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About this book

Details how new US legal issues surrounding digital currency products forced companies from the US market and caused the Treasury Department to enact stricter regulations.

Table of Contents

Frontmatter

Introduction

Abstract
For the past one hundred years, government institutions and regulatory agencies, such as the US Treasury Department, have held a monopoly over the movement of money in America. During the mid-1990s private digital currency emerged which circulates over the Internet outside of government supervision. Widely available encrypted Internet communications moved secure financial payments out of the regulated banking system and onto the unregulated Internet. Digital currency has interrupted banks’ monopoly and the government has been introducing new rules and laws trying to catch up with the new electronic version of money.
P. Carl Mullan

1. What Is Digital Currency?

Abstract
Privately issued digital currency is value that circulates over the Internet. Digital currency provides an instantly clearing accessible method of transferring funds and conducting business on a global scale. It is a code or serial number representing value that is circulated online. Most often this represents a physical value stored offline. Other decentralized virtual currency systems such as Bitcoin circulate units with a value determined by the liquidity of market supply and demand. As smaller digital currency systems become more commercially accepted by retail users and merchants, these systems also tend to evolve into highly regulated enterprises. The most important part of any digital currency system is the point where digital units are swapped for national currency providing liquidity for consumers and merchants.
P. Carl Mullan

2. Who Uses Digital Currency?

Abstract
Successful commercial digital currency systems serve different groups of users. Popular systems are used by people in areas of the world lacking in traditional bank products and services. In countries or regions of the world with large non-bank populations, digital currency offers critical services and benefits for local users. Recent changes in US regulations including the MSB Rule and the Prepaid Access Rule have had a negative effect on all US digital currency business. These restrictions apply to both US-based firms, foreign-based companies, and foreign persons engaged in US business. Significant US regulations under the Bank Secrecy Act (BSA) have blocked digital currency systems and products from the American market.
P. Carl Mullan

3. Digital Gold Currency

Abstract
Digital gold currency, or DGC as it is called, emerged in the mid-1990s and permitted complex, immediate, and irreversible financial transactions over the Internet. No restrictions on usage or identity verification made these systems instantly popular. Gold is a universally accepted monetary product and became an optimal global solution for use in digital currency systems. Digital gold currency systems, such as e-gold, held gold bullion and issued digital currency units representing small amounts of gold. Digital gold currency makes an excellent transnational currency. DGC works well as a medium of exchange for local or global trade.
P. Carl Mullan

4. E-gold

Abstract
The e-gold system emerged in 1996. For the first time in modern history, this system, backed by gold, functioned completely independent of conventional banking institutions. The e-gold software guaranteed a secure and efficient method for transmitting value and maintaining records of payment transaction information. Each digital gram of e-gold was backed by one physical gram of pure gold bullion held offline. E-gold transactions were instantaneous, could not be reversed, and cost much less than traditional bank payments. Founders of e-gold sought to create a private gold-based monetary system that included Internet-based transactions which would perform better than national currency. The e-gold system was believed to be operating outside of existing Bank Secrecy Act regulations from 1996 until 2005.
P. Carl Mullan

5. Digital Currency Growth

Abstract
HYIP Ponzi schemes helped build the digital currency industry. E-gold and other online methods of payment became popular with HYIP schemes. Many factors, such as the growth of independent exchange agents, helped to boost the usage and popularity of e-gold and digital currency. This new disruptive technology tended to exploit potential gaps in the US financial regulatory structure. In 2005, the US government started prosecuting many digital currency companies in the United States including e-gold. The application of FinCEN regulations was addressed during these prosecutions. This had a negative impact on digital gold currency in America.
P. Carl Mullan

6. Regulatory History

Abstract
Regulatory action against digital currency systems started quietly in Australia in 2004. In 2005, e-gold was raided but no charges were filed. In 2007, GoldAge, one of the original exchange agents, was closed and prosecuted. Also in 2007, the e-gold operators were indicted on multiple felony charges and the assets of about a dozen exchange agents in America were seized. Similar actions to separate digital currency businesses from US banking faculties can be seen today in the operation of US Bitcoin businesses.
P. Carl Mullan

