taking Bitcoin payments mainstream to merchants, now has Date on its board and previously hired former Financial Services Roundtable Chief Regulatory Counsel and Research Director John Beccia as its general counsel and chief compliance officer in Boston.

Circle made headlines when it launched in October with former Brightcove Chief Executive Allaire and a $9 million investment from Jim Breyer, who invested in Facebook in 2005 and served on the social networking company’s board of directors.

“There’s a lot of uncertainty and lot of risks here,” Beccia said. “You’re making a large investment to build a business and a new industry. They want to bring on people who have an understanding generally how to build these programs, to have the relationships and how regulatory agencies work and the lawmaking process works. It’s a natural progression.”

The regulatory investment to start a money services business in the United States is a minimum of around $2 million, Allaire said.

“When we raised this round, we understood and the investors understood this is the kind of company that would need more capital than your typical Internet technology company or your consumer Internet product or service because of the investment that’s needed to be a compliant, regulated business,” he said. “But we’re prepared to make those investments.”

The recruitment of experienced government hands is on display at Promontory Financial Group, a regulatory consulting firm that represents Circle and other digital currency businesses. The firm was founded by Eugene Ludwig, who was Comptroller of the Currency during the Clinton administration, and among its executives is Mary Schapiro, who joined Promontory earlier this year after she stepped down as chairman of the SEC in late 2012.

Promontory started to hear from virtual currency firms in early 2013 as state regulators began putting pressure on the industry, the firm said.

“The compliance needle can be threaded, but that doesn’t mean it has been threaded already,” Promontory Managing Director and San Francisco office head Konrad Alt said. “There’s a lot more work to be done.”

Promontory now has a handful of clients in the space, including Circle, and much of the work happens in the consultancy’s San Francisco office, which also includes a former California financial institutions commissioner, Alt said. It’s not a significant line of business for Promontory, but the firm wants to learn something new.

Alt, a former OCC chief of staff who worked on digital currency issues during the Clinton administration, said the chance of the technology getting into the commercial mainstream is unclear but larger than he thought at the outset.

“The day may come when we accept payment in bitcoin,” he said.