After series of Bitcoin businesses being dropped  by their banking partners earlier this year, the Internet Archive Federal Credit Union (IAFCU)  came to the rescue. The New Jersey based credit union, run by the Internet Archive, has been very friendly to the Bitcoin industry and has worked with a number of businesses who have had trouble establishing relationships with banks.

One of the businesses the credit union partnered with was the US based TradeHill  exchange. Late last week Jered Kenna, Tradehill’s founder and CEO, confirmed via Reddit that the exchange had suspended trading due to “operational and regulatory issues” faced by its bank.

IAFCU posted its own statement on the matter , but was not clear on the nature of the regulatory issues.

• As the rupee continues to struggle, Indian officials continue their attempts to curb demand for gold.

Via Reuters…

India is considering a radical plan to direct commercial banks to buy gold from ordinary citizens and divert it to precious metal refiners in an attempt to curb imports and take some heat off the plunging currency.

The RBI will ask the banks to buy back jewelry, bars and coins for rupees. Lenders will have to offer better rates than pawn shops and jewelers to lure sellers.

“We will start a pilot project among some banks where we will allow them to buy back gold from individual households,” the source, an official familiar with the central bank’s plan, said. “This will start soon, we have discussed (it) with banks.”

• From New York to Germany, check out a timeline of August events affecting the crypto-currency community here.

• For those following the Bitcoin Foundation’s board elections Bitcoin Magazine has posted transcripts from Let’s Talk Bitcoin’s interviews with the Individual Seat Candidates

Two new seats are being added to the Board of Directors. One representing Individual Members and the other is representing Industry (business) Members. In order to be eligible to vote in this election, you must be a current member of the Bitcoin Foundation.

On Monday 5 Foundation members, Marco Santori, Patrick Murck, Peter Vessenes, Brian Klein and Jim Harper, met with representatives from a number of US agencies including FinCEN, IRS, FDIC, Federal Reserve, OCC, FBI, DEA, Secret Service, and the Department of Homeland Security.

via CoinDesk

Murck, who is general counsel for the Bitcoin Foundation, said all parties at the meeting had a “productive and frank” discussion about digital currency. “It was a positive first step for the industry in creating an open and on-going dialog. I left feeling very encouraged that we were able to dispel some myths and misinformation about how the bitcoin protocol works.”

Another attendee, Jim Harper, director of information policy studies at Cato Institute, shared this sentiment.

He said a number of topics were discussed at the meeting, which was held at US treasury building in Washington DC, including privacy, law enforcement and how government controls have the potential to strangle the industry before it has even had the chance to really get going.

“We talked about how the weight of regulation in the US can, and does, drive bitcoin service providers to move outside of the country,” Harper explained.

He suggested the Bitcoin Foundation was able to set the record straight on a number of digital currency-related issues, and that explaining what exactly the blockchain is and how it works largely dispelled the idea that there is some “magical secrecy” to bitcoin.

Marco Santori also commented on the meeting via BitcoinTalk

I, of course, discussed regulatory challenges.  I discussed some of the ways in which the regulatory landscape in the US did not achieve the government’s policy goals.  In particular, I spent a few minutes just going through the ambiguity in the March FinCEN Guidance, and emphasized the importance of supporting innovation in the Bitcoin industry.  I hit some points very hard – like how the regulatory environment has disincentivized businesses from launching in the US and from servicing US customers.  I also discussed how some businesses were simply picking up and leaving the US entirely.

Tuesday, in another meeting at Capitol Hill, Foundation members Peter Vessenes, Patrick Murck and Marco Santori meet with representatives from the offices of several congressmen and senators.

Via CoinDesk

Santori, who is chair of the foundation’s Regulatory Affairs Committee, said the attendees raised a number of concerns including privacy and anti-money laundering issues, but most just wanted to know how the protocol works.

…

There were also people at the meeting who had a very in-depth understanding of bitcoin. Santori said he was surprised to find there were a few attendees who knew more about bitcoin than he did.

