Bitcoin Regulation Roundup: Bankruptcy, Derivatives and Consumer Protection
Published on March 22, 2014 at 09:47 GMT | Analysis, Asia, Bitcoin Gambling,Crime, Law, Mt. Gox, News, Regulation, US & Canada
Regulatory attitudes towards cryptocurrencies in countries around the world are shifting. Hardly a day goes by without a central bank issuing a statement on the digital currency, or a warning perhaps. But it’s not all bad news, some authorities are taking a much more positive approach. In CoinDesk’s regulation roundup, Certified Public Accountant and ACFE Certified Fraud Examiner Jason Tyra examines the most significant digital currency news from the world’s regulators and law courts over the past fortnight.
MT. Gox: Frozen assets
Mt. Gox has now filed for bankruptcy protection both in the United States and in Japan. Additionally, both the company and Karpeles have had their US assets frozen in connection with numerous civil complaints and at least one criminal probe.
Karpeles testified in a Texas bankruptcy court on Monday, March 10th, that Mt. Gox was the target of a massive and lengthy attack by computer hackers, but admitted that the exchange continued to accept trading orders and collect fee income for weeks after management knew that Gox was technically insolvent.
Further, Mt. Gox has so far failed to explain the reason for the discrepancy between the amounts of cash liabilities on its balance sheet and the balance of cash held in banks accounts known to be owned by the company.
As the drama plays out in public on multiple continents, online forums have buzzed with theories about the source and extent of the collapse, rumors of wholesale theft by Mt. Gox management and voluminous amounts of data alleged to have been leaked (or stolen) from Gox’s servers.
Nevertheless, no allegation, including the official statements by Gox management, has yet been conclusively proven. Mt. Gox’s website restored partial functionality on March 17, allowing account holders to check their balances, but not make withdrawals.
The Mt. Gox affair has set the stage for a shift in the focus of bitcoin regulatory efforts in the United States from money laundering exclusively to also include consumer protection.
New York: Registered exchanges
The State of New York seems to taken the lead in its drive toward regulating bitcoin-related businesses operating there.
The State Department of Financial Services, headed by Ben Lawsky, recently announced that it will accept proposals to establish regulated exchanges in New York.
Lawsky cited “the urgent need for stronger oversight […] including robust standards for consumer protection, cyber security, and anti-money laundering compliance” in his solicitation for applications and proposals.
The standards of acceptance and process of application do not appear to be available through the Department of Financial Services website, suggesting that both will be handled in an ad-hoc manner, with extensive input and negotiation by applicants.
New York’s only bitcoin exchange, BitInstant, ceased operating after the arrest of its founder on money laundering charges in 2013. CoinMap.org currently lists more than 100 bitcoin businesses operating in New York State, but that number does not include businesses located outside New York with a regulatory nexus there.
The US Treasury may have concluded that bitcoin is unworthy of extra regulation for the time being. In a speech given on March 18th, US Treasury Undersecretary for Terrorism and Financial Intelligence said:
The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has cracked down over the past year on unregistered exchanges, resulting in disruptions to bitcoin businesses and users throughout the world.
While registration requirements are unlikely to be eased, a de facto moratorium on further regulation is likely to be a welcome development.
Texas: Bitcoin investment blocked
Consumer protection seems to be on the minds of other regulators, as the commissioner of the Texas State Securities Board has issued anemergency order barring a private energy exploration company from accepting investments in bitcoin from non-accredited investors.
The company, Balanced Energy LLC, must also furnish potential investors with a disclosure informing them that bitcoin is volatile and that their investment may be subject to extraordinary risk as a result.
Both US federal and Texas state law require companies offering securities under one of the registration exceptions to take reasonable steps to verify that potential investors are qualified.
Offerings of unregistered securities by bitcoin-related businesses have become common over the last 18 months, with solicitations for everything from mining operations to exchanges and other tech startups being pushed online. Though failure to register is not generally a criminal matter, firms that violate the rules can face substantial civil penalties.
US: SatoshiDice in trouble
Also in securities registration, the SEC (Securities and Exchange Commission) is reportedly investigating whether bitcoin gambling site SatoshiDice violated registration rules by accepting funds from investors located in the US.
MPEx, the Romania-based exchange that hosts SatoshiDice shares, has so far declined to cooperate, citing lack of jurisdiction by the SEC.
US: Bitcoin derivatives?
Bitcoin derivatives may be coming to US financial markets. According to Bart Chilton, a member of the US Commodities Futures Trading Commission, the regulator already has statutory jurisdiction over a proposed derivatives market for bitcoin.
Chilton suggested that his agency had been in talks with several companies about bitcoin derivatives, but declined to name them, since no formal applications have been filed.
