Exchange Regulations

            Over the past six months, several Bitcoin exchanges have faced pressure from regulators.  Some exchanges were closed down by authorities or had temporary freezes on accounts holding bitcoins. The media attention given to “problem” exchanges has threatened the legitimacy of Bitcoin.  In March 2013, US Treasury’s FINcen (Financial Crimes Enforcement Network) released an “interpretive guidance to clarify the applicability of the regulations implementing the Bank Secrecy Act (BSA) to persons creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies.”  Under these interpretive guidelines, an exchange is classified as a Money Services Business (MSB).  MSB’s are required to file for a license under US law.  The guidelines are silent on whether someone who performs the functions of a Bitcoin exchange as a hobby or as a personal favor is required to register as a Money Services Business.


            The adoption of Bitcoin, a virtual currency…has been stymied by concerns over compliance with different countries' anti-money laundering and financial regulations. One of FinCEN's missions is to combat money laundering. Bitcoin's semi-anonymous transaction system has led to concerns that it could be used to hide money and avoid taxes.


            Mt. Gox, based in Tokyo, registered on Thursday with the Financial Crimes Enforcement Network (FinCEN) as a money services business (MSB), according to FinCEN's website. Registration comes just six weeks after one of its U.S. bank accounts was seized. The order alleged Mt. Gox failed to register as a money transmitting business.


            Bitcoin-24, one of the largest EUR/BTC exchanges halted operations in April after their accounts were closed by German authorities. Customers have since begun to receive funds from accounts held there. Similarly, New York-based Bitfloor had their account involuntarily closed, presumably due to regulatory matters, with many customers still awaiting the return of their funds. European exchange, Bitcoin Central, halted operations in April after it was hacked and lost hundreds of BTC held in its accounts. It is expected to reopen soon. LibertyBit, Canada’s second largest exchange before its closure, halted operations in April after their bank closed their account.


            Regulators use the same logic as with any other business accepting currency for an exchange of services, or operating as a money transmitter.  The US federal government and many states, require these businesses to file paperwork with FinCen.  Keeping track and cracking down on any exchanges not filing paperwork, has been a challenge with this new virtual currency due to the lack of oversight or backing of a central monetary authority.  Legitimate exchanges are taking the necessary steps with their filings to avoid government interference.

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