Early reports indicate that the Tokyo District Public Prosecutors Office has indicted Mark Karpeles, the CEO of the collapsed bitcoin exchange Mt. Gox, with embezzlement. These formal charges follow months of allegations of fraud, which culminated in Karpele’s arrest by the Tokyo Metropolitan Police.
Karpeles was arrested on August 1st but had not been formally charged until today. Liquidations proceeding for Mt. Gox are ongoing and a report detailing creditors claims of $22 billion against the company was released earlier this week. Mt. Gox filed for bankruptcy in February 2014, citing losses of over 750,000 bitcoin held on behalf of customers.
According to the indictment, Karpeles is charged with embezzling over $50 million from Mt. Gox company accounts. This is a developing story and Bitcoin Magazine will continue to update it as more information becomes available.
Chosun, the largest and most popular online news publisher in South Korea has reported that law enforcement is about to begin investigations on altcoin pump-and-dump and bitcoin Ponzi schemes.
The Bank of Korea will support local law enforcement and agencies with the investigation and will provide the necessary infrastructure and technology to search for scam bitcoin projects and programs.
The joint investigation will also focus on the trading of altcoins that have no value, or are suspected of being a pump-and-dump scheme.
“According to our sources, there are 676 altcoins, including bitcoin, listed on coinmarketcap.com. However, only 309 of them have a market cap of USD$10,000, and others are almost worth nothing. Furthermore, there are 550 altcoins that have extremely low daily trading volumes,” said the article.
The Bank of Korea and the local police already have started looking into several different altcoins that have been used over the last few months and are discussing with local enforcement whether to launch a full investigation on these altcoins and on the individuals or organizations that have been promoting the use and trading of altcoins that have recorded substantially low daily trading volumes over the past 48 hours.
This is a guest post by Drew Hinkes, an attorney at Berger Singerman. Drew is also frequently published and cited for his work on IT and technology-related issues, including virtual currencies, smart contracts, distributed ledger-based technologies, computer data security/breaches, and technology regulation.
Tokyo District Court Judge Masumi Kurachi recently rejected a claim for relief brought by a Kyoto man against the Mt. Gox bankruptcy receiver for bitcoin lost as a result of Mt. Gox’s collapse. In his ruling, Kurachi opined that bitcoin is “not subject to ownership.”
The court ruled that Japanese law allows only for proprietorship of “tangible entities that occupy space and which allow for exclusive control over them.” Since transactions of bitcoin require the involvement of a third party, exclusive control over bitcoins was not possible. Although the ruling seems dangerously misguided, it will likely be relegated to its own specific facts and not govern future disputes over bitcoin ownership.
Why This Opinion Seems Dangerous:
Taking the court’s conclusions about bitcoin at face value could create problematic results. Many assets, including stocks and bonds, transact through third parties. Most large-value transfers occur through the SWIFT network, which itself reduces value to intangible digital information. Many intangible assets such as trademarks, franchises, patents, consumer goodwill and contract rights are recognized as legally protectable assets worldwide. The logic of the recent ruling could potentially disturb long-understood concepts of property law, and drastically alter the legal status of many payment methods.
The court’s conclusion seems confused, or based on an improper understanding of bitcoin. Use of bitcoin requires only an Internet connection. Thus, it requires less intermediate infrastructure to use than a credit card. The court also appears to have misunderstood “ownership” of bitcoin. Although bitcoin itself may exist as intangible computer code, ownership and control of the private key providing access to a specific wallet functionally establishes exclusive ownership of whatever value is represented by the bitcoin held by that wallet. The court’s conclusions appear to be the result of an improper understanding of bitcoin.
However, as discussed below, the facts here are critical, and probably rescue this decision from having a long-term negative impact, or more widespread application.
A Digression About Japan’s Legal System…
Japan has a code-based legal system that differs from America’s common law legal system because courts in code-based legal systems generally cannot act in the absence of a specific applicable law. Prior decisions carry much less weight and generally do not bind judges determining future controversies.
In Japan, judges consider precedent to fill gaps or clarify the meaning of statutes, but precedent is generally non-binding. Thus, if a similar claim was brought before a different district judge in Japan, that judge may not be compelled to rule the same way on the same issue.
