Hysteria Grips Bitcoin Market As Apple Removes Bitcoin Wallet App from Its Store

The former event, the disappearance of the wallet app, evoked far more comment on the Internet. The wallet app creator, Blockchain, issued a comment highly critical of Apple that accused the app store of acting as a gatekeeper for innovation on the Web. The comment strongly implied that Apple's unexplained action was anti-competitive and based on the future launch of an Apple payment app which, being fee-based, could not successfully undercut bitcoins as a Web commercial process.

Amongst the fervered commentary and seemingly unnoticed by the specialist press and consumers was the nearly simultaneous announcement by U.S. authorities of the prosecution of Charlie Schrem, the operator of a bitcoin exchange, Bitinstant, for money laundering.

Schrem's prosecution is evidence of a two-pronged U.S. bitcoin regulatory regime. Since last year, the Feds have instituted a clever series of self-reporting mandates for those engaged in the bitcoin trade. See, “The Federalization of Bitcoins,” e-Commerce Law & Strategy (June '13).

FinCEN Regulations

The Financial Crimes Enforcement Network of the Treasury Department (FinCEN), the lead U.S. bitcoin enforcer, issued guidance on the application of its regulations: “Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies.”'

FinCEN's jurisdiction is, in part, the regulation of money services businesses. Such businesses, including those deemed money transmitters, are subject to reporting requirements, such as reports on currency transactions, including suspicious activities related to such transactions. See, 31 C.F.R. '103.20. Criminal and civil penalties apply to the non-registered and non-reporting money services businesses. See, 31 C.F.R. '103.41(e).

FinCEN relies on the facts and circumstances of the provided services to determine whether the broker or dealer is acting as a money services business. Therefore, the creation and transmission of bitcoins is germane to FinCEN's decision to deem certain bitcoin transactions as performed by money services businesses.

Because the bitcoin system uses peer-to-peer technology to operate with no central authority, a bitcoin transaction is carried out collectively by the network and are recorded only in an electronic log of transactions called the blockchain. See, “How Does Bitcoing Work?“'

Bitcoin transactions are anonymous, decentralized, and resistant to forensic exploration. A particular transaction traces bitcoins identified with digital signatures, verified by miners and authenticated by the blockchain. See, “Bitcoin: A Peer-to-Peer Electronic Cash System.” Thus, there is a serious question as to whether any one person involved in a bitcoin transaction has uttered, i.e. , sent the bitcoin into circulation. See, http://bit.ly/1jO81nq. A bitcoin has no inherent value, does not have a physical existence, and is utilized by persons who are intimately aware of its nature. Arguably, the use of a bitcoin is the trading of a commodity or token rather than the use of money.

FinCEN's guidance on virtual currency is remarkably succinct and direct. A bitcoin is a decentralized convertible virtual currency because it has no central repository and no single administrator. See, “Application of FinCEN's Regulations,” supra, p. 5. It is obtained through individual computing or manufacturing efforts.

Because the bitcoin is not legal tender and providers of prepaid access and dealers in foreign exchange are money services businesses only if they deal in legal tender, bitcoin exchanges by such businesses are not regulated by FinCEN.

It goes without saying that the appearance of the bitcoin presented federal enforcers of the Bank Secrecy Act with an unprecedented challenge. (The Bank Secrecy Act and its application to FinCEN are explained at http://1.usa.gov/1dIt33k.) The bitcoin's principal differentiation from regulated currency, as pointed out above, is that it is decentralized and not legal tender. FinCEN cannot hold a single issuer or regulator responsible for the virtual currency and thus has no leverage to regulate the currency one-on-one. Rather, the situation is FinCEN versus the Web. In addition, the fact that the bitcoin is not legal tender implies that market forces govern its ebb and flow and there is no public authority with any interest in any given value for the bitcoin.

The possibility of the use of bitcoins for criminal Internet transactions is obvious, but the inclusion of miners and third-party dealers as regulated entities, coupled with money laundering and contraband prohibitions, imply that FinCEN's limited regulation of the bitcoin will probably be a practical success.

