Bitcoin: no ML charges for Bitcoin exchangers

Source: Law360, New York (September 04, 2014, 7:00 PM ET) — Two prominent Bitcoin exchangers pled guilty in New York federal court Thursday to unlicensed money-transmitting charges, but escaped more serious money laundering allegations under deals with the government.
Charlie Shrem, the CEO of a Bitcoin exchange company and a prominent supporter of the virtual currency, pled guilty to aiding and abetting the operation of a money transmitting business that was not registered with the U.S. Treasury Department. Co-defendant Robert Faiella also pled guilty to operating an unlicensed money transmitting business.FCA - Bitcoin

Prosecutors had initially charged the defendants in January with scheming to sell and launder $1 million in Bitcoins. According to the indictment, Faiella sold the currency to anonymous users of the website Silk Road, a marketplace for illegal drugs. Faiella filled the Bitcoin orders through an exchange firm called BitInstant that was operated by Shrem, prosecutors said.

Both Shrem and Faiella admitted Thursday that they knew the Bitcoins were being used to buy and sell narcotics.

“I know that what I did was wrong,” Shrem told Judge Jed Rakoff during a hearing in Manhattan court. “I am pleading guilty because I am guilty.”

Sentencing for the defendants was scheduled for Jan. 20. The unlicensed money transmission charges each carry a maximum potential sentence of five years in prison. The money laundering conspiracy charges had carried a maximum punishment of 20 years in prison.

Marc Agnifilo, an attorney for Shrem, said after the hearing that the criminal conduct was “an aberration.” He added that Shrem hoped to continue working in the Bitcoin industry.

“For the most part, Charlie Shrem is on a path to making Bitcoins a more useful and acceptable currency,” Agnifilo said.

BitInstant ceased operating in July. The startup had been backed by Cameron and Tyler Winklevoss, the twin Harvard graduates who famously sued Facebook Inc. founder Mark Zuckerberg for purportedly stealing the idea for the social-networking company.

The Winklevosses said that when they first invested in BitInstant in the fall of 2012, its management assured them that it would abide by all applicable laws, including anti-money-laundering statutes.

U.S. officials shut down Silk Road in October 2013 and filed criminal charges against Ross William Ulbricht, the alleged founder of the site. According to prosecutors, Ulbricht went by the nickname “Dread Pirate Roberts,” coined after the fictional character in the 1987 cult classic “The Princess Bride.”

Ulbricht has pled not guilty.

The government is represented by Serrin Turner.

Shrem is represented by Marc Agnifilo of Brafman & Associates PC. Faiella is represented by Timothy Treanor of Sidley Austin LLP.

The case is USA v. Faiella et al., case number 14-cr-00243, in the U.S. District Court for the Southern District of New York.

–Additional reporting by Igor Kossov. Editing by Rebecca Flanagan.


Bitcoin foundation sues for common sense in Florida laundry sting trial

Back in February, Florida police officers posed as money launderers hoping to wash cash by buying bitcoin (BTC) from two men they found on FCA - Bitcoinan on-line bitcoin marketplace. Officers arrested the man and one other after they agreed to convert $30,000 in laundered money into bitcoin, according to reports. The men face charges of unauthorised money transmission.

The Bitcoin Foundation has stepped in with an amicus curiae which intends to protect the wider community of users in Florida from being closed down by ‘laws that put undue restrictions on their ability to transact with the digital currency.’ In short, if the defendants are tried for not being authorised money transmitters, the consequences for bitcoin use in the state could be significant, forcing all users to register as money transmitters.

The Bitcoin Foundation’s legal advocacy committee chair clarified the stance: “The foundation’s position at its core is this: state prosecutors are improperly applying Florida statutes regulating ‘money service businesses’ to individuals conducting peer-to-peer sales of bitcoins.”

