Bitcoin exchange Mt. Gox halts U.S. payouts


Bitcoin's Big Bank Problem: Why Did Mt. Gox Halt U.S. Payouts?

By Robert McMillan
Wired magazine, New York
Thursday, June 20, 2013

The world's best-known Bitcoin exchange stopped paying customers in U.S. dollars Thursday. Mt. Gox didn't exactly explain what was going on, though. It blamed an "increased volume" of transactions and said it would suspend U.S. cash withdrawals for two weeks as it sorted things out.

The issue "is with processing the sheer volume through our banks in Japan, which is causing a delay," said Mt. Gox's Thomas Glucksmann-Smith in an email message. "We are attempting to improve our services for this. In the meantime USD deposits are unaffected as are other currencies."

But the Japanese company has fallen afoul of regulators and is clearly under pressure in the U.S.

The suspension comes a month after the Department of Homeland Security froze a Wells Fargo account that Mt. Gox had been using to pay U.S. funds to the Dwolla mobile payment service. When it set up the account, Mt. Gox had failed to properly identify itself as a money transmitting business, a violation of U.S. anti-money-laundering regulations, the DHS said.

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And that, according to some observers, has made it radioactive to U.S. banks.

These regulatory problems have almost certainly caused some banks to shy away from doing business with Mt. Gox, says Larry De Palma, the CEO of TDG-Phenix, a financial services consultancy that focuses on payments. That's causing a serious liquidity problem when it comes to trading other currencies into U.S. dollars. "They can't go out and trade or cover trades," he says.

But that's not behind the suspension of cash withdrawals, according to Glucksmann-Smith. "This has nothing to do with the U.S. banks."

It may be that Mt. Gox is simply going through additional hoops to fix a technical problem or reassure its current banker, but that the exchange has already run afoul of regulators is certain to make banks nervous, says Will Voorhees, the director of the financial intelligence unit with Silicon Valley Bank.

DePalma puts it this way: "Banks are already bogged down with Dodd-Frank," he says. "They don't even know what the U.S. dollar is doing, let alone a virtual currency."

In March the federal agency responsible for enforcing the nation's anti-money-laundering laws, the Treasury Department's Financial Crimes Enforcement Network, spelled out what exchanges like Mt. Gox must do in order to stay in the good graces of U.S. regulators. Although some have said that the regulations are confusing and inappropriate for small businesses (for example, coffee shops that give cash back in exchange for Bitcoins technically must also register as money transmitters), the FinCEN's director says they were designed to take virtual currencies such as Bitcoin to the next level. "I will not deny that there are some troublesome providers out there," said FinCen director Jennifer Shasky Calvery, according to a transcript of a speech she gave in Washington last week. "But that is balanced by a recognition of the innovation these virtual currencies provide."

Nevertheless, some think the government is cracking down on virtual currencies. Last month federal prosecutors shut down another digital currency network, Liberty Reserve, and charged its founder with money laundering.

Bitcoin is different. Unlike Liberty Reserve, it works on a peer-to-peer network that isn’t controlled by anyone. It operates as a much more transparent digital currency where money transfers can be tracked in public -- even if the names of the people doing the transactions are kept secret. Nevertheless, U.S. banks are nervous. In the past month, two other Bitcoin companies, Bitspend and Bitfloor, have also had accounts shut down by U.S. banks. Bitfloor, a Bitcoin exchange, is now out of business.

Bitspend is a website that helps you spend Bitcoins on sites that do not accept them. It says that Chase froze its account in order to figure out if its money was coming from legitimate sources. "So because we have money coming in from Bitcoin exchanges, we are now a criminal and have had all our money seized," company founder Justin Whelchel wrote in exasperation on Reddit yesterday.

The problem is that U.S. banks are afraid that doing business with Bitcoin companies might draw the attention of U.S. or state regulators, Voorhees says. Although unrelated to Bitcoin, last month's shutdown of Liberty Reserve contributed to this sense of unease. "I've been in this space for 10 years, and I can tell you that I’ve never seen a more visceral reaction to an industry than the way I've seen banks respond to the digital currency industry," he says.

Because regulators are not on board, "the downside of dealing with the companies using/selling/brokering is much greater than any possible upside (fees)," wrote one commenter on the Bankers Online discussion board just last week.

This reluctance may be fed by the sense that Bitcoin poses a threat to the banking industry. Anyone can transfer Bitcoins anywhere for free and that could put a dent in some banking transaction processing fees.

But Silicon Valley Bank sees money to be made in Bitcoins. There's been a mini-boom in Bitcoin startups over the past year, for example, as Bay Area venture capitalists have moved in. "We've built out a really robust onboarding process and then an ongoing monitoring process so that we can bring them in safely and make sure that they live up to our standards," Voorhees says.

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