Both systems provide the right to appeal decisions to a higher court. If this opinion is appealed in a timely manner, the higher court will reconsider the arguments and evidence submitted to the district court. Thus the outcome of this case, may be changed.
The All-Important “Why”:
Although the court’s conclusion seems wrong, it likely ruled to uphold the bankruptcy receiver’s power to control the disposition of Mt. Gox’s assets and avoid the need to untangle commingled assets.
Former Mt. Gox customers who claim they lost bitcoin can assert claims for recovery through the claims administration and investigation process set up by the Japanese bankruptcy receiver. The claims process, which closed on May 29, 2015, may result in claimants from Mt. Gox’s remaining assets.
The lawsuit could be viewed as a collateral attack or “end around” of the claims process, seeking to obtain a better result than would be available by submitting a claim. This sort of gambit is not available in the United States because debtors in bankruptcy liquidating assets through Chapter 7 of the United States Bankruptcy Code are protected by an automatic stay of litigation pursuant to 11 U.S.C. §362. This stay shuts down litigation against the bankrupt entity and establishes the bankruptcy (generally) as the exclusive means for claimants to recover against the debtor. Japanese bankruptcy law, however, does not provide the same stay unless it is requested by the debtor. The court’s ruling may have been intended to prevent an “end around” to the bankruptcy liquidation claims system.
Even if the lawsuit was not an attack on the bankruptcy claims process, the court may have dismissed it to avoid tracing and separating commingled bitcoin assets. Recent news from a self-professed insider suggests that Mt. Gox operated a single bank account. Other reports suggest that client wallets previously held on the site were commingled. The claim brought in district court may have required the bankruptcy receiver to attempt to identify specific coins among its commingled assets, which may be burdensome or impossible. The litigant’s request for the return of specific bitcoin, as opposed to cash, may have provided a second reason to deny the claim.
What This Opinion Means for the Future:
It is likely that this opinion will be limited to its facts. This was a claim alleging entitlement to bitcoin held by a third party in bankruptcy where specific identifiable assets sought by the claim may not have ever existed, and where relief was available through a bankruptcy claims process. The very specific facts of this case may render the ruling not applicable to future claims regarding bitcoin.
Further, another lawsuit regarding bitcoin in Japan is unlikely to present the same facts. Finally, as noted by the JapaneseTimes, the presiding judge may have felt constrained because bitcoin is not directly addressed by any existing Japanese law. This suggests that the decision may have been a request to the National Diet of Japan to “fix” this opinion by creating law directly addressing virtual currencies. It remains to be seen whether this opinion will create valid precedent, or later be fixed through legislation.
Conclusion:
Although the headline is sensational, there are reasons to suspect that the opinion issued by Judge Kurachi may be limited to this specific lawsuit. Based on the structure of Japan’s legal system, the precedential value of the decision is limited, so that judges are not bound to the argument when deciding future disputes over ownership of bitcoin. Future cases could easily distinguish this case on its unique facts. Finally, because there is no specific law related to virtual currencies in Japan, the precedential value of this ruling may be mooted by future legislation.
The increase in bitcoin ransom demands and hacking incidents have alerted international law enforcement agencies and governments about the involvement of bitcoin in illegal activities. This week, bitcoin startup SABR has raised $1 million USD in an early seed funding round for its blockchain monitoring and identification system.
As a consultation-like service, SABR will work with law enforcement agencies to track down bitcoin transactions, how they’re being spent and who owns them. The company stated that its patented technology, data and partnerships enable it to fully track down information about a single or a series of transactions.
“SABR integrates data from multiple blockchains, as well as other public and proprietary sources,” the SABR team explained. “SABR’s unique position and partnerships within the network underlying the decentralized digital currency ecosystem provides access and insight otherwise inaccessible.”
The team added that following bitcoin transactions is not an efficient method to track down payments, as bitcoin creates a “blind spot.” SABR claimed that its technology could have found the Dread Pirate Roberts, the administrator of the Silk Road, in a few days, instead of the years of covert investigations by the U.S. Govenment.
According to Venturebeat, SABR has already begun to attract the attention of the “U.S. Department of Justice, the White House, and other federal agencies.”
All of SABR’s clients, individuals or organizations will be assigned SABR engineers and experienced data analysts and develop a close working relationship to ensure that its clients are efficiently using the SABR software, according to the company.
