Friday, April 29, 2011

Virtual Currency: The Legal Issues Are A Reality

By Theodore J. Kobus, III and Nicolai A. Schurko
Thursday, April 28, 2011

More and more businesses are making virtual currency part of their business model. While the use of virtual currency provides great opportunities, businesses need to be aware of the emerging legal issues before using it as a means to build customer loyalty.

What is virtual currency and why is it used?
Put simply, "virtual currency" is any medium of exchange, other than real currency, used to facilitate online or other electronic transactions. Numerous companies are currently using forms of virtual currency. For example, Apple provides iTunes users the option of buying prepaid iTunes gift cards, which contain credits that can be redeemed for music and movies. Many online games allow players to earn and purchase "points", "tokens", etc. that can be redeemed for virtual and real-world prizes. Facebook recently started a system of "credits" that has a wide variety of applications apart from gaming, such as making charitable donations using a particular charity's Facebook page. Looking into the future, Google has announced that it acquired the start-up company Jambool and its proprietary "Social Gold" virtual currency platform. There is industry speculation that Social Gold will be used to supplement Google's current online payment system, Google Checkout.

The bottom line is the use of virtual currency in e-commerce is on the rise. This trend is due in significant part to the advantages that virtual currency affords to a vendor. Virtual currency platforms allow issuing companies to lower costs by eliminating the need for a third-party company, such as a bank or PayPal, to process each payment transaction. Further, a vendor has significant control over the value of, and authorized uses for, virtual currency. This control enables companies to realize higher revenues, cut costs, and build more-attractive customer loyalty programs.

While virtual currency offers these potential benefits, there are a host of legal issues to consider.

What are the laws and legal issues affecting virtual currency?

Gift card laws:
Both federal and state gift card laws may apply to the electronic value of stored virtual currency. For instance, the federal Credit Card Accountability Responsibility and Disclosure Act of 2009 (CCARDA) contains provisions which prohibit retailers from setting expiration dates less than 5 years after a gift card is purchased. The CCARDA also prohibits retailers from changing dormancy, inactivity, and service fees unless a gift card has not been used for at least 12 months. If fees are charged after this period, the details of such fees must be clearly described on the card, and retailers cannot assess more than one fee per month under any circumstances.

State gift card laws may provide for even stricter requirements and are not preempted by the CCARDA. Thus, state law may further-limit a retailer's ability to penalize a customer for not regularly using a virtual currency account. That said, some state gift card laws provide exemptions for gift certificates or loyalty points that were provided to a customer on a promotional basis without consideration, and these may also apply to virtual currency.

Unclaimed property laws:
Unclaimed property laws may be triggered when virtual currency is earned or purchased but not used by the owner, i.e. "breakage". A typical state law provides that where property has been abandoned or unused for a specified period of time (usually 3-5 years), the property holder must turn over the value of such property to the state of the owner or to the state of domicile of the holder. Failure to comply with this type of law can result in interest and penalties which may exceed the initial amount to be reported.

In the context of virtual currency, unclaimed property laws may force a company to turn over a customer's stored virtual currency if that customer's account has been left with an unused balance for an extended period of time. Such laws may even require the officers of the company that issues virtual currency to attest to the company's compliance with unclaimed property protocol.

Gambling/Sweepstakes laws:
In some cases, companies will offer virtual currency units as a prize in a sweepstakes-type contest or will allow customers to use virtual currency as a wagering device in online games. When considering these applications, it is important to remember that federal law criminalizes most forms of online "gambling", a term which is broadly defined. Many states also regulate gambling, sweepstakes, and contests.

Currency transmittal licensure laws:
Federal and state laws generally require licensure, and sometimes special registration, for an individual or entity to engage in an activity that involves the acceptance and/or transfer of funds to a third party. These laws usually do not have a requirement that actual currency is being transferred and, thus, transfers of virtual currency could be covered. In particular, virtual currency models which allow value to be transferred to third parties, such as redemption of Facebook credits for a participating business partner's products or services, could require currency transmittal licensure. Failure to obtain a required license could result in civil and/or criminal penalties.

Ted Kobus is the Chair of Marshall, Dennehey, Warner, Coleman & Goggin's Technology, Media, and Intellectual Property Practice Group. Nick Schurko is an associate in Ted's group.

For further reading:
"Could virtual currency become king in developing countries?", Brendan Burge, April 14, 2011
"Virtual pigs and chooks see payday for crooks", The Sydney Morning Herald, March 29, 2011
"EVE Online: Its Economist on the Power Virtual Economies", Damon Brown, March 28, 2011
"Virtual Currencies: Real Legal Issues for Interactive Entertainment Companies", J. Dax Hansen, Kirk Soderquist, and Scott Edwards, April 8, 2010

Monday, April 25, 2011

Peer-2-Peer Digital Currency: The Long Road Ahead for FinCEN

By Mark Herpel
DGC Magazine
Friday, April 22, 2011

FinCEN (Financial Crimes Enforcement Network): is one of the U.S. Department of Treasury’s lead agencies in the fight against money laundering. It’s mission is to enhance U.S. national security, deter and detect criminal activity, and safeguard financial systems from abuse by promoting transparency in the U.S. and international financial systems. *

Why FinCEN has an almost impossible task ahead regulating modern Internet digital currency

The financial crime enforcement folks have made some highly effective moves in the legal department during the past few year in their attempt to regulate new Internet financial products. These new products include digital currency payment software, online payment systems and value transfer systems.

