Feds reveal the search warrant used to seize Mt. Gox account
arstechnica.com
arstechnica.com
This means it doesn't matter if bitcoin is a currency or not. If your taking money from one fiat currency account and moving it to another fiat currency account on customer instructions you can fall into the money transmitter classification.
It's also one of the (many) reasons that if you're running a marketplace startup you don't want to run an intermediately account that does pass-through for the transactions but instead use a service like Paypal X or Balanced which complies with relevant money transmission laws.
They shot themselves in the foot a bit when they started adding merchant services. Nevertheless I think they technically answered the questions correctly given the legal position they where taking that bitcoins are not a monetary device but a commodity. IANAL but I play one on TV, and they may still have some traction on that argument since bitcoin is only recognized as a currency by popular opinion not by legal decision.
Money laundering laws have been around a long time and tend to be written to encompass a wide range of work arounds that criminals have used historically. Using near money or liquid assets for money laundering has been commonplace for decades, hence laws tend to be designed to handle it.
(that said I'm much more familiar with EU anti-money laundering laws than US ones as I used to work in currency trading in London)
As a result, the statute is basically a sledgehammer for anything related to value transfer, broadly defined.
http://blj.ucdavis.edu/archives/vol-8-no-1/One-hour-Money-La...
But if the form question is not considered superfluous, then indeed it is asking the business owner what the proper intended purpose of the businesses is, not the unintended/illegal purposes.
> Mt. Gox estimates it costs $25 million in the first year to become fully compliant in the US. But considering a regulator could potentially swoop in and seize funds if a violation were found, it’s worth it.
I called bull[2] on that figure when that post was published.
The other reason i've stayed away from Mt Gox is despite their claims of compliance, they aren't listed on the Californian DFI website as a registered money agent[3]
When that article was posted I also emailed Mt Gox, since I couldn't find them in any registry as an authorized money transmitter, to ask them where that $25M was spent. The response I got was:
> Unfortunately, our financial statement is yet to be available. Once it is available and we have the permission to publish it from management, we will release this.
[1] http://www.theverge.com/2013/4/1/4154500/mt-gox-barons-of-bi...
To my knowledge, they have never made any claims of compliance. They have only said that they plan to become compliant some time this year.
Anybody reading that article in The Verge would conclude that they have spent the money. That whole article was about assuring people that Mt Gox was safe.
At best they were not straight forward and transparent, at worst they lied.
Not what I want from a company who is asking me to trust them with my money. Frankly I am shocked that their setup in the USA for Dwolla transfers was nothing more than an ordinary Wells Fargo business account.
[1] The email would have been the perfect time to respond with 'well, we haven't actually spent the money on compliance, but we plan to'
The bigger issue is that it takes lots of time and effort for back-and-forth with each state to get authorized. One person has maybe the bandwidth to obtain compliance with up to 3 states at a time, and this is for someone who knows the legal background very well. So you need to staff a pretty large compliance department off the bat to become compliant before engaging in money transmission (and thus before earning revenue). That's hugely expensive.
source: I work for a money transmitter.
In fact, as far as I can tell, federal FINCEN compliance doesn't cost anything beyond the cost of the accounting tools to maintain that compliance (which can be very expensive to buy or develop, to be fair).
Disclaimer: I am not a lawyer and this is not legal advice, only a conversational comment on the Mt. Gox affair.
As I understand it, it is federal requirement that they be licensed by each state into or out of which they will transmit money, but the actual licensing requirements are set state-by-state.
When you sign a legal form, especially tied to a business, you might want to consider the ramifications of how you complete the form. You probably should legal up prospectively if it deals with money and currencies.
This is not surprising for MtGox. Their platform, communications, and, now, essential business acumen all perform at the same unprofessional level. I guess it's back to trading cards then, eh?
Don't Libertarians preach contract supremacy?
Its interesting to me that typically this would be a simple "hey you filled out the forms wrong" kind of thing and the officers would go down and change their paperwork and correct any missing licenses, pay whatever penalties etc. This however is blown up as a 'big deal' which suggests that at least some folks would rather have you believe that the concept of bitcoin is illegal.