On June 1, 2015, the Securities and Exchange Commission (SEC) shut down and fined Sand Hill Exchange for acting as unregistered broker-dealers, selling security-based swaps, and offering swaps on an unregistered securities exchange.
Sand Hill was a bold experiment: Could a trading platform operated across the Bitcoin blockchain allow parties to trade derivatives based on the perceived value of pre-IPO companies? Although Sand Hill may have accomplished the construction of a functional derivatives market traded over the blockchain, the SEC was unimpressed, quickly shutting it down.
The story of an audacious startup skirting regulations viewed by some as overbearing, with the ensuing swift and severe regulatory response may be old news to businesses operating the virtual currency space, but Sand Hill’s saga emphasizes two key points to remember for any business seeking to disrupt regulated financial markets.
Change Must Occur Within the Confines of the Law
Sand Hill sold synthetic derivatives linked to the perceived value of unlisted pre-IPO companies. Sand Hill used illegal “Contracts for Difference” (CFD), a contract with a counterparty to settle in cash if the value of an asset changes at a time in the future.
Thus, if the projected valuation of a share of pre-IPO “Business X” was $10 when Purchaser obtained a CFD of Business X on Sand Hill, and the valuation increased at the contract settlement date, Purchaser would have earned value that could be liquidated.
To skirt the considerable registration burden associated with trading (legal) equities, Sand Hill apparently conducted its transaction activity over the Bitcoin blockchain. CFDs, however, are illegal to sell over any trading medium in the United States. Sand Hill also confessed to having inserted trader “bots” that created the illusion of active trading volume to populate their marketplace. Of course, these bots could also be used to intentionally manipulate values of the instruments being traded.
Less than a month after taking its platform live, Sand Hill reported that it was shut down and fined $20,000 for multiple violations of SEC regulations, including acting as unregistered broker-dealers, selling security-based swaps, and offering swaps on an unregistered securities exchange. Notably, Sand Hill stated in its blog that it had customer holdings only in the low thousands of dollars.
Co-founder Elaine Ou’s blog post about the SEC shutdown is eye-opening, and captures a zeitgeist common among virtual currency startups: We are hacking the system to make it better and nobody is getting hurt, so regulators, please leave us alone.
However, as Bloomberg observed, “Just because you mumble the word ‘blockchain’ doesn’t make otherwise illegal things legal.” As Sand Hill, Ripple, and others are learning, regulators will enforce the law against violators regardless of their philosophical ideology, level of funding, or stated intention.
Blockchain technology may inevitably reform the financial structures of many markets, but illegal, unregistered activity will always draw the attention of regulators. Innovation based upon blockchain technology may be the future, but that innovation can and should be conducted within the present confines of the law.
Just Because You Can Does Not Mean You Should.
It appears that Sand Hill knew that it was being investigated by the SEC. The company posted a series of blog entries noting the use of its site by the SEC. Using Google Analytics and other forensic tools, ostensibly to track user engagement, Sand Hill published a blog post demonstrating:
the SEC was aggressively using Sand Hill’s site,
the number of SEC users using the site,
information regarding the interests and surfing habits of the SEC users of the site, including the IP addresses, those users’ other frequently visited sites, and the amount of time spent engaged with Sand Hill’s service.
Predictably, according to unofficial comments, this was viewed as ‘doxing,’ or publishing personal information about the SEC investigators, and considered a serious affront.
Sand Hill appears to have used legal means to track the SEC’s investigative behavior. However, from a strategic standpoint, exposing this information publicly may not have been in Sand Hill’s interest. The SEC has considerable regulatory power and can seek injunctions and levy significant fines.
Although Sand Hill’s technology and philosophy may be of interest to the virtual currency community, its behavior and the likely effect on its experience with regulators should be noted. Antagonizing regulators is a poor negotiating strategy, even if you are using legal means and public information to do so.
No matter the perceived wrong, potential regulatory targets will always benefit from sound legal advice from counsel. Just because you can do it, does not mean you should do it.
On February 4, 2015, a young man named Ross Ulbricht was convicted of seven charges laid in a U.S. Federal Court in Manhattan. On May 29, 2015, he was sentenced to life in prison for his crimes.
