The Bitcoin Foundation took a decisive turn in its strategy for defending Bitcoin three weeks ago when the organization wrote its reply to a cease and desist
order from California’s Department of Financial Institutions. Rather
than meekly asking the government how the nonprofit advocacy group was
acting as a money transmitter, the organization delivered a seven-page reply
in which it laid out an argument that not only was the organization
itself not doing selling bitcoins in any way, but in fact even if the
organization was selling bitcoins the act does not constitute money
transmission under present California law. After making this argument,
the Foundation went so far as to specifically “request that your office
issue an opinion that, for the reasons explained above, the sale of a
bitcoin is not regulated under the California Money Transmitter Act.”
Now, Foundation legal counsel Patrick Murck has made his second move.
Two months ago, Liberty Reserve, an alternative payment processor known for its very weak know-your-customer policies, was shut down
and its owners arrested by the United States government. In a press
conference following the shutdown, FinCEN attorney Prret Bharara focused heavily on “anonymity” as a major reason behind Liberty Reserve’s shutdown, and weeks later a FinCEN Notice of Finding
criticized the entire category of irreversible digital payment systems.
“The fact that transactions are irrevocable, meaning that they cannot
be reversed or refunded in the event of fraud, makes it a highly
desirable system for criminal use and a highly problematic one for any
legitimate payment functions. Revocability protects users and merchants
from fraud and is a common feature of legitimate payment systems,” the
report claimed. Many have taken these words as a sign that, since the
currency has a considerably degree of anonymity and is almost completely
irreversible, Bitcoin is next. FinCEN director Jennifer Shasky Calvery
came out to reassure Bitcoin users and investors, saying that legitimate
businesses that follow the relevant laws “have nothing to fear from Treasury”, but even still many in the digital payments space seek a stronger reassurance.
It is under this background that Murck has sent another request for clarification, this time to US federal regulator FinCEN itself. The subject of the letter is a notice of proposed rulemaking
announcing a set of steps that FinCEN intends to take in order to shut
down Liberty Reserve transactions around the world. The actions are
targeted around Liberty Reserve itself; the first action listed is that
“Section 1010.660(b)(1) of the proposed rule imposing the special
measure would prohibit covered financial institutions from establishing,
maintaining, administering, or managing in the United States any
correspondent account for or on behalf of a foreign bank if such
correspondent account is being used to process transactions involving
Liberty Reserve, including any of its branches, offices or
subsidiaries.” However, especially in the context of the Notice of
Finding, the Bitcoin Foundattion is concerned that “although the special
measures contemplated by the Proposed Rule are explicitly targeted at
Liberty Reserve, many of the statements in the Proposed Rule and Finding
could be misread to apply more broadly to transactions involving
virtual currencies generally.”
The core arguments that the letter makes are the following:
- Maintaining consistent definitions is important.
Quoting the letter: “For example, the Finding describes Liberty Reserve
as a “web-based money transfer system, or ‘virtual currency.’” In doing
so, FinCEN infuses virtualcurrency with a new definition – namely, a
web-based money transfer system. This definition of virtual currency is
inconsistent with the definition FinCEN issued in its March 18,
2013Guidance … By equating virtual currency with “web-based money
transfer system” in the Finding and the Proposed Rule, FinCEN risks
muddying the analysis required byits own Guidance.” The letter instead
recommends that FinCEN use its own language from its own March 18 guidance, perhaps calling Liberty Reserve the administrator of a centralized virtual currency system.
- Anonymity is not necessarily criminal.
Once again from the letter: “The Finding and Proposed Rule broadly
state that ‘Liberty Reserve’s system is structured so as to facilitate
money laundering and other criminal activity,’ and cite, among other
things, theanonymity of the system as evidence of that illicit
structure. The Bitcoin Foundation is concerned about the broad use of
the term ‘anonymous’ and about FinCEN’s generalcharacterization that all
‘anonymity’ is designed to facilitate money laundering and other
criminal activity.” Here, the foundation is taking a brave turn, not
taking the usual strategy of defending Bitcoin by claiming that it is
not anonymous, but rather arguing that even anonymity itself is not
necessarily criminal. This is a highly beneficial strategy for Bitcoin
advocacy going forward; if Bitcoin becomes more anonymous in practice
through developments like Zerocoin or
decentralized mixers, the defense that “Bitcoin isn’t that bad” may not
cut it anymore. Questioning what is bad in the first place, on the other
hand, stands a solid chance no matter what the changes in technology.
- Neither is irreversibility. Contrary to what the Notice of Finding implied, irreversibility is a valuable feature for a payment system to have and, as Jon Matonis argues,
it is in fact necessary for a number of applications. Matonis (not
quoted in the letter) writes: “As an industry that suffered a high
degree of customer disputes, online gambling is instructive because when
certain customers lost in the casino and ‘changed their mind,’ it
became necessary for these merchants to accept only payment methods with
finality.”
The letter concludes: “The Bitcoin Foundation
supports a strong and vibrant financial system in the United States and
isnot objecting to the imposition of special measures in this particular
case. At the same time, the Bitcoin Foundation urges FinCEN to be
precise when it describes the growing virtual currency industry, and
when issuing findings and making rules affecting the industry, to avoid
any inadvertent implication that all virtual currency related businesses
(including compliant ones) are somehow more predisposed to facilitate
money laundering than other money services businesses.” All in all, this
is an example of the solid Bitcoin advocacy that the foundation was
created for. Rather than simply acting as a sitting duck waiting for it
and its member businesses to be sued, the foundation is actively, and at
the same time respectfully, seeking to engage in dialogue with federal
regulators and actually turn digital currency regulation in a more
favorable direction. It is only recently that Jon Matonis was named the new executive director of the Bitcoin Foundation; perhaps under his influence we will see more steps like this in the months to come.
Source : http://bitcoinmagazine.com/