FinCEN Flexes Muscles

It did not take FinCEN long to act on its own regulations. On May 15, 2013, U.S. authorities seized two accounts linked to Mt. Gox. A seizure warrant obtained by the Department of Homeland Security froze an account that an Iowa-based online payment processor, Dwolla Inc, held at Veridian Credit Union in the name of Mutum Sigillum LLC.

An affidavit in support of the warrant states that Mutum Sigillum, a Mt. Gox subsidiary incorporated in Delaware, was operating as an unlicensed money transmitter, in violation of federal law. Neither Mt. Gox nor Mutum Sigillum had registered with FinCEN. See, http://reut.rs/194pLDY. The amount seized was $2,915,507.40. In an action which surprises no one, Dwolla eliminated its bitcoin-related operations.

By the end of 2013, federal authorities had moved to seize 600,000 bitcoins in the possession of Ross Ulbricht, the operator of Silk Road, an Internet exchange site rumored to involve weapons and drug transactions. The site was shut down in October 2013 and Ulbricht is being held without bail with trial set for November. Ulbricht faces a 20-years-to-life sentence for engaging in a continuing criminal enterprise.

Then, in January of this year, Shrem was arrested for laundering Silk Road drug money.

Thus, the two-pronged enforcement approach ' civil self-reporting of engaging in commercial bitcoin exchanges, and criminal money-laundering, racketeering and conspiracy ' herald a high-season for U.S. involvement in bitcoin policing. A cursory visit to the FinCEN site yields this clear mission statement:

FinCEN's mission is to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.

This statement, coupled with the Mt. Gox and Silk Road litigation, would cause any in-house counsel to regard bitcoin involvement for a retail outlet as anathema. On Jan. 30, 2014, FinCEN announced a ruling that a company purchasing and selling convertible virtual currency as an investment exclusively for the company's benefit is not a money transmitter subject to FinCEN surveillance. Is the negative pregnant of this dictum that retail use of bitcoins implies regulation by FinCEN?

Conclusion

Bitcoin exchange for goods is currently a miniscule part of retail sales. Why would Amazon take bitcoins if they were aware that this might arouse FinCEN interest in their operations? And the same for Apple. It is clear that Blockchain was intended to hold bitcoins for use in transactions and that it arguably came within FinCEN's jurisdiction. Apple's position in eliminating Blockchain may rest on the possibility, however remote, that it was engaged with Blockchain in a conspiracy to engage in illicit transactions, or to launder money, or was benefiting from such criminal activity by enabling bitcoin transactions. After all, how would Blockchain, and hence Apple, know where the money came from? Bitcoin 100, a charity hub, recently acknowledged that a recent contribution of 180 bitcoins was probably stolen.

Overstock has just jumped into the fray. Patrick Byrne, its CEO, announced at the end of January that Overstock would accept bitcoins in payment for its goods and on the first day of this operation netted 840 orders amounting to $130,000. Bryne commented that because Overstock had taken this step, Amazon would have no choice but to follow suit.

Despite this challenge, Amazon, a notorious first-adopter, has not emulated Overstock. Maybe Amazon has better legal counsel.

Ultimately, the Blockchain/Apple story may rest on corporate prudence, given the obvious federal enforcement efforts. There is simply no money in handling bitcoins at the moment. The current furor in the press about Apple's anti-competitive need to bolster their supposed propriety payment system seems more a symptom of bitcoin hype than actual corporate motivation.

James Ching is a former Supervising Deputy Attorney General, California Department of Justice and Chief Counsel, California Board of Prison Terms. He specializes in criminal, constitutional and labor law and is the author of numerous published articles on these subjects.

Despite the active hostility of the Chinese, Indian and Russian governments, the spread of bitcoins throughout the world was untrammeled until last month. In a series of dramatic arrests and prosecutions, the U.S. government began an active campaign against the use of bitcoins for questionable purposes.