I'd guess that every single such violation is prosecuted if detected - money laundering is not that rare, and in accounting/financial/company tax matters pretty much all mistakes (unless detected in pre-signing validation) are treated as punishable/fineable violations, not "correct your paperwork" matters. And as a company officer, there quite a few papers that you are required to sign where you may face jail if they're not true.
Also, seizing/freezing any money-laundering or tax-evasion related funds is common practice - first ensure that the money isn't going away, and then release it when/if all the violations are cleared.
That sounds nice, but really, look at what you have to do before you actually go to jail as a "company officer"
The same would be true for any bi-directional virtual curency, really. Since Blizzard does this in Diablo 3, I wonder if they've gone through this process.
"Does your business
accept funds from customers
and
send the funds based on customers' instructions
(Money Transmitter)?"
No, while the FinCEN guidance on the application of money service bureau laws and regulations including those specific to money transmitting businesses to participants in various roles with regard to virtual currency systems summarized the FinCEN's understanding of application of existing law to that domain, the applicable statute requiring licensing for money transmitters, and defining what "money transmitting" means (which is the basis for the seizure warrant), existed for quite some time prior.
Why do you think that? A currency exchange is a business for grownups. Grownups with lawyers and accountants who can fill in forms correctly.
So when something comes up, you see if you can "resolve" it simply. So in this case the forms get updated, the Mt. Gox guys become registered as an MSB and go through the paperwork to meet the necessary standards, and if they can't they shut down. The enforcement interests of the state are served. Similarly if you are accused of violating a law the prosecutor will often offer you a plea deal of some form. This is effectively saying "Ok, let's assume I can prove all of this and your guilty and you will be fined and possibly go to prison. I'm willing to forego that lengthy process if you simply admit wrongdoing to this set of charges and accept this sentence for it." Of course sometimes the prosecutor has a different agenda and they want to "send a message" to people who might consider a similar path. This ranges from the small, police officers citing seatbelt violations, to the absurd like telling Aaron Schwartz he would spend 30 years in prison.
A friend of mine who was registering his business as a consultant in Santa Clara county screwed up and put down his business as "consulate." He signed the document that said that was what he was trying to do, and not surprisingly it is illegal to represent yourself as a diplomat when you aren't one. But he didn't get a DHS agent throwing him down in the street, he got a call from the County clerk when the State Department returned the application saying essentially "wtf?" They had a laugh, he updated and amended the form and didn't serve any prison time. :-)
Generally, its been my experience that "the man" isn't really out to get you. And maximizing compliance with the existing laws of the land trumps prosecuting every single violation. So skipping the first step [1] of just calling up and getting clarification seems unusual to me, given my experience with folks who prosecute people for a living.
[1] This is an assumption on my part, for all I know they may have called and said "Did you really mean to say 'no' here? Looks like you should have said 'yes'." And he may said "I said 'no' and I meant it."
I think you are looking at it from the perspective of the crime being misrepresentation on the form. That's not the crime at issue, though.
The crime at issue is actually operating the money transmitting business without the required licenses, the representation on the form that he was not operating a money transmitting business may be evidence that there was a deliberate attempt at concealment or something like that, but its not the fundamental prohibited act.
Saying "yes" on the form wouldn't have made things less criminal, just more easily detected.
So there are two outcomes:
1) Mt Gox gets shut down, its creators go to prison.
State enforces the rules which is good, but also cuts out some economic growth (people lose their jobs, retail space leases get broken, etc etc)
2) Mt Gox gets brought into compliance.
State enforces the rules (now they are in compliance when before they weren't) economic contribution remains intact so people still have their jobs Etc.
Universally governments prefer #2 over #1, for violations involving process compliance, because #2 costs less and doesn't impact tax revenues long term. They insure future compliance with fines and/or periodic audits.
All bets are off if innocent civilians are endangered or gross damage to the property occurs etc. Or, like in Enron's case, the tax payers are massively ripped off. So when Walmart creates rules that make their workers work overtime that isn't paid, the response is a fine and regular audits. Not shutting down Walmart or locking their stores where violations occurred.
