Yellen: Fed can't regulate Bitcoin

Federal Reserve Chair Janet Yellen told senators Thursday that the central bank can't regulate troubled digital currency Bitcoin because it operates outside the banking system.

"I think it's important to understand that this is a payment innovation that's taking place entirely outside the banking industry," Yellen told Sen. Joe Manchin, D-WV. "The Federal Reserve simply does not have the authority to supervise or regulate Bitcoin in any way."

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Yellen, who succeeded Ben Bernanke as Fed chair this month, was delivering the Fed's semi-annual monetary policy report to the Senate banking committee.

Manchin pressed Yellen to impose rules on the virtual currency, noting it has been used "by scam artists and hackers to steal money from hard working Americans." Bitcoin has been the currency of choice for illegal international activity, including money laundering.

This week, New York-based SecondMarket said it plans to launch a regulated exchange to facilitate trading for Bitcoin after Tokyo-based Mt. Gox, the biggest marketplace for Bitcoin transactions, abruptly shut down. An estimated $400 million in Bitcoins vanished. Unlike in the U.S. banking system, no entity insures the digital currency.

In a letter this week to Yellen and other top U.S. regulators, Manchin said Bitcoin "has allowed users to participate in illicit activity, while also being highly unstable and disruptive to our economy."

Yellen told Manchin that Congress could get involved "and set up a supervisory regime" to oversee the currency. She added, "I think it's not so easy to regulate Bitcoin because there's no central issuer or network operator to regulate."