Sting in the tail

FCA- stingThe foundation is clearly pushing to protect genuine BTC users and the use of the world’s fastest growing crypto-currency  from regulators who have not yet figured out how to manage the currency and are looking at sledgehammer tactics to close it down before it gets out of their reach. Some would argue that it already is out of their reach, it was designed that way. The only place regulators have in a BTC transaction is when it is exchanged for fiat currency.

But here is something equally important worth noting. Although the men were willing to trade BTC for funds they thought were the proceeds of fraud, and greed usually trips up the unscrupulous (see Ponzi and Advanced Fee Fraud), the cash offered never existed in the first place. It was invented for the purposes of a sting operation, a trap set by Florida State Police. I question the legitimacy of sting operations which are use widely in the US to entrap people who may never have committed a crime in the first place.


Will Asian investors trade their gold for bitcoin?

Recent overlaps between gold markets and crypto-currencies are causing a few waves in the digital currency world and as Asian gold imports continue at pace, investors in the region will be keeping an eye on bitcoin market movements. After a new gold backed digital currency launched in July, more ‘bitcoin for gold’ marketplaces are cropping up online and the bitcoin price is finally stabilising, something which observers believe make bitcoin/gold investments a viable option.

Anthem Vault, a new player in the digital currency world, launched the first, fully gold-backed crypto-currency last month. Independence Coin (INNCoin) is an open source crypto-currency, as is bitcoin, and there are only 10m INNCoins out there which can be mined, significantly fewer than the 21m bitcoins that will ever be mined. INNCoins will move a lot faster too. Anthem Vault expects all of the coins to be mined by July 2015, while the last bitcoin is expected to be mined in 2140, or thereabouts.

Bitcoin’s growth in China has been significant. In November 2013, China accounted for nearly one third of daily bitcoin transactions. Despite FCA - Bitcoinrumours circulating earlier this year, the People’s Bank of China has not banned bitcoin, as reported in Bitcoin Magazine. While regulators in China, as everywhere, are struggling to find a supervisory framework for crypto-currencies, bitcoin mining in China is a thriving industry.

Five and half years after the first bitcoin block – known as the Genesis block – was established, the currency has stabilised around the US$500-600 mark. Gold prices, however, continue to drop, and gold imports into Asia continue. China has been adding to its gold reserves for a few years, but what it plans to do with the gold is another matter. Theories that China is storing gold so it can usher in a new global currency to supercede the dollar as the world’s preferred reserve are dismissed by analysts; China would apparently need a lot more gold than it has to back the yuan in a new monetary system.

Whether China will invest in bitcoin remains as much a mystery as the real amount of gold it has in reserve, but the crypto/gold convergence continues.

In June 2014, BitPremier advertised the sale of  a Canadian gold mine; the owners will take the asking price of US$2m in bitcoin, (BTC3,423). At the time of writing, it was still on the market.

This article first appeared on

#Bitcoin: #FinCEN notes rise in BTC related SARs

The US government’s anti-money laundering overseer has published a new analysis on suspicious activity it has seen since May 2013 and for the first time ever, Bitcoin gets a mention in the report.FCA - Bitcoin

According to the Financial Crimes Enforcement Network (FinCEN) SAR Analysis for July 2014, the financial intelligence unit (FIU) is “observing a rise in the number of SARs flagging virtual currencies as a component of suspicious activity.”

The report offers readers guidance on when a Bitcoin related SAR might be filed with FinCEN which is worth noting, if only to highlight the FIU’s perspective. Financial Crime Asia’s commentary is in italics.

Information on users of crypto-currency (even when their participation in the transaction is not considered suspicious) is very useful for the analysis of the narrative. – Report information on users. 

Speculation in a volatile asset is not a criminal activity. However, speculation can share a transaction footprint with other activities that might be suspicious, (such as activity associated with High Yield Investment Programs (HYIP), or outright criminal, such as Ponzi Schemes involving Bitcoin.) – Fraudsters use Bitcoin. Report all speculation just in case. 

