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Virtual currencies run into legal trouble in U.S.

Section: Daily Dispatches

By Stephen Foley
Financial Times, London
Thursday, May 30, 2013

According to the website, in the United States alone there are more than 2,000 people in 650 towns and cities who want to sell you Bitcoins for cash, right now.

Transactions in the virtual currency, which came to mainstream attention this year, are anonymous and untraceable -- and they are increasingly drawing the scrutiny of law enforcement authorities who fear they will become a tool of money launderers.

A string of legal actions and regulatory manoeuvres in the United States in recent weeks has made life more complicated for people who hope to make a living from trading virtual currencies, which are created by individuals or companies instead of governments, and which are used outside the traditional banking system.

A glance at the US section of elicits a stark warning from one legal expert.

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"You better get yourself registered, or you better get your name off the list real fast," says Carol Van Cleef, a partner in Patton Boggs' banking practice and an adviser on anti-money laundering policies.

The bout of concern over the future of virtual currencies was sparked this week as the Department of Justice and the US Treasury moved against Liberty Reserve, the creators of "LR," a currency that a criminal complaint said was used to launder the proceeds of credit card fraud, identity theft, investment fraud, computer hacking, child pornography, and narcotics trafficking.

The action comes less than a fortnight after the Department of Homeland Security seized the US bank accounts of the largest Bitcoin exchange, saying its owner had failed to register the company as a money services business (MSB).

One of Bitcoin's early uses was as the currency of choice for buyers and sellers of drugs on the website Silk Road, although its supporters point to a gathering number of legitimate businesses that use it.

But the burgeoning number of virtual currencies, and the wave of entrepreneurial interest in building payments systems on the back of them, could be held back by the costs of acceding to government demands that they root out illicit uses. This could particularly be the case with Bitcoin and similar experiments, which rely on a decentralised and anonymous network of computers around the world to manage transactions.

"Criminals are always the first adopters," Ms Van Cleef says. "They will hit it and hit it, and they will keep hitting it until controls are put in place."

For the libertarians who have been drawn to virtual currencies as a means of wresting economic control from governments and central banks, recent developments have put them in a spot, she adds.

"This is the issue for those people who do not believe in government. They are going to have to 'cut a deal with the devil.' If they are in the financial services world, they are going to have to recognise that."

This is by no means accepted across the Bitcoin community.

"People are way too US-centric when discussing Bitcoin," says Erik Voorhees, an early evangelist for the currency, who moved from the US to Panama to pursue his business ventures.

"Bitcoin's early successes will not be in the US. They will be in the developing world where a banking system is practically non-existent or where currencies are being destroyed, such as in Argentina. US Bitcoin businesses absolutely need to follow the US regulations or they'll be shut down, and that doesn't help anyone, but US regulations do not apply to, for example, a Kenyan company doing business with Kenyans."

Venture capital money has flowed into Bitcoin payments businesses on the theory that the currency could be used to increase the speed and reduce the cost of international transactions, even through the US.

In March, the Financial Crimes Enforcement Network, a division of the US Treasury, clarified that all virtual currency exchangers needed to register as MSBs, and to set up procedures to identify and report suspicious transactions, in the same way as traditional banks must.

Since then, some Bitcoin businesses have reported having their accounts shut down by their banks.

Steve Hudak, spokesman for FinCEN, says it is not the Treasury's intention to stifle innovation in virtual currencies.

"We do expect banks to assess their risk tolerance and assess their customers, but we certainly did not intend to label all these businesses as unfit for banking," he says. "Our intention is only to set out what they need to do to make themselves legitimate under FinCEN regulations."

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