Federal Reserve initiates investigation into PayPal, Bitcoin for security risks

The Federal Reserve is conducting an investigation into online payment systems like PayPal and virtual currencies such as bitcoin because financial institutions are concerned those online participants could disrupt the financial system, according to officials who gathered Monday for the International Monetary Conference in Shanghai.

Federal Reserve Vice Chair Janet Yellen explained that the United States government already regulates and monitors online payment processors, but the purpose of the probe is to establish the best methods to protect consumers as further online services pop up.

“We have been talking with banking organizations over the last year or two, trying more carefully to understand what the concerns are with these new payment mechanisms,” said Yellen, who is considered the top contender to succeed Ben Bernanke as head of the U.S. central bank. “In point of fact, at least in the United States, there are regulations that apply. But that said, this is very much on our radar screen, and we are carefully trying to identify where the risks are.”

Since the economic collapse, U.S. authorities have feared that virtual currencies could pose harm towards the integrity of the dollar – the purpose for some of these online services is to have a currency independent of a central bank. Other officials are concerned these entities could be used by criminals, terrorists and hackers.

In March, the Treasury Department concluded that issuers or exchangers of online money, including currencies that are not backed by the federal government, would be subject to money-laundering rules and regulations.

Last month, the U.S. started a money laundering investigation against Liberty Reserve, a digital currency operator located in Costa Rica. It is alleged that the group handled huge sums of money – roughly $6 billion – outside the control of national governments.

Also, the Department of Homeland Security had confiscated the accounts of Mutum Sigillum LCC, one bitcoin digital currency exchange operator. It claimed the company and a subsidiary had performed transactions “as part of an unlicensed money service business.”

Bitcoin soared to $266 in value in the middle of April before its bubble popped.

Meanwhile, most of these online currencies are being exacerbated by merchants and those concerned about the fragility of fiat currencies. PayPal has been serving close to a billion people around the world and is the online payments source for eBay and other retail juggernauts.

Economic Collapse News reported late last year on a report issued by the European Central Bank (ECB) that analyzed private currencies – it mentioned briefly about Austrian Economics. Titled “The Relevance of Virtual Currency Schemes for Central Bankers,” study authors noted the success of virtual currencies could hurt a nation’s money supply.

“The theoretical roots of Bitcoin can be found in the Austrian School of economics and its criticism of the current fiat system and the interventions undertaken by governments and other agencies, which, in their view, result in exacerbated business cycles and massive inflation,” the report stated.

It appears that the establishment is terrified of competing currencies. As more and more people head into precious metals, virtual currencies and other alternative forms of money, the confidence in the U.S. dollar and other currencies is being eroded due to irresponsible monetary policy.