Over the last week, news has emerged that makes it clear that the divide that exists within the Bitcoin community is about to come into focus. The U.K. government issued their responseto a call for information regarding digital currencies. After reading comments from Bitcoin-related businesses and other interested parties in the U.K., they came up with a number of observations and recommendations.

Somewhat predictably, the report calls for some regulation of businesses surrounding Bitcoin and other digital currencies, particularly in the areas of Anti Money Laundering (AML) and Know Your Customer (KYC). Just as predictably, the word regulation has some of the virtual currency community apoplectic.

The document seems to suggest a relatively light touch by the government in the struggle to control the illicit use of Bitcoin (see Silk Road and, more recently, Evolution), while still preserving the essential nature of a decentralized peer-to-peer currency. The committee recognizes what they refer to as significant future promise of a distributed ledger system such as the blockchain and seem reluctant (most of the time) to strangle it at birth.

The report seems to take a positive view in other ways, including a section on Options for intervention to support the digital currencies sector. So far, so good, but contained within that section is the suggestion that the U.K. government should look to integrate digital currency technology, up to and including the possibility of the Bank of England issuing a form of digital Sterling.

Regular readers (if there are such beings) will know that I am generally in favor of some regulation of the businesses surrounding virtual currencies, but it is suggestions like this that give fuel to the all government is evil brigade. Incorporating distributed ledger technology at the Central Bank level and issuing a virtual version of an existing fiat currency is not regulation, it is an attempt to co-opt and neutralize what is presumably seen as a threat. The community should be looking to oppose this and any similar proposal vigorously.

What is most interesting to me, though, is that the vast majority of respondents (around 75% according to the report) declared themselves in favor of some level of regulation of the industry. It could be just that my fellow countrymen are by nature either reasonable or brainwashed depending on your position, but that number seems indicative of a fundamental shift in the Bitcoin community. As the popularity of virtual currencies has grown, so the extreme ideologies that once dominated discussion have waned in influence. There are still those for whom even AML regulations are an unwarranted denial of freedom, but they are being drowned out by those who understand that sometimes governments really can act in the interests of their people.

There are, within this report, several areas that suggest that this committee was actually trying to help, and yes, I am aware of Ronald Regans admonition that the most frightening words in the English language are I am from the government, and I am here to help. Rather than imposing regulations for consumer protection, for example, a voluntary framework and code of conduct is recommended. There is even recognition that while Bitcoin has been used for criminal enterprises, that usage is not disproportionate and an understanding that digital currencies, when used legitimately, offer an innovative, alternative payment option, which competes with existing payment models and has particularly clear short-term advantages for micro-payments, overseas remittances and cross-border trade. This is what happens when you trust data and evidence rather than headlines.

All in all, the report reads as a fair and balanced document. With the exception of the idea of the Bank of England attempting to hijack alternative currency technology most of the proposals seem to be reasonable attempts to address the inherent problems of virtual currencies without attacking the currencies at the core. Those that bristle at anything that brings digital currencies closer to the mainstream, among both opponents and proponents of Bitcoin alike, wont like it, but the proposals look like a reasonable starting for authorities everywhere who are wrestling with the rise of virtual currencies.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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U.K. Government's Bitcoin Report: The Good And The Bad