The 1970 Bank Secrecy Act authorizes the Secretary of the Treasury to require certain records or reports where they have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism. In 1990, the U.S. Department of the Treasury established the Financial Crimes Enforcement Network (FinCEN) to provide a government-wide multisource financial intelligence and analysis network. The organization’s operation was broadened in 1994 to include regulatory responsibilities for administering the Bank Secrecy Act, one of the nation’s most potent weapons for preventing corruption of the U.S. financial system. The USA PATRIOT Act of 2001, broadened the scope of the Bank Secrecy Act to focus on terrorist financing as well as money laundering. The Act also gave the Financial Crimes Enforcement Network additional responsibilities and authorities in both important areas, and established the organization as a bureau within the Treasury Department.Hundreds of thousands of financial institutions are subject to Bank Secrecy Act reporting and recordkeeping requirements. These include depository institutions (e.g., banks, credit unions and thrifts); brokers or dealers in securities; insurance companies that issue or underwrite certain products; money services businesses (e.g., money transmitters; issuers, redeemers and sellers of money orders and travelers’ checks; check cashers and currency exchangers); casinos and card clubs; and dealers in precious metals, stones, or jewels. *

Using new powers created by Bank Secrecy Act along with those exciting new Patriot Act upgrades, the great legal minds of the U.S. Treasury have successfully labeled most of the new U.S. Internet payment products and grouped them into existing “financial product” categories.

The FinCEN strategy was to use changes in the existing laws or proposed changes to identify these newer payment products by their activity. Once identified as a financial business the operators would be required to provide a mandatory degree of transparency and financial reporting as required by the laws regulating Money Service Businesses and Money Transmitters. This strategy worked extremely for well over the past few years for all of the existing digital currency payment systems, both foreign and domestic which did business in the United States. The prosecutorial actions stemming from the Treasury’s oversight have effectively shut down all popular U.S. based digital currency systems and forced all existing U.S. exchange agents to close.

The red tape which faces digital currency businesses within U.S. borders is simply to troublesome and expensive.

Large companies such as PayPal which have centralized account structures, process all customer funds through existing bank channels are able to comply with regulations without any hesitation. The flow of funds always moves from the customer, through the regulated bank product and into the online payment system. These large regulated companies comply with the law…..because the can. To be clear, because all customer funds move through the bank, the origin of the funds and the person behind the deposit are always known.

From the above FinCEN statement: “…to require certain records or reports where they have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism.

Regulations require the online payment company to generate these reports, keep stored records and maintain access for the purpose of, “…criminal, tax, or regulatory investigation…“.

Each PayPal customer account is directly linked to personal information, backed by government issued ID plus the funds flow through a licensed bank where an account is also linked to the account holder and their ID. PayPal is an extension of the bank account it is not a digital currency. It is accurate to say that a PayPal payment is “owned” by that account holder and no one else. If the payment turns up bad, the owner can be easily discovered. The funds can be tracked directly to that person before during and after the transaction and an detailed record of this transaction is held for many years.

Unlike digital currency products, the PayPal system was created as a extension of regulated bank products. Complying with FinCEN regulation changes is easy for PayPal. Reporting the customer’s personal information, the account number, transaction details and where the funds originated is a snap. Suspicious transactions can also be monitored for money laundering violations. Customer records can be accessed after the fact which could help to build a rock solid legal case. To prosecute financial crimes, all of this data can be quickly accessed with a U.S. court subpoena, a judge’s order, or even a ‘sneak and peek’ warrant.

FinCEN regulations are highly effective because the identifiable “markers” are in place which recognize trouble. If an account has too many large payments moving in one direction, the centralized computer AML software sends up a flag, the suspicious transactions are tracked and those details are sent on for further investigation. If 6 months after the payment, a list of account transactions are needed to prosecute fraudulent sales practices, those records are easily accessed. The records exist because they were captured at the time of the transaction by the bank like PayPal system.

FinCEN works very effectively using the tools and “markers” that are provided through the existing financial regulatory structure. During the past few years, regarding the newer Internet payment products, FinCEN has either changed the laws or is proposing regulatory changes that force all newer online payment systems into these existing categories. Domestic or foreign, big or small, the rule changes are attempting to fit all these products into existing reporting categories so that FinCEN will have access to all those reports or “markers” which identify crimes and suspicious activity. Based on the data created from the reporting company’s payment accounts, FinCEN acts as a sort of intermediary to regulate the financial industry online.

The government has been tightening up this process over the past 5 years in an effort to catch up with new software and technology. Since the identifying markers for online accounts are widely available in the current centralized payment systems, like PayPal, these regulatory moves towards transparency have been highly effective.

The Dead End Ahead: No More Markers

While the government has been tightening up their arsenal of regulatory tools, the software designers have been moving in exactly the opposite direction. This is the rapidly approaching problem for FinCEN and other government agencies.

The free creative minds that mold financial software have been busy building systems absent of the data markers which FinCEN needs.

Examples of where the markers are missing:

  • Any possible AML software within a system that would identify a suspicious pattern of payments….gone and impossible to implement in a decentralized system.
  • All personal information identifying the account owner…..gone and never even requested to open or operate.
  • Centralized record systems that maintain transaction histories on each account or the system as a whole….gone, not present, not possible.
  • Internet information from the user’s connection that might identify their location….gone.
  • All funding and withdrawals originate from multiple third party sources including unknown third parties. Source of fund details are impossible to determine.

The new decentralized value transfer and Peer-2-Peer payment products emerging across the Internet are free from all the markers that would permit proper oversight by FinCEN. The reports and records which FinCEN requires after they have categorized a business as a “financial product” are simply not available.

This new value transfer software is Open Source, decentralized, often P2P and striped of all existing markers that would generate data and permit a transaction to be a valuable tool for monitoring the movement and source of funds.