A cash deposits followed by a transaction to an automated clearing house or to a known virtual currency exchanger could identify entities acting as virtual currency dealers that may be acting as unregistered MSBs. – It may also denote those who are acting as registered MSB and are acting within the law

MSBs may be uniquely placed to see the funds originating from a compromised bank account destined for a virtual currency exchanger, other MSB, to other compromised accounts (at MSBs or other FIs) or for the purchase of virtual currency.

Correspondent banks able to see aggregate fund transfers to and from foreign-based virtual currency exchangers

Virtual Currency Exchangers may know when users send Bitcoin to other users who are customers of that same exchange or may be able to compare Bitcoin addresses associated with illicit activity against the activity of addresses they have issued to their customers.

Sourcce: Coindesk and FinCEN


#Bitcoin: US issues proposed regulations to mixed responses

Well, not mixed from the Bitcoin side of things. Dangerous, problematic, ridiculous, insane, absurd, Orwellian and archaic are just a few of the adjectives bandying around the comments under Benjamin Lawsky’s Reddit post of the proposed regulations. The New York Department of Financial Services Superintendent hopes the proposed rules strike a balance between protecting consumers and preventing crime while not stifling innovation.FCA - NY Bitcoins

Reddit commentator AmericanBitcoin summarised the important points of the proposed regulations:

  • 45 days for existing businesses to comply with the new regulations and register with the state.
  • Background check required for all employees/founders.
  • Fingerprints of the above submitted to FBI.
  • Requires a bond held with New York State.
  • Requires written approval of all new business activities/offerings.
  • Requires that you keep 10 years of records of business transactions.
  • Virtual currency accounts not active for 5 years must be handed over to the state.
  • Retained earnings and profits of the company can ONLY be invested in US dollars: Federal bonds, state bonds, or money market funds.
  • Mandatory reviews every 2 years: financial condition, safety/soundness of business, policies…
  • Quarterly financial statements required within 45 days of the closing of each quarter.
  • Financial statements must be audited, use GAAP.
  • Typical AML/KYC requirements.
  • Cybersecurity requirement: requires security officer, security plan, audits, backup plan.
  • In marketing/advertising, you must include “Licensed to engage in Virtual Currency Business Activity by the New York State Department of Financial Services.”
  • Must disclose a long list of material risks with dealing with virtual currency: e.g., “not legal tender, backed by any government”

If the regulations pass as they stand, they will limit the uptake of Bitcoin by retailers in the state. However, the decentralised nature of the currency means that it does not need a centre. Claims that the proposed regulations have destroyed New York as a centre for Bitcoin/Altcoin innovation could hold water, but again, on-line innovators do not need to be based in a major financial centre.

Lawsky’s direct approach to the bitcoin community via Reddit shows he and his department are tuned into where their target group picks up on news. They must have expected an onslaught of constructive and destructive criticism from Redditors. An official 45-day consultation period for the proposed rules starts on July 23rd and commentators are asked to sent feedback to the New York Department of Financial Services via the New York State Register’swebsite.

In the mean time, Financial Crime Asia is accepting comments from readers on the expected impact of the regulations.

Australia: Tiered rules proposed for mobile wallets, #Bitcoin

FSI panel suggests graduated framework.

The Government inquiry investigating regulation of Australia’s financial services industry has shied away from proposing strong regulatory action on virtual currencies and mobile wallets, suggesting a “graduated” regulation framework.FCA-BitcoinAustralia

The issue of virtual currencies, and Bitcoin in particular, has been plaguing governments the world over in recent years.

The Australian Taxation Office has been considering how it will tax the crypto-currency but recently pushed back the deadline for its ruling for a second time, seeking further expert advice.

In submissions to the current Financial System Inquiry, Australia’s largest banks complained of an uneven playing field being created as a result of unregulated new entrants into the payments space, compared to the heavy legislative burden authorised deposit-taking institutions (ADIs) are required to adhere to.

