THE BLOG
02/11/2014 08:18 pm ET Updated Apr 13, 2014

So Where Does Bitcoin Go From Here?

It's fair to say that it has been a couple of rough months for Bitcoin, the once ballyhooed Internet currency.

Just as it moved from the shadows into some form of respectability, all hell broke loose. The value of Bitcoins plunged on the various exchanges and companies like Apple removed it as a method of payment. Just yesterday, a report in Reuters announced that the Bitcoin value had slid so quickly that further withdrawals were being halted.

Swirling around in all of this are two storylines which should concern the easily seduced. The first is the ongoing saga surrounding Fed's closure of Silk Road and its various successors. For those unfamiliar with this organization, Silk Road is an online exchange for illicit drugs that operates within the Deep Web, living amongst some of the seedier online neighborhoods. The favored method of payment on Silk Road was Bitcoin. The second disaster was the arrest of Charlie Shrem, the 24 year old CEO of BitInstant, a company that allowed people to purchase Bitcoin by using traditional currencies. It turns out that he allegedly tried to launder roughly $1 million in Bitcoin for customers of Silk Road.

Both are horrible news for those who have invested their time and resources into developing a trans-national online currency.

For those unfamiliar with Bitcoin, it is one of many Internet-originated digital currencies that have been newsworthy lately. Instead of buying an item overseas on eBay, paying in dollars and then paying a fee for foreign exchange, Bitcoin allowed customers a more streamlined approach to payment. There are a number of digital currencies trying to achieve some mainstream traction, including Ripple, Litecoin, Namecoin, and Peercoin. Others will emerge, but for the sake of this argument, we'll lump them all together as Bitcoin because they face many of the same challenges.

There were some unique qualities to Bitcoin. With most traditional currencies, their value is pegged to a combination of factors, including, the state of a nation's economy as well as its monetary policy. The value of Bitcoin, on the other hand, is based upon the perceived value to the investor community. As a result, Bitcoin may fluctuate wildly, making it harder to peg its value when purchasing an item. It skyrocketed in value but is now falling back to earth. Using Bitcoin to purchase something is like buying something at Nordstom's Lancôme counter and paying with Twitter stock.

There are those who say that Bitcoin -- if able to build a global following -- can become a global currency unto itself, supplanting many of the smaller currencies and perhaps taking its place alongside the Dollar, Yen, Yuan, and Euro.

What hurts Bitcoin is its allergy to currency regulation. The cachet for Bitcoin is its desire to operate in a regulatory-free peer-to-peer environment. This may appeal to the growing Libertarian sub-community found within Silicon Valley and elsewhere within tech, but there is a reason why financial instruments are heavily regulated: the reality of currency fraud. We expect our government to enact regulatory reform to keep us safe from fraud but legislators will usually move only after a market crash or pattern of fraud. A whole slew of Wall Street reform came out of The New Deal under Roosevelt because of the abuses on Wall Street during the Great Boom of the 1920s, which preceded The Great Depression. After the Great Recession, there was a modest attempt to clean up some of the most egregious abuses.

Also, the great swings in Bitcoin make it a speculative currency but merchants and customers desire stability in value when it comes to paying for stuff.

With the arrest of Bitinstant's Shrem, another known quality descended into the controversy. Cameron and Tyler Winklevoss, who are probably best known for being the two cry-babies in the movie The Social Network who sued Mark Zuckerberg on a continual basis over who really created Facebook, have emerged as major players at BitInterest and recently owned as much as 1 percent of the Bitcoins globally. Now the twins will have somebody else to sue on a regular basis. The Winklevoss brothers have called for more regulation and were "disappointed" to hear that the horse they backed was allegedly illegally laundering a cool million.

When one of the leading voices for Bitcoin turns out to be little more than a common money launderer (as has been alleged), it should raise more than an arched eyebrow.

The twins remind me of Captain Louis Renault from the movie Casablanca who discovers that he is "shocked, shocked, shocked" that there is gambling going on at Rick's but then turns around to collect his winnings. What the twins are really saying to regulators is "OMG, please protect me from my foolish investment before I totally lose my shirt."

If Bitcoin wishes to become a currency that ascends for the long haul, it needs to be as regulated -- if not more so -- than any other traditional currency globally. It needs to be cleaner than a hound's tooth. The steps include a full embracing of every onerous piece of regulation that is found on the state and federal level. Doing so will answer critics who say that Bitcoin is nothing more than a sham. However, by doing so, it will remove the cachet out of what makes Bitcoin so appetizing to certain investors -- an alternative currency that allows you to transact without all of those "tedious" regulations.

However, if those within the Bitcoin community fail to welcome this regulation, the world of digital money will survive (and even thrive) as a rogue currency, the glue that would connect a spider web of drug cartels, human trafficking, and terrorism perhaps not today but somewhere down the road. It will be very much at home amongst the shadows of the Deep Web, where illicit transactions take place far away from prying eyes. If Bitcoin becomes the rogue currency of choice, it might be instrumental in helping transnational money laundering operations scrub the dirt out of their ill-gotten gains and make them harder it for law enforcement to track them. With that in mind, who's to say that the next 9/11 won't be underwritten by Bitcoin or any type of unregulated currency?

Perhaps one day Bitcoin and others may emerge as a viable and legitimate alternative online currency but those who run these currencies -- as well as those who invest in them -- will have to grow up a bit. Some may say, "Gee Mary, the U.S. Dollar is currently the currency of choice for a variety of rouge interests globally and how is this better than Bitcoin?" My answer is simple. There is a global apparatus of law enforcement at a variety of levels (local, state, federal and global) that do their darnedest to ensure that those who use the American currency to transact illicitly are caught and punished. Bitcoin and others lack that. The people at Bitcoin and other digital currencies need to clean up their act.