Here’s how it’s done:

1) No personal information is required. What is loosely called an “account”, is simply a long number or a nick name. The field holds no identifying information, not even an email address. There is nothing which links this “account” activity to any specific person. Even a straw man owner of this account can not be identified.

2) No records of transactions are kept. There is no middleman or third party intermediaries capturing data and no central database to access and locate past transactions. In most instances, payments do not move through any centralized point, the online value moves from person to person. It is simply not possible to capture any information during the transaction unless voluntarily and manually offered up by the participants.

3) The value of each unit is not often predetermined. The changing digital units of these systems are not pegged to one currency or they have floating value. The value of a unit is often different from another unit on the same system, it might be determined through a variety of methods such as market demand, daily precious metal prices or even the issuer’s reputation. 100 units moving from one owner to another could have a value of $100 dollars, 100grams of gold or even $1,470 which was the $147.00 daily value of that unit at the time of the transaction.

4) It is impossible to track the cumulative value moving through the system at any one time or over any long period. 100% of the funds entering the system do not originate through the ”account” owner’s regulated bank. There is no central record of overall amounts. Transactions can be funded or withdrawn using a variety of methods including cash using third parties.

5) No Internet identifiable information on the user’s connection can be tracked. Generally the time of a connection and the IP, along with other information is logged and that record kept for all users. These logs don’t exist in any of these systems because the connection does not contain such data.

6) These software systems are small, Open Source, can be copied and installed in a matter of minutes. The code is highly configurable and installation is can be accomplished on any server in any country around the globe. An organization having members in multiple countries around the world could set up a new system each day to mask their business, with absolutely no traceable connection between any system.

7) There are no reporting requirements for non-U.S. agents which engage in the exchange operations. (cash to digital) Independent small and large agents are located in many international countries and operate with no financial oversight.


Since FinCEN draws intelligence from financial markers and data generated by reporting companies, regulators have recently changed the rules and tried to make all Internet payment systems reporting companies. However, software designers have now created, built and operate systems that do not generate any of the traditional markers needed for proper regulation. Even categorized as a reporting company, because the raw data is simply not available, these new Internet payment systems operate far outside the reach of existing financial enforcement.

Presently there about a half dozen of these systems operating across the Internet which are known to the public. At least one holds value of more than $5 million or more. Since the programs are open source and free for anyone to download, it is impossible to track how many are in operation, how many clients are using them or a the amount of funds moving through them.

Industry experts are predicting several hundred of these systems to gain popularity in the next 12 months. Who sets them up and what they will be used for is unknown.

Reprinted with permission.

Wednesday, April 20, 2011

U.S. Department of Justice Seizes Major Online Poker Sites

By Dan Cypra
Poker News Daily
Friday, April 15, 2011

In what has been a lively afternoon in the online poker world, the Federal Government has seized the domain names belonging to PokerStars, Full Tilt Poker,, and Absolute Poker. Poker News Daily has learned that PokerStars, the world’s largest site, has ceased taking action from the United States.

According to a statement from the Justice Department, the founders of PokerStars, Full Tilt Poker, and Absolute Poker have been charged with “bank fraud, money laundering, and illegal gambling offenses.” In addition, “restraining orders were issued against more than 75 bank accounts utilized by the Poker Companies and their payment processors, and five internet domain names used by the Poker Companies to host their illegal poker games were seized.”

Visiting any of the four major online poker sites yields a message that reads in part, “This domain name has been seized by the FBI pursuant to an arrest warrant in rem obtained by the United States Attorney’s Office for the Southern District of New York… Conducting, financing, managing, supervising, directing, or owning all or part of an illegal gambling business is a Federal crime.”

The new home page of PokerStars, Full Tilt,, and Absolute Poker adds that violating such laws can result in up to five years behind bars and a fine of $25,000. Preet Bharara, the U.S. Attorney in Manhattan, commented in the Justice Department statement, “Foreign firms that choose to operate in the United States are not free to flout the laws they don’t like simply because they can’t bear to be parted from their profits.”

The statement discusses the passage of the Unlawful Internet Gambling Enforcement Act (UIGEA) five years ago and revealed, “Because U.S. banks and credit card issuers were largely unwilling to process their payments, the Poker Companies allegedly used fraudulent methods to circumvent federal law and trick these institutions into processing payments on their behalf.”

Read the rest of the article.

For further reading:
"Bitcoin, intermediaries, and information control", Jerry Brito, April 20, 2011
"Surprisingly Free: Gavin Andresen on Bitcoin", Jerry Brito, April 19, 2011
"Bitcoin: Imagine a net without intermediaries", Jerry Brito, April 16, 2011
"Daniel Tzvetkoff Purportedly Behind Online Poker Indictments", Dan Cypra, Poker News Daily, April 15, 2011
"U.S. Government Seizes eWalletXpress Funds", Brett Collson, Poker News Daily, November 28, 2010
"Internet Gambling Payment Processor Arrested in Las Vegas", Dan Cypra, Poker News Daily, April 17, 2010
"Online Poker Payment Processor Indicted in New York", Tom Jenkins, Poker News Daily, August 6, 2009

Sunday, April 17, 2011

Online Cash Bitcoin Could Challenge Governments, Banks

Time's Techland has published what is probably the first mainstream press recognition of the bitcoin RPOW (reusable proof-of-work) implementation as a functioning nonpolitical currency. "Online Cash Bitcoin Could Challenge Governments, Banks" by Jerry Brito was released on April 16, 2011. Jerry is a senior research fellow at the Mercatus Center at George Mason University and director of its Technology Policy Program. He also serves as adjunct professor of law at GMU.

