Announced this week at the Inside Bitcoins conference the new DATA industry group aims to represent businesses not just in the Bitcoin space but any digital asset including, “emerging payments, virtual currency, and other financial technology innovations”.
DATA, or the Digital Asset Transfer Authority’s founding members include the CEO’s of leading Bitcoin businesses such as BitInstant, BitPay, & BitStamp as well as the CEO’s of other digital currency businesses including Ripple’s OpenCoin and Ven.
However, the groups stated goals seem sure to heat up the regulation debate.
To reach this potential, to inspire confidence in the services we offer, and to ensure fair and responsible treatment of consumers and merchants, we believe our industry must evolve in compliance with law and regulation. We must work proactively with regulators and policymakers to adapt their requirements to our technologies and business models. We must develop and implement common risk management and compliance standards that address the public policy concerns associated with our businesses. And our firms must build risk management and compliance programs that meet those standards.
Exchanges are the link between the old world of banking and the new world of crypto-currencies; they play a vital role in supporting the growing Bitcoin economy. If Bitcoin hopes to continue rapidly gaining new users it needs this bridge between the old and new systems to be up and functioning. While Bitcoin is in no way dependant on a link to the traditional banking system, its smooth transition into mainstream use certainly is.
Unfortunately these bridges which make up the exchange market are concentrated and often broken. This leads to concerns over reliability and security, which can cause market panic and extreme volatility. As Bitcoin enters the mainstream a wave of new businesses, services and software developers have recently dedicated their efforts to solving this problem. Their task will not be easy, and the while the exchange rate has seen some recent stability, there is a long way to go before obtaining bitcoins can be called user friendly and reliable.
After shutdown of Liberty Reserve in May this year FinCEN proposed an “Imposition of Special Measure Against Liberty Reserve S.A. as a Financial Institution of Primary Money Laundering Concern”. The primary purpose of the ‘Special Measure’ being to cut Liberty Reserve off from the banking system.
FinCEN noted Liberty Reserve’s irrevocable transactions and lack of ID verification as evidence that “Liberty Reserve’s system is structured so as to facilitate money laundering and other criminal activity,” these comments worried the digital currency community and was likely what scarred off many of their banking partners.
On the 19th, the Bitcoin Foundation responded to FinCEN’s proposed special measure urging them to clarify that not all virtual currency transactions are inherently suspect.
CoinDesk is reporting that in a letter send to an exchange start up the UK, financial regulator HM Revenue & Customs (HMRC) has stated that the proposed exchange has no need to register under money laundering regulations. However the letter does make it clear that HMRC may change their mind and require registration in the future.
“With reference to your enquiry at this time there is no requirement to register with HMRC under the Money Laundering regulations, however HMRC recognise that the issuing of Bitcoins represent an emerging development.
One of the biggest problems currently facing the Bitcoin economy is the exchange market. The market suffers from continued concentration and price volatility. In order to maintain their links to the traditional banking world, these businesses have the unenviable task of attempting to shove Bitcoin into the world of bank accounts and anti-money laundering policies. New exchanges are joining the Bitcoin economy but regulatory compliance is no small barrier to entry. The few existing online exchange services continue to be significant points of failure for the Bitcoin economy.
A network of small, peer-to-peer transactions would likely bypass many of these issues and would be a fitting solution for the brilliantly decentralized Bitcoin network. But is such a thing possible? The guys behind MetaLair, a UK based start-up, think so and are working hard to develop the software and find the investors to make it a reality.
As Bitcoin continues its move towards the mainstream and Bitcoin businesses experience rocky relations with bankers and regulators, now is a good time to look at previous leaders in the digital currency world.
In the late 90’s and early 2000’s, e-gold was the industry leader. As one of the world’s first successful online payment systems e-gold was a pioneer using many now standard practices such as SSL connections and API’s. Brought down by a run in with regulators in 2008 the e-gold story is required reading for anyone involved in the digital currency world.
Sent in by Wikipedia editor Cadwallader, below is a thoroug review of the e-gold story.
One of the more worrying aspects of the Liberty Reserve takedown was the constant insistence by US authorities that Liberty Reserve was only a money laundering service with no legitimate use.
Regulators were very concerned with LR’s anonymity which was a serious draw to the service for many people. But what was likely an even bigger factor in LR’s success was its irreversible payments. This is a very important feature for businesses that are at risk of payment fraud or chargebacks, and it’s a feature that is not available in the current regulated financial system.
In the case of Liberty Reserve, It’s not the individual infractions committed by clients of Liberty Reserve that are worrisome to the regulators, it’s the fact that a semi-reliable platform for private payments existed in the first place.
Liberty Reserve provided a service that had a true market demand from legitimate business sectors and from non-criminals, notwithstanding the government’s claim that “virtually all” its business was illicit. If banks and traditional financial institutions still respected basic client privacy and facilitated some form of digital payments that did not always involve harmful reversibility to the merchants, then companies like Liberty Reserve wouldn’t even be necessary.
CoinDesk does an excellent job of pointing out the very different standards that entrenched TBTF financial institutions are held to as compared to those outside the system. Those choosing to operate alternative financial businesses are going to face many challenges. In fact, if you’re considering running a digital currency exchange you have only 3 choices…
Find some damn good security experts and operate anonymously
Forget about privacy for yourself or your customers and jump through any and all regulatory hoops
Go to jail
Indeed it is time for digital currency businesses to grow up and make some tough choices.
Liberty Reserve S.A., Arthur Bodovsky (owner), Vladimir Kats (left the business in 2009), Ahmed Yassine Abdelghani (left the business in 2009), Allen Esteban Hidalgo Jimenez, Asseddine El Aminr, Mark Marmilev, Maxim Chukharev.
Thursday last week Liberty Reserve went offline. On Friday Arthur Budovsky Belanchuk, the owner, was arrested in Spain after a joint money laundering investigation by US and Costa Rican authorities. The allegations are that Liberty Reserve was financed using money from child pornography websites and drug trafficking.
The Tico Times, an English newspaper in Costa Rica, is reporting that Budovsky has been under investigation since 2011 after a request from a prosecutor’s office in New York. Liberty Reserve is a Costa Rican business and Budovsky is a Costa Rican citizen of Ukrainian origin.