The big four banks all highlighted concerns that new, unregulated competitors – such as mobile wallet providers like PayPal and Google and alternate currencies like Bitcoin – risk upsetting consumer confidence in the stability of Australia’s financial system.

Westpac told the inquiry [pdf] that while it supported the entrance of new players in the market, all financial services needed to be subject to the same prudential regulation in order to avoid risks associated with disruption of service.

The bank urged the Reserve Bank to reconsider its recent decision to remove a series of requirements that non-ADIs were required to meet in order to participate in the payments system.

To date, new payment mechanisms and alternate currencies operating outside of the regulated payments system proposed little risk as they did not represent a “material portion” of Australia’s transaction activity, according to a submission by the National Australia Bank [pdf], but they may do so in the future.

But NAB warned that regulation will be required when these alternatives grow to a point where they are storing large amounts of value or processing material transactions.

At that point, the NAB suggested the Reserve Bank of Australia step in and do whatever it takes to stem the effect on the wider financial system and national economy.

CommBank [pdf] went as far as to call the uneven playing field a “risk to customers’ finance and personal information”, as well as the stability of the overall banking sector.

“While innovation in the system must be encouraged, allowing new players to enter an uneven playing field distorts the market. This may discourage entities which invest in the safeguards mentioned above from making the investments that have to date improved the system for customers while maintaining its stability.”

The bank was specifically concerned with the rise of virtual currencies including Bitcoin, highlighting the recent collapse of the largest Bitcoin exchange Mt Gox as one of the dangers posed by digital currencies.

“While Bitcoin is a cost efficient system, its conversion rate volatility, the recent bankruptcy of a major Bitcoin exchange, security challenges and facilitation of payments for illegal activity creates instability and poses a risk to the payments system and the economy.”

CommBank lobbied for such currencies to be closely monitored and regulated where necessary, and urged the Government to afford the same level of supervision to all members of the financial services sector, regardless of technology platform or service provider.

Suncorp [pdf] similarly urged the Government to make sure new entrants were appropriately regulated to maintain the “safety and soundness” of the payment system.

But the inquiry panel opted against offering any strong responses to these concerns, suggesting the nature and scale of the risk posed by these new entrants would first need to be established.

The panel urged [pdf] the Government to strike a balance between innovation and stability, which could best be achieved through a graduated framework approach.

Such a framework would set compliance requirements on a tiered approach based on the individual provider’s risk profile and scale.

“Failure to apply equivalent regulation may result in an uneven playing field and regulatory arbitrage. It may also incentivise those within the current regulatory perimeter to lower their own standards of compliance to compete.

However, applying the full weight of prudential or conduct regulation to small players and new start-ups, regardless of the materiality of the risk they represent, may stifle valuable innovation unnecessarily.”

– Interim Financial Services Inquiry report

Copyright © . All rights reserved.

Read more:,tiered-rules-proposed-for-mobile-wallets-bitcoin.aspx#ixzz37eOjQEhq


Source: ITNews

Bitcoin keeps on turning, AML standards body pays attention

And we’re rolling, rolling, rolling on a river… OK so, it doesn’t scan brilliantly, but any fans of crypto currency and/or Tina Turner will get the joke.

FCA - BitcoinThe Financial Action Task Force (FATF) has produced a study on the financial crime risks associated with crypto or digital currencies, a clear indicator that it is taking the newcomers seriously. The FATF is placing the risks associated with digital currency use and its potential policy responses as a priority for the 2014/15 presidency, expanding on the mention of Bitcoin (BTC) in the 2013 report on financial crime risks in new payments products and services (NPPS) report which grazed the surface of digital currency’s potential.

The report leads with a glossary of terms that the FATF has agreed upon to let readers know what they are referring to and it has adopted ‘virtual currency’ as the common denominator. Financial Crime Asia takes issue with the use of virtual to describe these new currencies that are taking the world by storm. They are, after all as real as a national debt or any fiat currencies governed by central banks; what started off as an algorithm is now worth USD615 per unit. Whether we like it or not, virtual will be the term used by the financial sector when referring to crypto and digital currencies.

