Bitcoin Regulation Roundup: Bankruptcy, Derivatives and Consumer Protection

NEWS
Jason Tyra
Mar 24, 2014 at 00:02 UTC  |  Updated  Jun 9, 2014 at 13:46 UTC

Regulatory attitudes towards cryptocurrencies around the world are shifting. Hardly a day goes by without a central bank issuing a warning on the digital currency. However, it's not all bad news – as some authorities are taking a much more positive approach. 

In CoinDesk's regulation roundup, Certified Public Accountant and ACFE Certified Fraud Examiner Jason Tyra examines the most significant digital currency news from the world's regulators and law courts over the past two weeks.

MT. Gox: Frozen assets

Mark KarpelesMt. Gox has now filed for bankruptcy protection both in the United States and in Japan. Additionally, both the company and Karpeles have had their US assets frozen in connection with numerous civil complaints and at least one criminal probe.

Karpeles testified in a Texas bankruptcy court on Monday, March 10th, that Mt. Gox was the target of a massive and lengthy attack by computer hackers, but admitted that the exchange continued to accept trading orders and collect fee income for weeks after management knew that Gox was technically insolvent.

Further, Mt. Gox has so far failed to explain the reason for the discrepancy between the amounts of cash liabilities on its balance sheet and the balance of cash held in banks accounts known to be owned by the company.

As the drama plays out in public on multiple continents, online forums have buzzed with theories about the source and extent of the collapse, rumors of wholesale theft by Mt. Gox management and voluminous amounts of data alleged to have been leaked (or stolen) from Gox's servers.

Nevertheless, no allegation, including the official statements by Gox management, has yet been conclusively proven. Mt. Gox's website restored partial functionality on March 17, allowing account holders to check their balances, but not make withdrawals.

The Mt. Gox affair has set the stage for a shift in the focus of bitcoin regulatory efforts in the United States from money laundering exclusively to also include consumer protection.

New York: Registered exchanges

Ben LawskyThe State of New York seems to taken the lead in its drive toward regulating bitcoin-related businesses operating there.

The State Department of Financial Services, headed by Ben Lawsky, recently announced that it will accept proposals to establish regulated exchanges in New York.

Lawsky cited "the urgent need for stronger oversight […] including robust standards for consumer protection, cyber security, and anti-money laundering compliance" in his solicitation for applications and proposals.

The standards of acceptance and process of application do not appear to be available through the Department of Financial Services website, suggesting that both will be handled in an ad-hoc manner, with extensive input and negotiation by applicants.

New York's only bitcoin exchange, BitInstant, ceased operating after the arrest of its founder on money laundering charges in 2013. CoinMap.org currently lists more than 100 bitcoin businesses operating in New York State, but that number does not include businesses located outside New York with a regulatory nexus there.

The US Treasury may have concluded that bitcoin is unworthy of extra regulation for the time being.  In a speech given on March 18th, US Treasury Undersecretary for Terrorism and Financial Intelligence said:

"Terrorists generally need 'real' currency, not virtual currency, to pay their expenses."

The Treasury Department's Financial Crimes Enforcement Network (FinCEN) has cracked down over the past year on unregistered exchanges, resulting in disruptions to bitcoin businesses and users throughout the world.

While registration requirements are unlikely to be eased, a de facto moratorium on further regulation is likely to be a welcome development.

Texas: Bitcoin investment blocked

Oil wellConsumer protection seems to be on the minds of other regulators, as the commissioner of the Texas State Securities Board has issued an emergency order barring a private energy exploration company from accepting investments in bitcoin from non-accredited investors.

The company, Balanced Energy LLC, must also furnish potential investors with a disclosure informing them that bitcoin is volatile and that their investment may be subject to extraordinary risk as a result.

Both US federal and Texas state law require companies offering securities under one of the registration exceptions to take reasonable steps to verify that potential investors are qualified.

Offerings of unregistered securities by bitcoin-related businesses have become common over the last 18 months, with solicitations for everything from mining operations to exchanges and other tech startups being pushed online. Though failure to register is not generally a criminal matter, firms that violate the rules can face substantial civil penalties.

US: SatoshiDice in trouble

Also in securities registration, the SEC (Securities and Exchange Commission) is reportedly investigating whether bitcoin gambling site SatoshiDice violated registration rules by accepting funds from investors located in the US.

MPEx, the Romania-based exchange that hosts SatoshiDice shares, has so far declined to cooperate, citing lack of jurisdiction by the SEC.

US: Bitcoin derivatives?

BTC derivativesBitcoin derivatives may be coming to US financial markets. According to Bart Chilton, a member of the US Commodities Futures Trading Commission, the regulator already has statutory jurisdiction over a proposed derivatives market for bitcoin.

Chilton suggested that his agency had been in talks with several companies about bitcoin derivatives, but declined to name them, since no formal applications have been filed.

A derivatives market would allow traders to write calls, puts, swaps, options and other types of contracts on bitcoin in much the same way as other investments. However, while derivatives might result in more robust long-term growth of the bitcoin economy, they also bring a risk of greater volatility to bitcoin markets.

The enormous worldwide derivatives market played a substantial role in the 2008-2009 financial crisis in the US, as bets on the performance of certain classes of assets drove a large number of previously profitable companies into insolvency.

Singapore: Compulsory registration

singapore-masThe city-state of Singapore has announced that virtual currency related businesses, including bitcoin exchanges and other intermediaries, will be required to register with a unit of the police force that enforces anti-money laundering rules.

According to the Monetary Authority of Singapore, these regulations place the tiny nation at the forefront of virtual currency regulation among developed countries.

Singapore's decision to impose anti-money laundering regulation on bitcoin businesses marks a reversal from its previous stance, announced just a few weeks ago, and coinciding with the installation of its first bitcoin ATMs.

Iran: Regulation talks

Iran has reportedly announced its own effort to regulate virtual currency trade within its borders. According to the Fars News Agency, the country's National Center for Cyberspace is currently involved in talks with the Ministry of Economic Affairs and Iran's Central Bank concerning what regulations might be needed in the Islamic state and how they might be implemented.

Iran has endured punishing economic sanctions at the hands of western countries in recent years, stemming from its alleged pursuit of a nuclear weapons program. The country has publicly claimed that the program is for civil purposes only.

The sanctions, which were partially lifted recently, have severely hampered Iran's ability to trade abroad, drained its foreign exchange reserves and driven the country to resort to extraordinary measures, such as gold bullion smuggling, to conduct business abroad.

Bitcoin could be used to partially subvert economic sanctions in the future, stoking fears among western governments that it could also be used for money laundering.

US anti-money laundering rules require financial institutions, such as money service businesses, to "know their customers" – that is, collect ID data – and ensure that they do not appear on the Office of Foreign Asset Control's Specially Designated Nationals list.

BTC derivates and oil pump images via Shutterstock

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