He was accused of being the owner and operator of the Silk Road website, the most popular online drug marketplace.
The indictment charged Ulbricht in seven counts, including narcotics trafficking, narcotics trafficking by means of the Internet, conspiring to commit narcotics trafficking, engaging in a continuing criminal enterprise, conspiring to commit or aid and abet computer hacking, conspiring to traffic in fraudulent identification documents, and conspiring to commit money laundering.
Filmmaker Alex Winter has written, directed, and produced a film outlining the story of the rise and fall of Silk Road called Deep Web. It premieres on May 31st at 8PM on Epix.
The documentary tells the story of the rise and fall of Silk Road, bringing the viewer into the world of U.S. law enforcement agencies during their early monitoring and seizure of the website, follows Ulbricht’s court case, and documents the present work of one group of people trying to rebuild a decentralized version of the Silk Road.
It includes testimonials from government officials, law enforcement, crypto-anarchists, ex-Silk Road vendors, and people who knew Ulbricht personally.
The filmmakers provide an impartial recounting of this shocking story while bringing to light important topics of discussion.
“I really tried to shine a light on aspects of the story that I wasn’t seeing,” says Winter. “It’s a complex thing to tell a story about for that reason. It’s very easy to paint a story black and white, So a lot of painstaking effort was made to dig into the roots of what these movements are about and examine the grays of what’s seen as a black and white story.”
The documentary’s footage of Ulbricht reveals an idealistic, fun-loving, and liberty-minded young American man whose life is paradoxically juxtaposed with that of a drug kingpin. His character straddles the line of between hero and villain throughout the story.
Creating such a comprehensive look at this whole story wasn’t without its challenges for the filmmakers.
“Creating this film required a fairly comprehensive understanding of the tech,” says Winter. “You also have to have an understanding of the people in the tech communities and get at what their motives are and what they’re trying to accomplish; look at hard truths that may not be palatable to people, and just try to paint a human face of the individual convicted of this crime since the counter narrative is so strong; trying to swim against that current is also challenging.”
Bitcoin Magazine spoke to Lyn Ulbricht, Ross Ulbricht’s mother at the SXSW premiere of Deep Web.
“He was pretty upset,” said Lynn Ulbricht. “It was very tough on him. The trial was emotionally draining; very hard on all of us. Since then, he really tries to be positive. He’s strong and resilient. He tells me that when he was feeling restless he started working out. He’s coping but it’s tough. He’s very cut off. I’m proud of him. “
“This case is very important,” concluded Lynn Ulbricht. “There’s evidence pointing to the fact that the Silk Road server was accessed illegally. It sets precedent going into the digital age that will affect all of us. It’s not just about Ross.”
News that two federal agents used their government position for the robbery and extortion of large sums of money from the Silk Road has recently surfaced.
Ulbricht’s attorneys filed a motion for a new trial on March 6 on the grounds that the government’s failure to provide this exculpatory material in a timely manner denied Ross his fifth amendment right to due process and fair trial.
Not denying that the criminal case against these former agents alleges corruption, judge Katherine Forrest has denied a retrial for Ulbricht. According to her ruling, “This motion for a new trial…does not address how any additional evidence, investigation, or time would have raised even a remote probability that the outcome of the trial would be any different.”
Winter is hoping to bring this story to everyday people and make them think about things that they would’ve otherwise given thought to.
“I hope that this project challenges people enough to dig deeper. I hope that people have enough humanity to question things. I hope that it provides impetus for more nuanced discourse about the internet and the movements around the internet that I think are very important.”
Overall, this gripping documentary demands the viewer’s’ attention and contains the staunch realization that we are entering the “future”. Along with that comes problems like cyber crime and unknown hacking methods used by both citizens and governments. Some questions to be asked are: Is it safer for drug deals to go on online? What are the US citizen’s relationship to their government? Is this altering?
Ross Ulbricht has not even been sentenced yet for his conviction as leader of Silk Road, the Amazon for drugs, and he’s already requesting a new trial.
Joshua Dratel, Ulbricht’s attorney, filed a motion that includes evidence that suggests the federal government gained access to the server that Silk Road was on without a warrant. Further, the defense argues that the government may have tried to hack into the site.
