The U.S. Department of Homeland Security has reportedly taken action against the Japanese Bitcoin exchange Mt. Gox, shutting down a major source of liquidity for the Internet’s unregulated shadow currency. Timothy Lee writes that the federal action against Bitcoin is unsurprising:

In the wake of the Gawker story two years ago, Sen. Chuck Schumer (D-N.Y.) described Bitcoin as an “online form of money laundering” and called for the authorities to shutter the Bitcoin-based drug market Silk Road. Yet until recently, the feds have taken a relatively hands-off posture. Agencies have issued guidelines and signaled that they are monitoring the situation, but none have taken active steps to force Bitcoin intermediaries to comply with federal regulations.

That hands-off stance may have started to change this week when the feds took action against Mt. Gox, the world’s leading Bitcoin exchange. Many people use Dwolla, a PayPal-like payment network, to send dollars to their Mt. Gox accounts. They then use those dollars to buy Bitcoins. On Tuesday, Dwolla announced that it had frozen Mt. Gox’s account at the request of federal investigators. It’s the first federal action against the currency. (Continue reading here.)

The news is alarming for those who see in Bitcoin the promise of a more democratic economy, free from the control of any government. Anthony Faiola and T.W. Farnam described those enthusiasts’ hopes at length last month:

For Jonathan Harrison — a former gold trader who ditched his London flat to join a group of virtual currency obsessives living in a dilapidated commune on the wrong side of Waterloo Station — what matters most is a sense that bitcoin is making him a fortune.

The cyber-currency has skyrocketed in value, but is it a sign of a new paradigm or speculative bubble? The Post’s Anthony Faiola fills us in from London. (The Fold/The Washington Post)

Some call it the purest form of capitalism: a version totally unfettered by monetary policy and politically driven economics. On a recent afternoon, Harrison constantly checked the value of his holdings in bitcoins and other cyber-currencies such as litecoin on his glowing smartphone. In less than 20 minutes, his portfolio’s value had surged by about 7 percent.

“Some people say it’s anticapitalist, but it’s more nonconformist,” Harrison said. “It can’t be manipulated by governments, changed by monetary policy. I call it digital gold.” (Read the complete article here.)

Neil Irwin writes that Bitcoin’s popularity is an opportunity to think about the definition of money:

We can all agree that the dollar bills in my wallet are money, as are the quarters and dimes in the jar on my dresser. So are the funds deposited in my checking account. The investment I have in a money market mutual fund probably counts, too; after all, I can write a check from that account and use it to buy things. Gold isn’t money, but can be readily traded for money, so it can be a reasonable substitute if you’re into that sort of thing. My refrigerator is definitely not money; even though it has value, it would be a lot harder than gold to convert it into money if I fell on hard times.

The common thread here is that money has almost nothing to do with physical form. It also doesn’t have much to do with who creates it: The dollar bills were issued by the Federal Reserve, the checking account created by my neighborhood bank, the money market fund was created by a mutual fund manager, the gold was mined out of the ground, and the refrigerator was made by General Electric.

Rather, what makes money money is what you can do with it. If you can purchase the goods and services that you want and need with it, it is money; if you can’t, it isn’t. Money is memory, said Narayana Kocherlakota in an important 1996 paper (he is now president of the Minneapolis Fed). It is the way we as a society record how much capacity to buy stuff each of us possess. (Read the rest of the essay here.)

For past coverage of Bitcoin, continue reading here.

What is a bitcoin?