But what exactly does the designation of “Rechnungseinheiten” mean for German Bitcoin users and businesses?

Via Pymnts.com …

The German parliament stopped short of granting bitcoin full currency status on August 19, but recognized bitcoins as “units of account” when it formally issued regulations for the popular virtual currency.

The ruling means bitcoin will be legal for use in private transactions, PC World reported. German commercial entities that want to conduct business with bitcoin will first need to obtain permission from the Federal Financial Supervisory Authority. 

The announcement comes at a time when global governments are looking for direction on how best to regulate bitcoin, and commentators told PYMNTS.com that the development can be seen as a win for both bitcoin users and business owners and investors.

Likewise, the ruling is likely to have reverberations in the international community, where it could serve as a template for lawmakers in countries where the regulatory environment for bitcoin remains unclear.

Additional Implications For Germany

German lawmakers also issued directives on key issues, determining if bitcoin would be subject to capital gains tax and sales tax, how bitcoin mining – the process by which additional bitcoins are generated – should be addressed and whether payment processors could avoid taxation.

Legislators decided commercial activities that use bitcoins should not be tax exempt, TechCrunch reported. Still, there is some confusion regarding this point. The media outlet noted that it was not clear how the sales tax would be implemented, and whether it would affect individuals who only occasionally sell items through third-party businesses such as eBay.

German lawmakers recommended bitcoin mining be governed as private money creation, and that payment processors be exempt from sales tax when dealing with German customers.

Further, notable German lawmakers made the philosophical case for bitcoin.

“We should have competition in the production of money,” said Frank Schaeffler, a member of the German parliament’s Finance Committee, according to CNBC. “I have long been a proponent of Friedrich August von Hayek scheme to denationalize money. Bitcoins are a first step in this direction.”

The statement made it clear that Bitcoin is not e-money and not subject to the EU’s e-money regulations.  Also bitcoins held for 12+ months are still free from capital gains tax.

However, there still seems to be some confusion for Bitcoin businesses over whether or not they need to register with Germany’s financial regulator BaFin. There are reports that BaFin classified Bitcoin (and other digital currencies) as “financial instruments“. This would require licensing and other challenging requirements such as €730,000 of capital.

Recently the German exchange bitcoin.de has collaborated with German based Fidor Bank which has pre-emptively applied for a license from BaFin. The outcome of their application may shed some light on the situation.

On Monday the US Senate Committee on Homeland Security & Governmental Affairs sent a letter to Homeland Security for information on any policies, procedures or guidance they have that pertains to “virtual currencies”.

The letter states the committee has initiated an inquiry into virtual currencies, list recent legal actions involving Bitcoin and contains the usual ‘hey were all for new tech, but we need to look at the threats and risks’.

The letter, which can be read here, ask Homeland Security for 3 things to be provided by the end of the month…

1. Any policies, procedures, guidance, or advisories related to the treatment or regulation of virtual currencies and any minutes of interagency working groups involved in the development of any such policies, procedures, guidance or advisories;
2. Information related to any ongoing coordination of your agency with any other federal agencies or state and local governments related to the treatment of virtual currencies; and,
3. Any plans or strategies regarding virtual currencies and information regarding any ongoing initiatives you have engaged in regarding virtual currencies and the name of the person most knowledgeable about any such plans, strategies or initiatives.

In their 2014 appropriations bill, the subcommittee directs the FBI to report on Bitcoin, specifically what the FBI is doing to address the “challenge” that they see from the “ersatz currency“.

Page 45 of the bill…

From the wording of the bill, particularly in describing digital currencies as “ersatz” (inferior substitute – merriam-webster.com) we can guess that the members of the United States House Appropriations Subcommittee on Commerce, Justice, Science, and Related Agencies are not big Bitcoin fans.

LetsTalkBitcoin, which broke the story on Monday, sees this fear from Congress as quite predictable.