On February 4, after only 3 ½ hours of deliberation, a New York federal jury found Ulbricht guilty on all seven charges, including drug trafficking, computer hacking, money laundering, running a criminal enterprise and fraud with identification documents. Should the seven felonies stand, Ulbricht would be sentenced to a minimum of 20 years in prison.
According to a memo filed Friday evening, Dratel is looking for a new trial for Ulbricht. The defense is also looking to re-visit a motion that would have suppressed all evidence gained from the Silk Road servers. The defense argues that the evidence was obtained without a warrant, violating Ulbricht’s Fourth Amendment rights.
Further, Dratel is arguing that Ulbricht’s Fifth Amendment rights have been violated.
“Mr. Ulbricht should be granted a new trial because the government failed to provide exculpatory material and information in a timely manner, thereby denying him his Fifth Amendment right to due process and a fair trial,” Dratel wrote in his memo.
Dratel argued that 5,000 pages of material related to the testimony of Department of Homeland Security agent Jared Der-Yeghiayan were not provided in a timely manner. During cross-examination, Der-Yeghiayan revealed that his group had been looking at Mark Karpeles, the owner of Mt. Gox, as the true “Dread Pirate Roberts,” the pseudonym used by the site’s founder.
Dratel has argued that this evidence was provided only two weeks before the trial started, thus making it nearly impossible for the defense to pull together a proper argument in time for the start date.
With respect to the Fourth Amendment violations, Dratel wrote: “Mr. Ulbricht’s motion to suppress evidence should be reopened based on information produced by the government in connection with trial, and should be granted in its entirety.”
The memo went on to say that: “In the context of Mr. Ulbricht’s suppression motion, this surveillance raises some novel Fourth Amendment issues, and also provides further evidence that the government discovered the Internet Protocol (hereinafter “IP”) address for the Iceland server ending in “.49” through warrantless TOR network surveillance.”
Dratel argued before that the government had hacked into the server. But the government argued that if the FBI had hacked the Silk Road server it would be legal because the server was based in Iceland and Ulbricht had not made clear that he was the owner. In other words, there can’t be a violation of constitutional rights if no one comes forward to say that their rights were violated.
Unfortunately for Ulbricht, there were five requests for a mistrial put forth by Dratel during the trial and none were allowed by the judge. It is highly unlikely that these requests will be granted, especially since Ulbricht already has been convicted and he’s requesting the retrial from the same judge who refused a mistrial repeatedly.
And Dratel may not be truly looking for a retrial. Instead, the motion might all be part of a larger plan to file an appeal.
Ulbricht and his defense team have until April 4 to file their formal appeal.
The Central Bank of Italy (Banca d’Italia) is that country’s first governmental authority to issue a statement on virtual currencies. It recently published three directives:
“In Italy the purchase, use and acceptance of virtual currency must be considered lawful activity: the parties are free to transact in amounts not expressed in legal tender.”
The January 30 Notice on virtual currencies also contains an analysis of the guidance published by the EBA, and agrees with the EBA’s recommendation that financial institutions should avoid buying or investing in virtual currencies until a formal legal framework has been established. This means the Central Bank will not ban regulated institutions from dealing in Bitcoin and other virtual currencies, but advises them to wait until formal regulations are announced.
The Notice allows financial institutions regulated by the Bank of Italy to do business with any virtual currency companies, provided that they respect existing AML/KYC requirements for account holders and warn them about the risks involved.
The Notice of Central Authority for Reporting on virtual currencies of Financial Intelligence Unit (FIU) warns that using virtual currencies may enable money laundering and terrorist financing, as previously discussed by the ECB and other European authorities. The FIU states that businesses dealing in virtual currencies, including holding them and exchanging them for fiat currencies, are not required to comply with any AML/KYC regulations.
A reading of the documents released by both the Central Bank of Italy and the FIU indicates that a business that transacts in virtual currencies is not subject to any regulation at this time. However, the owners of such businesses would be subject to existing AML/KYC requirements when setting up a bank account or dealing with a regulated financial institution. In that case, virtual currency activities are not subject to any unique regulations; instead the activities are regulated where they intersect with the existing AML requirements of the Italian financial system.
Italy is the first country to declare that virtual currency exchanges are not subject to any AML requirements. This is in contrast to the United States, where exchanges are required to register with the Financial Crimes Enforcement Network (FinCEN) as Money Services Businesses.