Unlike previous articles that merely discuss bitcoin as one of many alternative currencies, Jerry has clearly done his research. What I find most important about the article is the fact that he points out the major trade-off that irreversible digital bearer currencies face now that we have entered the bitcoin era. Either centralize to reissue digital tokens at a mint or decentralize and maintain a transaction chain to prevent double spending. Hence, the trade-off becomes a centralized single point of failure with full anonymity vs. a distributed peer-to-peer system with pseudonymous transaction details. Jerry explains:
"That's because digital cash is different from physical cash in one very important way: If I hand you a 100 euro bill, I no longer have it. You can't be as sure of that, however, when the cash is just 1's and 0's. So it's been necessary to have a trusted intermediary deduct the amount from the payer's account, and add it to the payee's.
Bitcoin is the first online currency to solve the so-called 'double spending' problem without resorting to a third-party intermediary. The key is distributing the database of transactions across a peer-to-peer network. This allows a record to be kept of all transfers, so the same cash can't be spent twice--because it's distributed (a lot like BitTorrent), there's no central authority. This makes digital bitcoins like cash dollars or euros: Hand them over directly to a payee, and you don't have them anymore, all without the help of a third party."
He also hints at how probable law enforcement efforts will be unable to target end-users. The logical extrapolation of this means that if bitcoin assets are not left in the system, the point of vulnerability becomes the exchanger infrastructure performing convertibility into national currencies. Since the global exchanger network covers multiple legal and physical jurisdictions, we are in for some interesting times so buckle your seat belts. From the article, Jerry writes:
"Because Bitcoin is an open-source project, and because the database exists only in the distributed peer-to-peer network created by its users, there is no Bitcoin company to raid, subpoena or shut down. Even if the site were taken offline and the Sourceforge project removed, the currency would be unaffected. Like BitTorrent, taking down any of the individual computers that make up the peer-to-peer system would have little effect on the rest of the network. And because the currency is truly anonymous, there are no identities to trace."

For further reading:
"Bitcoin: Imagine a net without intermediaries", Jerry Brito, April 16, 2011
"U.S. Department of Justice Seizes Major Online Poker Sites",

Saturday, April 16, 2011

Loosely Managed Digital Currency Could Be Avenue for Crime That's Hard to Block

By Colby Adams
Friday, April 15, 2011

An emerging virtual currency intended to be used in lieu of cash could also be a vehicle for criminals seeking to make international transactions anonymously, according to investigators.

Bitcoin, a loosely organized electronic payment system created in January 2009 by an otherwise anonymous computer programmer known by the possible pseudonym of Satoshi Nakamoto, allows users and merchants to make transactions through digital coins, with or without the aid of payment processors or other financial institutions.

While the project remains relatively small, it has already drawn enthusiastic users, including international vendors and nonprofit organizations like the Electronic Frontier Foundation, which accept charitable donations of the currency. Google developers have received the green light to research the coins, which are valued at a total of $5 million, according to estimates by

The currency was "no doubt developed for altruistic purposes by conscientious people, and there are perfectly legitimate, legal and philosophical reasons for wanting the financial anonymity that [Bitcoin] gives, but the other reality is, if this type of currency takes off, it will be a dream for the bad guys," said Steve Santorelli, director of global outreach at Team Cymru, a Burr Ridge, IL-based Internet security firm.

By using multiple e-mail addresses and anonymous proxies to disguise their locations, criminals can open a new Bitcoin account for each transaction and ensure that their money movements are "virtually bombproof and untraceable to an investigator," said Santorelli, a former Scotland Yard cybercrime detective and a former senior manager of investigations with Microsoft's Internet Crimes Investigation Team.

Because Bitcoin users can disguise their locations while potentially transacting large sums of currency with the aid of offshore merchants and payment processors, "domestic court orders and subpoenas to pierce the transactions [are rendered] obsolete," he said.

"The decentralized, international system means that, unlike a financial institution, there is no one to serve a court order on," said Santorelli. "If this system takes off it will be virtually impossible to police it, requiring a fundamental rethink in the investigative approach."

Money from nothing

At first blush, the origin and value behind bitcoins will likely seem strange to some. Few, if anyone, has met Nakamoto, organization principal Gavin Andresen said, during a March 15 interview with EconTalk. Control of the organization is decentralized and based on the premise that all users can have a say in monetary decisions.

"The root problem with conventional currency is all the trust that's required to make it work," Nakamoto wrote in a February 2009 blog on P2P Foundation. "The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust."

How bitcoins work is a "step beyond any payment system I have ever seen," said Santorelli.

The currency, which is traded through software anyone can download, is not backed by precious metals or other commodities but relies on the fact that it is accepted by a group of consumers and merchants whose transactions are vetted by one another on a volunteer basis.

To obtain bitcoins, users can buy existing coins from a participating company—the currency has traded both above and below the value of a U.S. dollar—or try to win a batch of 50 newly-minted bitcoins by first solving a cryptographic puzzle with proof that other users can evaluate. The puzzles are generated by an algorithm designed to make the challenges solvable at a rate of once per 10 minutes, thus establishing a steady rate of coin “creation.”

Among other methods, the coins can be redeemed for prepaid Visa cards, PayPal credit, cash shipped via mail, digital currency used in the online site Second Life and precious metals and coins, including in pounds of pennies, according to , which is hyperlinked from the organization's Web site.

The coins can also be traded between users or spent with the approximately 100 vendors currently accepting the digital money, including electronics dealers, clothing retailers and online bookstores. Among those accepting the currency are a handful of merchants purporting to sell psychoactive drugs, including heroin and LSD, and over a dozen online gambling Web sites, according to the Wiki page.