The whole theory of government is predicated on ensuring compliance rather than locking everyone up. The latter isn't scalable and its not the best thing for the people being governed.
Part of ensuring compliance is ensuring that people take reasonable care to comply before being caught not complying. That involves imposing consequences for people failing to comply when they have reasonable notice from which they should have known the requirements, whether or not they actually did know.
Well, as we stand in May of 2013 perhaps it's obvious that Mt. Gox should have identified themselves as a Money Transmitter and Money Service Business. Let's agree on two things though:
1. There's a fuzzy line as to who should have to get a license for this. For instance, the person that sold me Roman denarii for U.S. dollars on EBay might have to get a Money Service Business license with a strict interpretation of the law.
2. Literally two years ago in May of 2011 when Mt Gox filled out the forms, Bitcoin was not considered by most people to be a "currency". When most people think of currency exchange, they're thinking of U.S. dollars, Euros, Swiss Francs, British Pounds, etc. Is Parker Brothers responsible for registering as a Money Service Bureau because they exchange U.S. Dollars for Monopoly Money?
Seems like this is more applicable (although still a stretch) as they receive USD and then forward them on to BTC sellers.
But the US dollar has been considered a currency for a long time (longer, in fact, that the "Money Transmitter" rules at issue in the warrant have been in place), and certainly before May 2011. And that's the currency whose transmission is at issue in the warrant.
Further, the issue is not incorrect forms filled out in 2011, but unlicensed money transmission business continuing to be conducted into 2013.
There's a fuzzy line as to who should have to get a
license for this. For instance, the person that sold me
Roman denarii for U.S. dollars on EBay might have to get
a Money Service Business license with a strict
interpretation of the law.
From the FinCEN[1]:
"An activity threshold of greater than $1,000 per person per day in one or more transactions applies to the definitions of: currency dealer or exchanger; check casher; issuer of traveler's checks, money orders or stored value; and seller or redeemer of travelers' checks, money orders or stored value. The threshold applies separately to each activity -- if the threshold is not met for the specific activity, the person engaged in that activity is not an MSB on the basis of that activity."
Literally two years ago in May of 2011 when Mt Gox filled out the
forms, Bitcoin was not considered by most people to be a "currency".
[1] - http://www.fincen.gov/financial_institutions/msb/definitions...
[Can] Corn be a "store of value". What about gold? Or oil?
The whole point of the 'Money Services Business' designation which Bitcoin just ran into is to enforce standard regulations for all 'Financial Institutions'. The definition of 'Financial Institutions' already includes brokers, broker-dealers, exchanges, etc.[1]
So [is] a corn broker considered a money exchanger/transmitter?
It's all there. The concept of a 'bitcoin' isn't actually very original, people have invented dozens of currencies and other schemes to launder money and avoid taxes. Whether or not that was Bitcoin's intent, it's going to have to play by the rules as if it were.
[1] - http://www.fincen.gov/financial_institutions/msb/definitions... [2] - http://www.ecfr.gov/cgi-bin/text-idx?c=ecfr&SID=b49834e1...
This isn't even close to as cut and dry as you are trying to make it sound.
For once this at least seems like a legitimate takedown.
And when the evidence is presented in a stark, context-free, spin-managed manner, casual observers tend to agree with the charges. There was no question the feds would take an interest in Bitcoin with desire to take it down, and duly analyzed all paperwork from that perspective until they found an excuse to. Require enough paperwork, and somewhere a sufficient transgression will be found.
I agree that the quote is overblown in this context, but your argument is a strawman. Ayn Rand made strong intellectual arguments in _support_ of government and the rule of law, in contrast to anarchists and various flavors of libertarians.
Governments, in practice, do tend to be sources of substantial amounts of "evil" behavior. Probably the largest source, outside of religious institutions. So while your attempt at sarcasm is appreciated, it's pretty off base.
there is no such thing as a justified law
Nah, limit "law" to nothing more than a collective extension to our innate, individual right to self-defense[1], and you'd find very few arguments against it, even from radical libertarians.
