Now better regulated and policed for signs of tax evasion, state regulators follow federal precedent

The Bitcoin has a friend in California.  A new bill is offering some legal protections to the currency.  But what is most surprising is who drove it through -- Gov. Edmund Gerald "Jerry" Brown, Jr. (D), who just a year ago threatened to ban the Bitcoin.
California's Department of Financial Institutions last May sent a cease-and-desist letter against The Bitcoin Foundation for "allegedly engaging in the business of money transmission without a license or proper authorization."
The letter seemed bizarre to tech observers, as The Bitcoin Foundation was merely trying to hold a routine conference in the state.  California seemed to think that The Bitcoin Foundation was a money exchanger, when it reality it was nothing of the sort.  It was true, however, that most of its top members were money exchangers.  But to say the organization was itself trading money was rather laughable, as that would imply the various members -- who ran competing exchanges -- were somehow conspiring to launch a single new exchange.

Gov. Jerry Brown
Gov. Jerry Brown (D) [Image Source: AP]

The group itself was meant primarily to promote the spending of and accepting Bitcoins through education and networking.  Clearly California needed some education on the Bitcoin, but as of last summer it appeared rigidly opposed to cryptocurrencies.
The basis of this opposition was likely concerns over taxation.  Gov. Brown has always been a relatively fiscally conservative as far as Democrats come and he was famous for resisting mechanisms to cut or reduce taxes.
But it seemed hard to believe that the state that was home to Silicon Valley could adopt such a luddite position on a popular, burgeoning tech trend.
Over the last year Bitcoin has faced many pitfalls ranging from the collapse of the once largest Bitcoin exchange (Mt. Gox) amid fraud accusations, the emergence of yet another miner threatening to have access to 51 percent of the hash rate (and the vulnerability that comes with it), and the concerns regarding overseas Bitcoin tax evasion.  But the cryptocurrency has largely emerged victorious, with a new more sensible legion of tech entrepreneurs that are willing to comply with federal laws and pay the typical money trader's fees in order to make the novel digital payment system a legal tool.

Bitcoin has whethered a storm of legal and corruption concerns in the last year and is looking better than ever now. [Image Source: Bit-Square]

In California the man behind Gov. Brown's change of heart is Mark Farouk, 38, of Sacramento, Calif.  Appointed by Gov. Brown to the post of deputy commissioner of the Office of External Affairs at the California Department of Corporations, the young lawyer brought with him formidable experience in the space of financial regulation.  When tasked with the position of analyzing the "threat" of the Bitcoin he recognized that most cryptocurrencies were taking the necessary steps in the U.S. to obey federal laws and not be used as trading instruments for illegal goods or routes to personal income tax evasion.

So after winning the governor over to his perspective he looked to cement his position in law, writing AB 129, a bill which official prevents cryptocurrency participants in compliance with U.S. laws to freely do business in the state.  The bill states:

This bill makes clarifying changes to current law to ensure that various forms of alternative currency such as digital currency, points, coupons, or other objects of monetary value do not violate the law when those methods are used for the purchase of goods and services or the transmission of payment.
Is Bitcoin completely anonymous? No, it has been described as pseudonymous as it is somewhat like cash in that once Bitcoins have been received by one party no third party exists between the parties that knows their identities. However, the transaction information is recorded in the block chain as has every Bitcoin transaction that has occurred in history. Additionally, a person's identity, such as IP address, is recoded when the person makes a Bitcoin transaction at a website or uses one of the numerous services to exchange dollars from Bitcoins. One study, "Evaluating User Privacy in Bitcoin" by Elli Androulaki found that using behavior based analytical techniques could reveal the identities of 40% of Bitcoin users.

The bill officially acknowledges most major cryptocoins, icnluding:
  • Bitcoin
  • Ripple
  • Litecoin
  • Peercoin
  • Namecoin
  • Dogecoin
  • Primecoin
Bitcoin's success has inspired a fresh legion of cryptocurrencies based on various encryption algorithms.
[Image Source: James Best Jr./NYT]

The lawyer even shows his sense of humor, writing of the defunct "Coinye" currency:

Recently, a new digital currency attempted to emerge, known as COINYE (Originally called COINYE West) which was modeled after Bitcoin and implied a connection to rapper Kanye West via a cartoon picture of Kanye West as the currency's logo. A lawsuit filed in a Manhattan federal court sought to stop COINYE on the grounds that it used the rapper's image to cash in on his popularity without his consent, damaging his reputation and confusing consumers about the source of the cryptocurrency.

Facing legal action, creators of COINYE have ended the project and COINYE is now
Lost in the World, but may have been nothing more than a Dark Fantasy.

While clearly satirical, the line in the actually yields a couple of serious points.  First, not every cryptocurrency is aimed at becoming the next Bitcoin -- something attempting to achieve serious currency status.
Sometimes a meme/joke -- like the Dogecoin -- becomes a little more serious over time, but it'd be silly to over scrutinize some brief fad cryptocurrency that is not a serious monetary instrument.  Second, the quip's factual content points out that cryptocurrencies are best treated similarly to other foreign currencies -- regulated under federal laws.  There's no need to panic about unforeseen legalities (e.g., in this copyright infringement) as such problems could be handled in the same way as they are with other none cryptocurrency disputes.
The final version of the bill was written by Assemblyman Roger Dickinson (D-7th District), a state legislator from Sacramento.  He argues that stifling cryptocurrency would set a dangerous precedent against novel online payment schemes.  He tells The LA Times:

In an era of evolving payment methods, from Amazon Coins to Starbucks Stars, it is impractical to ignore the growing use of cash alternative.

Gov. Brown was clearly sold on the Bitcoin as he signed the bill into law nary an objection.
Part of his change of heart may be a desire to look progressive on election year, as he's this year running for a fourth term.  Some have criticized the entire process as theater.  While it's true that the Bitcoin went from being allowed via lack of prohibitory regulation to being allowed by a bill specifically forbidding such prohibition, it's also important to consider that California could easily have gone in the opposite direction bucking the federal position (as it's done on many issues) and going its own way -- potentially banning the Bitcoin for good.
Instead it's followed common sense and Bitcoin is back in business for good in Silicon Valley.

Sources: [PDF], via The LA Times

"The whole principle [of censorship] is wrong. It's like demanding that grown men live on skim milk because the baby can't have steak." -- Robert Heinlein

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