By Jon Matonis
American Banker
Thursday, April 25, 2013
http://www.americanbanker.com/bankthink/fincen-regulations-choking-bitcoin-entrepreneurs-1058606-1.html
More than a decade ago, regulators nearly suffocated PayPal. Now it looks like they’re trying to squelch another disruptive, innovative payments system.
At least three exchanges in the U.S. that traded the digital currency Bitcoin have shut down, apparently as a result of guidance
issued last month by the Financial Crimes Enforcement Network. That
agency has emerged as the top threat, at least in in the United States,
to the decentralized Bitcoin network – moreso than the widely reported
price volatility and hacker attacks.
"They've been the single biggest factor for stomping out currency competition," says Bradley Jansen, a former assistant to Rep. Ron Paul and director of the Center for Financial Privacy and Human Rights. Speaking recently on The Daily Bitcoin
podcast with Adam Levine, Jansen expressed surprise at how little focus
bitcoin business leaders are putting on Fincen, especially considering
how regulators thwarted earlier emerging payment systems like PayPal and
e-gold. PayPal obviously survived and prospered – but only after
selling itself to eBay and agreeing to put restrictions on its service. E-gold was not so fortunate.
"Fincen
was able to stop currency competition with technical innovations in the
90s even before their expanded powers under the U.S. Patriot Act. And,
what we've got now is a Fincen on steroids without clear restrictions
from Congress," Jansen says.
The guidance requires certain
intermediaries that handle virtual currency to register with Fincen as
money services businesses, which entails recordkeeping and reporting
responsibilities. And it says some of those businesses may additionally
be money transmitters, which would mean fingerprinting of directors and
officers and compliance with a patchwork of state licensing
requirements.
Jansen postulates that the recent Fincen virtual currency guidance was issued ex post facto as a way to set the stage for potential prosecutions in the future.
"It's
a failure of Congress to do its job. We knew that these guidelines and
these prosecutions were in the works even last Congress. Ron Paul was
the chairman of the House subcommittee that had jurisdiction over Fincen
and he never had a single hearing on this."
In a recent speech,
Fincen Director Jennifer Shasky Calvery said the new guidance aims "to
protect [digital currency] systems from abuse and to aid law
enforcement in ensuring that they are getting the leads and information
they need to prosecute the criminal actors." She reiterated that the
guidance does not apply to everyday users who pay or accept bitcoin for
goods and services.
But by saddling startups with compliance
requirements, and making them unattractive clients for regulated banks
that despair of serving MSBs, Fincen is choking these businesses that
facilitate conversion of bitcoins into dollars. Fewer exchanges and more
red tape will make it harder for merchants or consumers (who, after
all, must still pay the bills with dollars) to take advantage of the
Bitcoin payment system’s speed, privacy and competitive costs.
On March 20 – just two days after the guidance from Fincen came out – the bitcoin exchanger bitme.com suspended
operations indefinitely. Bitme was a relatively small operation, but it
was widely suspected among bitcoin users in online forums that this
closure resulted from difficulties related to potential regulatory
compliance.
BTC Buy, another bitcoin exchange site, suspended services and closed permanently in early April, specifically citing the legal uncertainty brought up by the Fincen guidance.
Most recently, the largest bitcoin exchange to halt
trading was Bitfloor, run by Roman Shtylman, who blamed "circumstances
outside of our control." His New York operation had average daily
trading volume of about $300,000 (depending on the exchange rate), with
U.S. dollar deposits and withdrawals running through a Capital One bank
account – which the bank unilaterally closed. "I had very little time
to act between receiving the account closure letter and the account
being closed," Shtylman told PaymentsSource.
In this case, the
regulatory guidance may have had an indirect effect. Bitfloor was
registered with Fincen as an MSB but was not licensed as a state money
transmitter. Shtylman surmised that Capital One had judged his business
to be "not worth the risk."
Across the Atlantic and presumably unrelated to Fincen, Poland-based Bitcoin-24 suspended trading after the government there froze its bank account.
It reportedly did so because a bank in Germany complained of
compromised accounts transferring stolen money without identification to
Bitcoin-24. Also, U.K.-based TransferWise,
a foreign currency intermediary, ceased transfers to any bitcoin
exchanges at the request of its banking partners. TransferWise had
mostly been servicing customers in the U.K., Poland, and Spain.
It
will be interesting to watch how Fincen intends to treat one-way,
fixed-rate brokers that either buy or sell bitcoin at a fixed price.
Since a two-way exchange market is not involved it could be seen as
merely a typical commodity purchase or sale.
Tangible Cryptography LLC, which registered as an MSB this month, operates FastCash4Bitcoins for selling bitcoins and Bitcoins Direct
for private off-exchange purchases. The two businesses function
independently of each other and neither is technically an exchange.
Bitcoins Direct is frequently closed to new clients and its cash deposit
feature was recently cancelled.
The fact that bitcoin survives at all with so many powerful forces lined up against it is a testament to its resiliency and tenacity. Now, in addition to the vicious press coverage
and persistent denial of service attacks on exchanges, the emerging
cryptographic money has to contend with onerous and targeted regulation.
With respect to bitcoin and financial regulation, Jansen warns: "I
think the lesson from the 90s was that you either become what Fincen
wants you to be or you're not going to be."
Not in the
U.S., that is. But jurisdictional competition will kick in and overseas
exchanges will gain market share and liquidity. They just may not have
U.S. customers.
Tuesday, April 30, 2013
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This also illustrates once again a general pattern in which compliance costs and risks impact smaller companies first, while the "unseen" ones, in Bastiat's terms, are simply never launched.
ReplyDeleteFinCen is the guard dog outside the regulatory moat which shields the banking cartel from the competitive market. It does nothing but oppress the American people and make our lives more frustrating and expensive.
ReplyDelete