Tags: Bitcoin | digital | money | laundering

Bitcoin Rules Needed to Stem Digital Wild West, Prosecutor Says

Wednesday, 29 January 2014 03:16 PM

Virtual currency firms should face regulations that are even tougher than those for established financial-services providers because of their ability to hide criminal activity, law enforcement officials said at a New York hearing.

“Without stronger government oversight, we are allowing cybercriminals, identity thieves, traffickers of child pornography, and other malevolent actors to operate in a digital Wild West,” Cyrus Vance Jr., the district attorney for Manhattan, said at the hearing today.

On the first day of the hearings yesterday on possible state oversight of digital currencies, investors and entrepreneurs called for lighter regulation for startups in the embryonic industry. Today, Vance and Richard Zabel, the deputy U.S. attorney for the Southern District of New York, both recommended the opposite approach. The hearings were convened by Benjamin Lawsky, the state superintendent of financial services.

“One aspiration with Bitcoin is for it to be a main artery of the commercial world,” Zabel said at the hearing. “Its intrinsic qualities mean it needs to be treated differently.”

The prosecutors cited illegal activity linked to digital currencies, the potential for tax evasion and technologies that can be used to obscure transactions as dangers for law enforcement. They also dismissed industry arguments that their successful investigation of several criminal networks demonstrates that criminal activity is under control.

Money Laundering

On Jan. 27, federal prosecutors indicted a prominent figure among Bitcoin entrepreneurs, Charlie Shrem, for alleged money laundering linked to Silk Road, a Bitcoin-driven website allegedly used for buying drugs and other illicit goods. Authorities shut the site down in October, and Preet Bharara, the Manhattan U.S. attorney, said that the probe is “ongoing.”

Bitcoin, a software protocol for issuing and moving money across the Internet, has gained traction with merchants selling everything from Sacramento Kings basketball tickets to kitchen mixers on Overstock.com.

Cameron and Tyler Winklevoss, twins who created a fund to invest in Bitcoin price swings, see it as an alternative to the global payment system currently dominated by companies including Visa Inc., Western Union Co. and large banks like JPMorgan Chase & Co.

The digital currencies’ threat to such companies will be diminished once regulators intervene, JPMorgan Chief Executive Officer Jamie Dimon has predicted.

Regulatory ‘End’

Bitcoin “will eventually be made as a payment system, I think, to follow the same standards as the other payment systems, and that will probably be the end of them,” Dimon said Jan. 23 in an interview on CNBC.

The price of Bitcoin rose less than 1 percent yesterday to $839.13 at 2:40 p.m. New York time, according to the CoinDesk Bitcoin Price Index.

Federal regulators in March said Bitcoin-related businesses can be handled as state-licensed money transmitters, a category that includes Western Union, for example, triggering a race by some states to assess their own rules.

Only New York has publicly contemplated creating rules specifically for virtual currency companies, what Lawsky has called a “BitLicense,” and its rules could set the tone for other states, and possibly other countries.

Lawsky said today that the first day of hearings attracted viewers via webcast from 108 different countries. “That shocked me,” he said.

Global Sensation

Bitcoin was introduced in 2008 by a programmer or group of programmers under the name Satoshi Nakamoto and has since become a global sensation. It has no central issuing authority, and uses a public ledger to verify encrypted transactions. Users hold Bitcoins in digital wallets secured by private encryption keys.

Vance endorsed the idea of requiring digital currency firms to obtain state money transmitter licenses, while warning, “that action in and of itself may not be enough.” He said businesses that swap Bitcoin for traditional currency, for example, should have to conduct “enhanced due diligence” on customers.

Lawsky said yesterday that regulators would have to prioritize money laundering and other illegal activities over promoting the new industry, and that the money transmitter licenses might not suffice. “It’s feeling more like little tweaks around the edges are not enough,” he said in an interview.

Regulatory Burden

Investors including Fred Wilson, the managing partner at Union Square Ventures, a New York venture capital firm, objected to the existing regulatory burden at yesterday’s hearings.

Fred Ehrsam, the chief executive of Coinbase, a San Francisco-based digital currency exchange, said today that customers are willing to provide identifying information.

“Generally speaking, regulation could be a positive thing in this regard,” Ehrsam said at today’s hearing.

Jeremy Allaire, chief executive of Circle Internet Financial Inc., which promotes use of Bitcoin for retail use, urged states to coordinate their regulatory efforts.

“We believe that there should be more guidance specifically geared toward digital currency firms and that the states should develop a streamlined approach to licensing these firms,” Allaire said at the hearing.

‘Take a Breather’

At a Bloomberg Government lunch today, Bitcoin Foundation General Counsel Patrick Murck said regulators need to step forward and clarify where digital currency falls into their rules and “take a breather” to see how the existing rules pan out before creating new ones.

Vance and Zabel harshly criticized the use of Bitcoin “tumblers,” which accept a Bitcoin payment, and return the same amount with a new digital trail, obscuring its source. The process, which some virtual currency enthusiasts embrace for privacy reasons, is sometimes called a “Bitcoin laundry.”

“In the cases I have seen they serve no other purpose than automated money laundering and identity concealers,” Zabel said.

Zabel also raised the possibility that Bitcoin itself could promote tax evasion as people change dollars into the digital currency for concealment.

“The currency itself could become a form of tax haven, both for businesses and individuals,” he said.

Both Vance and Zabel dismissed objections of investors, raised at the previous day’s hearing, that the prosecution of Silk Road and other illegal activities demonstrate law enforcement can handle the industry’s emergence. “It proves the opposite: this is a problem,” Vance said.

Zabel said that for a “nascent currency,” Bitcoin has been used for serious crimes, and said malefactors are still at large. “They have not all been arrested,” he said. “Many of them did, at least for now, avoid our jurisdiction.”

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Virtual currency firms should face regulations that are even tougher than those for established financial-services providers because of their ability to hide criminal activity, law enforcement officials said at a New York hearing.
Wednesday, 29 January 2014 03:16 PM
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