State and federal authorities wage indirect war against cryptocurrency

When the Bitcoin Foundation -- the organization charged with promoting the popular cryptocurrency -- was deciding where to hold its May "Future of Payments" conference, it decided California seemed a natural pick.  After all, the state was often known for its liberal leanings and it was home to much of America's high-tech leadership.

But according to a report by Forbes, Californian authorities have seized the conference -- held in San Jose -- as an opportunity to come down hard on the cryptocurrency.  California's Department of Financial Institutions sent a cease-and-desist letter for "allegedly engaging in the business of money transmission without a license or proper authorization."

CA State Cease and Desist May 30

How exactly Bitcoin ran afoul of this provision -- which is covered under federal Money Laundering Act of 1996 (31 USC § 5330) -- is unclear.  The law states:

Any person who owns or controls a money transmitting business shall register the business (whether or not the business is licensed as a money transmitting business in any State) with the Secretary of the Treasury....

Bitcoin conference
Two "speakers" engage the audience at the Future of Payments conference.

It's possible this all has to do with the world's largest Bitcoin exchange -- Mt. Gox -- whose partner Mutum Sigillum was targeted last month with a U.S. Department of Homeland Security investigation, for failing to register (under the aforementioned provisions) as a money exchanger with the U.S. Department of Treasury.  Mutum Sigillum was operating its exchange business out of a Dwolla account (which was housed in Dwolla's financial institution partner, Veridian Credit Union), according the seizure warrant.

The issue is a serious one for Mt. Gox.  If the exchange loses its American partner, it will be left without a direct route to exchange U.S. dollars to Bitcoins.  And as foreign governments engage in similar crackdowns, the routes to funnel real world currency into Bitcoin dwindle.

Back to the California crackdown, the Bitcoin Foundation's leaders should already have responded to the May 30 letter, under its 20 day response period.  Failure to respond can result in fines between $1,000 USD and $2,500 USD per day, plus potential prison time.
It's unclear what actions (if any) they took, but Jon Matonis, a member of the Bitcoin Foundation's Board of Directors, wrote in a commentary in Forbes:

One activity that the foundation does not engage in is the owning, controlling, or conducting of money transmission business. Furthermore, that activity would also be against the original charter of the foundation. As general counsel for the Bitcoin Foundation, Patrick Murck has lead responsibility for corresponding with the California Department of Financial Institutions.

At this stage, it’s difficult to tell whether or not it was a general blanket action and if other bitcoin-related entities received cease and desist letters from California. If Bitcoin Foundation was not the only recipient, then expect other companies to come forward in the days and weeks ahead.

Federal and state governments have a couple reasons to crack down on Bitcoins.  While the digital currency is not fully anonymous (due in part to loss of anonymity when spending) and formally should be taxed, it's harder in practice to track than standard currency, making it somewhat safer to dodge taxes or buy illegal goods.  Second, Bitcoin is outside the realm of nation-states' fiscal policy control, hence it interferes with trade barriers and other instruments that a nation-state might wish to enact.

So far the U.S. has not passed any laws that would make Bitcoins or other digital currencies directly illegal.  But as use grows, don't be surprised to see efforts to put a more direct ban in place pop up.

Sources: Californian State Gov't [via Scribd], Forbes

"Paying an extra $500 for a computer in this environment -- same piece of hardware -- paying $500 more to get a logo on it? I think that's a more challenging proposition for the average person than it used to be." -- Steve Ballmer

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