U.S. Treasury to Bitcoin: We Are Watching

Two years ago, when Gavin Andresen, the lead developer of the Bitcoin software was invited by the CIA to present his thoughts on the experimental cryptocurrency, it was the first indication that federal agencies were beginning to take interest. But in the two years since he made the trip, it's been unclear whether the financial arms of the government were as hip to the technology as their friends over at Langley.

Well, now we know. The U.S. Department of Treasury has been watching not only Bitcoin, but all virtual currencies. And this week, the Financial Crimes Enforcement Network (FinCEN) published a list of guidelines intended to help money transmitters who deal in virtual currencies to comply with the Bank Secrecy Act.

Many in the Bitcoin community suspected that some kind of regulation was fast approaching. The currency has had a few significant growth spurts of late, attracting new users from the Kim Dot Com's empire of filesharing followers and from the folks at Reddit. And, in fact, most didn't think the news would be as good as it is. 

Despite rather vague guidelines for compliance, the document makes one crucial thing very clear: Bitcoin is money. The document takes this point for granted as it describes a system exactly like Bitcoin:

"A final type of convertible virtual currency activity involves a de-centralized convertible virtual currency (1) that has no central repository and no single administrator, and (2) that persons may obtain by their own computing or manufacturing effort."

"We're glad Bitcoins are considered money," says Anthony Gallippi, the chief executive officer of BitPay, a Bitcoin payment processor. "Because we consider them money and we're glad they agree with us."

The Bank Secrecy Act requires any financial institution that can be defined as a money transmitter to register with FinCEN and help detect money laundering by keeping track of its clients and by reporting suspicious activity. Those entities that facilitate the exchange of Bitcoins for fiat currency will have to take note. This includes any exchanges that run their businesses on U.S. soil.

Mt Gox, the biggest online exchange moved its home base over to Japan after an early period of nomadic country hopping. However, they recently joined forces with Coinlab, a Bitcoin startup in Seattle, and Silicon Valley Bank, which together will begin handling transactions in the U.S. and Canada at the end of March. When this happens all of Coinlab's transactions will be regulated by the Bank Secrecy Act.

Mt. Gox already requires oodles of information from its clients and restricts high value transactions. As the most respected exchange, it seems they have already made an effort to be the most compliant as well. Coinlab claims that they are already registered with FinCEN.

As for BitPay, Gallippi says that services like his will not be subject to the regulation, claiming that as a payment processor his company falls under a standard exemption.

"It's business as usual for us. Nothing's really changed," he says. And if it does, they are already prepared. "All our merchants fully identify themselves. We know their bank accounts."

Nor do these guidelines change the story for people who are just using Bitcoins to make purchases. These activities fall outside of the Bank Secrecy Act.

The only people who are left somewhat in the dark are Bitcoin "miners" whose combined computing power processes and secures every transaction on the Bitcoin network. The work they do rewards them with newly minted Bitcoins, and this is how new currency enters the system.

Here's what the guidelines have to say about this group.

"A person that creates units of this convertible virtual currency and uses it to purchase real or virtual goods and services is a user of the convertible virtual currency and not subject to regulation as a money transmitter. By contrast, a person that creates units of convertible virtual currency and sells those units to another person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter. In addition, a person is an exchanger and a money transmitter if the person accepts such de-centralized convertible virtual currency from one person and transmits it to another person as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency."

In other words, if miners use their reward Bitcoins within the Bitcoin economy, it's no problem. But as soon as they use them to buy a physical currency, they become money transmitters and are subject to the Bank Secrecy Act. Registering for this kind of thing is burdensome, sure.

But Bitcoiners may have something even bigger to worry about. Forcing these individuals to register with FinCEN means forcing them to self-identify as miners. Compliance would put a map of Bitcoin's internal anatomy (at least those organs that lie in U.S.) in the hands of the government, a map that would be very useful if they ever wanted to make a quick strike at its heart.

Perhaps they've been watching more closely than anyone thought.

Image: iStockphoto

Advertisement

Tech Talk

IEEE Spectrum’s general technology blog, featuring news, analysis, and opinions about engineering, consumer electronics, and technology and society, from the editorial staff and freelance contributors.

Newsletter Sign Up

Sign up for the Tech Alert newsletter and receive ground-breaking technology and science news from IEEE Spectrum every Thursday.

Advertisement