Mr. Bitcoin goes to Washington

by on June 13, 2013 · 28 comments

Today I had the great pleasure of moderating a panel discussion at a conference on the “Virtual Economy” hosted by Thomson Reuters and the International Center for Missing and Exploited Children. On my panel were representatives from the Bitcoin Foundation, the Tor Project, and the DOJ, and we had a lively discussion about how these technologies can potentially be used by criminals and what these open source communities might be able to do to mitigate that risk.

The bottom line message that came out of the panel (and indeed every panel) is that the Tor and Bitcoin communities do not like to see the technologies they develop put to evil uses, and that they are more than willing to work with policymakers and law enforcement to the extent that they can. On the flip side, the message to regulators was that they need to be more open, inclusive, and transparent in their decision making if they expect cooperation from these communities.

I was therefore interested in the keynote remarks delivered by Jennifer Shasky Calvery, the Director of the Treasury Department’s Financial Crimes Enforcement Network. In particular, she addressed the fact that since there have been several enforcement actions against virtual currency exchangers and providers, the traditional banking sector has been wary of doing business with companies in the virtual currency space. She said:

I do want to address the issue of virtual currency administrators and exchangers maintaining access to the banking system in light of the recent action against Liberty Reserve. Again, keep in mind the combined actions by the Department of Justice and FinCEN took down a $6 billion money laundering operation, the biggest in U.S. history.

We can understand the concerns that these actions may create a broad-brush, reaction from banks. Banks need to assess their risk tolerance and the risks any particular client might pose. That’s their obligation and that’s what we expect them to do.

And this goes back to my earlier points about corporate responsibility and why it is in the best interest of virtual currency administrators and exchangers to comply with their regulatory responsibilities. Banks are more likely to associate themselves with registered, compliant, transparent businesses. And our guidance should help virtual currency administrators and providers become compliant, well-established businesses that banks will regard as desirable and profitable customers.

While it’s true that FinCEN’s March guidance provides clarity for many actors in the Bitcoin space, it is nevertheless very ambiguous about other actors. For example, is a Bitcoin miner who sells for dollars the bitcoins he mines subject to regulation? If I buy those bitcoins, hold them for a time as an investment, and then resell them for dollars, am I subject to regulation? In neither case are bitcoins acquired to purchase goods or services (the only use-case clearly not regulated according to the guidance). And even if one is clearly subject to the regulations, say as an exchanger, it takes millions of dollars and potentially years of work to comply with state licensing and other requirements. My concern is that banks will not do business with Bitcoin start-ups not because they pose any real criminal risk, but because there is too much regulatory uncertainty.

My sincere hope is that banks do not interpret Ms. Shasky Calvery’s comments as validation of their risk-aversion. Banks and other financial institutions should be careful about who they do business with, and they certainly should not do business with criminals, but it would be a shame if they felt they couldn’t do business with an innovative new kind of start-up simply because that start-up has not been (and may never be) adequately defined by a regulator. Unfortunately, I fear banks may take the comments to suggest just that, putting start-ups in limbo.

Entrepreneurs may want to comply with regulation in order to get banking services, and they may do everything they think they have to in order to comply, but the banks may nevertheless not want to take the risk given that the FinCEN guidance is so ambiguous. I asked Ms. Shasky Calvery if there was a way entrepreneurs could seek clarification on the guidance, and she said they could call FinCEN’s toll-free regulatory helpline at (800) 949–2732. That may not be very satisfying to some, but it’s a start. And I hope that any clarification that emerges from conversations with FinCEN are made public by the agency so that others can learn from it.

All in all, I think today we saw the first tentative steps toward a deeper conversation between Bitcoin entrepreneurs and users on the one hand, and regulators and law enforcement on the other. That’s a good thing. But I hope regulators understand that it’s not just the regulations they promulgate that have consequences for regulated entities, it’s also the uncertainty they can create through inaction.

Ms. Shasky Calvery also said:

Some in the press speculated that our guidance was an attempt to clamp down on virtual currency providers. I will not deny that there are some troublesome providers out there. But, that is balanced by a recognition of the innovation these virtual currencies provide, and the financial inclusion that they might offer society. A whole host of emerging technologies in the financial sector have proven their capacity to empower customers, encourage the development of innovative financial products, and expand access to financial services. And we want these advances to continue.

That is a welcome sentiment, but those advances can only continue if there are clear rules made in consultation with regulated parties and the general public. Hopefully FinCEN will revisit its guidance now that the conversation has begun, and as other regulators consider new rules, they will hopefully engage the Bitcoin community early in order to avoid ambiguity and uncertainty.

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  • Let’s Talk Bitcoin!

    Ms. Calvery’s remarks don’t give me a warm feeling, she acknowledges that uncertainty is causing major concerns among financial institutions, then declines to take the opportunity to do anything to clarify the situation.

    Do you think this is a good outcome Jerry?

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  • Cypherpunk

    The ‘guidance’ seems very clear to me. Any who doesn’t have millions to spend on compliance won’t be allowed to play. The effect will be that bitcoin companies in other countries will have a huge cost advantage over U.S. companies and will eventually push them out of the market. Bitcoin’s biggest advantages are removing barriers and restoring privacy in financial transactions. Unless the regulators can embrace that, the only result will be that the U.S. gets left out of the new digital economy.

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  • Jaime Gladish

    I hadn’t heard a lot of this, thank you for the article. It’s unfortunate that the regulations have the effect of keeping the smaller players out of the deal.