A statement on Bitcoin's Web site contends that "sometimes you just want to send money from A to B without worrying about limits and policies."

Like cash?

Checks against misuse are already built into the system, which operates as a "pretty loosely organized open source project," said Andresen, in his interview with EconTalk.

Because the software is open-source and money movements are made via a public platform that anyone can scrutinize, users have the ability, and the incentive, to check whether their peers have engaged in suspicious activity, or have tried to game the system, he said during the interview. Currently, between 5,000 and 10,000 individuals participate in the project, Andresen told EconTalk.

"Like cash, Bitcoin can be used for good, and it can be used for evil," according to Jeff Garzik, a Bitcoin developer and creator of, a Web site that follows Bitcoin's financial trends. Since transactions are public, and thus traceable, the currency is "slightly less anonymous" than cash, he said.

"In practice, this provides anonymity for the average transaction, but a government with subpoena power and the ability to perform statistical analysis may be able to track illicit bitcoin activity with a higher success rate than with hard cash U.S. dollar transactions," said Garzik.

"Every bitcoin transaction ever made is public, and the life of every bitcoin is fully recorded in public for all to see," said Garzik, referring to , a Web site that tracks each transaction by unique number. Yet penetrating beyond the number to the initiator of the transaction "would be the difficult part" of an investigation, he said.

Still, court orders may be served to bitcoin exchanges, users and other operators, ordering them to "ban" specific bitcoins if needed, he said.

Nothing stopping them

Even in instances when wrongdoing is discovered, the organization's decentralized nature would make it "extremely difficult for the government to regulate, and may require them to prosecute only individuals, rather than the system as a whole," according to Tom Kellerman, vice president of security awareness and government affairs for Core Security Technologies, a Boston-based data security firm.

Although both cash and bitcoins offer a degree of anonymity, they differ in one key aspect: how quickly they can be transported, said Kellerman. Like remittances, bitcoins can be sent across borders rapidly and with little chance of retrieval, he said.

"The speed difference is roughly that of e-mail versus conventional mail," he said.

"It avoids every reporting requirement out there, which is scary, and it's open source software, meaning someone could start their own currency, which is also scary," said Arnie Scher, Director at the New York office of BDO consulting and a former compliance manager at JP Morgan Chase.

"There's nothing preventing drug dealers from starting their own bitcoin currency - nothing," he said.

Already regulated?

In response to a request for determination for Bitcoin USA, an independent digital currency exchange company affiliated with the project, the U.S. Treasury Department referred the business to a January 2009 Financial Crimes Enforcement Network (FinCEN) ruling defining digital currencies as prepaid value providers.

Bitcoin USA eventually closed, in part, because "identification requirements stopped people from completing the registration completely," according to an April 9 post on Bitcoin's main public forum. "I had a total of three people upload their documents out of all the registered people," according to the post, which cited FinCEN's ruling.

Other bitcoin exchanges have been following the FinCEN ruling "in an ad hoc manner, in an attempt to proactively comply with AML regulations," said Garzik.

Under U.S. regulations, digital currency companies are prohibited from selling or redeeming more than $1,000 per person per day without registering as a money services business (MSB) with FinCEN, and filing suspicious activity and currency transaction reports.

Registering with FinCEN would bring Bitcoin-affiliated businesses under the Bank Secrecy Act examination authority of the Internal Revenue Service, which oversees 200,000 MSBs, according to a February 2009 report from the U.S. Government Accountability Office that also noted numerous logistical hurdles the agency faced in overseeing the companies.

But even if bitcoin exchanges with high-value transactions register with FinCEN, the IRS' monitoring of Bitcoin's vendors would be "unworkable" in part because of confusion over "which part of the system to regulate" and because the IRS is already stretched thin with its current roster of MSBs, said Scher.

Spokespersons for the IRS and FinCEN declined to comment on the organization. Nakamoto and Andresen did not respond to e-mails seeking comment by press time.

Room to grow

Currently, most bitcoin users keep their transactions below the $1,000 threshold because they would prefer to avoid reporting requirements, said Garzik. "Once Bitcoin grows larger, and can profitably support MSB-registered exchanges, those will flourish," he said.

The fact that the digital currency remains relatively small is also a sign that whatever potential problems Bitcoin may face, it's still too early to worry about large-scale money laundering, said Scott Dueweke, a senior associate at Booz Allen Hamilton who studies alternative payment systems.

"When you're talking about laundering drug profits, you're talking about millions - even billions - of dollars, and that's too big of a fish for a model like Bitcoin to fry at this point," said Dueweke. A laundering scheme involving Bitcoin would still need a "complicit or willfully ignorant financial institution to move anything in useful amounts," he said.

Other digital currency businesses have met with skepticism from federal regulators.

In July 2008, the three principal directors of E-Gold, a digital currency backed by gold, pled guilty to money laundering and charges of running an unlicensed money transmitting business. The Treasury Department fined the business nearly $3 million in October 2009 for helping others evade Iran and Cuba economic sanctions.

In February 2006, New York indicted three Western Express International executives for exchanging up to $25 million in international criminal proceeds for digital currencies, including digital gold acquired from the purchase of goods with stolen credit card numbers.

"We are concerned that mechanisms such as the Internet increasingly can be used to conduct business within the United States from a foreign jurisdiction," wrote FinCEN, in a May 2009 ruling. "Use of such mechanisms may avoid both our regulations and the regulations of the foreign jurisdiction," the ruling said.

Wednesday, April 13, 2011

Legal Tender, Illegal Tender: Will Bitcoin be Banned?