(a) The best and moral thing for you (or anyone) to do is to act in your own self-interest, i.e., in the pursuit of your happiness
(b) The governmental system that best allows this is one in which each individual is sovereign as long as they don't impinge on another's sovereignty. i.e., _initiating_ force is diasllowed, but retaliatory force under objective control (i.e., the government) is allowed.
Of course, establishing (a) and (b) objectively requires many dissertations-worth of philosophy, but I think it can be and has been done. And fortunately, they are intuitively plausible.
I wouldn't call rights "innate," but some people do. More often, people arguing for "innate" rights are just making an assertion.
In this case, I am taking an intuitive approach, based on the idea that if I exist, I can choose to defend myself, and I can do so without initiating any forceful action against anyone else. And if I choose not to defend myself, I (presumably) stand to cease to be. IMO, that makes "self-defense" what one could reasonably refer to as an innate[1] right.
It seems like you're arguing that a right is something that you can choose to do, as long as it doesn't involve using force against someone. I agree with that, but it begs the question. Why _can_ you choose to do anything you want? And why _can't_ you initiate force against people? My earlier answer is a starting point that connects rights to ethics.
Speaking of which, you're wrong that the question reduces to metaphysics and epistemology. I mean, it does, but only indirectly. Actually, the hierarchy is:
metaphysics (what exists)
epistemology (how we know it)
ethics (what is good) <- you left this out
government (what is good in a social context)
Right, that question is exactly why I say that it devolvees into an argument over metaphysics and epistemology. Also, I acknowledge what you say about including ethics, although my opinion on that is that ethical discussions also - at some level - devolve into discussions of epistemology and metaphysics.
"What is good in a social context" is a less important question to me. I don't believe in trying to "engineer" social good by manipulating our view of what is or isn't a "right" of an individual. Society, to me, is just an emergent aspect of the interactions of individuals. I believe you have to start with what individuals can or cannot rightly do, and accept whatever consequences that may entail.
Well, you need epistemology and metaphysics to reason about ethics. I mean, if you deny basic facts of reality and/or have no means to valid knowledge, you won't get very far.
Given those, though, ethics really hinges on looking at the nature of a human being. For a human being, is there any need or method to figure out what is "good" and what is "bad"? That is how you end up getting to my original point (a).
> "What is good in a social context" is a less important question to me. I don't believe in trying to "engineer" social good by manipulating our view of what is or isn't a "right" of an individual. Society, to me, is just an emergent aspect of the interactions of individuals. I believe you have to start with what individuals can or cannot rightly do, and accept whatever consequences that may entail.
I agree. But that's because of the implications of (a). And you still have to figure out how we're all going to get along. That's all I meant by, "What is good in a social context."
No, I do not. Anybody who has even a passing familiarity with history should be able to recognize the truth in my comment. Beyond that, this discussion isn't important enough to me to justify going out and treating it like a research project and providing citations and sources in meticulous detail.
OTOH, perhaps I am wrong. So be it.
That's a pretty broad statement.
"no matter how deep you go eventually you have to make a leap of faith off of the rationality train."
The same is true of mathematics. Eventually you need to make certain assumptions that cannot be proved, or else you would have circular logic (among other issues).
The real mark of irrationality is an unwillingness to resolve or even acknowledge inconsistencies. Some religions have this feature, usually dressed up in a "this tests your faith" argument. Other religions demand that inconsistencies be resolved by religious authorities or by practitioners willing to devote time and effort.
In the past century, a large number of religious leaders from various religious have adjusted their doctrines and teachings in the face of scientific results. Not every religion is based on denying reality or condemning people who question core beliefs. I know an ultra-Orthodox rabbi who acknowledges that it is possible to be an observant, orthodox Jew who does not believe in God.
2) Mathematics is based on logic, which doesn't need phenomenal "facts", just logical consistency. Physics, which uses mathematics needs both phenomenal facts and logical consistency, and since the more phenomenal facts can be discovered, the physical models can change. Mathematics is a tool of rationality, not a replacement for it.
