US authorities launch their first attack on bitcoin

By Adam L. Penenberg , written on May 15, 2013

From The News Desk

Yesterday 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. Today it appears that Mt. Gox, based in Japan, has been cut off from Internet. If you try to get to you get a "502 Bad Gateway" message or a blank screen. It may be a coordinated effort among governments as people from Holland, Israel, the United Kingdom, Italy, India, Canada, Egypt, Brazil, Australia, and elsewhere report the same lack of access to the site.

In the warrant (Ars Technica has posted it) Mt. Gox's subsidiary "Mutum Sigillum LLC," which is incorporated in Delaware, set up an account at Wells Fargo under the name of Mt. Gox's founder, Mark Karpeles. According to the warrant, when Karpeles, or someone acting on his behalf, filled out the required paperwork he answered "no" to at least two key questions:  "Do you deal in or exchange currency for your customer?" and "Does your business accept funds from customers and send the funds based on customers' instructions (Money Transmitter)?"

It was only a matter of time before the US government took action against bitcoin, the completely digital, crypto-based currency that offers its users far greater anonymity in transactions. A completely decentralized currency that's minted – or in bitcoin parlance "mined" – by its users outside the reach of US regulators, and nearly impossible for law enforcement to track, was bound to ruffle feathers in Washington. In fact, it already had.

If history is any guide, the government will act aggressively against Karpeles. In 2007, prosecutors shut down e-Gold, which had created a currency redeemable for gold. It based its case on the fact that users didn’t need to produce identification – transactions were anonymous. e-Gold, the government argued, was abetting money laundering and child pornography. The site’s owners were convicted of operating an unlicensed money-transmitting business. The business shut down, and the CEO was sentenced to house arrest.

Then there was Bernard von Nothaus, the “monetary architect” of the “Liberty Dollar.” His currency's value was derived from precious metals, and he managed to inject some $60 million worth of Liberty Dollars into circulation before the government put the kibosh on him. There was a lot of heated rhetoric: A government prosecutor accused him of “domestic terrorism.” After the trial – von Nothaus was found guilty – the FBI pointed out, “It is a violation of federal law for create private coin or currency systems to compete with the official coinage and currency of the United States.”

This is correct. There is a law on the books, 18 U.S.C. § 1960: Prohibition of unlicensed money transmitting businesses. It states: "Whoever knowingly conducts, controls, manages, supervises, directs, or owns all or part of an unlicensed money transmitting business, shall be fined in accordance with this title or imprisoned not more than 5 years, or both." It defines "money transmitting business" in the broadest terms, as any business that transfers funds on behalf of the public, "affects interstate or foreign commerce in any manner or degree" and "is operated without a license."

Proponents of bitcoin have long claimed that because of the decentralized nature of bitcoin, which is disseminated peer-to-peer with no central authority, the authorities would have trouble stamping it out, since the exchanges are largely located overseas. But law enforcement can prevent Internet users from accessing the exchanges just like US authorities did with online gambling sites more than a decade ago by simply by targeting the Internet service providers.

There is no word on the fate of Mt. Gox founder, Mark Karpeles. His blog is still up, with the last post dated May 8. We have reached out to him and will let you know if we hear anything.