By Vitalik Buterin
Bitcoin Weekly
Wednesday, April 13, 2011

Recently, Bernard von NotHaus was convicted for creating the Liberty Dollar, an alternative currency backed by precious metals, and the FBI now seek to confiscate the $7 million in metals that the dollars are backed by. He was charged under two sections of US law:

  • 18 USC 485: "Whoever falsely makes, forges, or counterfeits any coin or bar in resemblance or similitude of any coin of a denomination higher than 5 cents or any gold or silver bar coined or stamped at any mint or assay office of the United States... shall be fined under this title or imprisoned"
  • 18 USC 486: "Whoever, except as authorized by law, makes or utters or passes, or attempts to utter or pass, any coins of gold or silver or other metal, or alloys of metals, intended for use as current money, whether in the resemblance of coins of the United States or of foreign countries, or of original design, shall be fined under this title or imprisoned"

Aside from these, the standard conspiracy charge, was of course, also tacked on. The first charge, that of counterfeiting, is rather frivolous - looking at Liberty dollar bills and coins vs the US government minted ones, the bills don't even look similar. Sure, some inattentive person could mistake the silver liberty coin for a quarter, but if you want to scam an inattentive cashier for pennies you could just as easily pass a Russian kopeck. The FBI said that one of the aims of the Liberty Dollar was to mix it in with standard currency. Trying to read some sense into this statement, we get the impression that they see it as some evil conspiracy to sneak various US dollar-like coins into the market to devalue the US dollar by making everyone forget what US currency looks like. The second charge is more serious, however, and it seems that any gold or silver coin, no matter how different from the US dollar, would be covered under it. According to research by David Rostcheck, this section was originally written in 1864 with the intent of preventing counterfeiting, and was constitutionally justified by the section that allows the government to "provide for the Punishment of counterfeiting". The expansive interpretation of the act, that all alternative currencies made with metal are banned, is, according to Rostcheck, disproved by Las Vegas casino tokens, which are made of metal and do essentially operate as a competing currency in Las Vegas - you can buy goods and services for them outside of casinos. As evidence of his interpretation, we have the fact that Chapter 25 of the United States Code, which contains 18 USC 485-486, is titled "Counterfeiting and Forgery". What happens to this case in the appeal remains to be seen.

Fortunately, neither charge applies to Bitcoin as written, because bitcoins do not exist as physical metal. However, while the original intent of 18 USC 486 was to prevent counterfeiting, now the government is perfectly willing to use it to enforce the US government's monopoly on legal tender. The prosecuting attorney general referred to the minting of Liberty Dollar coins as "a unique form of domestic terrorism", saying that "while these forms of anti-government activities do not involve violence, they are every bit as insidious and represent a clear and present danger to the economic stability of this country." This shows that many in the US government see alternative currencies in general as a threat, and if they turn their attention to Bitcoin, they would be willing to use whatever legal means available to bring it down. While 18 USC 485-486 do not qualify as sufficient legal means no matter what spin a lawyer might put on them, other laws might.

One angle of attack that I can see the federal government taking is that of using money laundering and narcotics laws against Bitcoin. As a previous Bitcoin Weekly article pointed out, "Bitcoins are already being used for counter-economic purposes, by at least one person, the operator of The Silk Road anonymous marketplace... the marketplace there has categories for various drugs, as well as one for weapons." Bitcoin's anonymous nature makes it very easy for it to be used for the sale of illegal goods. Tax evasion is also a practical application, and one seminar in a recent Agora IO conference openly advocated ignoring tax and license requirements, as well as using Bitcoin to do so. The Bitcoin community has a very strong libertarian and crypto-anarchist (the precise term is agorist) fan base, one that sees breaking the law as a perfectly legitimate activity that is merely risky, just like walking around alone at night in a high-crime neighborhood - fines are equivalent to getting mugged, jail to getting kidnapped. If the risk is sufficiently low, then go ahead and break the law. The government relies on the perception of legitimacy to survive, so it will fight against such an ideology tooth and nail, and if Bitcoin is too strongly linked to agorism it will itself be persecuted.

It is true that Bitcoin is cryptographically secure, and the government is powerless to stop or even detect a technologically savvy user using it. However, pragmatically it is necessary to understand that the majority of people now do see the government as legitimate and, if Bitcoin was banned, would not use it out of a desire to be good upstanding citizens. The Bitcoin economy would lose 90% of its user base and the value of Bitcoin would crash. Therefore, Bitcoin needs to become a viable currency for legitimate business transactions. Advantages to Bitcoin other than its secrecy need to be highlighted. As I have previously described, Bitcoin can be used in microtransactions, and entirely internet-based Bitcoin employment is an emerging market, with listing boards such as gaining popularity. It is necessary that either established businesses start taking up Bitcoin, of which we have seen a glimpse with a Google engineer releasing an alternative Bitcoin client, for a new Bitcoin economy needs to grow. Even if you are an agorist and your final goal is to supplant the US government, this revolution is not yet nearly powerful enough to leave the stealth phase.

Reprinted with permission.

For further reading:
"Bitcoin and Anarchy", Practical Agorism, April 13,2011
"Liberty Dollar II – Did Prosecutor Anne Tompkins Violate Ethics Rules?", Bill Rounds J.D., April 11, 2011
"Bowling for Bitcoins: Interview with Gavin Andresen", The Bitcoin Bulletin, April 9, 2011

Tuesday, April 12, 2011

Bitcoin Mania on AgoristRadio

This episode special guest is mids, cypherpunk, digital currency fanboy, software engineer, privacy & anonymity software creator and project contributor, eurotrash turned turned AnCap by hanging out in the wrong online chat channels. Yes, its ‘mids’, lowercase ‘M’, cause this guy is L33t.

mids gives us the lowdown on this Bitcoin Mania that is exciting and confusing everyone. mids tells us the Cypherpunk Cryptocurrency invasion has begun.