The FIU concludes with a recommendation that regulated financial institutions evaluate their own clients to screen for suspicious transactions. It also recommends that financial institutions educate their staff about virtual currencies and how to identify suspicious transactions, with a particular focus on gaming operators.
Congratulations, virtual currency world—New York wants to expressly regulate you! That’s how important Bitcoin and other digital currencies have become in recent years. And as we know, what happens in New York’s financial world often has implications for the wider world. All the recent attention New York has paid to virtual currency is raising many important legal questions, with potentially profound implications. This article will offer a brief survey of just some of them.
A Cryptic History of Money
Bitcoin is the latest and best known in a long line of digital currencies. The basic premise of digital currencies is that they try to establish a medium of exchange based on immutable mathematics, thus putting the currency beyond the control or manipulation of any government. Not long after the computer was invented people started discussing the development of currency based on that series of zeroes and ones called “bits.”
But mediums of exchange go back to the first bartering by cave people. When A and B first exchanged goods, each was getting something from the other that he wanted. Soon, there came a point when B didn’t really want more apples but knew that he could exchange them with C for the tomatoes B really wanted. Soon he had an inventory waiting to be bartered. And shortly after that B needed some means of storing his accumulating wealth other than in the tomatoes and other produce he had bartered for.
Initially, B’s excess wealth might have been represented in certain beads or special rocks. Next came smelted copper and eventually gold and silver. Then there was the problem of storage for this wealth
inventory. So here came banks and coins minted by governments, followed by the age of paper or fiat money, checks and credit cards. Today, instead of masses of paper moving through the banking system, all this transfer of wealth—debiting and crediting—takes place electronically.That means we are already in the digital currency era.
A Few Legal Questions
The introduction to the original white paper by Bitcoin’s pseudonymous founder “Satoshi Nakamoto” states:
“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party. Transactions that are computationally impractical to reverse would protect sellers from fraud … . The fraud system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.”
What Nakamoto could not address at the time was Bitcoin’s legal status in the currency and taxation worlds. What exactly is Bitcoin for legal purposes? This is a critical question, because Bitcoin’s legal characterization makes a difference as to whether it is regulated, how it is regulated, and who regulates it.
Thus far, Bitcoin has been regarded as both a currency and a commodity. In SEC v. Shavers, a federal court in Texas held that since Bitcoin could be used to buy things other than Bitcoin itself, it was money. The court found that paying in bitcoins for shares in a business run by others for profit was buying a security and subject to SEC regulation. The court did not deal with the nature of what the business was going to do with the “money.” The business intended to deal in bitcoins.
The court could have classified the transaction as an investment in commodities, as a Bitcoin trading business, or as trading in forex. The case presented different ways of looking at Bitcoin, along with several possible regulatory schemes: currency, securities, commodities and forex.All of that suggests another question: Who has legal jurisdiction over Bitcoin transactions? Suppose Company A, physically in country X, uses the Internet to find an exchange, “GiveandTake,” upon which it can offer its shares. It accepts payment only in Bitcoin. The exchange is only virtual and Company A does not know where the exchange is located.
Company A offers its securities, and investors pay for it by depositing bitcoins into Company A’s electronic wallet. The wallet is administered by “Maybesafe,” thought to be in country Y. Company A does not have the physical name and address of “Maybesafe” or the investors. All it has is email addresses. Of course, the securities the investors purchase are really electronic entries. Later, Company A pays dividends to the investors by sending the dividends to their virtual wallets via their email addresses. These recipients could be anywhere in the world.
Suppose things go wrong. Perhaps some of Nakamoto’s “honest nodes” succumb to “attacker nodes.” Maybe the business simply goes bankrupt. What government(s) can take jurisdiction? To what court can the injured party go to seek justice? Where the physical offices of the various participants are located, or the location of their servers?
The New York Story
New York, Wall Street’s home, has published proposed regulations defining its jurisdiction as covering any transaction “involving New York or a New York resident.” There are stated limits to “involving,” but even so, anybody in the Bitcoin business “involving” New York will have to obtain a license. The only real exclusion is for “merchants and consumers” who “utilize Virtual Currency solely for the purchase or sale of goods or services.”