A derivatives market would allow traders to write calls, puts, swaps, options and other types of contracts on bitcoin in much the same way as other investments. However, while derivatives might result in more robust long-term growth of the bitcoin economy, they also bring a risk of greater volatility to bitcoin markets.
The enormous worldwide derivatives market played a substantial role in the 2008-2009 financial crisis in the US, as bets on the performance of certain classes of assets drove a large number of previously profitable companies into insolvency.
Singapore: Compulsory registration
The city-state of Singapore hasannounced that virtual currency related businesses, including bitcoin exchanges and other intermediaries, will be required to register with a unit of the police force that enforces anti-money laundering rules.
According to the Monetary Authority of Singapore, these regulations place the tiny nation at the forefront of virtual currency regulation among developed countries.
Singapore’s decision to impose anti-money laundering regulation on bitcoin businesses marks a reversal from its previous stance, announced just a few weeks ago, and coinciding with the installation of its first bitcoin ATMs.
Iran: Regulation talks
Iran has reportedly announced its own effort to regulate virtual currency trade within its borders. According to the Fars News Agency, the country’s National Center for Cyberspace is currently involved in talks with the Ministry of Economic Affairs and Iran’s Central Bank concerning what regulations might be needed in the Islamic state and how they might be implemented.
Iran has endured punishing economic sanctions at the hands of western countries in recent years, stemming from its alleged pursuit of a nuclear weapons program. The country has publicly claimed that the program is for civil purposes only.
The sanctions, which were partially lifted recently, have severely hampered Iran’s ability to trade abroad, drained its foreign exchange reserves and driven the country to resort to extraordinary measures, such as gold bullion smuggling, to conduct business abroad.
Bitcoin could be used to partially subvert economic sanctions in the future, stoking fears among western governments that it could also be used for money laundering.
US anti-money laundering rules require financial institutions, such as money service businesses, to “know their customers” – that is, collect ID data – and ensure that they do not appear on the Office of Foreign Asset Control’s Specially Designated Nationals list.
Mt gox ‘Discovery’: US Lawyers not convinced.
Mt gox’s announcement, yesterday, that it had ‘Discovered’ an old format wallet containing almost twenty-five percent of the missing bitcoins is being viewed as highly suspect. The bankrupt exchange has found the missing coins at a time when many are paying careful attention to blockchain transactions. Indeed I wrote on this myself on March 9th in an article entitled “$113 Million of missing bitcoins may be moving through blockchain.” Mt gox has announced that they immediately informed the relevant authorities of the substantial recovery, however, one man isn’t quite buying their story.
Chris Dore is a partner at a law firm involved in representing clients in a US class action against the bankrupt exchange. His firm Edelson Law is currently investigating events up to the collapse of Mt gox, and it is Dore’s belief that the announcement is merely an attempt to stem a growing suspicion that these bitcoins were being prepared to be broken into smaller wallets and then further dispersed. He stated: “Their statement that they found (these bitcoins) in a random wallet and failed to tell anyone for two weeks is highly suspect.” He went on to state that it was his belief that these were probably the 180,000 that had been discovered moving through the blockchain on or about the seventh of March. This was reported in Cryptocoinnews on March 9th.
Chris went on to further state: ” We believe that that we were on the right trail. It appears that these 180,000 to 200,000 bitcoins were being tumbled. That they were being broken down and reconstituted so our goal was to find this out.” Dore seems to believe that declaring these funds to be discovered may be a ploy to hold up further investigations into the missing funds. Dore went on to say: “If it’s a coincidence, it’s a $120 Million coincidence. We frankly just don’t buy it.”
Edelson Law yesterday applied to the courts for a relaxation of the restrictions on Mt Gox assets in order to make it easier to investigate their transactions and help to seek to ‘discover’ further funds. Dore is quite skeptical about the motives at Mt Gox stating that: “they found it in a wallet and they were breaking it down into hundreds of thousands of smaller wallets, it raises a lot of questions about their honesty and whether they are being forthright about what they have.” Dore was unwilling to state exactly how much he knew, but he seemed to believe that it would have been interesting to track the transactions to see where they would finally end up. Interestingly the investors that have lost funds are not currently being treated as creditors within the bankruptcy hearing and Mt Gox is attempting to have it’s US assets shielded until the conclusion of it’s bankruptcy hearings in Tokyo. The next court hearing, is scheduled for April 1st in Japan. Let us only hope that the date chosen is not indicative of their attitude towards their clients. This may be a futile hope in an organisation that has treated it’s investors with an attitude of nothing less that open contempt. Cryptocoinnews will keep you appraised of developments.
Bitcoin is Not Banned in Columbia…Yet
Columbia may ban Bitcoin transactions next week.