The cash-like nature of Cryptocurrencies such as Bitcoin seem to be fundamentally at odds with the identity-based financial systems we’ve used since the advent of the internet.  What the bitcoin-using community sees as the advantages of Bitcoin; trustless and irrevocable transactions divorced of official identity.  In another light this can be seen as enabling money laundering, consumer fraud and terrorism.

“It is natural for established industries and their representatives in the Senate to fear new and disruptive technologies.” explained Andreas M. Antopoulos, Expert on decentralized networks  “As with the early Internet, there are those who only look at the empowering effects on criminals, rather than on the vast majority of people who can benefit enormously. It just takes time for the lawmakers and laws to catch up to the technology and adapt”

Via Forbes’ Kashmir Hill …

A subpoena doesn’t mean criminal activity has taken place. A person familiar with the matter says the two-year-old department wants to make sure Bitcoin isn’t a conduit for illicit activities and is gathering information in order to decide whether to issue regulation for virtual currencies. The department has the authority to create regulation if there is no other primary regulator.

…

In addition to rooting out illegal activity, the department says it wants to make sure Bitcoin company customers’ funds are “safe and sound,” expressing concern about consumer complaints “about how quickly virtual currency transactions are processed.”

…

The virtual currency Bitcoin has already been getting lots of attention on the federal level. The IRS has been encouraged to make sure people pay tax on it. The FBI realizes it’s useful as a currency for illicit activity. The SEC has argued that it is indeed money and that people should go to jail for using it in Ponzi schemes. And the Department of Treasury has issued guidance for Bitcoin money transmitters. State regulators paying attention will help to further legitimize the currency, but it will also increase the start-up costs for Bitcoin money transmitters. The NYSDFS notes in its statement that “virtual currency exchangers may be engaging in money transmission as defined in New York law, which is an activity that is licensed and regulated by DFS.” That means ponying up bond money, as pointed out in the Wall Street Journal

Below are the companies subpoenaed.

• BitInstant
• BitPay
• Coinabul
• Coinbase Inc.
• CoinLab
• Coinsetter
• Dwolla
• eCoin Cashier
• Payward, Inc.
• TrustCash Holdings Inc.
• ZipZap
• Butterfly Labs
• Andreesen Horowitz
• Bitcoin Opportunity Fund
• Boost VC Bitcoin Fund
• Founders Fund
• Google Ventures
• Lightspeed Venture Partners
• Tribeca Venture Partners
• Tropos Funds
• Union Square Ventures
• Winklevoss Capital Management

It looks like Bloomberg is testing a Bitcoin ticker. Abbreviating Bitcoin as XBT, Bloomberg terminal users can now look up Bitcoin’s pricing history. Data comes from Bitcoin exchange service Mt. Gox as well as Tradehill. More details here.

The Bitcoin ATM is now available for pre-order. The makers of the Bitcoin machine, Lamassu, are now accepting orders for the machine. Lamassu will sell the machine with the appropriate software installed and leave regulatory compliance to those operating the ‘ATM’.  Customers in the US are required to sign a due diligence questionnaire.  Prices start at $5000 via Bitcoin or wire transfers. Order yours here.

Why Libbitcoin matters. Libbitcoin is an advanced alternative implementations of the Bitcoin protocol. While there are other alternative implementations, this one is unique it allows Bitcoin users with some technical skills but not necessarily experienced programmers to “work directly with the underlying [Bitcoin] building blocks.”

This may be a competitor to the current implementation, bitcoind and have the effect of limiting the influence of Bitcoin updates coming from authorities such as the Bitcoin Foundation. This may help to maintain Bitcoin’s decentralized nature and has some political implictions as explained here.

Bitcoin is officially Money. The SEC is suing Trendon Shavers for running a Ponzi scheme, the Bitcoin Savings & Trust. Part of Mr Trendon’s defence was to claim that Bitcoin investments are not securities and Bitcoin is not money; last week a judge disagreed.

The ECB is not worried at the moment because the volume of virtual currencies is still low. Therefore it does not see them as a threat to financial stability. But the ECB notes that such virtual currencies could have a negative impact on the reputation of central banks.