In the banking world, New York’s highest court has ruled its courts have jurisdiction over Lebanese Canadian Bank sued by U.S., Canadian, and Israeli citizens resident in Israel who were victims of Hezbollah rocket attacks. The claim was that the bank assisted Hezbollah by “facilitating international money transactions” by using its New York correspondent bank to transfer money to Hezbollah agents. This approach could be applied to Bitcoin. Beware Bitcoiners!
In our hypothetical case, New York’s proposed regulations could require that Company A know the physical address of the exchange, that the exchange and wallet be licensed, and that all parties, including the investors, know with whom they are dealing beyond mere email addresses.
The proposed regulation requires all advertisements by licensees to include their name and a statement that they are licensed to engage in a “Virtual Currency Business” by New York. The license will serve as an advertised badge of integrity, like a bank saying it is a member of the FDIC. Hopefully, there will be no Mt. Gox or Silk Road fiascos by New York licensees.
But it’s a tough regulation. Applicants must submit fingerprints, extensive personnel background information, certification of an outside investigator, a detailed business plan, and audited financials—much like a bank.
Once in business, a licensee must have a written compliance plan, maintain compliance personnel, be audited, and report frequently to the regulators. Among other things, if for instance, $10,000 in bitcoin or money is transmitted in “one day by one person,” as in buying shares “involving New York or any resident of New York,” the licensees will have to report the transaction to the New York regulators.
Some Laws That Might Apply
The Treasury’s Financial Crime Enforcement Network (FinCEN) requires U.S. financial institutions to assist U.S. government agencies to detect and prevent money laundering and other criminal activity. Under the Electronic Funds Transfer Act, any transfer of funds, other than a transaction originated by check, or similar paper instrument, which is initiated through an electronic terminal, telephonic instrument, or computer, must be reported. “Money transmitting” includes transferring funds on behalf of the public by any and all means within this country or abroad. These laws would ostensibly cover Bitcoin transactions such as the illegal drug dealings in the infamous Silk Road case.
Bitcoiners, like all businesses, will have to comply with the securities laws, privacy, tax, health, Social Security laws, and money transmitter laws, and honor their contracts—or risk being sued. For Bitcoiners, regulation will greatly compromise the vaunted anonymity of the currency. This is a matter of more than a little concern for many in the Bitcoin community. Will a New York badge of integrity be worth it?
And About the Rest of the World …
New York isn’t the only jurisdiction considering whether and how to regulate Bitcoin, but with New York being the 800-pound gorilla of the financial world that it is, you can bet that the rest of the world is watching very closely. Given Bitcoin’s endurance and ever-evolving prominence on the world’s financial stage, governments everywhere are considering regulation, and they will most certainly be closely observing what happens in New York.
As it stands now, Russia and others may criminalize Bitcoin in the future. On the other hand, they may find that tactic to be unsustainable and a bad move for their own financial system. The best advice from here is to stay tuned. Bitcoin remains an ever-evolving legal quandary.
Bitcoin Snapshot: Russia
The situation in Russia has many players, and has shifted ambiguously in 2014. In January, the Bank of Russia issued a statement discouraging the use of bitcoins, warning that Russians who use them risk becoming unwittingly involved in illegal activities. After a meeting with the Bank of Russia, Russia’s Prosecutor General announced in February, 2014 that with the ruble being the official currency of the Russian Federation, existing Russian law categorically prohibits Bitcoin. The Bank of Russia, however, came away with a different interpretation of that meeting. In March the bank clarified that it had not concluded that all “cryptocurrencies” were prohibited, and that the meeting was merely intended to develop a regulatory framework to combat illegal operations and protect the rights of users.
It seems that the matter will be settled soon enough, though, as Russia’s Finance Ministry is now backing a bill that would fine individuals involved with virtual currencies the equivalent of between $100 and $840, according to the nature of the offense. Officials and legal entities would face substantially higher fines, up to $12,500.While the Finance Ministry has backed off of its earlier attempts to impose more severe fines, its underlying hostility to virtual currencies remains intact.Its position is, however, opposed by the chair of the Duma’s Committee on Financial Markets. Given Russia’s well-documented ambivalence on the matter, the bill’s fate remains uncertain as a vote looms soon.
