| NEW YORK/ST. LOUIS
NEW YORK/ST. LOUIS May 31 These are unsettling
times for digital currency businesses and the venture
capitalists backing them.
On Tuesday, the authorities in Spain, Costa Rica and New
York arrested five people at the digital currency firm Liberty
Reserve, including its founder Arthur Budovsky, and seized
related bank accounts and Internet domains.
It was a further wake-up call for those involved in digital
currencies, such as the most prominent, Bitcoin, that they need
to comply with anti-money laundering rules or risk facing a
They had already been put on notice - first by an April 2012
report from the U.S. Federal Bureau of Investigation that
explained how Bitcoin was being used by criminals to secretly
transfer money around the world, and then this March by the U.S.
Treasury Department. Its anti-money laundering arm, the
Financial Crimes and Enforcement Network (FinCEN) stated that
digital currency firms needed to comply with the same anti-money
laundering rules as other financial institutions, including
monitoring customers and reporting suspicious activity to the
As regulators tighten the screws, businesses built around
digital currencies are trying to satisfy new monitoring
requirements without letting public enthusiasm for the
technology-based concept slip away.
"I think the whole ecosystem is maturing very quickly and we
have young companies that are just beginning to understand how
to navigate the regulatory issues," said David A. Johnston,
co-founder and executive director of BitAngels, a new venture
which only this week announced it had raised $6.7 million to
fund startups tied to Bitcoin.
Digital currency is electronic money that can be passed
between individuals without the use of the traditional banking
or money transfer system.
Different currencies are structured in different ways.
Some, like Liberty Reserve's "LR" digital currency, use units of
value that are tied to an existing hard currency, such as the
U.S. dollar. By contrast, the value of Bitcoin, the best known
virtual currency, fluctuates according to supply and demand.
Bitcoin, which has been embraced by a number of venture
capitalists in Silicon Valley, exists through an open-source
software program that any users with enough skill and computing
power can access. It is not managed by a single company or
government. Users can buy bitcoins through exchanges that
convert real money into the virtual currency.
Liberty Reserve, which was closed last week, however, was a
firm that U.S. prosecutors said created a platform that enabled
criminal gangs to launder more than $6 billion.
Bitcoin's supporters cite a host of legitimate reasons for
using a digital currency: It can be transferred using less
infrastructure than traditional currencies, and with fewer
service fees. A virtual currency could also be safer than using
a regular credit card for online purchases, because it is not
attached directly to any bank account.
But law enforcement officials see Bitcoin as another vehicle
for criminals to anonymously transfer money.
FinCEN's statement in March set off a rush inside the
community to learn about anti-money laundering rules and figure
out how to comply with them. At the 2013 Bitcoin Conference in
San Jose, California two weeks ago, discussion focused heavily
on regulatory compliance - its intricacies and its costs.
"That was a big theme of the whole conference," said Jerry
Brito, director of the technology policy program at the Mercatus
Center at George Mason University. Brito said businesses
exchanging Bitcoins were coming to terms with the fact that they
would now need to get licensed as money transmitters in 48 U.S.
states, a process requiring in-person interviews in each state,
thanks to FinCEN's guidance.
"Everything I'm telling you, I've learned over the past
couple of months as I'm racing to learn," said Brito, who
attended the Bitcoin Conference in San Jose. "I think that's
what the Bitcoin community is doing too."
Charlie Shrem, chief executive of Bitcoin transfer firm
BitInstant.com, told the conference about the importance of
complying with the new rules.
"You have to know your customer," he told the audience,
according to a video posted on the Internet. "Whether or not you
agree with the laws or not, you've got to follow them."
The FinCEN statement means companies that exchange Bitcoins
for hard currency must now hire full-time compliance officers to
verify the identities of users, especially those looking to
transfer Bitcoins out of the digital world and back into dollars
or other hard currencies. Estimates vary on how much it costs to
get compliant, but licensing and registration fees alone can
total in the tens of thousands of dollars, an added heavy cost
for small startup businesses.
Brito said the Bitcoin community is also trying to increase
its contact with law enforcement and regulators. The Bitcoin
Foundation, a Bitcoin advocacy group made up of Bitcoin-related
business owners and software programmers, is looking to hire a
full-time lawyer based in Washington to make its case to
regulators and lawmakers.
Some members of the community are declining to discuss
regulation. Jon Matonis, the Bitcoin Foundation's secretary who
is identified on the group's website as one of two spokesmen for
press inquiries, told Reuters: "I am electing to take a brief
break from commenting on issues such as this."
U.S. law enforcement officials are looking first and
foremost to unmask criminals operating in cyberspace and arrest
them, wherever they may be in the world, and they're looking to
digital currency businesses to help.
Ed Lowery, special agent in charge of the U.S. Secret
Service's criminal investigative division, said the agency is
working "aggressively with our international partners" to pursue
cyber crime and the companies that permit the misuse of digital
currencies. He declined to comment specifically on Bitcoin.
Liberty Reserve has not been the only recent target for the
authorities. The Tokyo-based firm Mt. Gox, the world's largest
exchanger of U.S. dollars with Bitcoins, had two accounts held
by its U.S. subsidiary seized this month by agents from the
Department of Homeland Security on the grounds that it was
operating a money transmitting business without a license.
Mt. Gox on Thursday announced it would require all of its
users accounts to be verified before allowing them to perform
any more deposits or withdrawals. Its founder declined to
comment for this story.
Other companies are simply trying to avoid having to comply
with U.S. rules by keeping away from the country. Following
FinCEN's statement, two digital currency firms structured
similarly to Liberty Reserve - Russia-based WebMoney and
Panama-based Perfect Money - restricted access to their services
from inside the United States.
Vyacheslav Andryushchenko, a spokesman for WebMoney in
Russia, said each of the company's 20 million users had to agree
to prohibitions against money laundering and illegal trade when
signing up for an account. Users who violate the rules are cut
off, and all actions inside WebMoney's system are recorded, the
spokesman said. A user is blocked if there are any suspicions of
anything illegal. In addition, the less personal information the
user provides, the fewer services are available to him or her,
the spokesman said.
Several messages on the listed number on Perfect Money's
website were not returned. The company's address is an empty
suite in an office block on the northwestern side of Panama
City. A secretary in a neighboring office said she had never
seen anyone go in or out.