Moreover, the ECB points out that the high degree of anonymity of virtual currencies poses a challenge to public authorities because virtual currencies could be used as means of payment for illegal activities and money laundering.

Virtual currencies are not regulated per definition used by the ECB. Therefore electronic money, which is regulated in the EU since the first E-Money-Directive of 2000, cannot be a virtual currency. Analyzing the impact of virtual currency schemes, a proper definition and categorization between virtual money and e-money, which is compliant with EU-regulation, is crucial. Let´s have a closer look to the genesis of these new currencies and their domestication by regulation before discussing the definitional misunderstandings of the ECB.

Genuine digital currencies like Bitcoin are decentralized digital bearer instruments stored in an electronic device (PC, chip card etc.). Such instruments are not a new phenomenon. The first wave of pioneers of this digital cash-equivalent, like Mondex and DigiCash, entered the monetary world in the mid-90-ies. Unfortunately, they did not survive. Similarly, the e-purses schemes that were meant to replace cash in the physical world did not gain much of the market and were discontinued in most European countries (except Germany where banks still ride an expensive, but almost dead horse called “GeldKarte”).

In spite of the limited success of the early attempts to implement digital cash in the market, central banks and other oversight authorities in Europe introduced a wave of (premature) regulation of these digital currencies. In 2000 the first E-Money Directive (2000/46/EC) was passed – long before any relevance of these e-money products could be detected.

Indeed, with the closure of most schemes, there was hardly anything that fell under the new regulation. But rather than having an empty regulatory box regulators started to widen the definition of e-money to include all kinds of other new payment instruments. Later on, this regulatory practice found its way into the definition of e-money in the second E-Money Directive in 2009 (2009/110/EC).

As a consequence, today most of the e-money schemes which fall under the scope of the e-money-regulation have nothing to do with genuine e-money in the sense of digital cash (digital bearer certificates).

Most of today’s e-money consists of balances held in special “prepaid” accounts, centrally administered by the issuing institutions. These accounts are like limited purpose accounts comparable to a current account at a bank that has a restricted functionality. PayPal is the well-known market leader of this kind of e-money.

So, in the EU, we have had regulations in place for genuine e-money and other prepaid products for more than 10 years. As far as we can see, most “virtual currencies” would simply be treated as “e-money” if they were issued in the EU. However, notwithstanding the existing regulations, the ECB Report makes a comparison between “E-Money” (regulated) and “Virtual Currencies” (not regulated). It identifies two types of virtual currency schemes,

• closed schemes and
• schemes with a monetary inflow via currency exchanges (traditional exchange: currency versus virtual currency).

In contrast to e-money, the unit of account of virtual currencies is an invented unit (like Bitcoins). Moreover, as stated by the ECB-report, there is no guaranteed redeemability of virtual currency funds into traditional currency.

The analysis of the ECB is striking for a number of reasons:

First, it is remarkable to see that the ECB is using an outdated definition of e-money (of the invalid EMD I) which not complying with the current e-money definition of the EMD II and the regulation within the EU.

Second, no matter whether the EMD I (not relevant since 2009) is used or EMD II, the core characteristic of e-money has remained the same: issuance on receipt of funds (= prepaid). This implies that every virtual currency which is issued (not traded!) in exchange for traditional money is legally defined as e-money (if the other requirements are fulfilled too).

Thus, the equation “virtual currency = unregulated” applies only in special cases like Bitcoin. Otherwise, those currencies defined by the ECB as “virtual currencies”, which are issued via an inflow of traditional currency, are subject to e-money regulation in the EU! Linden Dollars or Liberty Reserve Dollars (both “prepaid”) would be subject to e-money-regulation if issued within the EU-jurisdiction. All of these schemes would have to be redeemable at par. This is a regulatory requirement (Article 11 of EMD II) and cannot be part of a definition or a criterion for categorization, as in the ECB report. (By the way, when the EMD I was drafted in 1999, the ECB itself insisted on this requirement).

