Carl Mullan is DGC’s founder, former editor and publisher of DGCMagazine with more than 50 past issues online. His new book, The Digital Currency Challenge – Shaping Online Payment Systems through US Financial Regulations, is now available on Amazon.
This week members of the Bitcoin Foundation had a series of meetings with regulators and law makers in DC.
On Monday 5 Foundation members, Marco Santori, Patrick Murck, Peter Vessenes, Brian Klein and Jim Harper, met with representatives from a number of US agencies including FinCEN, IRS, FDIC, Federal Reserve, OCC, FBI, DEA, Secret Service, and the Department of Homeland Security.
Exchanges are the link between the old world of banking and the new world of crypto-currencies; they play a vital role in supporting the growing Bitcoin economy. If Bitcoin hopes to continue rapidly gaining new users it needs this bridge between the old and new systems to be up and functioning. While Bitcoin is in no way dependant on a link to the traditional banking system, its smooth transition into mainstream use certainly is.
Unfortunately these bridges which make up the exchange market are concentrated and often broken. This leads to concerns over reliability and security, which can cause market panic and extreme volatility. As Bitcoin enters the mainstream a wave of new businesses, services and software developers have recently dedicated their efforts to solving this problem. Their task will not be easy, and the while the exchange rate has seen some recent stability, there is a long way to go before obtaining bitcoins can be called user friendly and reliable.
After shutdown of Liberty Reserve in May this year FinCEN proposed an “Imposition of Special Measure Against Liberty Reserve S.A. as a Financial Institution of Primary Money Laundering Concern”. The primary purpose of the ‘Special Measure’ being to cut Liberty Reserve off from the banking system.
FinCEN noted Liberty Reserve’s irrevocable transactions and lack of ID verification as evidence that “Liberty Reserve’s system is structured so as to facilitate money laundering and other criminal activity,” these comments worried the digital currency community and was likely what scarred off many of their banking partners.
On the 19th, the Bitcoin Foundation responded to FinCEN’s proposed special measure urging them to clarify that not all virtual currency transactions are inherently suspect.
Late last week the Japan based exchange received an MSB license from US financial regulator FinCEN, license #31000029348132.
The exchange market leader had a run-in with US regulators earlier in the year when their US subsidiary, Mutum Sigillum LLC, had its bank account and Dwolla account shut down due to a lack of licensing. Soon afterwards the site changed their policies requiring all customers wishing to perform any USD withdraws/deposits to first verify their identity. As the majority of Mt. Gox’s businesses is in USD/BTC trades, their decision to appease US regulators is unsurprising.
As Bitcoin continues its move towards the mainstream and Bitcoin businesses experience rocky relations with bankers and regulators, now is a good time to look at previous leaders in the digital currency world.
In the late 90’s and early 2000’s, e-gold was the industry leader. As one of the world’s first successful online payment systems e-gold was a pioneer using many now standard practices such as SSL connections and API’s. Brought down by a run in with regulators in 2008 the e-gold story is required reading for anyone involved in the digital currency world.
Sent in by Wikipedia editor Cadwallader, below is a thoroug review of the e-gold story.
One of the more worrying aspects of the Liberty Reserve takedown was the constant insistence by US authorities that Liberty Reserve was only a money laundering service with no legitimate use.
Regulators were very concerned with LR’s anonymity which was a serious draw to the service for many people. But what was likely an even bigger factor in LR’s success was its irreversible payments. This is a very important feature for businesses that are at risk of payment fraud or chargebacks, and it’s a feature that is not available in the current regulated financial system.
Jon Matonis via PaymentsSource
In the case of Liberty Reserve, It’s not the individual infractions committed by clients of Liberty Reserve that are worrisome to the regulators, it’s the fact that a semi-reliable platform for private payments existed in the first place.
Liberty Reserve provided a service that had a true market demand from legitimate business sectors and from non-criminals, notwithstanding the government’s claim that “virtually all” its business was illicit. If banks and traditional financial institutions still respected basic client privacy and facilitated some form of digital payments that did not always involve harmful reversibility to the merchants, then companies like Liberty Reserve wouldn’t even be necessary.
Liberty Reserve S.A., Arthur Bodovsky (owner), Vladimir Kats (left the business in 2009), Ahmed Yassine Abdelghani (left the business in 2009), Allen Esteban Hidalgo Jimenez, Asseddine El Aminr, Mark Marmilev, Maxim Chukharev.
The 2013 San Jose Bitcoin Conference has proven to be rather controversial. While it is considered to have been a success, being well attended and attracting high profile speakers, it has brought up a very divisive topic in the Bitcoin community…regulation.
The problem here is that Mt. Gox is operating as an unlicensed money transmitter.
With their recent guidance, FinCEN decided that virtual currency exchangers are money transmitters.
“An administrator or exchanger that (1)accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN’s regulations.”
Mt. Gox is not a US company; however, it does a lot of business in the States and is not registered with FinCEN.
An informant working with a Homeland Security agent signed up for both Mt. Gox and Dwolla accounts. After making a few transactions, he was able to determine that his funds had gone through a Wells Fargo bank account owned by Mt. Gox and opened by the exchanges’ CEO Mark Karpeles. The account was opened by Mark in May 2011 who at the time signed a Wells Fargo form declaring that his business was not a Money Services business or a Money Transmitter. Of course this was almost 2 years prior to FinCEN’s guidance on the issue.
The Warrant states that Mt. Gox is in violation of 18 U.S.C. section 1960. The punishment for this can include fines and up to 5 years in prison.
Ars Technica obtained a copy of the warrant which can be read here.