  • Mirco Romanato

    If US exchangers are burdened with too much regulation, this will slow down the adoption of Bitcoin in the US. But it will not slow down the adoption elsewhere where regulation are lighter. And, at the end, people with Bitcoin could find out is better for them to keep them and use them and never convert them in fiat.

    And on the other hand, when regulations are in place it is difficult to change them. So, if Bitcoin continue to grow, its economy will grow totally at the expenses of the US$.

  • ijere

    What does he going there to do…

  • andrea

    as soon as Bitcoin even ATTEMPTS to be regulated under the guise of Good bussines, I,m OUT!
    This is NOT what bitcoin users envisioned , we want to be UN REGULATED, regulation is very offensive to any upstart, I hope that the “powers that be” at bitcoin will NEVER I mean , NEVER EVER ,even consider this option. they will be taken over, pushed out and the whole thing will be destroyed,
    Bit coin, do not fall for any of this talk, they will only buy you out regulate you to death and bury Bitcoin , never to be seen again.
    New laws will pop up making any cyber-currency illegal at all.

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  • Jerry Brito

    I don’t know yet. I’m optimistic that at least regulators and members of Congress are not overreacting the way we initially saw Sen. Schumer overreact to the Silk Road story, for example. At the conference regulators and law enforcement all echoed Shasky Calvery saying they understood the amazing potential of Bitcoin even if there are some bad uses, so that’s good. But then you also heard some pretty unhelpful comments like the one i quote above.

    So what I see are just very tentative steps on all sides. I didn’t expect FinCEN to redo its guidance, but at least they’re signaling that they’re willing to talk about. So I hope the Bitcoin community does get in touch with them and does start asking questions about particular use cases. We need to get them to state publicly how they interpret the rules and the guidance in particular cases. If they refuse, then there are other steps the community can pursue.

  • Jerry Brito

    I agree. This is a point I make when I talk to policymakers. There is no stopping Bitcoin. All regulators can do is hobble its legal uses domestically. That helps no one.

  • Jerry Brito

    I agree. This is a point I make when I talk to policymakers. There is no stopping Bitcoin. All regulators can do is hobble its legal uses domestically. That helps no one.

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  • CoinComply

    Thanks for writing this up Jerry. I was also there and was impressed by the passion of your panelists and their understanding of the issues. From a banking perspective, I can tell you that operating in the most heavily regulated industry makes us very wary of opening a banking relationship with a digital currency exchanger or dealer because of the perceived inherent risks and the way the banking regulators view the industry. If they don’t understand it, then they come down hard on the banks that bank them. That’s why banks are shy on these companies. The FinCEN regulation goes a long way in legitimizing the industry and making it a contender for traditional banking services. They only way Bitcoin survives is in a legit market.

  • Rassah

    Don’t worry. Bitcoin itself is unregulatable.

  • Rassah

    “Again, keep in mind the combined actions by the Department of Justice and FinCEN took down a $6 billion money laundering operation, the biggest in U.S. history.”

    It’s so awesome that they took down $6 billion worth of money being sent back and forth, instead of actually stopping and arresting $6 billion worth of crimes and criminals pats on back

  • Adrian

    Bitcoin is not in their control, they do not like that, whatever they say, they will attempt either to control it or destroy it.
    Having a currency that operates according to free market principles (as far as that is ever possible) is not issued any anyone, and allows people to hide wealth in their heads with a brain wallet is something they abhor.
    They will attempt to control it, but since they can’t do that, then my guess is that they will try to destroy it, through over regulation, demonisation, propaganda and market manipulation.
    They have to destroy it because they can’t control it, they can’t even bring out their own version because most people will say, we’ve already got one thanks, why should we trust you.
    No, I think, ultimately, they have to wage war against Bitcoin, because it’s everything that money should be.

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  • freeme

    The economic slaves to the current currency world are waking up and freeing themselves from their bonds. The cows are learning to fly and bitcoin is one of the first steps to full freedom and choice of where you transact life force energy. Jurisdictions as we know them today are going to morph into a bidding war for your business. In Minnesota we can see the beginnings of this as the schools are advertising for you to enroll your child. Deregulation is the trend and big governments are going to eventually be too big to sustain. I welcome bitcoin and all the other digital decentralized currencies, they are our path to true freedom and choice on this planet as the internet slowly integrates more and more into our daily lives

  • daphne

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  • qikcoin

    Schumer overreacted because there was no one in the bitcoin community to reach out (or who had previously reach out) to him to explain the technology. That was June 5th 2011. Where are we now with getting out in front of the message to the general public about bitocoin?

  • qikcoin

    And due the regulatory hurdles this will drive many bitcoiner underground forcing them to work against the desires of the regulators instead of trying to work with them. This “guidance” has effectively shut out 99% of the unfunded bitcoin business from the market.

  • JoeCascio

    I have to disagree a bit with this. Yes, at the time Schumer made his little outburst, there weren’t a lot of visible places to go to learn about bitcoin. But as we’ve seen just recently with the CA Dept. of Financial Institutions, government functionaries and in particular members of Congress frequently are less interested in learning anything than blustering shows of force, sabre-rattling and grandstanding.

    Clearly, the CA department did almost zero investigation into the Bitcoin Foundation and what it does, even though TBF’s mission is plainly and openly stated on its website. I doubt Schumer would have done much more even if he’d had resources at his disposal. So I agree that the bitcoin community has to be very proactive about explaining more to government about bitcoin and in particular show how much promise it holds in financial innovation.

    The country that embraces bitcoin could become, like Switzerland has been for many years, a global hub of finance.

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