Bitcoins

In the first governmental action against bitcoins, the Department of Homeland Security served the Dwolla mobile payment service with a court order requiring it to immediately cease all account activities with the Mt. Gox bitcoin exchange. Dwolla has complied with this order.

The news was first reported by Betabeat citing an email that OkCupid co-founder Chris Coyne received from the Dwolla and posted to Twitter. Other users have subsequently reported receiving similar communications from the federal agency and having difficulty accessing funds transferred to Mt. Gox from Dwolla in the last 24 hours.

There are certainly more questions than answers at this stage. We are prompted to wonder whether this is this the first of a series of governmental assaults on the exchanges? That’s what they’d target if they want to put the kibosh on bitcoin. Or, is this a case where DHS is investigating some individual or organization who may have used bitcoins, via Dwolla, for some potentially nefarious or terroristic reasons?

Members of the PandoDaily team have spoken to sources close to the bitcoin ecosystem and have been hearing that it’s likely the former.

As Adam Penenberg wrote recently:

It’s conceivable the government will try to either regulate or destroy it if it becomes widely adopted. With more than $1 billion worth of Bitcoins in circulation that could happen any time now. In the past the government has aggressively fought back threats to the U.S. dollar’s preeminence. There’s the lesson of Bernard von Nothaus, a “monetary architect” who created his own currency based on precious metals called the “Liberty Dollar.” After von Mothaus managed to inject some $60 million of his homemade currency into circulation, a government prosecutor accused him of “domestic terrorism” for attempting to undermine the government. Unlike with Liberty Dollars and Wikileaks, there’s no single person identified with the movement.

The cryptographic currency has gained popularity at a dramatic rate in the last six months, with more than $1 billion worth bitcoin now in circulation and with an explosion in the number of physical and digital businesses accepting it as a form of payment. Japan-based Mt.Gox is the largest exchange in the ecosystem handling roughly 63 percent of all bitcoin transactions in April 2013. Despite the rapid growth – or perhaps as a consequence of it – things haven’t always been easy, with a number of security breaches in critical ecosystem infrastructure and several post-speculative sell-offs.

Most recently, just 10 days ago US-based bitcoin exchange startup CoinLab sued Mt. Gox for $75 million alledging breach of contract related to a partnership between the two companies. According to the lawsuit, CoinLab entered an agreement to license Mt. Gox’s technology, including “exclusive right to certain intellectual property” to exclusively provide exchange services Mt. Gox’s North American customers. The plaintiff, which is backed by Tim Draper, Geoff Entress, Peter Vessenes, and others, claims that Mt. Gox breached this agreement by dealing with North American customers directly and failing to share data as stipulated under this agreement.

There’s no immediate link connecting the Coinlab lawsuit to today’s Department of Homeland Security action regarding Dwolla, but the timing of both events raises some questions.

The IRS and Financial Crimes Enforcement Network (FinCEN) have also been looking closely at the bitcoin ecosystem and the adherence – or lack-thereof – of leading companies in the space to relevant tax laws. Numerous companies have started offering to pay employees in bitcoin, and small businesses are accepting the virtual currency for the purchase of goods and services. While bitcoin is popular for its pseudo-anonymity, Uncle Sam is obviously less than pleased with the idea of being cut out of the payment loop.

FinCEN regulations state that bitcoin exchanges and miners must register as Money Services Businesses (MSBs) and comply with anti-money laundering regulations, although everyday bitcoin users do not. Whether today’s action has any connection to these inquiries is currently unclear, but even if not, such action is likely to come shortly.

We have reached out to a number of bitcoin investors, entrepreneurs, and otherwise informed observers for their thoughts on today’s events. This is obviously an evolving situation and we will strive to update the situation as more information becomes available.