The Bitcoin Foundation caught the attention of California’s Department of Financial Institutions after last month’s Bitcoin 2013 conference and this prompted the CFDI to send a cease and desist letter alleging that the Foundation was engaged in “the business of money transmission without a license or proper authorization.” An odd cease-and-desist to say the least because as far as everyone who attended Bitcoin 2013 or has seen the Bitcoin Foundation’s mission statement, the organization doesn’t engage in money transmittance.
According to a Forbes article written by Jon Matonis, a member of the Bitcoin Foundation’s Board of Directors, the penalties for violating this California law could be quite stiff—although, as noted, California does seem to be confused about what the Bitcoin Foundation does:
If found to be in violation of California Financial Code, penalties can be severe ranging from $1,000 to $2,500 per violation per day plus criminal prosecution which could result in fines and/or imprisonment. Additionally, it is a felony violation of federal law to engage in the business of money transmission without the appropriate state license or failure to register with the U.S. Treasury Department. Convictions under the federal statute are punishable by up to 5 years in prison and a $250,000 fine…
One activity that the foundation does not engage in is the owning, controlling, or conducting of money transmission business. Furthermore, that activity would also be against the original charter of the foundation. As general counsel for the Bitcoin Foundation, Patrick Murck has lead responsibility for corresponding with the California Department of Financial Institutions.
Matonis leaves us some speculation that it’s unknown if this is part of a blanket action against all Bitcoin-related interests in California or if it was specifically targeted at the Bitcoin Foundation at the time because of its visibility. The cease-and-desist order (available here on Scribd) is dated May 30th, 2013—a mere 10 days after the Bitcoin 2013 conference—and states that it requires a response within 20 days.
Bitcoin and government regulation of money
The Forbes article goes into how small vendors and mobile payments processors have seen some regulatory heat (or in the opposing parlance a chilling effect.) However, we could take a look at how Bitcoin has increasingly been under scrutiny by the world as much as the United States when it comes to regulation.
Watchdog groups have cited Bitcoin as a possible obfuscation source for money laundering (only a concern once you ignore that anything can be used to launder money) and even the FBI showed concern over Bitcoin’s attractiveness to criminal activity. Later into 2013 money laundering and Bitcoin flared up again as anti-money laundering regulations began to be sought to track large payments in virtual currencies, although it’s hard to see how it affects BTC directly any more than it affects any large money exchange.
Early in May 2013, the US Department of Homeland security seized the Dwolla account of Mt. Gox in an apparent disagreement about money transmittance and federal law.
Canada, without apparent prompting, decided to let the Bitcoin exchanges in their jurisdiction know that they didn’t thing exchanges were in the business of transmitting money. FINTRAC, a financial reporting and analysis agency for the Canadian government, sent out letters to exchanges in their country to let them know they likely had little to worry about.
Also in May the Liberty Reserve (a value exchange service) was shut down by the US US Department of Justice and this caught the attention of the Bitcoin community.
More than likely, the CFDI is mistakenly jumping the gun with their cease-and-desist order and threatening legal language to the Bitcoin Foundation—especially noting that the Foundation doesn’t engage in any of the activity alleged in the letter in the first place—but it might be the first of many such mistaken letters to be seen in the future. Bitcoin is just barely beginning to make its mark in the popular media, already it has foothold enough to appear in major press sites such as Forbes, but the impetus to actually research and contact organizations that are involved in the Bitcoin community will still be on attorneys and politicians.
It’s currently hard to see this action as part of anything more than a state government feeling out what Bitcoin is and not making an effort to fully understand what Bitcoin is or what the Bitcoin Foundation does.