3) Somewhat agreed that irrationality is an unwillingness to accept models rationally created. If the model of a system isn't created by phenomenal facts and logical consistency, then it is irrational.
The problem is that for most interesting math, we can only assume without proof that there is logical consistency.
I have never understood why having my rights denied, trampled upon and generally treated as nonexistent is considered a great evil when done by "government", but a great and necessary moral victory when done by "the free market".
I also do not understand how anyone can look at, say, the first few stages of the industrial revolution -- when, for example, in the United States any attempt to protect the innate rights of workers was viciously struck down in service to the great "freedom" of contract -- and believe that markets will solve problems on their own, or that government has no place beyond a bare minimum of defense of property.
But then, people also don't read Thomas Hobbes anymore, because even though he was right about the state-of-nature thought experiment, his ideas on its consequences are no longer fashionable.
Speaking as an Objectivist, the quote is becoming somewhat apt for the us financial industry, which is (and long has been) by far the most government-controlled industry. But its not yet apt for bitcoin in particular.
BINGO. Give this man a cookie. This kind of thing was inevitable, and you'd have to be blind to think the US Government is OK with even the idea of an unregulated currency like Bitcoin... even though it's not actually "anonymous" in the sense that some people claim. The fact that, combined with Tor it can be used in a pretty-damn-close-to-anonymous manner, and that it could enable a completely separate side/underground economy if it ever become popular enough (even without the ability to convert in and out of USD) you have to figure the US Gov (and other world governments) are going to take efforts to hinder its adoption. Why? Because control of money == power. And governments don't like it when the little people take back a little bit of their power.
2) There is already a completely anonymous store-of-value allowing a underground economies: plain old face-to-face USD cash transactions. Ever seen drug lords busted with stacks of USD bills?
3) The US govt is ok with transactions in a currency they don't control: it is perfectly legal to pay, for example, in Iranian rial on the US territory, if the seller and buyer agree to use this currency.
You seem to be some sort of tinfoil-kind-of-guy who thinks the government is out there to "stop Bitcoin".
So you believe everything the government tells you? Because we all know that no government agency or agent has ever distorted or misrepresented the truth, ever.
There is already a completely anonymous store-of-value allowing a underground economies: plain old face-to-face USD cash transactions. Ever seen drug lords busted with stacks of USD bills?
True, but irrelevant in this context. Bitcoin and USD aren't the same thing. Try crossing the border carrying large sums of physical USD bills sometime. Bitcoins, OTOH, can be exchanged digitally. Not even close to being in the same ballpark.
The US govt is ok with transactions in a currency they don't control: it is perfectly legal to pay, for example, in Iranian rial on the US territory, if the seller and buyer agree to use this currency.
Again, this is irrelevant, as using Iranian rial is even less convenient than using USD, at least in the US.
You seem to be some sort of tinfoil-kind-of-guy who thinks the government is out there to "stop Bitcoin".
Please refrain from personal attacks, this is not Reddit. I trust our government about half as far as I can throw it, but that doesn't make me a "tinfoil guy". It makes me somebody who has at least a passing familiarity with history and who can use a little logic, reason and inference here and there. That's all.
I'm not claiming there's some big, grand, X-Files like conspiracy going on here... but to ignore the fact that the US Government has many reasons to try to quietly put the screws to bitcoins seems unreasonable to me.
And yes, I do think you are ludicrous to see FinCEN's statement as not representing their true desires.
If the US govt was truly after Bitcoin you would see the Congress starting talking about laws against it, rather than a lawsuit about "so and so did not register as an MSB".
Perhaps, but the only reason that is relevant to attacking a Bitcoin exchange is if Bitcoin cannot survive without exchanges. I personally agree with that view, as everything I have seen suggests that no standalone Bitcoin economy is possible. On the other hand, a large number of people in the Bitcoin community disagree and seem to think that a Bitcoin economy can be bootstrapped.
"Require enough paperwork, and somewhere a sufficient transgression will be found."