Yet the bitcoin world seemingly is unaware of the thrust of recent U.S. actions. It was, however, roiled recently by two events. The first was the elimination of Blockchain, a bitcoin wallet app, from the Apple store. The second was the announcement that both Mt. Gox and Bitstamp, prominent bitcoin exchange sites, were halting withdrawals. The latter events were described as the result of technical problems and a denial of service attack, respectively, with no confirmation as to whether Mt. Gox was simply attacked as Bitstamp was. See, “What's Going on with Bitcoin Exchange Mt. Gox,?” TechCrunch.

These events caused a fluctuation in bitcoin value of 20%, although the value of a bitcoin is, somewhat loosely, determined by prices set at the exchanges or by one-on-one transactions.

The former event, the disappearance of the wallet app, evoked far more comment on the Internet. The wallet app creator, Blockchain, issued a comment highly critical of Apple that accused the app store of acting as a gatekeeper for innovation on the Web. The comment strongly implied that Apple's unexplained action was anti-competitive and based on the future launch of an Apple payment app which, being fee-based, could not successfully undercut bitcoins as a Web commercial process.

Amongst the fervered commentary and seemingly unnoticed by the specialist press and consumers was the nearly simultaneous announcement by U.S. authorities of the prosecution of Charlie Schrem, the operator of a bitcoin exchange, Bitinstant, for money laundering.

Schrem's prosecution is evidence of a two-pronged U.S. bitcoin regulatory regime. Since last year, the Feds have instituted a clever series of self-reporting mandates for those engaged in the bitcoin trade. See, “The Federalization of Bitcoins,” e-Commerce Law & Strategy (June '13).

FinCEN Regulations

The Financial Crimes Enforcement Network of the Treasury Department (FinCEN), the lead U.S. bitcoin enforcer, issued guidance on the application of its regulations: “Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies.”'

FinCEN's jurisdiction is, in part, the regulation of money services businesses. Such businesses, including those deemed money transmitters, are subject to reporting requirements, such as reports on currency transactions, including suspicious activities related to such transactions. See, 31 C.F.R. '103.20. Criminal and civil penalties apply to the non-registered and non-reporting money services businesses. See, 31 C.F.R. '103.41(e).

FinCEN relies on the facts and circumstances of the provided services to determine whether the broker or dealer is acting as a money services business. Therefore, the creation and transmission of bitcoins is germane to FinCEN's decision to deem certain bitcoin transactions as performed by money services businesses.

Because the bitcoin system uses peer-to-peer technology to operate with no central authority, a bitcoin transaction is carried out collectively by the network and are recorded only in an electronic log of transactions called the blockchain. See, “How Does Bitcoing Work?“'

Bitcoin transactions are anonymous, decentralized, and resistant to forensic exploration. A particular transaction traces bitcoins identified with digital signatures, verified by miners and authenticated by the blockchain. See, “Bitcoin: A Peer-to-Peer Electronic Cash System.” Thus, there is a serious question as to whether any one person involved in a bitcoin transaction has uttered, i.e. , sent the bitcoin into circulation. See, http://bit.ly/1jO81nq. A bitcoin has no inherent value, does not have a physical existence, and is utilized by persons who are intimately aware of its nature. Arguably, the use of a bitcoin is the trading of a commodity or token rather than the use of money.

FinCEN's guidance on virtual currency is remarkably succinct and direct. A bitcoin is a decentralized convertible virtual currency because it has no central repository and no single administrator. See, “Application of FinCEN's Regulations,” supra, p. 5. It is obtained through individual computing or manufacturing efforts.

Because the bitcoin is not legal tender and providers of prepaid access and dealers in foreign exchange are money services businesses only if they deal in legal tender, bitcoin exchanges by such businesses are not regulated by FinCEN.

It goes without saying that the appearance of the bitcoin presented federal enforcers of the Bank Secrecy Act with an unprecedented challenge. (The Bank Secrecy Act and its application to FinCEN are explained at http://1.usa.gov/1dIt33k.) The bitcoin's principal differentiation from regulated currency, as pointed out above, is that it is decentralized and not legal tender. FinCEN cannot hold a single issuer or regulator responsible for the virtual currency and thus has no leverage to regulate the currency one-on-one. Rather, the situation is FinCEN versus the Web. In addition, the fact that the bitcoin is not legal tender implies that market forces govern its ebb and flow and there is no public authority with any interest in any given value for the bitcoin.