7. Follow the Money

Abstract
The US Treasury Department, through the Financial Crimes Enforcement Network, implements, administers, and enforces compliance with the Bank Secrecy Act and associated regulations. FinCEN creates the rules that monitor and regulate all US digital currency systems and related businesses. As defined by US law, almost all digital currency businesses are considered to be financial institutions. The Money Service Business Rule (MSB) places all digital currency systems in the category of Money Transmitter Service, and forces all exchange agents, third-party processing agents, and most Bitcoin miners into the category of Money Transmitter.
P. Carl Mullan

8. Money Service Business

Abstract
On July 21, 2011, FinCEN issued a final rule clarifying money service business (MSB) definitions. It said that a money services business is a financial institution. Most digital currency businesses are MSBs. Once an entity falls into the category of a financial institution, there are numerous requirements which must be met for that entity to legally operate in the United States. MSB digital currency businesses are subject to anti-money laundering rules under the Bank Secrecy Act. This new rule also required all foreign-located MSBs engaged in US business to follow BSA regulations.
P. Carl Mullan

9. Prepaid Access

Abstract
On July 29, 2011, FinCEN published a final rule on definitions and other regulations relating to prepaid access better known as the “prepaid access rule.” All existing digital currency companies and agents engaged in US business were now considered to be operating under the “prepaid access” rule with very few exceptions. Several large digital currency companies withdrew from the US market. Bitcoin was proven to not be subject to the new Prepaid Access Rule.
P. Carl Mullan

10. WebMoney Transfer

Abstract
WebMoney Transfer started in 1998. The digital currency payment system is now the largest and most successful digital currency in the world. The Russian company’s payment platform includes a P-2-P credit purse, global payment solutions, merchant services, local payment products, online billing, and direct integration with other global financial service providers. Unlike e-gold, WebMoney creates targeted products for specific users. Because of the MSB rule and the prepaid access rule, WebMoney is no longer available to the US market.
P. Carl Mullan

11. Loom

Abstract
The Loom software is an example of powerful value transfer Open Source software that is available for anyone to download and use. It emerged shortly after the e-gold prosecution as a knee-jerk reaction to law enforcement’s large asset seizures. The system creates a private digital currency unlike Bitcoin or e-gold. The lack of identifying information available on Loom users or transactions makes this system one of the most private in the world. Regulatory agencies do not yet have the tools to properly monitor activity in products such as Loom software. When operated in a decentralized model the Loom system is one of the most private electronic value transfer systems ever created.
P. Carl Mullan

12. Bitcoin Decentralized Virtual Currency

Abstract
Bitcoin was created as an electronic version of cash. The decentralized currency is revolutionary for its use of a distributed ledger. Rather than a central ledger held by a third party requiring trust of that third party, Bitcoin distributes that ledger to all users and removes the need for a third-party intermediary. Bitcoin is becoming “money without banks” for many users. It is difficult, but not impossible, for regulatory agencies to monitor Bitcoin activity.
P. Carl Mullan

13. Early Bitcoin

Abstract
The reasons for creating Bitcoin are only speculation because the actual person or persons which created the concept is unknown. Speculation surrounds the fact that Bitcoin emerged during the 2008 financial crisis and the original block of Bitcoin contained an embedded text referencing bank bailouts. No single person, company, or group can speak on behalf of the entire Bitcoin network.
P. Carl Mullan

14. Bitcoin Mining

Abstract
Bitcoin mining is the process by which new Bitcoins enter the world. This is an online mathematical process which is generally operated as a business. The process of mining Bitcoin furnishes the computing power which operates the network. Mining builds the block chain which is a continuous public record of all transactions occurring on the network from day one. Mining generally occurs in pools of more than one user. FinCEN issued guidance on March 18, 2013, for the application of regulations pertaining to persons administering, exchanging, or using virtual currencies. This guidance seemed to state that miners are considered money transmitters with no activity threshold.
P. Carl Mullan

15. Bitcoin Differences

Abstract
Existing centralized digital currency systems derive value from assets backing the digital units. Bitcoins have no assets backing the units. They are valued from being traded in public online market. In previous digital currency systems units were non-negotiable. Bitcoin units transfer value with each transaction and hold more obvious cash-like features than previous digital currency products. Bitcoin transactions are pushed from a user account, opposite of bank checks and credit cards that are pulled out by someone other than the account owner.
P. Carl Mullan