Issues discussed include: What is Bitcoin? Why is Bitcoin Money? Can a tyrant in government seize the worlds Bitcoins? P2P Software/Network that makes up Bitcoin. Open Source Software. Bitcoin Mining. Past and Current USD value of Bitcoin. OTC Exchangers. Business opportunities in parts of the world for on the ground Over the Counter exchangers. The massive amount of developers creating systems for Bitcoin. The fast growing number of merchants accepting it. And… lots more. Enjoy and look forward to more episodes on Bitcoin and other topics with mids.

Listen to Part 1 - the April 6th, 2011 interview here.

Listen to Part 2 - the April 22nd, 2011 interview here.

Saturday, April 9, 2011

Bankers, Amsterdam and Bitcoin

Last week on April 6th, 2011, a group of bankers and payment professionals at the 10th Annual European Payments Consulting Association Conference sat patiently and listened to a presentation on the disruptive bitcoin from Mr. Amir Taaki (or Genjix). Taaki is also the founder of Britcoin, a new bitcoin to Pound Sterling exchange service. The full video is below, but a recent article in DYNDY mentioned the high points:
"Our guy Genjix is a colorful and open minded type, witty and messy, a good mix that entertained the people present despite it being the last presentation of the day; he did a good (unpaid) job presenting some quite impressive information on the growth and usage of Bitcoin, making people present progressively interested (or pissed, but then hard to notice behind the suits) at this crypto-cash system that seems to be there to stay or, one could argue, to multiply in different flavors in the near future."

"Being shown an anonymous digital currency with its own laundering service. Used for selling drugs. Bit-coin, you have cheered me up." --Michael Price

"Ultimately, the positive message that bitcoin also carries is that of more possibilities in engineering currencies, that of a future in which complementary currencies can make economic systems more resilient to the the disruption of capitalist behaviors, while closely relating people to their community values and maybe even revolutionize the way we contribute to the common good – paying taxes for what we really care, rather than not paying them, let me add."

AmirTaaki from itzard on Vimeo.

Thursday, April 7, 2011

Use the Dollar or Else

by Llewellyn H. Rockwell, Jr.
Wednesday, April 6, 2011

Look up the phrase "a unique form of domestic terrorism" on a search engine and you will turn up a story about a man whom the US government is trying to cage from now until the time of his death.

And his crime? His unique form of terrorism? He minted silver and copper coins and sold them. In other words, he did what innumerable entrepreneurs from the beginning of time have done. He attempted to provide consumers with a store of value. No one was forced to buy. He met a market demand, and that’s it.

Whom did he hurt? No one. Unlike illegal drugs, which the government bans on grounds that it doesn’t want us to hurt ourselves, these silver coins did not endanger their users. They only gave people an option on what to do with their money. Did the proprietor attempt to claim that these were legal tender for monetary exchange? No, he sold them for what they are.

Could people use them for money? Yes, but people can use anything for money: shoes, shells, flash drives, or books. Whether something is money or not depends on the intentions behind the exchange. Do you acquire something to consume it? It is not money. Do you acquire something in order to trade it for something else? In that case, it takes on money-like properties.

It is wholly understandable that people have doubts about the future of the paper dollar. Many people are seeking alternatives, in their own financial interest. What this proprietor did was provide something that turned out to be a possible alternative to the dollar. And for that, and that alone, he is being hounded and destroyed.

His name is Bernard von NotHaus and he is 67 years old. In the course of the proceedings, he was called every name imaginable. He was called a crook, a terrorist, a crank, and a crazy man. What he actually did, however, should be fully legal and encouraged in any nation, in all times and all places.

A nation that is confident about its money’s future would not fear currency competition. A nation with a dying money uses every possible means to crush the competition. That is precisely what is happening in the case of the so-called Liberty Dollar.

What’s striking here is that no one believes there is any reason to argue the point. It is obvious to his persecutors that he is a criminal. "He's playing on a core idea of the radical right, that evil bankers in the Federal Reserve are ripping you off by controlling the money supply," said Mark Potok of the Southern Poverty Law Center. "He very much exists in the world of the anti-government patriot movement, whatever he may say. That's who his customers are."

And what is the interest of the SLPC in this case? This is a group that claims to be about stopping hate and racism – and this has something to do with opposing poverty. And yet here they are intervening in a case in which a man is actually trying to prevent people from being impoverished. As for the Fed, it is not exactly an act of hate to point out that the Fed controls the money supply. Bernanke himself admits this!

The government has made no bones about the foundation of its case. Citing a Civil War-era law, prosecutors say that it is a crime to compete with the official dollar. Note that they are not citing the U.S. Constitution, which nowhere prevents such a thing. In fact, private coinage has a rich history in the U.S. It was essential when the West was being settled. Providing coinage services was as common as any other trade.

But since 1971, when the dollar became all paper, there has been a sense that its viability needs the backing of federal guns in order to thrive. This attitude is inconsistent with freedom. The right of private coinage is an essential part of free enterprise. Currency competition, especially in a digital age, is something that every country needs.

As Seth Lipsky wrote in the Wall Street Journal, "it's a loser's game to suppress private money that is sound in order to protect government-issued money that is unsound."

