NJ Legislators Want to Make Sure Bitcoin Users Don’t Get ‘Screwed’

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NEW YORK (InsideBitcoins) — A group of nine participants did their best to explain bitcoin to the New Jersey Legislature’s Financial Institutions and Insurance Committee on Thursday, and it seems that a bit of progress was made when it comes to informing the lawmakers about how they should view digital currency as a whole. Chairman Coughlin gave a brief overview of the main purpose of the hearing as it started:

“Digital currency [is] something that I find to be fascinating. It’s a growing industry; it’s becoming widespread with uses and applications probably still to be developed and considered. But it’s something that — as of now — is only beginning to be considered for regulation.”

After briefly mentioning the pending BitLicense regulation in New York, Coughlin went on the say, “It’s an interesting topic, and I think it’s something that the committee will benefit from — having an understanding of [it]. And as we go forward we’ll consider whether we ought to be regulating and — if so — where and how.”

By the end of the hearing, it was clear that the legislators viewed this as an opportunity to learn about bitcoin and figure out what sort of problems it could present for consumers. There was basically no mention of terrorism, Silk Road, or money laundering, which are three topics that usually come up in regulatory or legislative hearings on digital currency. As New Jersey Assembly Democratic spokesman Tom Hester told Inside Bitcoins yesterday, the focus was mainly on consumer protection.

Jerry Brito explains bitcoin’s volatility

The hearing began with Coin Center’s Jerry Brito explaining some of the basics of bitcoin. Once he finished his description of the world’s first blockchain-based currency, the legislators began to ask him questions related to volatility and making sure that customers can be protected from risk, loss, and fraud. When it came to the issue of volatility, Brito was able to clearly explain why he believes bitcoin is volatile right now and how it could become more stable over time:

“There are many reasons [as to why bitcoin is volatile]. Largely is that it’s a very illiquid market to this point. There are very few hedging instruments that would help stabilize [the currency], and there is no monetary authority — like a central bank — that would exist to stabilize that currency. That said, we’re seeing more liquidity coming into the market. We are seeing more hedging instruments emerge, so I suspect that the volatility will subside with time.”

Brito then went on to explain that he doesn’t believe bitcoin will become as stable as some of the established fiat currencies in the world, but he could see it becoming as stable as something like gold.

Making sure that consumers don’t get “screwed”

A few minutes later, one of the legislators pointed to the graph of the bitcoin price over time. He talked about the spike in the price in late 2013 and the slow decline in price over the past year. The legislator then went on to ask, “What caused the spike? What caused the steady decline over the past year? And were consumers — is ‘screwed’ an appropriate word?”

“What caused the spike? What caused the steady decline over the past year? And were consumers — is ‘screwed’ an appropriate word?”

As Brito was giving his response, the legislator politely interrupted to ask if he thought “manipulation” had anything to do with the price climb in late 2013. Brito responded by stating the meteoric price rise in bitcoin during that time was not dissimilar to the sorts of quick rises in value found in certain dotcom companies and domain names in the early days of the Internet. Getting back to the point of protecting consumers from wild swings in the bitcoin price, Brito noted:

“I think the typical person who is acquiring bitcoin and investing in bitcoin is not your typical consumer. It’s going to be a sophisticated person. Secondly, the bitcoin market right now is incredibly tiny. It’s a couple billion dollars. I’ve spoken to folks at the Consumer Finance Protection Bureau [CFPB], and they’ve expressed to me that it’s something they’re looking at and they’re keeping an eye on. But relative to some of the other consumer challenges that they’re looking at, this is incredibly small. So yes, I think the fact that bitcoin is volatile potentially could hurt a consumer who doesn’t know what they’re doing, which is why we need good disclosures, and that’s something I think the companies are doing and we may seem some sort of regulation from the CFPB at some point in the future addressing that. Finally, I would say that you can use bitcoin without being exposed to the volatility.”

When saying that individuals could use bitcoin without being exposed to the volatility, Brito was pointing out that someone could hold dollars on a bitcoin exchange, such as Coinbase, and spend those dollars at a bitcoin accepting merchant while the exchange between dollars and bitcoins is completed in the background. In other words, the consumer does not need to always be holding bitcoins to gain use from them.

Is bitcoin a pyramid scheme? Who is behind it?

It’s clear that the New Jersey Legislature’s Financial Institutions and Insurance Committee has a large amount of room to grow when it comes to learning about bitcoin, but it seems that the participants in Thursday’s hearing were up to the task of educating the legislature and recommending possible regulatory solutions for perceived issues. There was a point at which Brito had to explain the difference between bitcoin and a pyramid scheme to one legislator, while another attendee, Houman Shadab, was asked who created bitcoin in the first place.

Loved the question I was asked by a New Jersey legislator: "So who started #Bitcoin?" — Houman Shadab (@HoumanShadab) February 5, 2015

It’s difficult to tell which way the New Jersey Legislature is leaning on bitcoin right now, but it’s clear that they are willing to learn about the technology before they enact any new regulations. Of course, most bitcoin entrepreneurs will want to create jobs in the jurisdictions where operating their business comes with the largest amount of regulatory clarity.

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