Bitcoin and other decentralized, math-based virtual currencies emerged in 2013 as nascent challenges to traditional payment systems, drawing widespread public attention, venture capital investment, and regulatory scrutiny. Here is an overview of major legal developments during the past year:
- FinCEN Issues Guidance on Virtual Currencies
In March, the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury issued interpretive guidance regarding the treatment of users, exchangers and administrators of decentralized virtual currencies. The guidance stated that exchangers and administrators who transmit, buy or sell virtual currency are considered money transmitters under FinCEN’s regulations. Companies operating virtual currency exchanges are now likely subject to Bank Secrecy Act requirements and must register wuth FinCEN as money services businesses.
Link:
http://fincen.gov/statutes_regs/guidance/pdf/FIN-2013-G001.pdf
- Mt. Gox’s U.S. Assets Seized
Mt. Gox, based out of Tokyo, Japan, operates one of the world’s largest and most widely used Bitcoin currency exchange markets. In May, the U.S. Department of Homeland Security (DHS) seized an aggregate of $5 million from Mt. Gox’s U.S. accounts. The affidavits submitted in support of the warrants cited Mt. Gox’s failure to register with FinCEN as a money services business as the primary reason behind the seizures.
Link:
http://cdn.arstechnica.net/wp-content/uploads/2013/05/Mt-Gox-Dwolla-Warrant-5-14-13.pdf
- GAO Report Recommends Additional IRS Guidance on Virtual Currencies
Also in May, the U.S. Government Accountability Office (GAO) submitted a report to the U.S. Senate Committee on Finance outlining possible tax compliance risks associated with virtual currency transactions and economies. GAO found that current guidance from the IRS was insufficient for virtual currency transactions involving the purchase of real goods and services. During a senate committee hearing in November, the Director of FinCEN confirmed that the IRS is working on releasing additional guidance in the coming months.
Link:
http://www.gao.gov/assets/660/654620.pdf
- Liberty Reserve Shut Down for Money Laundering
Liberty Reserve (LR) was a Costa Rica-based company operating a private virtual currency system. LR became a popular payment processor for cybercriminals because it allowed users to send and receive payments without verifying their identities. In May, U.S. federal prosecutors, in a coordinated international effort, seized the website and charged its founder and six other individuals with laundering $6 billion. In the indictment, LR funds were linked to criminal activities including credit card fraud, identity theft, computer hacking, wire fraud, child pornography and narcotics trafficking.
Links:
http://www.justice.gov/usao/nys/pressreleases/May13/LibertyReservePR/Liberty%20Reserve,%20et%20al.%20Indictment%20-%20Redacted.pdf
http://www.justice.gov/usao/nys/pressreleases/May13/LibertyReservePR.php
- Bitcoin-Based Hedge Fund Manager Charged by SEC
In July, the Securities and Exchange Commission brought Ponzi scheme charges against a Bitcoin denominated hedge fund and its operator. In a preliminary ruling, a US District Court for the Eastern District of Texas judge declared that for the purposes of applying federal securities laws, Bitcoin is “a currency or form of money” and that investors in the fund were providing an “investment in money.” As such, the defendant’s activities were within the jurisdiction of the SEC.
Link:
http://www.courthousenews.com/2013/08/06/Bitcoin.pdf
- New York DFS Issues Subpoenas and Announces Hearings
The New York State Department of Financial Services (DFS) issued 22 subpoenas in August to various Bitcoin processors, exchanges and investors across the country in an attempt to investigate potential money transmission activities. A few months later in November, DFS announced that it will be holding a public hearing in the coming months to help determine whether it should issue special purpose “BitLicenses” to virtual currency money transmitters and whether new guidelines should be tailored specifically to virtual currencies.
Links:
http://www.dfs.ny.gov/about/press2013/memo1308121.pdf
http://www.dfs.ny.gov/about/press2013/virtual-currency-131114.pdf
- FinCEN meets with Bitcoin Foundation
Federal regulators including FinCEN, the Justice Department, the FBI, the DHS, the IRS and the Secret Service met with representatives of the Bitcoin Foundation and other virtual currency industry representatives in August to discuss risks associated with the Bitcoin currency system. The Bitcoin Foundation is a non-profit advocacy group that promotes the standardization of the currency.
Link:
http://www.washingtonpost.com/blogs/the-switch/wp/2013/08/27/inside-the-bitcoin-advocates-closed-door-meeting-with-federal-regulators/
- Silk Road Taken Down by FBI
Silk Road was a website that served as a marketplace for purchasing illegal goods and services including drugs, hacking services and identity theft tools. All transactions were conducted in Bitcoin through the website’s internal Bitcoin bank and required parties to have a Silk Road-associated Bitcoin address. In October, the FBI arrested the owner and operator of Silk Road on money laundering, drug trafficking, computer hacking and murder-for-hire charges. Law enforcement agents shut down the website and seized Bitcoins worth approximately $33.6 million at the time.
Links:
https://www.cs.columbia.edu/~smb/UlbrichtCriminalComplaint.pdf
http://www.fbi.gov/newyork/press-releases/2013/manhattan-u.s.-attorney-announces-seizure-of-additional-28-million-worth-of-bitcoins-belonging-to-ross-william-ulbricht-alleged-owner-and-operator-of-silk-road-website
- Senate Committees Hold Bitcoin Hearings
The US Senate Committee on Homeland Security & Governmental Affairs and the US Senate Committee on Banking, Housing and Urban Affairs held separate hearings in November on the subject of virtual currencies. Witnesses in the hearings included regulators, academics and market participants. Both hearings discussed issues on consumer protection and the use of virtual currencies by criminals. The hearings focused on the question of whether existing regulations are sufficient in regulating virtual currency activities, and whether existing laws hamper payments innovation.
Links:
http://www.hsgac.senate.gov/hearings/beyond-silk-road-potential-risks-threats-and-promises-of-virtual-currencies
http://www.banking.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=955322cc-d648-4a00-a41f-c23be8ff4cad
- FinCEN Sends Warning Letters to Various Bitcoin Businesses
FinCEN sent letters to various Bitcoin related businesses in November and December with warnings to register with the agency as money transmitters. Casascius LLC, a one-man operation that mints Bitcoins into physical metal coins (typically for novelty or security reasons), has suspended its business activities as a result of receiving one of these letters. The owner of Casascius decided it was better to be cautious, despite disagreeing with FinCEN’s assertion that his company is a money transmitter.
Link:
http://www.reuters.com/article/2013/12/18/us-bitcoin-letters-idUSBRE9BG1DC20131218
