Regulation and security is a major issue that enterprising people in the Bitcoin economy have to deal with on a day-to-day basis. Localbitcoins, is a Finland-based marketplace for connecting people to buy and sell the currency. Recently, the site experienced an event that is an example where banking authorities have shown their authority with concern to Bitcoins.
In a blog post, Localbitcoin’s Andrei Zillo relayed the story of his company’s Swiss bank account being frozen by authorities there because of a large Bitcoin transaction. A customer that Localbitcoins had done business with in the past requested a large amount of Bitcoins for Euros. The money was sent to Localbitcoins using a Single Euro Payments Area (SEPA) transfer. Localbitcoins carried out the transaction, only to later receive a request to return the funds by the bank that sent to transfer.
The problem is, Localbitcoins had already transferred BTC to the customer’s Bitcoin address. Because of this, they declined the request to return the funds to the originating bank. This resulted in the Localbitcoins Swiss account being frozen until the situation was resolved.
The predicament took three days to untangle while the bank had Localbitcoins's account frozen. While dealing with the complications arising from a transaction supposedly gone wrong, the company was able to continue operating. “We keep minimum balances on all of our accounts to minimize the impact of asset freezes due to political and criminal risks in the virtual currency industry”, Zillo explained.
Interestingly enough, the customer requesting the Bitcoins had deleted their Localbitcoins account shortly after the transaction was completed. This could be construed as suspicious activity, especially for a customer who had been regularly doing business with Localbitcoins.
“By the laws of Finland, the originating bank of a wire transfer (the Swiss bank in our case) is responsible for clearing the money and making sure the transfer is legit”, wrote Zillo. Because of this, and by providing a receipt of the transaction, including the Bitcoin addresses involved, the account was unfrozen.
Stories like this are likely to crop up from time to time as the banking industry grapples with how to handle digital currency transactions. Unlike credit cards, once Bitcoins are sent from one address to another, the transaction cannot be reversed. Many Bitcoin businesses could be confronted with problems because of this as the currency tries to gain adoption and respectability.
In the end, companies that are doing business exchanging Bitcoin for fiat currency face challenges because they inevitably have to work with the banking industry. When dealing with the exchange and transmission of currencies, it’s important to know the laws. Understanding how SEPA works, as well as regulations in other localities where Bitcoin enterprises do business is going to be important going forward.