In first enforcement action tied to popular new online currency Bitcoin, US seizes account

Two months ago, the US government fired its first warning shot at the booming world of virtual currencies. The US Financial Crimes Enforcement Network issued guidance applicable to all virtual currencies, such as Bitcoin. It announced that all currency traders and possibly even currency users would be regulated as money transmitters.

Last week, the US government demonstrated it was serious in its intent to rein in virtual currencies when the Department of Homeland Security seized an account linked to the virtual currency exchange, Mt. Gox. Based in Toyko, Mt. Gox is the primary exchange for users of Bitcoin, the largest and most widely-used virtual currency.

The account seizure comes at a time when virtual currencies in general, and Bitcoin in particular, are causing consternation among financial institutions and regulators. Bitcoin’s decentralized online network offers users the ability to conduct transactions internationally with complete anonymity. This has led many law enforcement and financial services officials to fear that it could become an ideal money laundering vehicle.

US moves against Bitcoin exchange for noncompliance with FinCEN regulations

On May, 14 DHS obtained a seizure warrant on the Bitcoin account maintained at the Iowa-based online payment processor Dwolla by a Mt. Gox subsidiary. The DHS justified the seizure on the grounds that it was operating as an “unlicensed money transmitting business,” according to the affidavit for the seizure warrant filed in the federal court in Baltimore.

The affidavit by Homeland Security Investigations Special Agent Michael McFarland states that Mt. Gox owner Mark Karpeles misrepresented the account in 2011when he opened it in the name of a Delware-based subsidiary, Mutum Sigillum. In the account application forms, Karpeles allegedly answered “No” to the questions, “Do you deal in or exchange currency for your customer?” and “Does your business [transmit money] for customers?” McFarland also stated that neither Mutum Sigillum nor Mt. Gox registered as a money transmitter with FinCEN, as required by law.

The seized account was used by Mt. Gox to clear US dollar trades in Bitcoins, allowing users to purchase Bitcoins in US dollars or sell existing Bitcoins, the affidavit says. It is unclear if Mt. Gox has other US-based accounts or if the seizure effectively cuts off the exchange’s ability to deal in US currency.

Bitcoin draws eye of regulators as value and use soar

Unlike traditional, or “fiat” currency issued by governments, Bitcoin operates solely online through a peer-to-peer network of Bitcoin users. The value of a single Bitcoin is not fixed, but varies based on how the currency is trading against other traditional currencies, such as US dollars, on exchanges like Mt. Gox.

The Homeland Security Investigations seizure is the first legal action taken against Bitcoin, which has exploded in popularity and value in the past year. Worth less than a cent when first issued in 2010, the value of one Bitcoin peaked at $266 last month. While primarily still traded online, a growing number of real-world stores and even bars and restaurants have begun accepting Bitcoins.

In a podcast on ACFCS.org last month, which is archived on the website, Patrick Murck, General Counsel of the Bitcoin Foundation, said the currency welcomes greater scrutiny from regulators. He said that major Bitcoin exchanges, such as Mt. Gox, were paying close attention to FinCEN regulations and seeking to comply. He added that the increased oversight should allay concerns that Bitcoin would become a conduit for illicit proceeds.

While the account seizure may hamper Mt. Gox’s access to its US customers, it does not appear to have significantly impacted Bitcoin as a whole. Bitcoins have recovered their value after dipping slightly in the wake of the account seizure and are now trading higher than immediately before the seizure, at $122 as of May 21.

Banks remain dubious of virtual currencies

Whether financial institutions will warm up to Bitcoin and its currency exchanges remains doubtful. Last week, the ACFCS 2013 International Financial Crime Conference featured a panel examining the anti-money-laundering issues in virtual currencies. Representatives of major banks discussed their institutions’ approach to Bitcoin. The consensus among AML officers was to steer clear of a customer or account linked to virtual currency trading, viewing them as a serious compliance risk.

It is not yet clear if Karpeles, the owner of Mt. Gox, will face criminal charges related to the seized account. Under Title 18 US Code Section 1960, which allows the US government to seize property linked to an unlicensed money transmitting business, a person may face up to five years in prison for operating an unauthorized money is transmitter.

View the Seizure Warrant and Affidavit Here