The FATF weighs in from the US regulations’ angle, defining convertible and non-convertible ‘virtual currency’; briefly, convertible is something that can be exchanged for fiat currency, such as BTC or Linden Dollars used on the Second Life role playing game. Non-convertible currencies cannot be exchanged – think Q Coins or World of Warcraft Coins. Aligning BTC with currencies used in role playing games is a little confusing, given their increasing use in commerce (Expedia has started accepting BTC and pretty soon Financial Crime Asia will too) and, as pioneered by the States of Jersey last week, in investments. However, the FATF is taking notice and its report will permeate the banking sector nonetheless.

The vast majority of bankers and regulators are interested in BTC at the time of exchange into fiat currency. This is where the FATF sees the potential risks and the opportunity to offer guidance  in terms of anti-money laundering and counter-terrorist financing. That said, the power of BTC lies in its exchange for goods and services and not in whether or not you cash it in for fiat at a favourable exchange rate. Although there are some BTC speculators out there who make money on the exchange rate, the vast majority of users are trading BTC outside of the fiat system. In June, US Marshalls made a sale of USD18m worth of BTC last month and the buyer plans to use them as they are to fund the development of BTC use.

FCA -Emperors new clothesUsefully, the FATF does assess the risks posed decentralised systems of exchange. Although BTC addresses contain the information on every transaction the coin has made, unlike fiat currency, there is some concern that the user’s identifying information is not held on file. This would make monitoring suspicious transactions extremely difficult and would confound law enforcement’s attempts to investigate the malicious use of digital currency. The report looks at Liberty Reserve as an example of this, but let’s face it, LR was practically set up to launder money for crooks. Bitcoin was not. Customers on the Silk Road anonymous market place were restricted to using BTC when buying innumerable goods and services, both legitimate and illegitimate and that is a classic example of how criminals can exploit a financial system, bitcoin is simply the launderer’s new clothes.

The qualities that make BTC brilliant are also those that pose the greatest risks when held up against the fiat monetary systems and AML/CTF. BTC and other Altcoins (Litecoin, Peercoin, Ripple) using the BTC protocol are exchanging without Silk Road. They are transparent, are not bound by central governing body, some are limited by geography – see Auroracoin and Mazacoin – but most are not. We are starting to see some regulators tackle this (Germany has done so, the US is talking about it and a few countries have banned the use of BTC) but more importantly, we are stargting to see more jurisdictions adopting crypto-currency.

The FATF’s report is worth reading as an indicator of where the FATF, OECD and national governments are thinking. In the meantime, BTC keeps on trading.

Related articles

Bitcoin: Jersey announces first regulated bitcoin fund #bitcoinisle

The States of Jersey has launched what is believed to be the world’s first regulated bitcoin fund (BTC1=USD624.35) in line with its campaign to become a #bitcoinisle.FCA - Bitcoin

A Jersey based investment management firm has received approval to launch the fund, which indicates a significant step in the adoption of bitcoin and paves the way for other crypto/digital currency funds.

The Global Advisors Bitcoin Investment Fund (GABI) will be operational from August 1st. Although the fund will not be open to investment from the general public, it will mean that pension and insurance firms can invest in the bitcoin fund.

Global Advisors, a professional asset management firm,  hopes the fund will open a gateway for firms to participate in the digital currency space. Watch this video to learn more about the fund and its adoption on Jersey.

The fund is in line with Jersey’s campaign to become a world leader in digital currencies, a campaign backed and supported by, an industry body set up to encourage the use of bitcoin and make Jersey a #bitcoinisle.

Although many in the financial services sector still have reservations about the use of digital currencies, and regulation around the exchange of digital for fiat currencies, others see the benefits and potential advantages of adopting bitcoin and are in a position to act.