16. Benefits and Advantages

Abstract
Private digital currency, which circulates outside of conventional bank systems, has the benefit of lower transaction costs and fees. The ability to send unrestricted payments and capital flows anywhere in the world at any time with no restrictions should always be the number one reason for using Bitcoin. Bitcoin peer-to-peer transfer process is absent of any middleman and third-party risk. There is no single point of compromise in the hardware or software that could cause the system to be vulnerable to failure, seizure, or closure. No personal information is exchanged and there is no ID theft or card fraud possible in the Bitcoin network. No requirement for PCI compliance.
P. Carl Mullan

17. Disadvantages and Barriers

Abstract
Bitcoins can be lost, misplaced, or stolen. Once the digital file is gone the value of the Bitcoins cannot be recovered. Bitcoin purchases are final and irreversible which is often negative for consumers. The network contains no anti-money laundering software and does not permit monitoring of customer accounts in order to identify suspicious cash flows and patterns which may indicate criminal activity. A large barrier to entry in the American consumer marketplace is trust. For Bitcoin to succeed on a large commercial scale in the United States the transaction and settlement experience for American Bitcoin merchants needs to be much more streamlined and certain.
P. Carl Mullan

18. FIN-2013-G001

Abstract
On March 18, 2013, the Financial Crimes Enforcement Network issued interpretive guidance clarifying the applicability of the regulations implementing the Bank Secrecy Act to persons creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies such as Bitcoin. The guidance explains only how FinCEN characterizes certain activities involving virtual currencies under the Bank Secrecy Act and FinCEN regulations. Under FinCEN’s rules a Bitcoin miner may be an administrator. This guidance clarified that Bitcoin exchanges are considered money transmitters and are required to obtain all proper licenses to conduct business in the United States. This registration and licensing process includes the federal registration as a money service business.
P. Carl Mullan

19. Global Bitcoin

Abstract
Bitcoin offers a changing landscape on a global scale. It will be important, in future Bitcoin activity, for US law enforcement to carefully interact with foreign law enforcement and international regulatory policies. Bitcoin-related business fit nicely into Germany’s existing regulations. Australia prohibits any kind of anonymous style digital currency product and has issued bank warnings. Canada offers room for Bitcoin business and does not yet see a need to license agents. While Bitcoin is popular in China, banks and businesses are now banned from trading BTC. The primary banking establishment in Thailand has issued a ban on Bitcoin.
P. Carl Mullan

20. Bitcoin Challenges

Abstract
Financial transparency is a growingglobal trend, especially in the United States. However, virtual currencies, such as Bitcoin, are moving away from greater customer identification and toward less transparency. Large differences exist between how virtual currency enthusiasts view decentralized currency and how regulatory agencies view Bitcoin. The decentralized virtual currency platform presents a challenge for money laundering investigations. In a competing US financial market, Bitcoin faces many well-funded existing bank products and tough competition from banks.
P. Carl Mullan

21. Bitcoin Merchant Services

Abstract
One possible future for Bitcoin in the United States would be as a commercial service provided by Bitcoin merchant services or BMSs. The service could deliver a turnkey payment platform taking the risk and headaches out of a merchant’s hands. BMS could handle: refunds on merchandise returns, dispute resolution, theft protection and insurance on Bitcoin wallets and trading platforms, consumer protection and guarantees on performance of Bitcoin exchange transactions, and escrow payments on money remittance and commercial transactions.
P. Carl Mullan

22. Bitcoin Opportunity

Abstract
Digital currency is fast proving its worth as a medium of exchange and a store of value. Non-bank digital currencies should legally exist in America and could serve a major role in assisting members of this large consumer market. Bitcoin delivers a simple-to-use, inexpensive, secure, globally accepted payment product to the millions of Americans presently shut out of the banking system. Continued global growth of the digital unit as a currency and payment system is anticipated.
P. Carl Mullan

23. The Future

Abstract
Digital currency brings financial freedom and opportunity for people at all levels of society. Growth in digital currency systems is likely to continue unabated for the next several decades. A recognized trend is that any user can design and issue his or her own brand of currency. It is also possible that any new BSA regulations combined with a less-than-enthusiastic US banking community could force Bitcoin payment products and companies out of the US market.
P. Carl Mullan

Backmatter

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