Precisely. As Lipsky points out, NotHaus operated very close to the line in terms of legality. He put the dollar sign on his coins, for example, and sold them with numbers. I can’t comment on his business dealings or the integrity of his operations. But this much is clear: the grounds on which he is being hounded are egregious and tyrannical.

Allowing for alternative currencies is not terrorism. It is a path to monetary reform, merely an application of the principle of free enterprise to a sector that should have never fallen so completely to government control. The people who are working to provide alternatives should not be jailed; they should be celebrated in every country that values freedom.

Llewellyn H. Rockwell, Jr., former editorial assistant to Ludwig von Mises and congressional chief of staff to Ron Paul, is founder and chairman of the Mises Institute, executor for the estate of Murray N. Rothbard, and editor of Reprinted with permission.

For further reading:
"Hard Money, Hard Time", Thomas L. Knapp, April 7, 2011
"The 'Crime' of Private Money", Robert Murphy, April 7, 2011
"How to Start Your Own Private Currency", Derek Thompson, The Atlantic, April 5, 2011
"Von NotHaus Affair Shows Two Sides Of Coinage", Addison Wiggin, Forbes, April 4, 2011
"When Private Money Becomes a Felony Offense", Seth Lipsky, The Wall Street Journal, March 31, 2011
"Anne Tompkins: Tyranny's Whore", Larken Rose, March 29, 2011

Monday, April 4, 2011

EconTalk Interview with Gavin Andresen

On March 15, 2011, Gavin Andresen spoke with EconTalk host Russ Roberts about the bitcoin cryptocurrency. The interview can be downloaded here.

From EconTalk:

Gavin Andresen, Principal of the BitCoin Virtual Currency Project, talks with EconTalk host Russ Roberts about BitCoin, an innovative attempt to create a decentralized electronic currency. Andresen explains the origins of BitCoin, how new currency gets created, how you can acquire BitCoins and the prospects for BitCoin's future. Can it compete with government-sanctioned money? How can users trust it? What threatens BitCoin and how might it thrive?

Additionally, there is a thoughtful and ongoing debate about bitcoin on The Mises Institute Forum: Is BitCoin the currency of the future? The forum topic is arranged chronologically, so if you advance to the end of the discussion thread, the more recent entries are displayed.

For further reading/viewing:
"Bitcoin and Fractional Reserve Banking", webisteme, April 2, 2011
"Open source identity: Bitcoin technical lead Gavin Andresen", Rodney Gedda, CIO, March 21, 2011
"Bitcoin – a Digital, Decentralized Currency", Technical interview with Gavin Andresen about BitCoin, OmegaTau podcast 59, March 19, 2011
"What is Bitcoin?", A video by, March 22, 2011
"Bitcoin and the Current State of Currency", Spark 139, February 27, 2011
"BitCoin CryptoCurrency" (video), Security Now 287, February 9, 2011
"Making Money" (video), Gavin Andresen, Ignite Amherst, February 8, 2011
"Interview: How Bitcoin Created a Decentralized Crypto-Currency", Klint Finley, December 29, 2010
"Bitcoin: Virtual money created by CPU cycles", Nathan Willis, November 10, 2010

Sunday, April 3, 2011

Selgin Responds to Bagus and Howden on Free Banking

For those of you who missed it, Philipp Bagus and David Howden have written a piece in the Winter 2010 Quarterly Journal of Austrian Economics entitled "Fractional Reserve Free Banking: Some Quibbles" that is a critique of George Selgin's The Theory of Free Banking (1988). Bagus and Howden, of Iceland and Euro fame, explore several unaddressed issues in George Selgin’s claim that the best monetary system to maintain monetary equilibrium is a fractional reserve free banking one.

Selgin's masterful response dissects each one of their claims point by point: Monetary Disequilibrium, Apoplithorismophobia, Limits to Credit Expansion, Nominal Indeterminacy, Two Kinds of Money, Saving and Cash Holding, Getting Money where it is Wanted, Business Booms and Price Level Stabilization, The Business Cycle and Sluggish Price Adjustment, and Spontaneous Central Banking.

This is an enjoyable read focusing on the primary 'economic' issues around free banking. When it comes to the legal and ethical issues, the 100-percenters routinely fail to establish how fractional reserve free banking stands in direct contrast to the legal principles of a free society when the practice is based on mutual and contractual full disclosure. In the end, Selgin's thesis comes out ahead in maintaining free banking (and yes, even fractional reserve free banking) as the dominant academic paradigm for monetary, and hence economic, freedom.

For additional conversation on the Mises Economics Blog, see here.

Friday, April 1, 2011

Central Banking vs. Free Banking and the Gold Standard

Would the world have experienced a financial crisis like the recent one in an environment of free banking? Lawrence H. White, an adjunct scholar at the Cato Institute, speaks at the Cato Institute's 28th Annual Monetary Conference held November 18, 2010.

For further reading:
"The Gold Standard and Monetary Freedom", Dr Richard M. Ebeling, April 1, 2011
"Central Banking is a blight on humanity", Lars Schall, March 22, 2011
"Communist China Embraces the Gold Standard", Daniel Sayani, February 22, 2011
"Currency Wars", Robert P. Murphy, Mises Daily, November 15, 2010
"The Gold Carry Trade", Whiskey and Gunpowder, July 25, 2007

Monetising Game Play on Social Network Sites

I was invited to speak at the KPMG eGaming Summit in Gibraltar (31 March 2011) on the topic of "Monetising Game Play on Social Network Sites". The presentation gives an overview of the current state of the virtual currency industry and also introduces bitcoin as the ideal digital representation of a physical casino chip.

The full KPMG Programme and agenda which included opening remarks from The Chief Minister of Gibraltar, Peter Caruana, can be found here.