El Tiempo is reporting that Columbia is planning to ban all Bitcoin-related transactions next week. This news comes as quite a shock because the fact of the matter is Columbia is not exactly the first country that people think about when it comes to hotspots of cryptocurrency. The Finance Superintendent of Columbia has claimed that virtual currencies are not safe because they have no backing from government. He claims that Columbia already has a safe and useful currency and there’s no reason for people to use bitcoins. The El Tiempo article also quotes the Economics Director at the University of La Salle stating that Bitcoin is useful as a payment system, not as a currency.
Why Would Columbia Ban Bitcoin?
Any final say on why Columbia may want to ban Bitcoin would be nothing but speculation at this point. Having said that, there is definitely one clear reason as to why Columbia and other South American governments are not going to like cryptocurrencies. Many countries in this part of the world have restrictions on how much money their citizens can take out of the country, and Bitcoin is one of the easiest ways to avoid these restrictions. When people are only allowed to move a few thousand dollars outside of the country each year, Bitcoin could start to become a more interesting option for securing one’s finances. Economic restrictions and Bitcoin are the polar opposites of each other, so countries that have governments who want to have control over the economy will definitely face huge issues during the age of cryptocurrencies. We’ve reported on the capital controls in Argentina on CCN in the past, and this ruling from Columbia could have a ripple effect throughout the rest of South America.
What Happens Next?
Most of the facts related to Columbia’s action against Bitcoin are currently tied up in a government document that has not been released to the public. Even the Bitcoin community in Columbia is not really sure what will happen quite yet, but a member of Bitcoin Columbia has a meeting with some of the “bigwigs” inside the government next week. It is not yet known whether this meeting will be a good or a bad thing for the local Bitcoin community. We’ll be sure to update this story on Tuesday when the supposed document behind these claims is released. The Bitcoin community should be hoping that this document is more of a recommendation than an actual change in law.
Note: Special thanks to Rey Poullard on Twitter for help with this article.
BTC-e Allows Withdrawal Of Funds To Visa
And Mastercard In Any Currency, Let’s See
How Long That Lasts
Today, at 17:49 BTC-e time, BTC-e released this update on their site. This was the first update in nearly a month, the last update being a statement regarding Mt. Gox.
Withdrawal of funds on the cards VISA / MasterCard issued in any country and in any currency.Dear our valuable clients!We are pleased to announce that for your convenience, we have implemented a new payout system that allows you to send your funds to any cards VISA / MasterCard issued in any country and in any currency.Fee – 5%Transfer of funds is possible only in U.S. dollars . If your card is not in USD, the money will be converted at the rate of VISA / MasterCard or your bank’s rate (depending on the agreement with your bank). It takes 2-4 business days to deliver funds to your card. «Maestro» and «VISA Electron» cards are not supported by our payout system.
BTC-e is one of the top Bitcoin and Litecoin exchanges in the world in the aftermath of The Goxxing. BTC-e has drawn a lot of interest in the last few months as its anonymous owners have not yet stepped forward to allay the fears of some customers, and even some regulators. According to Bitcoincharts, BTC-e is currently the third largest Bitcoin Exchange by USD volume and this new withdrawal method potentially opens the exchange up to even more users worldwide.
The Limitations
BTC-e included a short FAQ that cleared up any questions potential users of this new program might have. Users can only fund VISA and Mastercard cards that allow a positive balance on the account, and the transaction from BTC-e occurs in USD and the user is responsible for additional currency exchange costs.
During the test period, our administrators have received a lot of questions. Here are the answers to the most frequently asked questions:1 . What is displayed in the statement of my card?
Operation appears as : «affiliate payment» or «refund affiliate payment».2 . Does it matter in which country my card is issued ?
We can fund any card (VISA/MasterCard) in any country.3 . Is it important the type of my card: credit , debit , etc.?
Yes, it is. On some cards withdrawal is not possible, this is due to the restrictions polices of some banks. For example: you cannot withdraw money through our exchange on the cards issued by PayPal. Some credit cards that does not allow to have a positive balance cannot be funded.If payout to your card is not possible, then we will immediately notify you and refund the money back to your account.
Mixed Reception From Bitcoiners
BTC-e hasn’t revealed exactly which third party payment processor is providing this service to them. Some Bitcoiners have noted that similar capabilities were already provided by BTC-e through LiqPay. On the other side, some are skeptical about the longevity of this program. The fiat appears in the system as an affiliate payment, or a refund affiliate payment. Those familiar with such programs have been quick to point out that the industry widely frowns upon abuse of affiliate payments, and payment codes. Visa and Mastercard could take offense to this operation, or the third party processor could pull out. Either way, BTC-e has always taken this approach in releasing functionality and news. Because of that, BTC-e has both haters and lovers.
Check out this /r/Bitcoin thread about the announcement.
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