Jersey is the largest of the Channel Islands, a British Crown Dependency in the English Channel. Although Jersey is in the heart of Europe, it is unregulated by Europe and has its own legal and regulatory framework.

This fund will be worth following Global Advisors @GABIjersey for the latest updates leading to the launch.

Video: Scottish store drops GBP for XBT, financial inclusion in action

A high-street shop in Scotland has banned the use of pounds sterling  in its store, and is only allowing FCA - Bitcoincustomers to use bitcoin (XBT1=GBP261.80)  – for three days starting on May 13th. The store in question operates as a goods or recycling exchange; customers can bring in second hand, unwanted goods and exchange them for cash, credit or other items in the store.  This week, they will be able to trade  goods for bitcoin at the store, which will put the digital currency – or at least denominations of it – into the hands of a group of people who may never have mined nor bought bitcoin on digital exchanges.

This is  a fascinating experiment, which could spell the future of digital currency use globally. It falls far short of the nationwide ‘airdrop’ made by Auroracoin in Iceland, and the introduction of Mazacoin to the Lakota Nation but nonetheless it does make an interesting case for crypto-currencies and financial inclusion.

Scotland is seeking independence from the United Kingdom and there if the ‘Yes Scotland‘ campaign wins, the country will need to introduce a new currency. Although this experiment is nothing more than a trial on a small scale, it will introduce the concept of digital currency to the general public and could pave the way for more trials with diverse crypto-currencies. This is not about ‘banking the unbanked’ but about providing currency and economic power to a population.

Watch the report on the IB TIMES portal.

Source: IBTIMEs

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Crypto-currencies, hawala and the spectre of terrorist financing

A new protocol which is based on the chain of trust system used in hawala has been developed and it has the potential to empower people to transact pretty much anything they want to someone else, anywhere else  in the world. (Probably not the DPRK though)


Most readers of this blog are familiar with the concept of hawala  – the ancient and paperless system of transferring funds to different locations based upon trust. The sender and the recipient trust that the agent of the other side of the world will hand over the required amount of cash to the right person. Used for centuries by the South Asian diaspora, hawala’s ease of use and cost effectiveness mean it has provided fierce competition to money remittance businesses in the past and even kept them out of the market in some communities. Why use a service that only runs from Monday to Friday and will cost you ten per cent of the transaction amount when there is something that is open 24 hours a day, reaches directly into the smallest villages and costs a fraction of the rate charged by banks for a poorer service?

Enter crypto-currencies. Although not exactly without an information trail, digital currencies maintain the data of each transaction made, but not necessarily the person who made the transaction and they are traceable. They can be bought, sold, transferred or used at any time of the day or night, during national holidays and there are no geographical limitations. Some countries have tried to prohibit digital currencies and others have restricted their use, but this has had little effect on the currencies and users with access to the web have continued to use them anyway. Jurisdictions can limit or restrict the opportunities to exchange digital currencies for fiat currency, but that will have little impact on the use of non-fiat currencies overall. As this article asks, ‘What if a government banned bitcoin and no one noticed?’

So while the US and other governments are busy wringing their hands to find solutions about how to regulate crypto-currency as if it were fiat currency, new protocols and new ways to exchange value are being developed and secured every day.

Bitcoin can be used for anything – yes, even terrorist financing

News reports issued at the end of last week focused on how the US government has designated bitcoin to be a potential terrorism threat. Or at least that is what the headlines are saying.

It looks like the US government’s Department of Defence might be calling upon the expertise of crypto-currency specialists to analyse why and how terrorist groups could useFCA - Bitcoin et al to fund terrorist attacks.  Although far from being a cryptographer nor an internet protocol developer, even I can shed some light on this one.

As Bitcoin and other crypto-currencies exist as methods of transferring funds, so they will be exploited by criminal elements to launder money, to defraud and to fund everything from buying a getaway car to financing terrorism. The point about decentralised crypto-currencies is that they exist and can be used for anything.

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