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.
By Jon Matonis
American Banker
Thursday, April 25, 2013
http://www.americanbanker.com/bankthink/fincen-regulations-choking-bitcoin-entrepreneurs-1058606-1.html