Third, the report states that e-money is (in contrast to virtual currencies) always issued in units of account of existing legal tender currencies. This is also not correct. Regulated e-money can be issued in fantasy units but the exchange rate vis-à-vis the legal tender currencies must be fixed (“issuers issue electronic money at par value on the receipt of funds”, “issuers redeem, at any moment and at par value”). The denomination is not essential! The ECB is missing the point by stating: “lastly, the fact that the currency is denominated differently (i.e. not euro, US dollar, etc.) means that complete control of the virtual currency is given to its issuer, who governs the scheme and manages the supply of money at will.”^[3]

Fourth, another criterion of categorization used by the ECB is the acceptance of the currency: only virtual or also real goods and services. A good or service is virtual, if it is offered within a virtual community and cannot be traded outside the community (ECB-definition). From a monetary and regulatory point of view the kind of goods and services which can be bought with a particular currency has no relevance, at all. Relevant could be the level of acceptance at third-parties (besides the issuer) whether in a virtual or real world.

So, as rule of thumb: if a virtual currency is prepaid, it is e-money with the regulatory requirement of redeemability at par value. Only non-prepaid currencies in closed systems (like Bitcoin or some in-game currencies) could be considered as non-regulated virtual currencies in the EU.

Central banks are monopolist providers of cash. So, they may be forgiven when they do not spend an awful lot of time observing and analyzing competitors. But central banks are also regulators and as such they should – at least after 10 years of experience – understand what they are regulating and what the regulations are.

Dr. Hugo Godschalk

Managing Director

PaySys Consultancy GmbH – Frankfurt/Germany

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.

From DATA’s official announcement …

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.

This would seem to suggest a willingness to alter software protocols to appease authorities. Many in the Bitcoin community, such as the Bitcoin 2 authors, have been fearing such proposals and the possibility that they will lead to Bitcoin being watered down and absorbed by the current financial establishment.

For example, an elimination of Bitcoin irreversibility which could transform it into simply a PayPay 2.0, or as the Bitcoin Foundation’s Jon Matonis put it “Govcoin”.  In a new post for American Banker, Don’t Let Bitcoin Morph into Govcoin, Jon expresses his concern with an over eagerness of industry organizations to appease regulators.

 Although SROs can be extremely beneficial in advancing an industry, clear political lines must be drawn to mitigate the risk that an SRO would be co-opted by government and this is where it gets tricky. To avoid more direct and onerous regulations, the government may ask the SRO for certain guidelines or rules to be incorporated among its membership. If such modifications are objectionable to the majority of industry participants, the SRO faces the dilemma of challenging the authorities and risking its relevance or being complicit in harmful and over-reaching backdoor legislation.

The path of complicity ultimately leads to an SRO that has strayed from its core constituency and could be absorbed by the government as a direct regulatory body. The SRO should periodically conduct a reality check by remembering Voltaire’s words: “To learn who rules over you, simply find out who you are not allowed to criticize.”

Via the exchange’s site…

At the conclusion of the meeting senior members of the Foreign Exchange Administration and Policy Department advised that due to lack of existing applicable laws, capital controls and the fact that Bitcoin straddles multiple financial facets the following Bitcoin activities are illegal in Thailand:

• Buying Bitcoins
• Selling Bitcoins
• Buying any goods or services in exchange for Bitcoins
• Selling any goods or services for Bitcoins
• Sending Bitcoins to anyone located outside of Thailand
• Receiving Bitcoins from anyone located outside of Thailand

The exchange had been operating on previous advice from the Bank of Thailand that Bitcoin was not a currency. However, the businesses had been in the process of registering with regulators in Thailand to ensure that they were operating lawfully.

This change in policy from the Bank of Thailand occurred after the exchange made a presentation to bank members in an attempt to explain the currency to them. The companies managing director gave a presentation on “the workings of Bitcoin, the benefits of Bitcoin, incite into the company’s operations and future implications of Bitcoin.” …I guess he got their attention!