The paperwork in this case was not very complicated; it plainly asks if the business transfers money at the request of its customers, and MtGox simply answered "no." It is not as though MtGox is being investigated for not filling out paperwork or for a bad answer to an ambiguous or confusing question. MtGox was already engaged in exchanging Bitcoin for USD and was already performing transfers of money for its customers when those forms were filled out.
I agree with your general sentiment, but I seriously doubt that anyone in the government was sitting there saying, "Bitcoin is a threat, let's take it down! Start with this exchange!" More likely, some regulator somewhere saw that Bitcoin was becoming popular and said, "Let's make sure they are following the same laws that other financial companies are expected to follow." Those laws predate Bitcoin; they may have been set up to protect large banks from small competitors, or they may have been created to protect individual Americans from fraud and predatory companies, but that is an entirely separate issue.
They are not licensed as a money transmitter in my state of Indiana, nor are they licensed in others. They also routinely hold funds past the 10 day statutory time allowed by most states they are licensed in.
My knowledge was a few months out of date, and I didn't check the license page for updates.
However, that still does not invalidate my claim that paypal grossly violates money transmission acts by regularly holding money past most statue times.
The rest of them are here: https://www.paypal-media.com/state_licenses.cfm
Most of these laws are just a way to increase seizures so the USG can continue to grow, raiding the population. Just so happens this particular one is federal, instead of local cops and DAs.
E-Gold got used by customers even sketchier than anything I've seen BTC used for -- I used to think of it as the carder currency, but it was also heavily used in the CP world, I think. They really hated e-gold, but chose to use the MSB laws against it.
I know the e-gold guys tried to go out of their way to be as compliant as possible, too. They were fundamentally pro-liberty/pro-gold people, not involved in the "sketchy" business, and had been fully cooperating with authorities as much as they could (e-gold was not really about anonymity as much as "honest money"; they had bank-level KYC requirements for accounts at some point, although initially they had none.).
The interesting question is whether fully KYC/etc. compliant Bitcoin businesses will be allowed to register as MSBs, or if there will be artificial roadblocks put up. One issue is the global pseudonymous network that is Bitcoin once it leaves a KYC-compliant site, but that isn't too different from either a KYC-compliant bank that pays out physical cash or one which sends SWIFT wires to overseas banks with more lax KYC requirements (or issues prepaid debit cards).
e-gold was actually incredibly popular for online gambling and participating in HYIP(short term Ponzi schemes). Not exactly the most squeaky clean activities, but not exactly terrorism or whatever else the feds used to shut down e-gold.
The HYIP stuff was amazing. I don't remember it being so popular for gambling. The other gold currencies which turned out to be scams (osgold, etc) were super lulzy too.
Were the FinCEN rules in effect on May 20, 2011? I see this on the "Guidance"[0] released in March (starting the "background" section):
>On July 21, 2011, FinCEN published a Final Rule amending definitions and other regulations relating to money services businesses ("MSBs").4 Among other things, the MSB Rule amends the definitions of dealers in foreign exchange (formerly referred to as "currency dealers and exchangers") and money transmitters.
Separately, since the guidance was issued, there seems to have been wide-spread confusion / misinterpretation. If they ignored it after this was issued, then they obviously were in violation, but before? How do ambiguous-interpretation cases get handled?
[0]: http://fincen.gov/statutes_regs/guidance/html/FIN-2013-G001....
It doesn't really matter, because while the form is referenced, the alleged crime supporting the warrant isn't incorrectly filling out a form on May 20, 2011, it is conducting unlicensed money transmission business.
Just because the Government say it's "wrong" doesn't mean it actually is.
Ignorance of the law is no excuse, and it is doubtable that this is even a case of ignorance.
https://news.ycombinator.com/threads?id=thinkcomp
https://news.ycombinator.com/item?id=5398074
Edit: He also just filed his lawsuit against virtually every VC and payment startup, including Dwolla.
http://www.daniellemorrill.com/2013/05/lawsuit-names-slew-of...
http://www.scribd.com/doc/139975904/Aaron-Greenspan-lawsuit
The timing, and the previous comments made by him directly referencing this issue and Mt. Gox is very suspicious.
Is Coinbase safe? Is BTC-E?