The possibility of the use of bitcoins for criminal Internet transactions is obvious, but the inclusion of miners and third-party dealers as regulated entities, coupled with money laundering and contraband prohibitions, imply that FinCEN's limited regulation of the bitcoin will probably be a practical success.

FinCEN Flexes Muscles

It did not take FinCEN long to act on its own regulations. On May 15, 2013, U.S. authorities seized two accounts linked to Mt. Gox. A seizure warrant obtained by the Department of Homeland Security froze an account that an Iowa-based online payment processor, Dwolla Inc, held at Veridian Credit Union in the name of Mutum Sigillum LLC.

An affidavit in support of the warrant states that Mutum Sigillum, a Mt. Gox subsidiary incorporated in Delaware, was operating as an unlicensed money transmitter, in violation of federal law. Neither Mt. Gox nor Mutum Sigillum had registered with FinCEN. See, http://reut.rs/194pLDY. The amount seized was $2,915,507.40. In an action which surprises no one, Dwolla eliminated its bitcoin-related operations.

By the end of 2013, federal authorities had moved to seize 600,000 bitcoins in the possession of Ross Ulbricht, the operator of Silk Road, an Internet exchange site rumored to involve weapons and drug transactions. The site was shut down in October 2013 and Ulbricht is being held without bail with trial set for November. Ulbricht faces a 20-years-to-life sentence for engaging in a continuing criminal enterprise.

Then, in January of this year, Shrem was arrested for laundering Silk Road drug money.

Thus, the two-pronged enforcement approach ' civil self-reporting of engaging in commercial bitcoin exchanges, and criminal money-laundering, racketeering and conspiracy ' herald a high-season for U.S. involvement in bitcoin policing. A cursory visit to the FinCEN site yields this clear mission statement:

FinCEN's mission is to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.

This statement, coupled with the Mt. Gox and Silk Road litigation, would cause any in-house counsel to regard bitcoin involvement for a retail outlet as anathema. On Jan. 30, 2014, FinCEN announced a ruling that a company purchasing and selling convertible virtual currency as an investment exclusively for the company's benefit is not a money transmitter subject to FinCEN surveillance. Is the negative pregnant of this dictum that retail use of bitcoins implies regulation by FinCEN?

Conclusion

Bitcoin exchange for goods is currently a miniscule part of retail sales. Why would Amazon take bitcoins if they were aware that this might arouse FinCEN interest in their operations? And the same for Apple. It is clear that Blockchain was intended to hold bitcoins for use in transactions and that it arguably came within FinCEN's jurisdiction. Apple's position in eliminating Blockchain may rest on the possibility, however remote, that it was engaged with Blockchain in a conspiracy to engage in illicit transactions, or to launder money, or was benefiting from such criminal activity by enabling bitcoin transactions. After all, how would Blockchain, and hence Apple, know where the money came from? Bitcoin 100, a charity hub, recently acknowledged that a recent contribution of 180 bitcoins was probably stolen.

Overstock has just jumped into the fray. Patrick Byrne, its CEO, announced at the end of January that Overstock would accept bitcoins in payment for its goods and on the first day of this operation netted 840 orders amounting to $130,000. Bryne commented that because Overstock had taken this step, Amazon would have no choice but to follow suit.

Despite this challenge, Amazon, a notorious first-adopter, has not emulated Overstock. Maybe Amazon has better legal counsel.

Ultimately, the Blockchain/Apple story may rest on corporate prudence, given the obvious federal enforcement efforts. There is simply no money in handling bitcoins at the moment. The current furor in the press about Apple's anti-competitive need to bolster their supposed propriety payment system seems more a symptom of bitcoin hype than actual corporate motivation.

James Ching is a former Supervising Deputy Attorney General, California Department of Justice and Chief Counsel, California Board of Prison Terms. He specializes in criminal, constitutional and labor law and is the author of numerous published articles on these subjects.